Headline risks are everywhere, and as an investor, you must keep your head on a swivel and human reactions in check so that you’re not drawn into well-written narratives that promise to unveil the mystery of financial markets, says Landon Whaley of Whaley Global Research.
This week’s headline risk comes courtesy of our favorite Wall Street punching bag, J.P. Morgan. According to Bloomberg, J.P. Morgan strategist Nikolaos Panigirtzoglou lamented, “The last time such a strong agreement on strategy existed was in late 2017 and early 2018, and that time period serves as a reminder that such a consensus view rarely plays out in its entirety.”
He also believes, “For asset allocators, what is thus important is scale exposures to avoid an overly concentrated portfolio, one way of scaling exposures to the consensus trading themes is by limiting exposure to the most crowded ones.”
Which markets are “the most crowded,” you ask? Drum roll, please…
“For J.P. Morgan, those crowded trades include shorting the US dollar versus cyclical developed-market currencies, long copper and long Bitcoin. On the other hand, bullish positions on oil and gold are less crowded.”
While this article has enough Wall Street fluff to make a down comforter, do you know what’s missing? Data. Outside of referencing the years “2017” and “2018,” there isn’t one dagum number to back Panigirtzoglou’s claim of crowded trades.
This article is classic Wall Street and represents the highest of all headline risks. If you have a viewpoint on markets, it better be backed by the data and nothing but the data. Given our mission to always remain data-dependent, let’s evaluate investor-positioning data related to the markets that ol’ Nicholas believes are “the most crowded.”
According to the latest CFTC non-commercial net long-positioning report, there are currently -3,179 net short contracts in the US dollar. In Z-score terms, the current positioning in the US dollar is registering a -0.79 over the last year. Investors are leaning bearish on the greenback, but it's far from being a “crowded” trade. Investors are bullish on copper, and it's registering a one-year Z-score of +1.71. The copper sentiment is undoubtedly moving towards an extreme reading but isn’t there just yet. As for Bitcoin, there is no way to tabulate investor positioning accurately. So, any rhetoric about its “crowdedness” is as speculative as playing Fan Tan in Macau.
As for Nicholas’ stance that oil and gold are “less crowded,” he’s right. Crude oil positioning is currently registering a +0.64 Z-score, which indicates investors are hip to black gold but haven’t loaded the hopper. Gold’s Z-score is now -1.43, which means investors are as bearish today as they’ve been at any point in the past year.
I agree with the call to be long crude oil; all three gravities are currently aligned for a massively bullish move. That said, the idea that investors should be buying gold just because it's “less crowded” is freakin’ ridiculous. If Mr. Panigirtzoglou dabbled in numbers the way he dabbles in storytelling, then he would know that now is not the time for a gold trade. During a summer FG environment, gold averages a -1.3% loss, experiences average drawdowns of -8.6%, and yields negative returns 64% of the time. In short, the data tells you unequivocally to either short the barbarous relic or avoid it entirely.
The headline risk bottom line is don’t let anyone sell you a market perspective based on narrative; demand the data that led to their conclusion. If no data is supporting their viewpoint, run, don’t walk in the opposite direction.
To learn more about Lanndon Whaley, please visit WhaleyGlobalResearch.com.
