“…without question, you want to own things that are priced in dollars!

Now, of course U.S. stocks are priced in dollars, right? Right! And, sure, own some (we do), but be careful doing so when they’re priced at 1999ish valuations (by several metrics) and the economy has the proverbial Mount Everest yet to climb.

And definitely own other things priced in dollars that aren’t historically expensive.”

“Our commodities exposure (DBA and DBB being brand new positions) now makes up roughly 20% of our core portfolio; and I suspect we’ll be incrementally adding as things progress.”

“You’re about to experience, at least at the open, what I’ll call a classic what-others-think-others-are-going-to-do rally.

The linked phrase above was the subtitle to my April 10 post; I recommend you read it (again?) when you have a chance. Here’s a snippet:

“My base case that stocks have yet to see the worst is entirely based on data and experience. My illustrating aplenty herein that bear market retracement rallies are the norm is meant to help our readers understand how incredibly risky it is to wade into this snap-back rally as if the bear market is already over. Which, by the way, would make it the shortest on record — amid the worst economy on modern record! Just seems like a very far-fetched notion if you ask me…”Still my base case, by the way…

In a nutshell — in the short-run:

“Keynes suggested circa a century ago that trading (as opposed to, I’ll say, investing in) markets is not about assessing fundamentals, it’s about what traders think other traders are going to do. And for the more savvy traders, it’s about what they think other traders think other traders are going to do.””

From “A Better Look, Commodities, and A Monster Mountain Left to Climb” on July 3:

“The next few weeks will be telling, as, per the latest news, a number of states are delaying, and or, reversing certain stages/aspects of their reopening plans.
Half of this week’s improvement showed up in the commodity space. Which, coincidentally, is something we anticipated and, therefore, have begun to express in client portfolios.

I should tell you, however, that while rising commodity prices does show up as a positive in our macro index, our bullishness there has everything to do with the prospects for a weaker dollar going forward (and, ultimately, with regard to metals, the prospects for infrastructure spending), as opposed to the prospects for robust economic growth anytime soon.”

“…in a world where the world’s governments are willing to weaponize their equity markets against their respective economic woes, not to mention against each other, stock prices can remain detached from economic reality for what can seem like a very long time. History (those charts I alluded to), however, strongly suggests that the reattachment can be most painful…”

From “The Most Bullish Chart for Stocks Right Now” on July 6:

“Now this one guys/gals is the most bullish chart of all for stocks for the remainder of 2020. And it’s really incredible. It’s the TGA (treasury general account). Think of it as the treasury’s piggy bank. The amount you see there amounts to well over a trillion dollars (1.6 in total) of new borrowing (a trillion being the normal entire-year’s budget deficit) that essentially wasn’t needed to fund the government. They literally issued this debt just to hold onto the cash. So, why? This is an historic first! Well, as you know, or should know, I struggle with conspiracy theories, but this one is so blatant I can’t help it. This is Mnuchin essentially assuring that no matter what, whether Congress passes more stimulus, and/or regardless of what the Fed does, he has the firepower to juice the markets during the critical months leading into you-know-what in November.

Yes, this is huge support for stocks, you can bet on it. However, betting big on stocks given everything else going on (and there’s lots) is — despite what I just wrote — hugely risky. Stocks can still fall in the face of rampant stimulus, I’ve seen it… If not over the next few months, dear Lord, just wait till we reach the point when they’re forced to let up, even modestly, on the life support for stocks:”

To add a little more to our messaging herein that the equity market is historically disconnected from economic reality these days, here’s The Wall Street Journal’s Nick Timiraos quoting from this week’s banks’ earnings calls:

WFC: “Our view of the length and severity of the economic downturn has deteriorated considerably”

JPM: “The recessionary part of this you’re going to see down the road”

Citi: “The pandemic has a grip on the economy and it doesn’t seem likely to loosen…”

“The treasury will issue debt without restraint and the Fed will purchase it likewise, indefinitely.

Commodities — gold especially — are the most obvious trade under these circumstances. US equities stand to ultimately benefit as well, however — and this will produce great anxiety for the Fed along the way (due to extreme global carry) — with bouts of extreme volatility, given the unavoidable economic stagnation such a scenario creates, and the potential for huge political disruption — regulation, taxation, etc. — as growing income/wealth inequality continues unabated (exacerbated, in fact) going forward.

Foreign market equities, emerging markets in particular, stand to outperform the US markedly for several years to come; but — while we anticipate adding there incrementally in the near-term — we’re going to let the COVID situation and the coming election play themselves out before we go there in a big way.

The immediate question for equity markets being, given the abysmal state of macro affairs, political risk, geopolitical risk and so on, will there be the 50+% correction that will reset valuations, etc., to the point I believe necessary for the US market to recapture any semblance of a “fundamentally” investable setup — at all or anytime soon? Bottom line; that risk is there, which demands that we hedge our equity exposure against a major drawdown either until one occurs or until the risk abates…”