This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Dr. Vinay Nair, co-chairman of 55 Capital Partners, a firm recently founded by ETF industry veteran Lee Kranefuss and based in Mill Valley, California. Max Wolff, market strategist at 55 Capital, contributed to this report.
U.S. equities are a place of unbridled excitement. We are having some trouble “buying” the aggressive rush to risk. The direction makes sense; the intensity does not.
Markets see the U.S. stepping back from global leadership, slashing taxes and regulations. Recent action suggests this track spells rapid growth. It’s the end of the long bull market in bonds. The anticipated rapid “normalization” of interest rates is here. The U.S. dollar will strengthen and U.S. exports levels will remain, or grow. Gridlock in Washington will end. Corporate and individual taxes will be cut, infrastructure spending will surge. This will create inflation and force rapid, upward rate resetting.
Fixed income, gold and emerging market equities have been left out of the party. This is a sketch of the new world order suggested by recent price action in markets. The table below includes the ETFs that track recent trends.
|ETF||% Change Nov 8 - Nov 25|
|TLT (US Treasury)||-7%|
|EEM (Emerging Market Equity)||-6%|
Not Buying This Emerging Consensus
Interest rates are already spiking. The 10-year U.S. Treasury popped from 1.88% on Election Day to 2.33%, 55 basis points, or a 24% increase, in two weeks. No sweat?
We don’t see eye to eye with the emerging consensus. We have developed a multi-asset, proprietary risk outlook: 55 Capital MRI. We use a collection of market indicators to forecast near-term market risk. We are concerned that risks, costs and counterfactuals have been drowned out by cheers. This insight compels us to comment on the difficulties of a smooth normalization to rates.
Over eight years of slow growth and fierce battles with deflation, central banks have led risk assets and debt levels higher. Indexes and fortunes are synced with low rates and quantitative easing. Recently, yields went negative on trillions in debt.
In November, Fitch Ratings tell us $1.1 trillion in sovereign credit came back into positive yield territory. Until recently, all that mattered—despite earnings recession and rising political instability—was low rates.
Suddenly, we don’t care about rates. Is it all about a reflationary surge in U.S. manufacturing-led growth?