Global Allocation Fund commentary for the month of January 2018.
“There are two bubbles: We have a stock market bubble, and we have a bond market bubble. The trouble in the bond market will eventually be the critical issue.” – Alan Greenspan, Bloomberg TV, January 31, 2018
During January we have witnessed the surpass of various historical records that remained in the stock markets, especially in the USA. We have seen record purchases of ETFs and equity funds by the retail investors, which has definitely entered the “market that never falls”. The bullish optimism levels registered have surpassed all previous bubble highs. Volatility has registered historical lows while the RSI have placed themselves at maximum levels. Four hundred days have gone by without a correction that reaches a mere 5%. We are talking about data series which include more than 150 years.
We have seen without any doubt, the total claudication. Maximum equity exposures in the portfolios, historical liquidity lows, savings plummeting and credit card debt above 2008 levels, funding a good portion of cryptocurrencies´ purchases.
On a strategical level, we have slightly increased our short exposure, exchanging part of this exposure on the S&P 500 for put options of the same index. These are one-year options at 2000 strike. The cost of this option was not more than 1% of the AUM, a total bargain. Delta is low now but will increase significantly if the market falls and will go down if the market rises. We also switched out of the short S&P futures into short exposure to Russell 2000, increasing the short exposure in this index, which we like even less than S&P 500.
Regarding bonds, we increased our short exposure in 30-year German bonds, which have been gradually falling as stock markets were rising. In Europe, this is the “great bubble” that never explodes, thanks obviously to BCE purchases (supposed to end in September), the great originator of the bomb that is just around the corner.
We believe that a synchronized selloff of both bonds and equities has increased significantly these last few days. Correlation between both assets has suddenly augmented to levels seen early 2009. Corporate bonds, especially US High Yield are slowly starting to suffer. Imminent danger.
During this month, European banks have registered significant gains. Nevertheless, after seeing Deutsche Bank’s results and Italy’s NPL´s figures, shivers ran down our spines. These are the ones supposed to earn money when interest rates go up.
February has not had a promising start I must say. I recommend re-reading last month’s commentary, and, as Greenspan used to say, I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.
See the full PDF below.