Broken Signals: Bonds Say Stop, Stocks Say Go

McAlvany Weekly Commentary

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Falling Yields Globally May Be Signaling Concern Rising Stocks & Cryptos Show Bulls All In Send Questions For Our Q&A Programs To: [email protected] "I think there's perhaps too many currents swirling together today, just under the surface, to sort out precisely what's happening in the markets. What is undisputable is that credit markets globally have moved to unsound levels, and a variety of pressure points and vulnerabilities, areas of uncertainty, exist in the spheres of public policy, of fiscal policy, and international relations. And so, on the surface, you have a host of catalysts for consequential movement within the markets." —David McAlvany Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany. David, before we get started, let's just announce to our listeners that we would love to hear their responses, their questions. Every year, toward the end of the year, we ask for questions. We ask that you keep them short, something that we can actually read in a short way, and then answer. And so we would ask our listeners to just send that to [email protected], and over the next few weeks we'll gather those. And Dave, I know you put a lot of time and effort into every question, so it's very much appreciated. David: Every year gets a little harder. I feel like it's a competition of stump the chumps. The questions get better and better, the answers get thinner and thinner. Now, we'll do our best to put something together that's coherent and reflective. Thanks for sending the Q&A material over. We'll do that on Christmas Eve and New Year's Eve. Just send your questions to [email protected]. Kevin: Yeah, and just to reiterate, please do keep the questions just to a few lines, because we try to get through everything in several weeks. You know, Dave, you and I, when we were sitting down—and I love the fact that we have our meetings at Table 30—we're 17 years in, but they were out of Talisker last night, but we had Lagavulin instead. So we sat down at Table 30, we had our Lagavulin, but I think we both were on the same page. There's a lot of noise going on right now, and some of it's information with meaning, some of it's information without meaning, and it's an exciting time because there is a change in the wind. But a lot of times when you have changes like that, it's hard to analyze the data. David: Yeah. Times we can stretch our limits in terms of inputs, and for the child with Asperger's, sensory inputs can aggregate and then overwhelm. For the average inquiring mind, my own included, there's a lot of complexity embedded in price trends today, pick your market. There's a lot going on. Not all of it is cohesive and coherent. A lot of it is contradictory or at least sufficiently complex enough to keep you second-guessing real hard conclusions. So what we do on a weekly basis as an asset management team, we review—twice weekly, actually—a spreadsheet with over a hundred financial market variables. These oscillate minute by minute, and they indicate all the nuanced shifts within the financial markets. They provide us with a mosaic very much like the tiled art with a million pieces that in aggregate create a theme. And some days the theme is clear. Other days, all we have is movement with the meaning piece remaining a little bit elusive. Kevin: You and I were talking about Doug Noland last night, that he's got some disciplines, models, that he follows. That can be very, very valuable in an environment of noise. And I remember, Dave, you and I for decades read a wonderful market analyst named Richard Russell. He also had a model that he used called the Dow Theory, and there were times when he disagreed with what his model was saying, and there was still the human element. In other words, it wasn't just an algorithm everybody followed. I think Doug and the team do the same thing, don't you? There's models that you follow that tell you certain things to do. You don't always have to react to them, if you think possibly the humanity element, not just the algorithmic element. David: Yeah, but we are looking at theories of liquidity and credit, and it helps us organize and find meaning in those hundreds of market variables. What is it really saying to us? And yeah, I loved reading Richard Russell. Read him daily for almost 20 years, and looking at the non-confirmations of the industrials and the transports, looking at Dow Theory, which was created by Charles Dow and then popularized by Hamilton, Rhea. These were the precursors to Richard Russell who basically took the theory and put it into practice in his Barron's articles before he launched his private newsletter. Kevin: But he wasn't a slave to the model either. He would say the model says this and I trust the model, but I'm taking a position possibly a little bit different. David: I have to disagree with this or that. He would have a justification or rationalization for what seemed to be off in a particular period of time, even though the model is most of the time very helpful. Models are just means by which we have explanatory power, and models are inherently inadequate. As much as they are adequate in most instances, they're not complete, they're not totalizing. So we respect the models for what they offer, no more, no less. Kevin: Okay, so the currents right now that are swirling about with all this information in it, how do they fit into the model? David: Yeah, I think there's perhaps too many currents swirling together today, just under the surface, to sort out precisely what's happening in the markets. What is undisputable is that credit markets globally have moved to unsound levels, and a variety of pressure points and vulnerabilities—areas of uncertainty—exist in the spheres public policy, of fiscal policy and international relations. And so, on the surface, you have a host of catalysts for consequential movement within the markets. Kevin: Don't you find though that just loose credit, when everybody's loaning money or borrowing money, that actually makes it very difficult to analyze true data? David: Well, certainly it creates an exaggeration of trends. I think there's another undisputable fact, and that's the Financial Conditions Index—we noted that last week—at its loosest since October 2021, and that's consistent with the record levels of debt issuance and the general giddiness for risk-taking. As we survey the investment landscape after month-end, without surprise we find that the bias was to the upside in financial assets. Kevin: Well, and sometimes that can catch people off guard because of course there's two sides to every market. You've got the long side, which you're betting that something's going to go up. You've got the short side, when people are betting that something's going to go down. Both sides can be wrong at various times, or they can be right at various times. Goldman Sachs has an index where they measure that, don't they? David: Yeah. These are the companies that are most short at a particular point in time. The Goldman Sachs Most Short Index, it rose 13.3%, and that would suggest that you had a good bit of short covering and a lot of activity that was a reversal of speculation in the month of November. So you had the Goldman Sachs Most Short Index, it rose 13.3, the KBW Bank Index rose 13.6, regional banks in the month of November rose 14.8%, which puts year-to-date returns in financial stocks closing on 50%. NASDAQ Financial Index was up, in aggregate for November, 14.2. Russell 2000, those are your small-cap stocks, up 11% for the month. Value Line, that index, up over 8%; mid caps, 8.8; S&P, 5.9. It was a lot of green in the month of November. Kevin: Do you think that green, though, is possibly a vote of hope? Look at what's happened to Tesla and Musk's connection with Trump. I'm wondering if there are people actually just buying Tesla because they're happy Trump won. David: Yeah. Less connection to volume of goods sold and more connection to what's next, and we do hope that things change considerably. Tesla's post-election surge puts its market cap at 20 times that of Ford, 16 times that of GM, not to mention the crypto frenzy, where triple digit returns are in play, which for a rate of return, triple digits, that's enough to make you feel like you've missed out, and behavior is reflecting that fear. The nature of speculation is not to ask why, but to ask how. Speculation is an expression of pure pragmatism. How do I get in? Kevin: Yeah, and it really is human emotion. I mean when we talk about humanity, I ordered the book that you talked about last week, Money: A Story of Humanity. I haven't gotten it yet, but I know that's a book that you recommended to everyone. David: Yeah, I mentioned it last week. I'm 90% through it, and I've loved probably 80% of what I've read. If you want a review of the history of manias and panics, I recommend you read it. You won't be surprised to find that innovation in money and credit led to risk-taking, which in turn drives economic growth and speculation, but it always goes one step beyond the precipice. It's just where the markets tend to go. They pick up a head of steam and don't know when to stop. When Aristotle defined virtue as the midpoint between excess and deficiency, he knew that virtue was in fact a very rare commodity. And as the human story is one of wild swings between those poles of excess and deficiency, we're just not given to stasis. Monetary virtue is as rare as hens' teeth. Kevin: Well, it's actually hard to sit quietly in a room alone. Remember what Blaise Pascal said? He said that's where all of humanity's difficulties come from is our inability to sit quietly in a room alone. But you talked about manias and panics. I've got a cousin who called me up and he wanted to talk about what's going on in the markets, and he really did have true fear of missing out.

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