Jurrien Timmer
@TimmerFidelity
Dir. of Global Macro @Fidelity. Student of history, chart maker, cyclist, cook. Helping investors break thru the clutter. Views are mine.
1.4K Following 221.3K Followers
Bitcoin is looking particularly interesting here as it challenges key resistance at $80k. If it breaks it will confirm a double bottom targeting $100k.
Both the BCOM spot index and Bitcoin continue to be good diversifiers, as are managed futures, REITs, hedged equity, and cash.
In my view, a broadly diversified 60/20/20 model continues to make sense. The chess pieces are always moving, and currently it’s Bitcoin and commodities in the lead, followed by the Mag 7 which has perked up in recent weeks. At the bottom are (what else?) long yields.
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Will 5.0% be the ceiling for the nominal Treasury yield? Maybe not, but for bond investors the risk-reward math has gotten considerably better. The 5% yield provides such a good cushion that if the 10-year yield were to fall 100 bps, an investor would make 11.9%, while only losing 1.9% if the yield were to rise to 6%.
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Below is a longer view of real yields vs real potential GDP growth and R-Star. For the ever-rising debt burden to remain sustainable, it’s essential that economic growth remains above the country’s funding rate. Based on the CBO’s real potential growth rate of 2.5% (and falling below 2% in the coming years), that is no longer the case. Hopefully, the CBO projections are too low given the AI boom that is currently underway. If not, we run the risk that the rising cost of capital will choke off the economy’s formidable growth. Note below that the last few times that the real yield spiked to or above the real potential growth rate were 2007, 2000, and 1994. Those were either rate shocks or growth shocks.
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As for the Fed, it raised rates last week as expected, and the market wants several more hikes. The SOFR curve is considerably more hawkish than the Fed’s own dot plot, which as usual is all over the place. The biggest development as far as I am concerned is that the 10-year real yield has now risen to above the economy’s real potential growth rate.
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And below is a nifty heatmap of the weekly progression by quarter. Aside from 2021, which was the recovery form COVID), only 2018 shows a similar momentum. That was a mid-cycle boost from the TCJA. Ironically, 2018 was a down year as falling multiples more than offset booming earnings. It’s a reminder that prices do follow earnings, but rarely at the same time.
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How booming are #earnings#? Very. The incoming waves of quarterly estimates are still rising, which is the opposite of what normally happens as we approach a new quarter. For Q3 earnings, which will be reported in a month, the expected growth rate is holding in at 24% (same as last quarter).
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As disturbing as the near-perfect price analog is between the semis today and the internet stocks 26 years ago (see below), the critical difference is that earnings were non-existent in 1999 and 2000 while they are booming today. So, at forward P/E of 20x, there is no valuation bubble as far as I can see. If the AI theme unravels at some point, my guess is that it will be because investors are choking on the firehose of capital raises as opposed to being deceived by earnings that don’t materialize.
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On the AI front, the trade has been dead money for more than 3 months now. The metrics I am following (token expenditures and GPU lease rates) are all flat to down. The price of memory (DRAM) seems to be the only thing that is still going up. 🧵(1/2)
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Triple digit oil matters because crude oil remains negatively correlated to the S&P 500, which remains positively correlated to bond prices. It’s all one trade right for now.🧵(2/2)
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The energy complex is struggling through an echo of May’s severe supply stress. At $100/barrel, crude is probably not expensive enough to derail the US economy’s resilient growth, but we are now 6 months into a regime of supply chain bottlenecks, and those pressures are working their way through the inflation data at a time when affordability is already a massive concern. The hyperscalers are immune to rate hikes, but American homebuyers are not.🧵(1/2)
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The S&P 500 has not made any lasting progress since early June. The market remains in a state of churn as investors try to assess whether earning growth is peaking, whether the AI boom has ended, and whether the Iran conflict will continue to accelerate as bond yields surpass 5% and oil trades above $100. What’s the catalyst to generate the bull market’s next up leg? For now, I don’t see one. Welcome to September!
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The real 10-year yield is now 2.67% and is above the US economy’s potential real GDP growth rate of 2.5%. That is a significant and somewhat troubling milestone. Yes, margins are still rising and credit spreads remain tight and earnings are still booming, but investors are not paying up for what well may be peak earnings growth. The result is an S&P 500 that has treaded water since early June, with only 29% of stocks above their 50-day moving average and 53% above their 200-day MA.
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Good to be home in Boston and cooking again, and this is some of the best swordfish I haver seen. On the grill with corn-on-the-cobb and a burrata-tomato-cucumber salad.
Finally, Bitcoin has been on the move after holding the $60k support zone for almost a year. That’s how long a typical Bitcoin winter lasts, so I’m sensing that a new 4-year cycle bull market is underway. Note that the Z-score of BTC/gold has turned positive after being -100%. In the past that has generally been confirmation of a bottom.
What does all of the above suggest? We are in a new secular regime of a higher cost of capital, which suggests that governments will respond with that oldest trick in the book: financial repression.
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Gold has rebounded from its support at $4k and based on global liquidity and rising demand we could easily see $5k or higher in the coming months.
The monthly chart shows that we remain in a secular bull market for commodities. This suggests that consumer inflation will remain sticky for some time, with the cost of capital to follow.
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Bitcoin has held the floor of its power law curve and has now corrected long enough to satisfy the time element of its mild 4- year cycle winter.
Gold and Bitcoin have been the momentum laggards all year and are now catching up. I believe they have plenty of room to run.
