With equities rallying despite soaring commodities and rising bond yields, we can eliminate one more suspect for the continuing equity rally and US dollar strength.
Have you looked at Mike Green’s work on “passive“ investment dominance in the US - target date funds in 401ks, structured products, massive move out of active mutual funds (baby boomers) into passive indexing (millennials), regulatory framework to mandate passive/target date funds for all employee retirement accts, etc? Market share of S&P index funds moved from sub-10% to over 50% in the last 10-12 years.
Would make sense that this is the dominant feature of ever-persistent US equity outperformance, given that other countries don’t have this dominant a passive investment landscape.
A massive unemployment crisis would halt the passive bid…
Its a good question - and Mike is very big brained. And if liquidity was pulled from the market I think you would definitely see this. But Japan has a massive passive environment, and equities are purchased by the BOJ... so that should imply massive Japanese outperformance.
My view is that you have a dominant financial theme, and then capital flows to the best instrument to capture that theme. Liquidity and share buyback - and share buybacks are much bigger in the US than elsewhere - seem dominant to me, and ETFs are a good instrument to play that.
For Covid, it also took a bit of time to really ripple through. I remember being glued to my newsfeed starting end of January and the real hits came only beginning of March. Zoltan Pozsar also thinks along these lines. Michael Every too.
And if I can recommend one book, it's "Limits to Growth the 30 Year Update". Not very popular on Wall Street, but IMO incredibly timely.
However, I am not convinced the low commodity environment of the last decade is not the culprit, however INDIRECTLY. The shale oil revolution drove commodities down, and the low inflation ALLOWED THE CENTRAL BANKS TO KEEP THE OVERNIGHT RATES BELOW INFLATION - AKA FINANCIAL REPRESSION. That monetized financial assets, as a run to safe haven from repression in the bond market.
Does that make sense?
Keep up the work! as soon as I can save some money I'll subscribe (at least for some months)
why do you assume high commodity prices leads to tighter credit conditions which then leads to lower equity markets, or vice versa? credit is function of many things, i.e. of capital flows, monetary policy, fiscal policy, business cycle, so on and forth.
Thanks. I agree in reaction function. I guess higher cmdty px'es eats into margins of many businesses and eroding profitability, which then leads to lower equity prices.
I was asked this question:
Have you looked at Mike Green’s work on “passive“ investment dominance in the US - target date funds in 401ks, structured products, massive move out of active mutual funds (baby boomers) into passive indexing (millennials), regulatory framework to mandate passive/target date funds for all employee retirement accts, etc? Market share of S&P index funds moved from sub-10% to over 50% in the last 10-12 years.
Would make sense that this is the dominant feature of ever-persistent US equity outperformance, given that other countries don’t have this dominant a passive investment landscape.
A massive unemployment crisis would halt the passive bid…
Its a good question - and Mike is very big brained. And if liquidity was pulled from the market I think you would definitely see this. But Japan has a massive passive environment, and equities are purchased by the BOJ... so that should imply massive Japanese outperformance.
My view is that you have a dominant financial theme, and then capital flows to the best instrument to capture that theme. Liquidity and share buyback - and share buybacks are much bigger in the US than elsewhere - seem dominant to me, and ETFs are a good instrument to play that.
I think I will do Murder on the Orient Express sequel!
OR you are early and this is Murder on The Orient Express.
Why is there a substack limit? None of my other subs seem to have one
Its the pics... not the words
Seems like this liquidity is related to Yen carry trade, no?
Ahhh .... Thank you
For Covid, it also took a bit of time to really ripple through. I remember being glued to my newsfeed starting end of January and the real hits came only beginning of March. Zoltan Pozsar also thinks along these lines. Michael Every too.
And if I can recommend one book, it's "Limits to Growth the 30 Year Update". Not very popular on Wall Street, but IMO incredibly timely.
Russell, excelent thoughts.
However, I am not convinced the low commodity environment of the last decade is not the culprit, however INDIRECTLY. The shale oil revolution drove commodities down, and the low inflation ALLOWED THE CENTRAL BANKS TO KEEP THE OVERNIGHT RATES BELOW INFLATION - AKA FINANCIAL REPRESSION. That monetized financial assets, as a run to safe haven from repression in the bond market.
Does that make sense?
Keep up the work! as soon as I can save some money I'll subscribe (at least for some months)
👍👍👍
why do you assume high commodity prices leads to tighter credit conditions which then leads to lower equity markets, or vice versa? credit is function of many things, i.e. of capital flows, monetary policy, fiscal policy, business cycle, so on and forth.
I assumed there would be some sort of reaction from higher commodity prices - or at least a change in asset market behaviour
Thanks. I agree in reaction function. I guess higher cmdty px'es eats into margins of many businesses and eroding profitability, which then leads to lower equity prices.
Also tends to reduce discretionary spending...
Awesome analysis ... I look forward to the culprit being revealed!
Thats all my ideas!!
My apologies! post deleted!
No need to apologise! I found it.funny
Okay good!