1. Asset Performance YTD: Crypto is up 32.0%, stocks have gained 14.2%, oil is at a 10-month high, high-yield bonds are up 6.1%, gold has risen 5.5%, commodities are up 5.2%, cash has seen a 3.2% increase, investment-grade bonds are up 2.1%, the US dollar has gained 1.3%, and government bonds are down by -2.5%.
2. Market Zeitgeist: There is a prevailing sentiment of a "soft landing," but many bond managers with substantial assets under management (AUM) anticipate a "hard landing."
3. Oil Market: Oil is at a 10-month high due to factors such as decreasing US crude oil supply, production cuts by Saudi Arabia and Russia, strong demand from India and China, and Saudi Arabia's reduced recycling of oil revenues into US Treasuries.
4. US Dollar Strength: The US dollar is at a 6-month high due to factors like decreasing global liquidity, capital inflows into US technology companies, and concerns about Chinese debt.
5. Stocks and Bonds Relationship: The earnings yield of the S&P 500 is now lower than the T-bill yield, a trend not seen since 2000. Historically, when the earnings yield exceeds the T-bill yield, it has been a bullish time for stocks and credit markets.
6. Market Flows: Recent market flows include a significant inflow to cash, inflow to TIPS (Treasury Inflation-Protected Securities), inflow to bank loans, outflows from emerging market equities, and outflows from various sectors including tech and US small-cap stocks.
7. Stock Market Trends: Japanese banks and US tech stocks are currently the main beneficiaries in the market. Japanese banks are rising due to anticipation of higher interest rates in Japan, while US tech stocks are supported by the belief that the Federal Reserve is done with rate hikes.
8. Market Risks: The consensus probability of a hard landing is estimated at around 20%. However, higher oil prices, a stronger US dollar, and rising yields could pose risks to financial markets, particularly in September/October.
9. 2020s vs. 2010s: Treasury yields remain stubbornly high despite various factors, including lower inflation, expectations of Fed rate cuts, AI-driven productivity improvements, weaker job growth, and economic challenges in the EU and China.
10. The Deficit Factor: The massive US Federal budget deficit, increased government debt, global fiscal stimulus efforts, and upcoming elections in various countries suggest that fiscal excess and government spending are likely to continue, potentially impacting bond markets.
11. Tales of the Expected and Unexpected: The expected scenarios include the Fed being done with rate hikes, a US soft landing, optimism around AI, and resolution of geopolitical conflicts. These factors are keeping credit spreads low and encouraging increased allocation to stocks. However, there is also a risk of recession and higher unemployment causing fiscal policy panic, which could lead to higher long-term government bond yields and a hard landing.