Another excellent week if you are involved in the long usd risk assets funded by borrowing other currencies. The Russell2000, Financials and Transports have provided the beta and in measured in the world currencies like jpy or euros or sgds they are up 15% in just a few weeks. Its a near vertical move and as the team suggest, although the breadth is excellent, they are showing over bought conditions and therefore the risk reward is starting to shift on the near term timescales.
What has not performed are the other carry trade candidates. The long nik225 carrying the jpy has been ok but the long ftse100 carrying the pounds has not performed and the negative beta, again, has been long euro equity with borrowed euros. You have to wonder if or rather when the euro area equities may ever perform so long has their under performance been. Asian equities have also failed to perform.
Bonds and precious metals have been the negative alpha candidates with both moving swiftly downward. They are being classed together as safe heaven assets. Therefore not what is needed in a cyclical inflationary period. From a macro perspective its worth therefore restating here that gold is clearly not only a safe heaven. Gold’s long term function is to act as a store of wealth during inflationary periods. Beyond this it also acts historically as the alpha hedge to inflation when monetary growth exceeds economic growth ie in stagflationary periods.
Stagflationary periods usually occur when excessive monetary liquidity is poured on to a poor productivity economy. Typically where regulation is high and where historic investment in the means of production has been low. This is exacerbated during periods of protectionism or trade wars and where skilled slack in labor and or the means of production in an economy exists. From a macro perspective the stage is set for bullion’s mega secular bull market to resume. Technically we are waiting for a momentum surge to show an attempt to rejoin longer term trend.
For my own book i’m close to record highs but i have been at the same level now for the last few weeks. Ive enjoyed the warm winds of the various currency pair trades vs the dollar and also the various long usd risk allocations. Offsetting these positive winds have been the weakness in the eurostoxx50, ftse100, Hangseng, Singpore and precious metals. The out performance by US equities over world equities is stunning and at extremes of extremes.
Without delay here are the teams latest comments:
And here Fitzpatrick:
Here LC:
More to come when i find time.
All the best
Rich