The New Zealand central bank is neutral on rates, but markets bullish on the kiwi, notes Matt Weller...
Gold, Bonds and Dollars
08/03/2016 10:00 am EST
Looking beyond the headlines, Landon Whaley focuses on economic, quantitative and behavioral factors to assess the outlook for various financial markets. Here, we talk with the editor of The Whaley Report about gold, bonds and the US dollar.
Steve Halpern: Joining us today is Landon Whaley, a brilliant advisor and editor of The Whaley Report. How are you doing today, Landon?
Landon Whaley: I'm doing well, Steven. Thank you for asking me.
Steve Halpern: Now you've been bullish on gold on this year. In fact, your top picks for 2016 was the Market Vector Gold Miners ETF (GDX), which is up 118%. And while you're still bullish on gold long term, you've recently shifted your shorter-term perspective. Could you explain this to our listeners?
Landon Whaley: Whenever I evaluate a market to trade, I always use my 3G framework, and for those who are not familiar, the G stands for Gravity, because I focus my analysis on the three most critical forces or gravities that impact markets; fundamental, quantitative and behavioral, and fundamentally the goal remains very bullish.
We live in a world full of negative interest rates and gold performs very well in declining or low interest rate environments. We now have other $13 trillion in negative yield and government bonds worldwide.
For instance, Sweden is now paying negative interest rates on 50-year bonds, and Germany just became the first Euro country to auction new 10 year bonds with a negative coupon.
I mean this is incredible, because next to US Treasuries, German bonds are considered one of the safer asset classes on earth.
Clearly, the word "safety" has a new definition these days, and from a quantitative perspective, gold looks fantastic. It's up 25% this year, has broken through every significant line of resistance, and is on the verge of breaking out above its five-year downturn.
So while I love gold from a fundamental and quantitative perspective, what has me concerned short-term Steven, is the behavioral gravity.
When I made the GDX pick back in December, no one was talking about gold, and frankly up until Brexit, the only people talking about gold, other than me, were the gold buffs who think you should own gold all the time.
Since Brexit, both retail investors and professional money managers are piling into gold at a record pace, and that's what has me nervous. In fact, just a couple of weeks ago, gold ETFs had their largest one-day inflow ever.
Now I'm not looking for a significant correction, but because of the uber-bullishness I'm seeing right now that wasn't there a month ago, I'm expecting at least a 6% to 8% pull back before the next leg up.
But that said, as long global monetary policy continues to emphasize negative rates, then that pullback in gold is absolutely a buying opportunity.
Steve Halpern: Now, I don't mean to put you on the spot, but from the standpoint of somebody who might be sitting out and waiting for that correction, would you recommend going back into the Market Vector Gold Miners ETF, or is there a different ETF product that you would suggest for somebody who has not invested yet?
So once we see that pullback, that's when you would look for an opportunity to get into GDX, so I would use gold as the market to monitor, and that's what I was saying.
With the 6% to 8% pullback I'm expecting in the gold market, obviously Gold Miners will pullback more than that because it is a leveraged play on gold, so it moves higher than gold when it goes up, and it obviously moves lower than gold when there is a decline.
Steve Halpern: Now at the start of the year, you also recommended long-dated treasuries as the year's best conservative investment, and you specifically focused on the iShares 20+ Year Treasury Bond ETF (TLT) which is up 16%. Now again here, you like this for the long term, but you're cautioning the investors that it's a dangerous short-term trade. Could you explain your thinking behind this shift?
Landon Whaley: Yes, absolutely. Again, the same fundamental gravity that is bullish for gold, is equally bullish for US Treasuries, and specifically as you mentioned, long-dated treasuries that you can access through the iShares TLT.
Because of the massive amounts of negative yield and debt, the US now has a virtual monopoly -- controlling 75% of all positive yield in government debt worldwide.
That said, as with gold, it's the shift in the behavioral gravity that has me concerned about initiating new positions right here, or overstaying my welcome in current long positions.
Everyone and their mother, now believes that global and US yields will continue to plunge further, and that US Treasury is the place to be.
First of all, I don't like it when everyone agrees on the likely direction of an asset class, and second, I know that markets don't go straight up or straight down. Even if the majority is right, and yields continue to slide further, how much more upside is there with TLT?
Even if you believe that 30-year yield will break a low 2% for the first time ever, that's only about 5% more upside for TLT. I see a real possibility of TLT trading down as low as $128, which implies about a 10% downside.
So where we're sitting now, there's twice as much downside as there is upside, but as I said, as long as global monetary policy stays on its current course, when that pullback in TLT does occur, it's a huge opportunity to step in and buy.
Steve Halpern: Now, you have been bearish on US equities since the start of the year, and you made a switch in your viewpoint -- that you want to be out of the US equities, but you also want to avoid short positions -- which is just really a neutral outlook. Could you tell me what's behind this thinking?
Landon Whaley: Absolutely. Fundamentally the case for being bearish US equities is still very much intact. Economic data is not improving dramatically and US corporate earnings have been declining for four straight quarters.
Quantitatively, people might say that the S&P looks extremely bullish, but price action is just one aspect of the market's quantitative gravity, and frankly the price performance of the S&P over the last six months is the only bullish aspect.
For instance, another aspect I evaluate is breadth, or how many companies in the S&P are participating in this latest rally to new high-only 15%.
Only 15% of the S&P 500 are currently sitting at 52 week highs, which means this latest rally is being led by just a handful of companies, and there's a real lack of conviction.
With the first two "gravities" being bearish, it's once again, the recent development in the behavioral gravity that have me switching from a short bias in the S&P, to a neutral bias.
First, investors of all sizes, from retail to institution have been net sellers of US equities for the better part of four months.
Second, most people are expecting this latest round of earnings announcements, to be hugely disappointing, so I'm concerned because markets are cyclical.
People don't sell forever. The economic data and corporate earnings don't fall forever. This means that any slight improvement, in either the economic data or corporate earnings and the very investors who have been selling, will turn back into buyers, pushing the S&P even higher.
The reason I'm not advocating a long position, is because I think the upside in US equities is limited compared to the downside, which I think is at least 10% to 15%.
The way I see it, any further rally in the S&P simply increases the magnitude of the correction when it comes. I would be completely out of all things U.S. equity related.
Steve Halpern: Now, we're almost out of time, but I do want to ask you about another market that you have particularly interesting insight into, and that is the US dollar. You believe that's the most important market to monitor the second half of 2016. Could you give me your thoughts?
Landon Whaley: Absolutely. The US dollar is the most important market to watch, because it impacts the most markets worldwide, and no one is talking about it. Fundamentally the case is very bullish.
Put simply, every other central bank in the world is easing and trying to burn their currency, while the Fed is holding steady with one rate hike. This puts a monetary policy tailwind at the dollars back.
Quantitatively, the U.S. dollar is starting to show signs of life. The post Brexit reaction has pushed the dollar back to the 96 area, which forced it out of its downtrend for the first time all year.
Behaviorally, I'm seeing exactly what I saw back in December when I was evaluating gold and US Treasuries. No one was discussing gold and everyone hated Treasuries because the Fed had just raised rates. You could see the kind of run those two markets have had since then.
Right now, no one is talking about the US dollar and investors positioning is split right down the middle, with no one willing to lean one way or the other.
This is the ideal bullish set up for me. I have the fundamental and quantitative gravities flashing bullish signs, and investors haven't figured it out yet.
When the US dollar begins to move higher, emerging markets will get hurt the most. In the midst of a global slowdown and a Fed tightening regime, emerging markets are up 20% which is unheard of. When the next leg up occurs in the US dollar, investors are going to run towards the exits.
There are two opportunities to participate in the US dollar bullish move – either be long the dollar via the Powershares DB US Dollar Index Bullish ETF (UUP), or you can be short in emerging markets via the iShares MSCI Emerging Markets Index ETF (EEM).
Steve Halpern: Again, our guest is Landon Whaley, editor of The Whaley Report. It is always fascinating to hear your thoughts. Thank you so much for your time today.
Landon Whaley: Steven, thank you again for having me. Take care.
By Landon Whaley, Editor of The Whaley Report
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