Famed 60/40 Portfolio Is So Beaten Down It’s Almost Cheap Again (Worst Return Since 2008 As M2 Money YoY Nosedives)

Model is down 20% this year, its worst return since 2008
Yet routs could allow model to ‘rise from the ashes’

(Bloomberg) Blame the Fed, war and fiscal profligacy all you want. But big trouble was lurking in many widely followed portfolio strategies long before those threats took hold (because of the Fed).

That’s the upshot of new research that uses a yield-derived valuation model to show the famous 60/40 allocation reached its most expensive level in almost five decades during the Covid-19 rally. The situation has reversed in 2022, which is now by some definitions the worst year ever for the bond-and-equities cocktail.

The data is a harsh reminder of the primacy of valuation in determining returns. It may also pass as good news for the investment industry, suggesting logic rather than broken markets is informing the current carnage. Leuthold Group says the hammering has been so brutal that valuation is apt to become a tailwind again for a portfolio design many seem willing to leave for dead.

It’s worth considering the heights from which 60/40 has fallen. Yields on the Bloomberg USAgg Index slid in 2021 to 1.12%, while the earnings yield on the S&P 500 dropped to 3.25%, one of the lowest readings in the last four decades. Taken together the levels had never implied a more bloated starting point for cross-asset investors.

To be sure, the 60% stock, 40% bond mix did a good job of protecting investors against market swings in the past. This year has been different, with stocks and bonds falling in tandem amid stubbornly high inflation and the Federal Reserve’s whatever-it-takes approach to bringing it down. A Bloomberg model tracking a portfolio of 60% stocks and 40% fixed-income securities is down 20% this year, a hair away from topping 2008 as the worst year ever and only the third down year since Bloomberg started tracking the data in 2007.

The co-movement of equities and bonds has tightened “decisively” in 2022, with three-month rolling correlations jumping to a 23-year high of 45%, versus the 10-year average of minus 25%, according to Mandy Xu and Frank Poerio at Credit Suisse Group AG. In other words, both are selling off in tandem, with the two recently posting 11 consecutive days of moving together, a streak not seen since 1997. And their performance is twice as bad this year as it was in 2002 when stocks posted a similar drawdown.

“We were coming off historically high valuations for both equities and fixed income,” Marvin Loh, senior macro strategist at State Street Global Markets, said in an interview. But the strategy could soon start to do what it’s supposed to do, he added, “because you’re getting in with fixed-income valuations that make a whole lot more sense. There’s a lot more natural buyers for a 4% 10-year than there is for 0.3%.”

Plenty of others have taken this view as well — cross-asset strategists at Morgan Stanley said over the summer that the 60/40 portfolio was merely resting and not yet dead, while researchers at the Independent Adviser for Vanguard Investors said it was a bad time to “steer a new path” and abandon the balanced approach.

Elsewhere, exchange-traded fund investors are preparing for the possibility that peak bond pain has passed, with investors scooping up call options on products like the iShares 20+ Year Treasury Bond ETF (ticker TLT) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).

Let’s see how it all works out as M2 Money YoY crashes with Fed tightening.

The B.I.D.E.N System! Biden Plans To Release Additional 10-15 Million Barrels Of Crude Oil From Strategic Petroleum Reserve (Regular Gasoline Prices UP 62% Under Biden And Diesel Fuel Prices UP 101.4%)

Joe Biden reminds me of Dennis Reynolds from “Its Always Sunny In Philadelphia.” And his D.E.N.N.I.S System. But Biden’s System is blatant politics. With the midterm elections in November and Democrats looking a bit behind, Biden is pulling out the political guns by 1) ramping up student loan forgiveness … again and 2) releasing 10-15 million MORE barrels from the Strategic Petroleum Reserve to lower gasoline prices. Particularly after his failed attempts to get the Saudis to pump more oil (too bad Biden put the kabash on US energy exploration and cancelled the Keystone pipeline).

Having said that, we can see that BEFORE the latest SPR order, the US Strategic Petroleum Reserve, meant to cope with national emergencies like … Russia dropping a nuke on the US, has declined -36% under Nuclear Joe.

At the same time, regular gasoline prices are UP 62% under Biden and the all-important diesel fuel prices are UP 101.4% under Biden.

Of course, expect The B.I.D.E.N System to do everything in its power to destroy the economy if Republicans win the midterms. Including no more SPR release.

The B.I.D.E.N. System.

Pivot Powell? “Temporary” Cash Added To Banking System Seems Strangely Permanent Under Bidenflation (Will The Fed Break The Market?) Stocks UP Over 1% Today

Will The Fed break the … market?

I love to teach, but my students at Chicago, Ohio State and George Mason would fall asleep when I would discuss repurchase and reverse repurchase agreements (or REPOs and Reverse REPOs). But repos and reverse repos are a critical part of the banking system.

In short, the Repo market is a window into what’s going on behind the scenes.

As Bidenflation soars, and The Fed counterattacks, we see Fed’s repo market remains elevated. Note that The Fed’s balance sheet (orange line) is only slowly being reduced.

Right now, the risk lurking in the shadows is Balance Sheet Runoff. The Fed, the markets, the regulators, have limited experience with the Fed shrinking the balance sheet. Bottom line: there’s a risk that Balance Sheet Runoff will breaking something.

The global stock market is up again today, despite Fed tightening and a war in Ukraine. The Dow is up 1.38% and the S&P 500 is up 1.75%.

Likely cause? Rumors that The Fed and other global central banks will pivot sooner than later.

It is likely that The Fed will pivot to prevent a crash and the stock market in pricing in that pivot.

Bernanke, Yellen and Powell are NOT Paul Volcker. In fact, I am coining a new nickname for Fed Chair Jerome Powell: Pivot Powell.

Another Saturday High! US Mortgage Hits 7.20%, Highest Since 2000 As Fed Counterattacks Bidenflation (US Core Inflation Highest Since 1982)

Another Saturday high for the Biden Administration. Americans got less money thanks to Bidenflation.

The US 30yr Mortgage rate just hit a new high since 2000 as The Federal Reserve counterattacks the highest core inflation rate (6.60%) since 1982.

According to the Taylor Rule (which The Fed has chosen to ignore), a 6.60% core inflation rate implied a Fed target rate of 12.40%. Not likely since Fed Funds Futures data points to …

A maximum target rate of 4.963% at the May 2023 FOMC meeting, significantly lower than the needed rate of 12.40%. The Fed is like the world’s worst bar bouncer.

Rather than accepting blame for the horrific inflation rate crushing the American middle class and low wage workers, Biden is twisting the night away.

The Fed’s Limbo Rock! How Low Can Consumer Sentiment For Housing Go? (Lowest Reading Since 1992 As Fed Counterattacks Bidenflation)

The Fed’s Limbo Rock! How low can consumer sentiment for housing go?

The University of Michigan’s consumer sentiment index for housing for October just fell to its lowest level since 1992 as The Fed counterattacks against Bidenflation, causing mortgage interest rates to rise.

Of course, despite slowing home price growth, expensive home prices are really hurting along with expensive rents. But how sustainable are high home prices when REAL average hourly earnings growth is negative??

Movin’ On Up To The Dark Side! US Core Inflation Rises To Highest Level (6.6% YoY) Since 1982, Bond Volatility Now Highest Since Covid Lockdown (REAL Weekly Wage Growth Declines To -3.8% YoY)

The US is movin’ on up, to the dark side, while DC elites live in deluxe apartments in the sky. The US is movin’ on up to the dark side, we finally got a piece of the Banana Republic pie. … And its tastes horrible!

Today, the BLS released its inflation data. And it was terrible.

To begin with, headline inflation remains high at 8.2% YoY while CORE inflation (headline less food and energy) rose to 6.6% YoY.

Meanwhile, REAL average weekly earnings growth YoY further declined to -3.8% YoY.

On the bond front, the Bank of America ICE bond volatility index rose to Great Recession/banking crisis levels (also achieved during the Covid government shutdowns).

But back to the low-ball BLS inflation data. The biggest gain in price is … fuel oil at 33.1% YoY. Food at home rose 13.0% while gasoline rose 18.2%. Rent, according to the BLS, rose 6.6%.

Biden has probably been told by Ron Klain and Susan Rice that this is a good report.

US Core Inflation Seen Returning to 40-Year High as Rents Rise (Producer Price Index Higher Than Expected At 8.5% YoY)

The US Producer Price Index (Final Demand) printed at a higher than expected 8.5% YoY, throwing cold water on the notion that inflation is “transitory.”

A key US inflation measure due Thursday is set to return to a four-decade high, underscoring broad and elevated price pressures that are pushing the Federal Reserve toward yet another large interest-rate hike next month.

The so-called core consumer price index that excludes food and energy is projected to rise 0.4% in September from the prior month and 6.5% from a year earlier, matching the rate seen in March that was the highest since 1982.

The overall CPI, however, is expected to decelerate to a still-rapid 8.1% annual pace, restrained by a decline in gasoline prices, based on the median estimate.

Meanwhile, rents are soaring.

Biden’s policies are sending me to the poorhouse with killer inflation.

What Was The White House Press Secretary Talking About? REAL Disposable Income Growth Is NEGATIVE And Diesel Prices Are Skyrocketing (Gasoline Prices Rising Too) Will The Fed Pivot Soon?

I feel sorry (sort of) for people like White House Press Secretary Karine Jean-Pierre who has to read ridiculous scripts in defense of awful Federal policies. For example, yesterday she touted Biden’s “accomplishments” of rising real disposable US income and declining gasoline prices. What? Doesn’t she read Confounded Interest?? /sarc

First, REAL disposable personal income growth for the US is NEGATIVE and has been since Biden and Congress embarked on their green energy crusade driving US inflation to its highest level in 40 years. Not exactly a great sales point for the midyear elections.

If we look at REAL average hourly earnings growth, a similar measure, we see that it is negative also. So, what on earth is Jean-Pierre talking about?

She also mentioned that gasoline prices are falling. Except that they are rising again. Apparently her talking points were from September.

Then we have diesel fuel prices, the backbone of the shipping industry, rising like crazy as Biden drains the strategic petroleum reserve.

Meanwhile, The Federal Reserve is tightening their uber-loose monetary policies (thanks Bernanke, Yellen and Powell). Will The Fed pivot to help with the midterm elections OR will The Fed keep trying to extinguish inflation by raising rates and withdrawing Fed monetary stimulus?

The we have Biden speaking (incoherently) with Jake Tapper about the possibility of recession.

The Fed’s BIG Green Bag! MSCI Global Technology Index Has Worst Month since October 2008 As Fed Withdraws Stimulus (NASDAQ, PayPal, ARKK All Tumbling)

I feel like I am living in the horror movie “Saw”. The Federal Reserve is tightening their BIG green bag of money to fight inflation … caused by Biden’s energy policies and massive Federal government spending.

(Bloomberg) Stocks fell, pressured by rising Treasury yields and signs that company earnings were set to disappoint. A gauge of the dollar climbed to the highest this month.

European shares declined for a fifth straight session as bond yields jumped amid concerns of persistently high inflation as well as the impact of hawkish central bank policies on global growth. The Stoxx Europe 600 Index dropped 0.6%, with futures on the S&P 500 down by about the same magnitude, pointing to another risk-off day on Wall Street.

The mood is fragile ahead of Thursday’s US inflation data, with the case for another 75 basis-point rate hike likely to be strong if the reading comes in higher than than forecast. Fed officials until now show little sign they are in a mood to pause the rate-hiking cycle despite the potential hit to economic growth.

As The Fed tightens, the MSCI Global Technology index had the worst month since October 2008.

And the NASDAQ Composite index continues to fall with Fed removal of money. Hold on to your lugnuts! Because The Fed hasn’t stopped tightening.

Both ARKK and PayPal have gotten clipped by The Fed too.

The Perils Of Fed Tightening 3: US Taxpayers Getting Scaled By Fed Losses Thanks To Fed Tightening

The Federal Reserve, in their war on inflation (partly caused by excessive monetary stimulus since late 2008 under Nobel Laureate Ben “The Mad Money Printer” Bernanke) has led to large losses on their Treasury holdings as rates rise. The bill, of course, goes to Janet Yellen and The US Treasury. Ultimately, that burden is paid-for by US taxpayers.