Risk Parity Shining Bright

The 10 year yield is at 1.81% today, the same level it was at on Monday, October 21.  The big difference between the two dates is that the SPX was at 3000 on October 21, and it is now at 3125.  So 125 SPX points higher in 1 month and the 10 year yield has gone nowhere despite Powell clearly stating that the Fed is pausing its rate cutting cycle for the time being. 

When risk parity is firing on all cylinders, like in 2019, the wind is at the back of the bulls.  It is a favorable environment for stocks to continue rallying.  Only when bonds noticeably weaken can you start to question the rally.  Right now, its a nightmare for short sellers, and frustrating for market timers who sold early and are looking to buy on a pullback.  That pullback is not likely to happen anytime soon with the way bonds are ignoring equity strength and staying strong. 

These are the type of markets that get counter trend traders in trouble.  They get used to the pattern of fading all time highs and expecting a sharp pullback like in May, August, and October, and the market isn't following that pattern.  November and December are the most active months for stock buybacks for the year.  Corporations who have made buyback announcements catch up to buyback stock before the year ends.  Buybacks are heavy, with benign price action and investors are starting to add risk after having low equity exposure for most of the year.  That is a recipe for an uptrend that confounds the bears and the market timing fund managers who thought all time highs always meant that stocks would pullback hard and consolidate its move. 

You can't be stubborn when you are a bear.  You take you profits on panicky drops and wait for the complacency to built up again and take another shot at shorting.  Only when the conditions are super bearish can you just hold on to the short and wait for a huge move down.  We are getting closer to those type of bearish conditions, but the seasonal upward forces are just too strong to fight right now. 

How can the markets keep going up when there is no earnings growth and valuations are probably in the 99 percentile in US stock market history?  Its because the institutional investors and corporations could care less about valuations when they buy and sell.  Institutions are just trying to keep up with the indexes, and the corporations have good enough cashflow to keep buying back stock and they don't need to spend money on investment and R&D because most of the big companies have quasi-monopolies and are just rent seeking.  That is the best business model to have, either acquire the competition or lobby your way to having regulations that keep competition at an absolute minimum. 

So despite the absurd valuations, the only way to get a sustained bear market is to have a big enough economic slowdown that corporations have a hard time both repaying debt and buying back stock.  A mild slowdown will not get the job done. 

But the perverse thing about the stock market in this modern age of financialization of  economies is that a bear market will probably be the event that starts the recession, not the other way around.  The stock market is driving the economy more that the business cycle is.  Its because when there is low growth and perpetual easy money policies around the world, the determining variable is asset prices, not consumption and investment. 

That is why the worst thing that could happen for most of the world economy is a big real estate downturn, and the worst thing that could happen for the US economy is a big SPX bear market.  And those are the 2 markets are that are currently the most vulnerable.  In most of the G20 countries, real estate has been the asset that has gone up the most in price since 2008.  In the US, it has been stocks.  So there is a huge vulnerability that has been building up over the years, as the increasing debt has been driving up both real estate and stocks. 

The key is the credit market, as the inability of debt expansion, both corporate and household, to continue at the same pace will cause a weakening in both real estate and stock markets.  It seems like China has reached debt saturation where only a suicidal money printing spree would be able to prevent a big downturn, and that money printing would only build up even more nonperforming loans and make the Ponzi scheme bigger than it already is, and it is enormous now. 

Yes, from a long term view, this is probably one of the worst times to invest in stocks or real estate, but since everyone has a short term focus, they are buying, because the corporations are, and because they have to in order to keep up with the S&P 500.  It will end in a bear market, like they all do.  Its just a matter of timing.  And the 2020 US Presidential election is probably the perfect excuse to start the selling. 

Keeping my powder dry, as the short selling opportunity for 2020 gets better and better with each new all time high.