“The best way to deal with an anomaly is to wait it out until it disappears.”
— Robert Shiller
Anomalous Friday Charts
I’ve been trading markets for 25 years now, so I've seen everything. Except for everything that’s happening now.
Markets are doing things they've never done before; or doing the opposite of what they've always done; or doing nothing much when they should definitely be doing something big.
This market has more anomalies than a full season of The X Files. Should we just wait it out until they all disappear? Let's check some charts to see how long we might be waiting:
Two-year Treasurys are doing things they’re not supposed to do:
Yields have decoupled from Fed Funds, trading an unprecedented 200 bips above the benchmark rate. That could mean rate hikes are fully priced in. Or that they are more than priced in. Or that the Fed is way behind the curve. Or that the market is way ahead of the curve. Or none of the above. We don’t have much to go on.
Ten-year Treasurys are doing things they’re not supposed to do — in the other direction:
Ten-year yields are an unheard of 550 bips below CPI. You can plausibly argue that means the Fed needs to hurry up and get aggressive. Or that it should sit on its hands and do next to nothing.
The Yen is making new lows at a time you’d think it would be making new highs:
The currency of big, stable, safe Japan is meant to be a flight-to-safety asset. It’s not this time. Which shows that geopolitical risk is driving these market moves, not financial risk. Financial markets have a hard enough time predicting finance things, let alone geopolitical things.
The standard playbook is not working, Part One:
The Aussie dollar is usually the first thing you buy when commodities rally. Not this time. Likely because it’s too close to China, which is too close to Russia.
The standard playbook is not working Part Deux:
The other first thing you buy is Materials stocks. Also not working!
Forget playbooks; some traders don’t even know if they’ve bought, sold or done nothing at all.
Nickel futures are toggling between limit up and limit down, with a high chance of trades being canceled in between.
Gas suggests this too shall, um, pass:
Bad pun aside, UK gas futures have reverted to something close to normal.
Oil futures look pretty normal, too:
But it’ll be a little while — the curve suggests a year or two.
Equity investors are similarly sanguine:
With the S&P just 5.5% off its all-time highs, we seem to be taking Robert Shiller’s advice to just wait ’till it all goes away. If you only looked at equities, you’d hardly know anything’s happening.
Go ahead and keep your head in the sand. It’ll all be fine when you look up. Maybe.
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