By Michael A. Gayed
Whether the majority realize it or not now, the crowd will soon enough. We are nearing the end of one of the most incredible inter-market disconnects in modern times, as the relationship of bonds to stocks nears a breaking point.
I don't care what you hear in the media. We should all want to see rising rates. Rising rates means growth and inflation expectations are rising in a fiat economy. It signals a healthy demand for money. It signals an environment of expanding profits.
"The truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is."
Markets rallied strongly last week. Brexit became Bridiculous. Stocks in the S&P 500 /zigman2/quotes/209901640/composite SPY -2.07% staged a stunning comeback after a worldwide two-day crash. Feels safe, right? Problem is what led markets higher was all the wrong stuff. Defensives led stocks. Utilities /zigman2/quotes/206645117/composite XLU -3.22% have been absolutely crushing it. This matters because as shown in the 2014 Dow Award-winning paper I co-authored (available here to download), utilities have tended to be a leading indicator of volatility in the past.
I have said it before, and I will say it again. The behavior of bonds is wildly disturbing globally, and the U.S. is not immune. If bonds are right, then a deflation tsunami may be coming. And that means stocks likely have a lot of downside and volatility to come in the years ahead.
If bonds are right, we are at the end of the bull market and period of low volatility /zigman2/quotes/202248173/composite VXX +8.66% for stocks.
But are bonds right? Maybe not. If indeed stocks are right about the future, then it is the end of the bond rally, and rising rates finally will come. We should all be cheering for that to be the case.
Either way, though, I believe we are nearing the end of one of the most historic disconnects of all time. When we will find out the answer of who is right is unclear at this point. Every day that goes by, though, we are closer to one class of investors being dangerously wrong. For now, our Beta Rotation Index (click here to view) remains in defense mode. Short term, the weather isn't looking so hot for risk assets. Long-term? The weather depends purely on whether bonds are right.
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