Monday, April 23, 2018

The End of The Alpha Males

Ten years later, and it's all dumb money now...

There was an interesting study released last week which showed that alpha males significantly underperform their peers. The study is even more interesting given the recent stream of headlines as billionaire hedge fund manager after another faces redemptions. It was world's largest hedge fund manager, Ray Dalio, who declared from Davos on January 23rd that "a surge is ahead, and those who hold cash will look like fools". It turns out the "surge" was behind, and that was the top of the market. Subsequently, those who were on maximum margin got wiped off the map, along with the entire "low volatility" trade.  

Now, "Bond King" Jeff Gundlach is one of the last alpha males standing; his fixed income corner of the world is highly attuned to the fake reflation trade. I think we all see where I'm going with this. He sees higher inflation, higher yieldshigher oil prices, and no sign of recession. 

He begins with this beautiful non-sequitur:
"Going back to 1972, commodities always go up a lot right ahead of recession. But of course then they tank immediately thereafter. Fortunately, there's no sign of recession now"

Holy fuck. With logic like that who needs enemies?

It gets better (or worse) with respect to the flattening yield curve, where he says what I said earlier this week - the yield curve doesn't have to invert ahead of recession:
"Japan had several recessions wherein the yield curve never fully inverted. Which may have something to do with rates being so low."

Which gets back to the self-destructing triple constraint. Compliments of higher bond yields, the massively shorted dollar is now rising, which is bad news for oil, and if oil rolls over, there goes "inflation".

"The Bloomberg Dollar Spot Index is headed toward its best three-day advance since 2016"

“The flow is all one-way, while the euro is starting to show signs of material fatigue.”

In the options market, sentiment on 10-year Treasury futures turned the most bearish since the February equities correction."

Other than the inverted yield curve, and an end-of-cycle blow-off in commodities, there's no sign of recession. Because record global debt levels combined with soaring gas prices and rising interest rates, has always never been good for the 'Conomy. 

Crude oil (black) with credit card delinquencies: