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CHART OF A GENERATION - OED 24th October 2023

The cost of money is.. exactly where it was twenty years ago.


For year after year we have been witnessing ever-cheapening money, to the point where it became hardwired into the minds of investors that rates only go down. Pundits from all sides have been debating whether or not this dynamic was real, healthy, prudent, accidental, criminal, permanent, necessary… add your own talking point.


Now, in the blink of an eye, it’s over. Tons of articles written on the subject are suddenly moot. Arguments have fallen silent. It has simply gone. In the greatest bond crash in history, rates have returned to those of ancient Rome.


The 5% - 6% centuries-old normal rate, which is probably linked to human lifespan more than anything else.


There are a few out there who seem to think that rates now are abnormally high. They are obviously ignorant of history before Taylor Swift, and are pushing the idea that things will get better when rates return to “normal”, or 1% - 2% as they see it.


Forget it.


The tension has been released and we have exited the experiment.


Below is a twenty year chart of bonds vs equities.


In the red corner, representing bonds, is the iShares 20 year bond fund (TLT).


In the blue corner for equities we have the venerable QQQ Nasdaq fund.


It is unsurprising to see a multi decade correlation of equity values to the cost of money. To sum up the current state, bonds have round-tripped and equities are at all time highs.



The data series running along the bottom is the weekly traded volume of TLT.


Once in a generation capitulation.


The price action of TLT is clearly in a capitulatory phase. Price is accelerating to the downside and volume is exploding. One MUST trade the event. The capitulation spike may push lower than here, but the bottom is in sight.


On Friday night we entered a significant position buying the TLT and selling dollar equivalent QQQ. We will do the same tonight (Monday) and again probably tomorrow.


A fund manager can observe and research only so much before action is required.


Capitulation events are exceedingly rare, and are the best entry points into a position if you have been waiting for a signal.


Chart points are one thing, but capitulation is real. It is the clearing level, and if you have been wise/lucky enough to be on the right side of the wait, then deal in size into those who are panicking/being forced out of the wrong side.


If you are running a long-only bond fund then you simply have to allocate in large scale here.


Pension funds and banks the world over are insolvent and hands are being forced.


No one WANTS to sell here, and with so many billions being swept into hold-to-maturity (HTM) accounts, many CAN’T.


The parties that have tried to hide in HTM are watching the market fall farther away from them, and will retreat further into denial. BAC will be swallowed by JPM, pension funds will be nationalised and the HTM accounts may never capitulate, but those who can give in are doing it now.


If you are managing absolute return funds, then the spread between bonds and equities is compelling. If the bond leg continues to fall, then the rate story for equities moves from terrifying to cataclysmic, and the Wile E. Coyote moment will resolve.


If rates steady here, then they simply drag on equities over time. Keep in mind that one earns interest on the short leg, so you are being paid on BOTH sides to hold the position.


Can the top stocks save everybody?


I may have misinterpreted it, but the way I understood TSLA’s earnings call was that they basically cannot operate properly under the current rate regime.


Price action since the call seems to go along with that. Market breadth is at record concentrations with the Titanic deck chairs having been moved entirely into the Magnificent Seven dining room.If the pillars go then all is lost.


The AI bandwagon needs to be running at full speed for NVDA to lift everybody else up, and the news flow there seems to be drying up. Maybe an earnings call will whip us up again.


In the absence of new leads, it would appear that everybody is already there. The outperformance of the top stocks over the rest of the market is so extreme that it appears the bottom 493 losers have been all but abandoned.


If rebalancing starts back in favour of bonds and a broader range of stocks then the headline indices face even more pressure.


So, no, they can’t.


Trade/Position Summary


One-eyed deer: Buy TLT / Sell QQQ.

Runner up: Sell GSR @85. Short HOG.




Wrapping up.


This week is shaping up to be the most interesting of the year.


There is an earthquake in the bond market and the ripples will propagate across all other assets.


Some are obviously already buckling but headline indices must surely give way soon. There is reason to make allocation decisions right now and we are doing so.



Till Next time!


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