Home to Roost

Turkey time is fast approaching. With all that 2020 has brought upon us, its hard to be thankful. This year's Thanksgiving weekend will be an unusually sombre affair. Our family will be having a highly unsatisfying, distanced Zoom-feast. Since it's just the two of us this weekend, I asked Pat if they sell 5 lb turkeys? "Yeah", she said, "they're called chickens."

And speaking of such farm foul, the COVID chickens are now roosting in Trump's magically fulsome hair. Deriding Biden for not wearing a mask seems now like a career-limiting (and perhaps life-shortening) strategy by the stricken President.

But this weekend we should focus on the positives, at least for a little while.

Although battered, the global economy is holding up a well as can be expected, courtesy of the massive fiscal band-aid being applied by most governments. Markets have been buoyed by the monetary easing so swiftly applied by central bankers, fearing a liquidity abyss similar to 2008's GFC. And people everywhere whose lives have been thrown for a loop are pragmatically dealing with the 'new normal' world of changed priorities and procedures.

Unfortunately, when it comes to the pandemic, we are a far cry from blowing the medical all-clear. Fear of a 'second wave' flare-up, fanned in part by Trump's own gross negligence, is creating a self-fulfilling loss of economic momentum. The enormous debt burdens now being absorbed by the global balance sheet will retard growth and wealth creation for decades. A sub-par economic recovery, with higher tax burdens, is now the base case.

As markets continue their choppy, trendless way forward, investors are poking among the ruins of a rally that has run out of steam. Yesterday saw a light volume rally that reflected a lack of sellers. Buyers were missing as well, as low volumes proved. But breadth was impressively robust, as virtually any spin you wanted to put on the latest news of Trump's COVID 19 diagnosis was deemed a positive and all sectors participated. GOP fans looked for the 'quick fix' outcome while the Democratic poll leads widened, engendering a generally bullish mood.

The bond market, sensing a fiscal package was in the cards, responded poorly to these developments. As a result of lowered odds of a contested election, inflation expectations, critical to market dynamics have suddenly stirred. Though debatable at best, a 'Blue Wave' victory would certainly hasten a concomitant fiscal boost. This is precipitating an abrupt adjustment in asset preferences, as economic growth would improve more rapidly than under the current stalemate. Goldman Sach's strategy stance is now bullishly pro-cyclical after their recent research promoted the merits of the Value/Cyclical trade over the currently crowded Growth/Defensive stance to which most investors have gravitated.

My reading of the inter-market action is directionally similar, yet there is more wood to be chopped prior to going all-in on the reflation trade. The uncertainties are clearing up, paving a path to an improved 2021 economy. The mean reversion trade of the century is starting to shape up. Look at the massive underperformance of energy vs technology. The sunset industry, energy, has collapsed to 10 cents on the dollar, relative to the sunrise technology. The TSLA:XOM long-short pair trade has been more than a twelve-bagger this year.

Surely we can spare a little cash to put on a pro-cyclical bounce trade. The fourth quarter of the year is seasonally a period of portfolio positioning for the year-end. Selling 'losers' to show 'winners' runs its course during the lead up to Christmas, setting up a Santa rally effect that has higher than random probability. Next year's 'comps' will be easy to beat, should we continue down the path to economic normalcy.

But I'm getting ahead of myself. Back to chopping wood. At my cottage, I've just laid in a fresh bush cord for the upcoming season. The fall is a time for sitting in front of the fireplace with a hot drink and chill attitude.

Time also to be thankful for what we have, not for what we are missing. That is unless you have chickens in your hair.

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Risk Model: 3/5 - Risk On

Volatility markets gave a signal yesterday (with a tentative follow-through today) that looked encouraging. Below, I show the 3 month Vix relative to the signal line derived by the back-testing work done by Adam Bomers when at Aurion Capital. Although you may have heard that the VIX was up yesterday, longer-dated measures importantly declined, signalling a bullish reversal of the correction.

Similarly, the Copper/Gold ratio improved after a brief risk-off head fake in September.

Both these measures need to resolve definitively across their respective horizontal lines (VIX lower and Copper/Gold higher) to confirm a durable pro-cyclical trade and not just another mean-reversion head-fake.

Over to you, U.S. electorate.