The "Everything Rally"
EDITOR'S NOTE
I don't know who coined it, but the "Everything Rally" is such a great term for what's happening right now.
Stocks are up. Commodities are up. Bitcoin is flying. Trading cards are surging in value. The MSCI all-country world index, a basket of stocks in 49 different countries, opened at another record high today. It all feels "toppy," or so people have been saying for months while we keep climbing. It reminds me of the anecdote in a recent Dan Loeb letter where he says a 13-year-old wrote to him to boast of his investing prowess. The line that best sums up 2020, as I've said before, is Dave Portnoy's "stocks only go up." Now everything goes up!
We all know this can't last forever, yadda, yadda. Except that it can, in the sense that strong, broad-based rallies like this are often glimpsed in the early stages of bull markets. As the Journal points out, the last time U.S. and global stocks were rallying alongside raw materials for this long a period of time was in 2009, as the decade-long expansion in stocks was just getting started. (The Journal, by the way, first started using the "everything rally" language back in May of 2019.)
Now, wait a minute--how on earth could we be at a similar point now, with stocks already at all-time highs, as we were back at the near-lows of 2009? The S&P 500 has just climbed 45% in two years. The Dow, nearly 30%. The Nasdaq I won't even mention (okay, it's up 79% since January of 2019).
It sounds crazy, but some pretty savvy people are betting the run can at least continue through 2021. Like Dave Zervos. The Jefferies strategist, who's been right on the rebound from the pandemic lows, made a remarkable admission the other day: he's out of hedges. Treasuries, the usual market hedge, got too rich in value, especially after the 10-year yield sank to 0.5%. Corporate bonds, which became his hedge after the Fed's backstop this spring, have also now gotten too rich.
"There are clearly no viable rate-based hedges left," he wrote, for protection in a market downturn. TIPS don't work as well, he said, the dollar doesn't work as well. So how is he hedging the risk of a market downturn in 2021? Quite simply, he's not. Or more to the point, his hedge is now the Fed (and the Janet Yellen Treasury) itself.
"Over the last decade the Fed has mastered the art of crisis policy response," Zervos wrote. In the event of another downturn, "They will veer deeper and deeper off the reservation into direct credit easing," backstopping corporate bonds, mortgage securities, supporting Main Street directly...all of which is now on the table post-pandemic. "Easing will come fast and furious if need be...I'm happy to bet on them in 2021 without any risk parity-style hedge."
Who needs to be hedged with this Fed (and Yellen Treasury)? That's a pretty extraordinary statement. And that's how you end up with an "Everything Rally," today's declines notwithstanding.
But you can also now see the challenge that presents itself to policymakers. We just went through a whole cycle after the 2008-09 financial crisis of discussing how the central bank needs to be more focused on "financial stability" and "systemic risk," a.k.a., leaning against the housing and credit bubble before it was too late. They kept policy too loose for too long! That was a constant debate and refrain.
Yet today, post-pandemic, the conclusions are very different. The Fed can't tighten prematurely again! How often are policymakers trying to reassure us they won't raise rates for years and years or until absolutely necessary, even as inflation is on the rebound right now because of supply chain pressures and the aforementioned commodity price run-up. (As Peter Boockvar points out today, the 10-year inflation breakeven has finally gotten back up to 2%, the Fed's long-term "goal.")
The message markets are getting from the Fed, in other words, is "let 'er rip." We're about to see just how far they're willing to let it go.
See you at 1 p.m!
Kelly KEY STORIES
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