The global BAML fund manager survey was released a few days ago and it showed two key observations: this is no longer a bear market rally but a bull market, and that the Dollar is done and has lost its reserve status with everyone now most short in over 40 years!
Fund managers cannot be blamed for this as the Fed has done an incredible job in supporting the markets and asset classes accordingly, giving the illusion that all is well. In truth, only one sector and a handful of stocks have been performing extremely well, whereas most "old economy" and "cyclical" sectors are still below their two year levels or more. Sectors like Energy, Financials, Industrials, and Retail stocks have massively underperformed. So, when one says we are in a bull market, make sure to rephrase that by saying the Technology sector is in a bull market. What does it mean when even Softbank (SFTBF) and Swiss National Bank (SWZNF) and other funds of funds are long Apple (AAPL) , Amazon (AMZN) , Microsoft (MSFT) , and Alphabet (GOOGL) , deviating away from their fund mandate to just chase returns? Everyone is parked in the same stocks, be right as that may be, timing is critical. Today the Dollar is just like that, it is so asymmetrically stretched on the short side, it is impossible to find a dollar bull.
It falls back to the elastic band theory, when one stretches an elastic bank so much and so wide, at some point it can lose its tensile strength and eventually snap back! That is where we are today. A sense of complacency on the dollar losing its hegemony status as the central bank has diminished its value. It has no other way to solve the massive debt problem, other than to inflate it away. This is an experiment, one they have no idea how it ends but know not what else to do. But the dollar is still the lesser of all the other developed market currencies, the lesser of the evils. It will gain its importance and safe haven status from time to time, especially when risks get very skewed to one side. Make no mistake, we are at the beginning of the demise of the dollar, but we are still years away from a total collapse. After all, which other currency would you choose to replace it? Is there even a credible candidate?
After the initial rebound post lockdown opening of economies, we saw a rush for the economy to pick up, consumers to spend, travel, basically make up for all they did not get a chance to do three months ago. But looking at the economic data, after the bounce in May and June, July onward is showing signs of stalling. We are not going up in a V-shaped manner. Employment is still a problem and the labor market is weak. The Fed has done all it can to boost markets, but even now it has stayed flat at buying just $120 billions of Treasurys. The economy is now in the hands of fiscal spending dynamics. Judging by the way the Democrats and Republicans are fighting, there is an impasse about what and how much to spend. They don't really care about helping the people but more about whether they get elected.
Even the Fed minutes from their July FOMC meeting suggested they are still worried about the recovery which is still weak and uncertain. One of the most important points in the release was that the Fed members are not contemplating yield curve control as they do not see the benefits of that. That comment saw Bond yields squeeze up as the bond market got knocked down. For the longest time, investors have felt that the Fed will not let rates go up as they will cap them while at the same boost enough money in the system to make the system very easy. If the Bond market is allowed to move in the way demand/supply dictate, then yields will move higher as inflation is rearing its ugly head. This can present risks to the frail economic recovery at a time when growth is muted, suggesting stagflationary implications.
It's a shame that the whole world is short the dollar at a time when risks are picking up. During a quiet August month, a small unwind can turn out to be a painfully vicious one especially if no one is prepared for it.