Yellen’s nomination for Treasury Secretary takes markets into peak “greed trade” mode

Markets cycle between greed and fear, with November seeing the “greed trade” turbocharged by vaccine news and Yellen’s nomination. But chemicals data suggests it is time to prepare for the “fear trade” to re-emerge.


We focus on Brent as the global benchmark.

Brent duly stormed through its Fibonacci target last week, closing up at $48.30/bbl. And sentiment remains highly bullish despite record levels of Covid infections in the USA and other major economies. But in reality, we are nearer the end of the cycle than its beginning, with high prices now already boosting supply. Largely unnoticed, for example, the US rig count has jumped 26% since September. It has risen for 10 of the past 11 weeks.

The end of the cycle will also likely create a secular shift in the energy landscape, and some major new opportunities for investors:

  • The pandemic has accelerated the shift from fossil fuels to renewables, as people saw the benefits of clear skies and cleaner air
  • Estimates for ‘peak oil’ demand are therefore getting closer – with BP and Shell suggesting 2019 might prove to have been the peak
  • But unusually, the US has lagged in focusing on the opportunities from the Green agenda, due to the influence of President Trump

History shows, however, that the US moves very fast when it starts to change direction.  And President-elect Joe Biden’s appointment of John Kerry as his Climate Envoy highlights his focus on regaining US leadership ahead of November’s Climate Change conference.

Investors will therefore likely be spoilt for choice as the cycles continue to turn. Oil prices could have quite a way to fall as today’s “greed trade” turns to “fear”, after more than doubling since March. And then pension funds are likely to make big bets on the Green agenda as the next “greed trade” appears, given the opportunities it will create.

WATCH FOR: Oil price weakness, followed by markets starting to refocus on Biden’s Green agenda as the Trump presidency becomes history.

S&P 500

We focus on the US S&P 500 Index as the world’s major stock market index.

Markets celebrated the nomination of Janet Yellen as Treasury Secretary, closing up 2% at 3638, with the VIX volatility index falling 12% to 21.

Goldman Sachs had already led the cheer-leading after the vaccine news, forecasting the S&P will hit 4300 next year. Unsurprisingly, many investors are now saying they were too cautious. 

But this view ignores the fact that Yellen’s real gift to investors was her support for the ‘Fed put’. As a new paper from the National Bureau of Economic Research documents:

Negative stock returns realized between FOMC meetings are a more powerful predictor of subsequent federal funds target rate changes than almost all macroeconomic news releases. Using textual analysis of FOMC minutes and transcripts, we argue that stock returns cause Fed policy and document the mechanism underlying the relation.”

This analysis suggests the first Yellen-Powell stimulus programme will be reactive, after the next stock market downturn. It is unlikely to be a proactive effort to push markets ever higher.

As promised, we also continue our series on FAANMG valuations, using the Ben Graham formula. Apple is next for analysis:

  • Its P/E is even higher than Facebook’s at 35%, suggesting annual growth of 13% out to 2030
  • This seems very optimistic as its smartphone business has peaked and cloud services face major competition
  • A flat growth scenario, with a P/E of 8.5, would give it a Graham Value of $28 versus today’s $117 level

WATCH FOR: As noted before, prudent investors to lock in gains before year-end, as attention turns to Biden’s ability to work with Republican Senators like Susan Collins to implement his policies

Interest rates

We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.

The rate rose to 0.84%, with the MOVE volatility index slightly lower at 40.

Unsurprisingly, the “greed trade” assumes economic recovery will finally create inflation. But we continue to see deflation pressures increasing due to the dual influence of (a) the low-spending Perennials 55+ generation on demand and (b) energy abundance created by the paradigm shift to low-cost renewables.

WATCH FOR: Downward pressure on interest rates to resume as and when the “greed trade” turns to fear.

Economic outlook

The chemicals industry is the best leading indicator for the global economy. The reason is that chemicals are used all around the world, and in almost every product. Best of all, the data is available is available within weeks rather than months, and in great detail – covering countries, regions and key industries. October’s data is particularly useful as the chart shows:

  • The UK is the best performer, as firms rush to stockbuild ahead of a likely No Deal Brexit in January
  • China’s rebound is also supporting Germany, due to the importance of its exports to China
  • India, Italy and Brazil align with the global level of 2.2%
  • But the USA and Canada are still negative, highlighting the divergence from Wall Street
  • France and Japan are the weakest performers, down 11%

WATCH FOR: Renewed weakness in Europe and N America, as Brexit and the pandemic’s second wave impact.

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This Research Note has been prepared by New Normal Consulting GmbH for general circulation. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. New Normal Consulting GmbH do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, New Normal Consulting GmbH does not accept, and disclaims, all liability for loss and damage suffered as a result. The pH Report and pH Outlook are published by New Normal Consulting GmbH.
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