This "Melt-Up" Looks Like a Set up to Me (bonds, hedge fund)
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Look at the correlation between central bank assets and the broader market index in the last chart in the article.
Do you see the de-coupling?
It is said that retail investors and perhaps the Chinese are responsible for the recent run up in equities.
What type of implications do you think this has?
At the minimum, I expect a market drop which could very well be exacerbated by all time high margin calls and and short vol.
To me, I think the trade in this case is to go long Chinese bonds and maybe gold.
Thoughts? I need some real opinions. I'm trying to make an investment decision.
I know there are some smart people out there, so I would appreciate it you don't dismiss this topic. If you take a look at the last graph, you can see how heavily correlated market returns are to central bank balance sheets.
In this case, since capital injections directly affect equity markets, I think it's safe to say correlation equals causation to a high degree.
I suppose one of the reasons investors would leave high yield bonds, despite them paying 2.75% is because Chinese 10 year are paying 4% and with China purchasing oil and gold, maybe those bonds are looking more attractive in terms of their risk profile.
It could also mean there is something wrong in the underlying economy, as high yield implies high risk. I imagine the derivate risk dwarfs the debt itself. Whether or not there is anything wrong in the underlying economy probably depends on interest rates. Again, with Chinese bonds paying 4%, I expect a lot of money to flow into China which will force the Fed to raise rates faster, which could compromise some industries like commercial real estate, retail, and in my personal opinion, the tight oil industry among others.
Due to a recent correlation that has emerged, I don't think crypto is a safe haven. I think it will lead or follow the market.
Anyway, so that leaves gold as a hedge that I can think of. I don't know if a near term market sell off would result in a long-term exodus of capital out of the US. Does anyone have any thoughts on this?
Maybe equites will continue to track central bank assets, and we should expect a bear market, but if it managed correctly, maybe a slow decline.
Another thing to look at in that article is short term interest rates. Maybe the yield curve will become inverted. That would signal a recession. To be honest, everything seems to be automated and manipulated, so who knows if these signals are indicative of anything anymore. It seems as if the majority of hedge funds that have defaulted recently attempted to trade on fundamentals. That has been the excuse for many long term traders that have shut their doors, citing that the market is incorrect.
It does seem that tax advantages to cooperations might have some affect, but the strategy up until recently I believe was to use debt to buy back stock. That type of growth is artificial. It doesn't lead to anything productive and only inflates the asset prices, particularly when interest rates are so low. They've also been holding onto a lot of cash.
It sounds like you've answered a lot of your own questions.
What is right is now wrong, what should be down is up.
Welcome to the Mad Hatters tea party where all the guests are crazy.
Just know when to grab your coat and leave as the stock market seems to be a place other countries use to wage war on the U.S.
It sounds like you've answered a lot of your own questions.
What is right is now wrong, what should be down is up.
Welcome to the Mad Hatters tea party where all the guests are crazy. Just know when to grab your coat and leave as the stock market seems to be a place other countries use to wage war on the U.S.
That's what I was thinking too. It seems that retail investors took the bait and the Chinese were happy to accommodate them. The reversion to the mean could be highly volatile because of long market and short volatility margin positions that will be squeezed out.
But surely the professionals wouldn't put themselves in this position, right? They must know something that we don't because one of the most obvious correlations was the central bank to equity market correlations, so to bet against it would be extremely haphazard unless there was another source of guaranteed liquidity.
I'm really considering going long gold and silver. I think the charts look attractive. Crypto is a market I'm indecisive about. I think there are some possible gems, but due to a recent correlation with volatility, I think it might crash in the short term. It seems that the safest bet would be PMs that might give the highest returns. I'm not really sure the best way to enter those markets though. Any thoughts?
Well, all you're trying to do is outguess world events, global economics and all the political shifts for the next few years. Not sure why you're wasting time asking for advice.
I suppose one of the reasons investors would leave high yield bonds, despite them paying 2.75% is because Chinese 10 year are paying 4% and with China purchasing oil and gold, maybe those bonds are looking more attractive in terms of their risk profile.
Or it could be that investors think they get receive an overall higher rate of return in stocks and stocks that pay dividends, especially since dividends and capital gains are taxed differently and at lower rates than interest.
about 1/2 of all retail investors have their equities in retirement plans so taxes are a moot point .
those who don't will likely have any tax advantage wiped out as even taxes on a 2% dividend over decades takes its toll as far as wiping out the tax advantage if you qualify for those special capital gain rates. the only ones who can benefit without a hitch are those in the zero percent capital gains brackets .
Well, all you're trying to do is outguess world events, global economics and all the political shifts for the next few years. Not sure why you're wasting time asking for advice.
there has never been a time in my 30 years as an investor that things did not look like we were headed for a plunge or headed in to a bubble . if i believed my own bull i would have never found a good time to go in as something is always wrong .
in the mean time through recessions ,wars , black swans , political nonsense and the crushing debt worries i grew a who lot of money over the decades just riding the cycles and stop playing economist . .
there has never been a time in my 30 years as an investor that things did not look like we were headed for a plunge or headed in to a bubble . if i believed my own bull i would have never found a good time to go in as something is always wrong .
in the mean time through recessions ,wars , black swans , political nonsense and the crushing debt worries i grew a who lot of money over the decades just riding the cycles and stop playing economist . .
Yeah, but did you see the chart? You know I've been half trolling asking where the money is going to come from? Well, this actually caught me by surprise. I didn't know of this de-coupling.
But that de-coupling looks like a divergence from reality. It only makes sense that money would flow to higher returns. If this market is no longer juiced, I think the money will flow out. Citi makes a great case.
What do you think will happen in the short term? If a bank doesn't come in and create a soft landing, I think we are due for an imminent correction. I'm talking within the next 3 months, but probably sooner.
In fact, I'm quite comfortable calling this the top. I suppose there could be another intervention, but I think it's time to find an exit.
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