We think that multi-week highs in the Aussie dollar and Silver highlight everything that one needs to know in world financial markets. The behavior of these two instruments highlights two underlying themes, that is the demand for;
High-yield and inflation hedge instruments.
Everything else that is occurring within world financial markets are merely “sub” themes on these two broad master macro themes. We believe that these two master themes are now well entrenched and will be with us for many months to come.
Equities
When equity markets go up in a straight-line they collapse spectacularly as we have just witnessed in China. For now we continue to have a series of higher highs and higher lows in world equity markets (you can fight and argue between yourselves as to why this is occurring all we are saying is that it is occurring). The fact that small caps are still outperforming large caps suggests that the probability of further upside is very high.
Fixed Income
We still cannot understand why anyone would want to own long dated US treasuries, given that the yields are only less than half the earnings yield of the Dow! We don’t want to speculate that long dated treasuries are being back by government forces but we have our suspicions! From a bullish perspective the behavior of junk bonds is encouraging, the weakness sustained in August is nothing more than “consolidation” of the gains made in July. From a bond market perspective at least a yield seeking condition remains in vogue.
Commodities
The CRB is beginning to paint a rather sorry picture for commodities in general. However, there is hope on the horizon. Gold and silver are now leading the way. Silver is at a multi-week high and Gold is pounding on the all important $1000 barrier. A breakout in gold should ensure a material move higher in the CRB.
Currencies
The chart of the USD Index tells it all. The USD continues to remain under what appears to be “controlled” selling pressure. Perhaps it is not so much controlled selling but controlled printing, perhaps the weakness in the USD accounts for the strength in US Treasuries! The high yield ETF DBV is close to breaking to a multi-week high. Clearly investors are after yield and this underlying condition shows no sign of changing.
We take the behavior of the ETF DBV very seriously because the behavior being exhibited in currency markets more often than not is a leading indicator for other asset classes.
Yes the ongoing saga continues. The action of this week is definitely an improvement, from a risk taking perspective, than last weeks (click here for last week’s article).
Our wealth creation portfolio is up 14.9% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.
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