#120: Time to Sit Back and Take Stock

Author

micksonmatch
August 09, 2024

It has been a very hectic week in the markets and on the S2N development front. I am looking forward to a chilled weekend. Have a great one.

S2N Spotlight

The RecessionAlert subscription service is a brilliant one that I used to subscribe to. Dwaine van Vuuren is a really excellent analyst. This morning, I got a note highlighting the following:

The National Bureau of Economic Research is the independent body that declares whether the US is officially in recession. There are other definitions, such as consecutive quarters of negative GDP growth, but this is the official one. It comprises 6 macro-factors, which, when diffused according to their proprietary weightings, pass the final verdict. It is not that hard to replicate their model, and according to the latest reading, it is not in recession. One of the reasons is that the NBER model is being aided by non-farm payrolls and Household Survey Employment data that stubbornly refuse to concur with the rising unemployment rate.

Dwaine says that if you include the unemployment rate as a further employment indicator, we would be in recession territory. He postulates that the Fed is heavily influenced by the NBER, and due to the fact that it is unlikely to officially call a recession in the near term, we may not see the interest rate cut by the Fed. It is an interesting angle and one that shouldn’t be dismissed.

S2N Observations

I call these charts a price journey as they show you the cumulative return through time starting on January 1, 2024, to date. When you look at YTD on a static table, you miss the drama that unfolds over the course of time. The US long bond is positive for the year, only just. The Nikkei is still positive, even after collapsing. The yen is still down on the year, even though it has been strengthening lately.

Just for some context, here is a chart of positive 2.25% or more days.

I shared the MOVE (bond) volatility index yesterday, and today I just plotted the VIX and MOVE together.

I have spoken a lot about the S&P 500 and how a very unhealthy relationship has unfolded. It spoke of an adjustment coming. Anyone who traded the spread in this trade when the correlation dropped near 60% would have made a killing. There is still plenty of fat left on this trade.

I find a rolling correlation very informative. Here we are looking at a 1 year lookback that is rolling daily through 10 years of data on TLT (the US 20+ year-long bond) versus a basket of assets. As you can see, this is a very dynamic chart. The bond-dollar correlation is what catches my eye right now.

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