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*Pension Partners Tactical Exposure Model Year-To-Date through July 8, 2016 +15.92%
*Beta Rotation Index remains defensive
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“Tell me to what you pay attention and I will tell you who you are.” – Jose Ortega y Gasset
The last couple of weeks have been nothing short of bridiculous.
Britain votes to leave the EU, and worldwide markets crash. Many European indices in a span of two days shed greater than 10% in market capitalization, rivaling historic declines that occurred in the 1987 Crash. The media hammered the idea that leaving the EU was cataclysmic. Pensions were going to get destroyed! A global recession was about to start!
Two weeks later? The VIX Index has its biggest decline in history.
Somehow all of that reasoning for why Lehman 2.0 was about to begin was forgotten. Actually, I shouldn’t say “somehow” because the reason is clear: stocks staged a huge rebound in a very short period of time. Because narrative always follows price, the story was constructed as to why stocks came roaring back. I cannot blame the media for doing this because their role is to report and find a reason for why markets do what they do. At the end of the day, the media gives the people what they want, and the mind loves a pattern and story. However, the bipolar behavior of markets should not be cheered or explained away. It should rather be a reminder that no one can predict the future, and that short-termism is a horrendous way to not only manage money, but also live life.
The real story isn’t the comeback in stocks. The real story is the risk-onff behavior of bonds and Utilities. No, that is not a typo. Since Brexit, long duration Treasuries have been on a tear as yields dropped in an unrelenting way. More durations on the global bond market stage went negative. On the surface, it looks like a risk-off environment when looking at defensive posturing. Yet, the fact that credit spreads have not widened suggests a more risk-on type of word. Strong credit is more a sign of risk-on conditions for markets.
Risk-onff in the last few weeks has thrown off some indicators, but such a condition cannot last in the near-term. More likely than not, weakness may reassert itself in the coming weeks just as everyone believes the danger of Brexit is over.
Why do I say this? Because the extreme decline in volatility and breadth push higher lends itself to some form of mean reversion back down again. Our Beta Rotation Index (click here to view) remains in defense mode for now. While there are conflicting signals as to the potential for a near-term correction, it is clear that defensive momentum has thus far remained intact.
Given that our investment strategies can quickly rotate, we stand ready to get out of this posture in a moment’s notice. There will come a point where a defense breakdown and cyclical melt-up takes place. Because so much money has chased low volatility investment themes, the majority likely will be late to the game of shifting away from overpriced yield to underpriced capital appreciation. Yet, the gap between low volatility and high beta stocks presents an incredible opportunity in the years ahead.
The mind loves a narrative, and we all know that by the time high beta cyclicals come back in vogue, some story will be concocted as to why years after the fact. Regardless of the reason why it happens, that normalization of the “right stuff” leading markets is brexciting.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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