The Fed was always involved in the markets, but never to this degree. When they made their announcements in March, it took them two months to put these facilities together. Now, they can turn it back on at any point. Until a new narrative develops, we are probably going to trade sideways. Number one, the gut reaction is that everything you think you should do is already in the market. Also, there is a London based pollster called Survation.
That means investors line up with the betting markets, not with the polls. Whatever people thought going into the debate, is what they think after the debate. So this election is going to be determined by turnout. Biden and Trump were not on stage to convince somebody to vote for them. They were trying to get people to actually do it. Shortly thereafter, we learn about the Covid-outbreak in the White House and the President needs to get treated in the hospital.
What do you think is going to happen on election night after all that drama? But then, as we start counting the mail-in ballots over the following couple of weeks, one by one states flip from Republican to Democrat, and by Thanksgiving, the election is gone the other way. This is not when the contested election came completely out of the blue and lasted 36 days.
How does Covid play into this? Right now, Europe has the highest case counts. The virus is spreading especially in the UK, in Spain and in France. True, this time the case counts are resulting in less hospitalizations and less deaths. You are starting to see that in the UK, for instance. There will be some roll back pulling down economic activity. The situation is especially bad in Wisconsin, where they are openly talking about hospitals getting overrun.
In addition to that, Wisconsin is a swing state, and if it winds up having a full blown Covid crisis by November 3rd, that could play into the election. At this point, I bet that you are going to see some kind of second Covid wave in the US, and I suspect we will get some roll back of the lockdowns. As mentioned, by most measures the market is probably overvalued.
The hope is that despite the market being a little bit ahead of itself, the economy will eventually speed up and justify these valuation levels. There are already signs that the recovery is slowing. But then, around mid-July to early August, the recovery stalled.
We know that real GDP growth in the second quarter was the worst ever recorded at Now, the recovery has stalled. This forecast has been falling hard and is now just 3. While 3. The quarter is only seven days old and some economists are openly talking about Q4 being another negative growth quarter. The medical bailout is still hanging out there.
By that I mean a vaccine or a treatment. Today, there are several vaccines in Phase III trials. Thanks to Operation Warp Speed, the US government has already awarded massive contracts to start producing doses of all these vaccines now, and the military is putting together ways to administer them ASAP. So as soon as a vaccine is approved, they already have hundreds of millions of doses ready.
But according to leading companies like Moderna or Pfizer a vaccine will not be ready until spring or summer That means a second Covid wave can really slow down the economy. How likely is it that Republicans and Democrats will agree to a deal? I thought a deal would come already in August. But now, we have airlines and other companies like Disney furloughing tens of thousands of people.
Therefore, I expect a renewed push by both, the Democrats and the US administration, to get a deal. Both sides are afraid to be blamed for a giant jump of unemployment. In stark contrast to stocks, the bond market has hardly been moving until recently.
It this bond market now finally waking up? The bond market has seen one of its quietest periods in history. A main reason for that is heavy central bank intervention. That has a big dampening effect. Another reason is yield curve control. But what about the unintended consequences of these war like policy measures? They have witnessed two 50 per cent corrections in the stock market over the last 20 years, and Investors are running away from active managers and toward passive investment choices, as seen in the surge in ETFs.
But it is more than substituting into lower cost-equity vehicles. They aren't adding to their overall equity investment holdings at all. The last five years combined has seen virtually no new money flow into the stock market. This simple but powerful trend is changing the landscape of investing like no other post-crisis trend. They aren't performance chasers looking for the next star manager to make them rich. Fund-management companies also understand they aren't getting paid via inflows for stock picking, so they have re-oriented toward marketing objectives to reflect this reality.
For strategists who haven't grasped this concept and continue to look for the public to chase the hot hand, here's a tip: That era is over. Jim Bianco is the president and founder of Bianco Research, a provider of data-driven insights into the global economy and financial markets. He may have a stake in the areas he writes about. Skip to navigation Skip to content Skip to footer Help using this website - Accessibility statement.
Dec 14, — 6. This desire for safety is changing the face of active money management. Read More Wall Street. Big four Fund managers set to embrace bank stocks Nov 24, Jonathan Shapiro. Sharemarket Vaccines lift ASX 1. Sharemarket Top picks amid 'violent' market rotation Nov 24, Tom Richardson.
Live ASX up 1. ASX to rise, Dow keeps 30, in sight, Tesla extends rally. Top picks amid 'violent' market rotation. Fund managers set to embrace bank stocks. The show must go on for fashion Lauren Sams. Mining is not about a pick and a shovel and a hard hat Sally Patten.
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The answer, I think, is inflation. The reason — first of all, the stock-bond relationship is not stable. It does change over time. It goes from being both of them move together to both of them moving inversely or negatively correlated to both of them moving together. We worried at varying degrees for deflation. You run the bonds.
Once stock prices go up, we are not as afraid of deflation. You get out of bonds. And so that relationship held. Yields go up and stocks go down. Same thing. And that is bad for them. Well, this is the old relationship, this is the new relationship. The stock-bond relationship is changing. Stock and bond prices will move together, not opposite each other. So that when you see a hint of inflation or you see a hint of problems, they both fall.
When you see things getting better, they both rise. And that is going to change the whole way that 30 million people have their money with wealth managers. That relationship will vacillate over time. Because we had a major blow-up in markets at the beginning of What happened was the whole volatility complex basically blew up in one day.
And the reason that happened was a very, very small little clique of guys figured out how to monetize the contango yield in the term structure of VIX futures. And it was a picking-up-nickels-in-front-of-a-steamroller trade. It produced just terrific returns until the day it blew up. That was a tiny, tiny, tiny, little, small, miniscule percentage of the people in financial markets that were even involved in that trade. And their activities caused an event that sent ripples through the entire financial system.
The only way, Jim, that they can justify having that leverage — because normally leverage involves an extreme amount of risk that would not be appropriate for an institutional portfolio — the way they justify that leverage is that that risk of leverage is hedged by the equity portfolio and the inverse correlation.
And that, in this case, sell all the bonds and all the stocks. First of all, the period you referred to, I love the word is volmageddon, and that is what we referred to it as. But let me put it to you more basic. They are allowing themselves to leverage and be aggressive because there is a belief that there is this gigantic asset class, the Treasury market, that I could run to for a hedge.
I could be way out there on the edge, you know, risking it all. Because in a heartbeat I can go and protect myself in the Treasury market because it moves in the opposite direction all the time. There is no, oh, just go engage in buying some derivative space on Treasuries or swaps or something like that.
And, therefore, if I lose on this primary trade I will offset it on this hedge. There is one thing you can do to protect yourself. Sell out of your position, liquidate your position. Or, I do. The bond market, the high-yield market, was looking a little bit wobbly.
I could be — put options on HYG. Because the hedge is easier and more liquid to put on and take off. You only have liquidation. Their hope is that those hedges will return and that that risk can come back. But if these relationships have changed, those hedging opportunities are not going to come back. Meanwhile, not only can they not hedge anymore, but we also agree that the Fed put has expired. I just want to be really clear.
Liquidation is not a solo act. It takes two to tango. Liquidation means selling something, which somebody has to buy. This is, like I said, it especially shows up in markets that are not traded on regulated exchanges, like in the credit markets and stuff. So this is why these markets are so stressed and this is why these markets are trading at such difficult levels right now. What should I buy here? But what was curious about it is it happened much faster than previous crises.
What if this is only the first third of the price movement? You and I were talking about this at the end of January. The market kept going up. What happens when the virus goes away? And I think most of these people, their answer is we go back to work and everything returns quote to normal. Then you have to start contemplating that maybe what these markets are trying to tell you is that coming out of this is not going to be the same as it was going into it.
I think things are going to change in a lot of different ways as well too. By the way — I mentioned this to you offline, I mentioned this to the listeners — he announced yesterday he tested positive for COVID as well too. He talked about all of the suppression techniques that we could use to flatten a curve and not overwhelm the health-care system. But the thing that supposedly got Trump and the White House really eye-opened was this returns in the fall. This returns next year.
It only goes away when one of two things happens, according to the report. Or a vaccine. Until either herd immunity or a vaccine comes. This is what they are afraid of. So why are you in such a hurry to pick a bottom? You would be, only if you think this is going to be temporary. It will go away and then it will be right back to January as if it never happened.
Not after One in which the previous free-trade, free-market capitalism was kind of replaced by central banks and central bank liquidity fueling a massive bubble in both stocks and bonds at the same time. And, because that correlation was working, it allowed people to just keep laying leverage on, leverage on more and more. The bubble kept getting bigger. It was the pin. Yes, do you know what day SARS was announced as a global pandemic?
Two days before the Iraq war began. We were preoccupied with other things. And that was April of The markets had already, were just completing a recession. There was a risk attitude in markets best summarized by the Federal Reserve. Markets were depressed in that year because we had just fought a terrible war.
This one came at the height of a raging bull market. This one came at the height of a market that supposedly had the perfect hedge. Go ahead, risk the farm on everything. The famous Trump tweet of January of this year. He was reflecting a mentality that a lot of people had. It was when this one came, not what it was. SARS might have done this, if it came in January of The Spanish flu might have done this if it came in But they came when markets were already depressed at near-recessionary levels to begin with.
This one came in the 11th year of an expansion when the president of the United States is running a re-election — you need to re-elect me because the stock market is up. That was the belief that we had on it. So, yes, this was the big pin. You never know what pin is. But you know the balloon is ready for a pin. And this just happened to be it. You were on top of this and your graphs and charts and your projections of the exponential growth curves have been incredibly insightful. What do you see that maybe nobody else is seeing yet?
And let me define it. Now let me explain that. Let me rephrase that. Not 81, but 81 million. They say that they had 3, deaths. Now the reason I say that is, well, wait a minute, a death is a binary thing. Keep in mind that in the Chinese health-care system they do things a little differently.
There was an exact example of this came around in February. An year-old man with a heart condition contracts coronavirus. He leaves his house from quarantine to walk to the nearby clinic. He has a heart attack and dies one block from the clinic.
And there was a famous picture of him lying on the sidewalk. The health-care system in China will list him as Cause of Death: heart attack. Now why is that important? They are trying to restart their economy. TomTom is the GPS tracking system that is in a lot of cars. TomTom has real-time tracking of congestion indexes for major cities around the world. You can go to their website and find out to this minute what are the congestion patterns in any city.
And that emotional damage is far, far worse in China. And you also see it in social media and you also pick it up that the amount of social unrest, the amount of complaining to the government. This is leaving a mark in China. But it is much more damaging than anybody thinks. The last five years combined has seen virtually no new money flow into the stock market. This simple but powerful trend is changing the landscape of investing like no other post-crisis trend. They aren't performance chasers looking for the next star manager to make them rich.
Fund-management companies also understand they aren't getting paid via inflows for stock picking, so they have re-oriented toward marketing objectives to reflect this reality. For strategists who haven't grasped this concept and continue to look for the public to chase the hot hand, here's a tip: That era is over.
Jim Bianco is the president and founder of Bianco Research, a provider of data-driven insights into the global economy and financial markets. He may have a stake in the areas he writes about. Skip to navigation Skip to content Skip to footer Help using this website - Accessibility statement. Dec 14, — 6. This desire for safety is changing the face of active money management.
Read More Wall Street. Big four Fund managers set to embrace bank stocks Nov 24, Jonathan Shapiro. Sharemarket Vaccines lift ASX 1. Sharemarket Top picks amid 'violent' market rotation Nov 24, Tom Richardson. Live ASX up 1. ASX to rise, Dow keeps 30, in sight, Tesla extends rally. Top picks amid 'violent' market rotation. Fund managers set to embrace bank stocks. The show must go on for fashion Lauren Sams.
Mining is not about a pick and a shovel and a hard hat Sally Patten. How five female BHP leaders made it to the top. Fear of failure: seven steps to overcome insecurity. Turning a '90s dream car into a s reality. Can't fly overseas?
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