? The Stock and Bond Divide (w/Michael Purves) | Stock Trade Ideas

Welcome to trade ideas. I’m Alex Rosenberg here with Michael Purvis of tolbukhin Capital Advisors, and before we get into everything we’re gonna talk about today. What’s a what’s a tall Bakken I tell you Thank you for asking. Thank you for having me back Alex. So yeah tall bakit is the name of my new firm It’s an obscure Swedish phrase referring to sort of a knoll with with with large Pine trees on it. Actually. It’s a slightly obscure reference But when I’m fond of as you know, I’ve been you know for the last several years. I’ve been we at whedon company broker-dealer The way the sell-side is changing is that it’s it’s really kind of bifurcated. There is either trade execution over here if you will Which is increasingly favoring large scale heavy technology or there’s just content right and there’s a there’s an unbundling of of how you know content and Trade execution is happening And so for me just looking prospectively looking at some of the trends in Europe was myth it and so forth it just made it was eminently clear that just going to a Pure content model that where the we’re clients institutional clients are just paying a monthly or quarterly fee for High-quality advice and let’s get some of that advice here Last time you were on was in June you talked about this Divergence between what the bond market and what the equity market seemed to be looking at you said it was almost like they were looking At two different sets of economic data with the bond market looking for much slower growth maybe even recession equity markets much a lot more sanguine and A lots happened this week. We’ve gotten the Fed statement. We got powell talking about how its insurance cut We got another tweet about tariffs from the president and then today friday we got a jobs number that you know pretty good overall pretty Substantial wage growth that at least so given all that who’s who has the upper hand who’s winning this fight between stocks and bonds? I think one of this enduring things is this sort of Enduring gulf between the the bond market when I say the bond market bugging me about the Treasury market On the one hand and then the equity market and I’ll put the credit with that as well You know high-yield investment grade credit over here, right and you ask me who’s winning? Well in a sense I guess they’re both winning because the S&P is up twenty percent year-to-date and if you went long Treasuries, you’ve been doing great but within that sort of both or winning condition the question is is what what is the story between this two because still okay, a Powell gave us 25 basis points and and It would seem to be a little bit more of a nudge that hey we’re not at the we’re not starting a cut a cutting cycle but You know, we could easily do more than just this one cut, right so sort of between those two areas Trying to thread a few different needles which was you know quite candidly You know for all the criticism that Powell gets he has a very hard job when on the one hand There’s an enormous gulf between where? the rates markets the bond market the treasury markets decided to go over the last several months on the one hand and where his Economic forecasts are which are pretty much by the way right aligned with Wall Street consensus forecast as well in most other Institutional forecasts whether it’s IMF or world bankers so forth right there, you know, there’s variances But they’re usually marked by 10 or 20 basis points in terms of 2020 GDP and inflation Right and then on the other hand Powless all has to fight this battle in a sense with the white house, right? Because sure enough, you know right after the powell came on wednesday There was you know trump was out there commenting that hey, you know, look he’s not playing ball here Right and this morning larry cudlow was in the media discussing how look you know? We’ve had highly restrictive monetary policy for the last two years There so, you know, he doesn’t have an easy job, right he’s fighting a war on two fronts the white house and the markets and with a with a huge gap between between that I think it’s how this gap gets resolved is a gonna require a lot of Finesse from powell right finesse that he’d a lot of people would say you hasn’t actually mastered yet there but frankly, you know, you could have the most articulate and nuanced Fed, share ever in this role It’s a hard job to sort of navigate that right because on the one hand if he does say he doesn’t give us a cut in September because the economic data is strong and The bond market is still Heavily bullish rates meaning they’re expecting yields to be lower for longer Across the curve. Well, that’s almost You know, like giving a rate hike in a sense to the markets in terms of it’s jarring and therefore he drives up the VIX and he’s and he’s gonna Put you know a little bit more financial stress and it’s a little bit circular, right? Because then of course financial stress is one reason for him to to to cut right so it’s a very difficult condition There and I think there’s another dimension of this whole REITs rally here, which is really important I’ve touched on it in June, but I think it’s worth talking about again, which is that the global rates market Has been one that’s been even more extreme, of course, right? And Look at the bond market where 10-year bonds are, you know minus 40 basis points. They keep somehow making fresh lows No, we can debate the economic rationale of buying a bone with a for 10 years with a negative 40 point yield on it But nonetheless that’s where the markets are are actually pricing that particular security, right? so One of the things that I think is a real conundrum for Powell is that he’s talking about the rest of world issues rest of world weakness The eurozone China and so forth as being this principle Rationale for the insurance cut. We just got our for and effectively for any dovish policy we get prospectively But my question would to Powell would be but sure but a lot of that stuff is already Reflected in these foreign bond markets, right? So what buns are crazy low? That’s reflecting real bad real persistently weak economic condition and Germany and Europe and so forth and Those bund yields have been dragging down our Treasury yields with it right now. Clearly there’s a the Treasury market the Euro dollars market the Fed Funds markets are very focused on What Powell’s policies going to be with respect the Fed Funds rate nonetheless? The correlation between the buns and the 10-year Treasury yields has been spiking Hugely, as both fields came lower together, right? You know, there’s always some correlation, but the correlation got really really strong here. So play out a scenario into later this summer or fall Where you know it sounds hard to imagine right now, but what if there’s a big economic? Uptick in some of the eurozone data what if those bond yields? Start climbing back to zero or up to positive 10 20 30 basis points where they were For a lot of the last several years, even though the euro zone data never got that great right in 2017 It was ticking up but it it never really got back up but still from minus 40 60 basis points is a scenario You have to consider and given how strong the correlation has been with rates coming down together Is that going to lift that certainly at least the ten-year back up and also not only re steep and our Treasury yield curves? but also sort of throat yet another monkey wrench into how Powell is processing all this data and all this market data Economic data and the market data. So if it seems like the bond market and the stock market are looking at different things Perhaps is because they are maybe maybe earnings and the economy in the u.s Is strong enough for for equities to remain bid while the bond market, you know? That’s a pool of investors were thinking do I want to buy US Treasuries, or do I want to buy bonds at negative rates? So I guess if you’re thinking about the chance of improving economic data in Europe Leading those rates to go higher obviously negative for the bond mark in the US as well I guess how correlated do you think that global economic data is especially we’re in a world with with you know deep increasing trade tensions increasing divergences between the political outcomes I mean just look at brexit in and all the other things that are happening in Europe that are not necessarily related to What factories are producing in the US I guess? Know, how does that? Correlation play into that market correlate. Yeah It’s a great question and thank you for asking it but you know look the stock answer about the US is that we’re relatively Insulated relative to certainly economies like China the eurozone and so forth that it’s just we’re a lot more self-sufficient and That’s true. Having said that if you look talk about the US equity complex, that is not insular, right? I mean that is if you You know for discussions, they just pretend the SP is one giant company, correct? It’s a global multinational company where nearly 50 percent of its revenues come from overseas Therefore right. So even if our economy is more like 25 for some the SPS more closer to 50 percent, right? So there’s a doctor you know when you talk about the US economy and you talk about the US stock market you have to first start with the you know appreciating That difference there. The other thing you were touching on is is that is that these? They’re this economic correlation across countries and and look clearly the US has been the performance story Relative to the rest of the world still is that’s sort of saying on the face of it that there’s correlations are relatively weak but there’s also things that kind of you know tend to tend to lag the correlations have been remarkably strong between Eurozone particularly a lot of the German manufacturing data and a lot of the Chinese Economic data, right those correlations pretend to be really stickier and stickier So in the midst of this this global situation where stocks and bonds are maybe looking at different things, of course You know all part of the global economy as we discussed Where is the greatest pain trade do you think is it in stocks is and bonds and you know Or is it in some other asset and which way does that go? It’s hard to figure out how people are you know, when so many people are looking at different things It’s not like everyone’s on one side of the boat necessarily, you know That is a great question like you several minutes ago You asked me like so who’s winning bonds or? Equities and I said both I would say though in terms of where the pain trade is and I think that’s a really good question a way to sort of frame this discussion Where’s where’s the asymmetric risk to the downside and I would say Candidly, and it’s a tough call to make given how strong this bond market rally has been right but to my mind I think There’s still a very good case for rates in the United States to be going higher here, right? We talked about some of those Scenarios where what if the euro zone data gets better? But if the China stimulus starts taking hold in that ricochets into the euro zone data and that lifts Yields higher that will be exported into our market over here and then you’ll see you know it quick rise up higher here and I’d very least there’s a lot of sentiment pulled up on that whole Treasury notion right that you know, 10-year yields are going to 1% and all that and some people were even saying 0% I’m not quite convinced That’s that’s the case and then when you talk about where are people how are people positioned, right? well Look at the euro dollars positioning, right? If you look at the net speculative positioning relative to the total open interest there at seven-year highs, right? I mean, I mean basically post great financial highs So basically in the money markets everyone and their grandmother seems to be long euro dollars right now that to me is a risk factor That that people are heavily on one side of the boat equities on the other hand We’ve had you know, year-to-date rally 20% We came off those December lows, you know was supposed to be this Oh my god, you know we’re gonna be you know There was part of that whole like we have trade and we’re gonna Powell is gonna hike us into a recession, right? And When we had that, you know, we’ve had a really solid risk rally here But I’m not convinced that it took everyone with it, right? I don’t see a lot of sentiment gauges that are where we’re like, oh my god, like, you know It’s not like every taxi driver sort of screaming about like, you know, you get long Amazon right that condition. I don’t see it Either in the retail space or the institutional space right now. I think there’s a partly because of this bond market bid There’s a healthy skepticism about oh my god. Well, geez, you know, do I really want to play here? do Be buying the market 20% of year today when the bond market is sort of seems to be telling me is there’s a recession in 2020 so I don’t think you know, there’s I think a lot of large-scale allocators have been De-risked equities Last year thinking it was sort of topped the eighth-inning of this economic cycle and a lot of some of them have come back in like the Norwegian self the sovereign wealth fund was Public about you know buying that dip on late December, right which obviously wasn’t brilliant rate But I don’t know how many of them are there. I think there’s a lot of people that are still being very careful with with risk right now Which means that there’s room for the market to rally further or at least that if it does sell-off that maybe perhaps then those guys will come back in and And be dip buyers So I think right now my landscape is is that is that if there’s asymmetric risk to the downside? it’s more in the bond market than there is in the equity market I think people are really gonna appreciate this perspective because we’ve had a lot of people Come on, real vision to beyond what it sounded like is the consensus side of the trade, you know John Burbank coming on talking about buying call options on Eurodollar futures for instance, which is you know, Sort of his way play this potential Recession lower rates even going down to negative raise potentially outlook. So it’s it’s first of all really great to hear the other side I think this is really useful just from from a high level if you were to advise anything tactical to kind of play off of this this allocation that and this idea that people are playing for these lower rates that if David turns around especially in Europe. It could really turn the other way fast. How would you think about that tactic? Well, I think look if you’re using ETFs just simply speaking You can look at the TLT and shorting that or buying puts on the TLT would be sort of an obvious way of rates going higher in the United States play I think I think with in equities I think if rates do go higher or utilities have been extraordinarily Aggressively bid right just like euro dollars have been aggressively dead. It’s sort of effectively the same trade Those have a lot of torque to the downside if rates do in fact break They’re getting long banks would probably play as you know, if particularly at the backend Increases higher and and that you see those yield curves, you know ranging a little bit more dynamically to the upside. Very good Well, Michael, thank you for sharing this contrarian perspective I think the way you look at the world and make sense of the way acids are correlated and the way Economies make sense together. It’s gonna be really useful for folks. So Michael, thank you so much for joining us, Biba So Michael fears bonds may be overbought and specifically he thinks the potential for an uptick in global economic data Could drive Treasury yields higher in bond prices lower He recommends playing the set up with put options on the TLT That was Michael Purvis of tall Bakken Capital Advisors into real visions. I’m out with You

15 thoughts on “? The Stock and Bond Divide (w/Michael Purves) | Stock Trade Ideas”

  1. Stronger currencies for greater import / export trade and increased money velocity with greater purchasing power

  2. I think they should just peg the interest rates across the curve to whatever we decide (like 1% for 1year, 2% for 5 yr, 3% for 10 yr) and then deal with the inflation/deflation issue through fiscal and tax policies. This up and down of interest rates just gives a bunch of money to the rich people who play the system (buy bonds late cycle knowing they're going back down). I've seen research that shows the interest rate increases are not helping control inflation anyway (it just creates bubbles and excessive risk in shadow banking/money markets). They'll do more QE to try to keep the bubbles inflated.

  3. Clearly the bond yield is giving the wrong signal because it's artificially suppressed by Central Banks. Fiat is the clear loser, which is why Gold, equities and cryptos should be where capital should be deployed.

  4. Looks to me private inv getting out of stocks. Stock buybacks are high. Central bank needs to go 0 interest rates. So long bonds. Fed will buy them

  5. We don't need no stinkin' upticks. I shorted long treasuries post-FOMC meeting just to be ornery. Bring on the good (fake?) economic news. I'm not smart or rich. Just ornery. Right? No, don't tell me.

  6. Does the cleanest dirty shirt becomes Europe meme center around city of London desire ? Negative real American rates allows currency to be created with Treasury getting a kickback and corporations can issue stock and the federal reserve gets the banks off the TIT? Playing drummer on the titanic was a great gig?

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