18.12.2020 – Special Report. Rebalancing of funds at the end of the year”.
Of course, no one wants to say goodbye to a frenetic market – and many believe that it will go on forever. But this is exactly where we have to quote Warren Buffett: “The market is a lot like sex, it feels best at the end.” In fact, there is a concrete argument for an interruptus in the near future: at the end of the year there is a threat of a sell-off on the stock market because of the portfolio rules of large funds. The bull market led to an overweighting of equities here, and this must be corrected.
Already at the end of November, JPMorgan had sent out a drastic warning: According to this, “some $160 billion in negative equity rebalancing (read selling)” is pending by pension and investment funds. If the December rally continues, funds could dump another $150 billion or so of assets, as they have to maintain the 60/40 ratio between equities and government bonds. In other words, the value of equities has risen too high in the meantime. Of course, forced selling in a dried-up market at the end of the year is likely to have enormous consequences.
Threat of outflows from pension funds due to Corona
And there is another little-noticed bearish detail that Larry McDonald’s reported in his “Bear Traps Report”. According to this, a small fiscal loophole in the CARES Act (Corona Aid, Relief and Economic Security Act) could cause further substantial outflows from pension funds. The programme was launched on 27 March this year in the amount of 2.2 trillion dollars. Under Section 2022 of the CARES Act, the 10 per cent tax penalty for an early withdrawal before retirement is waived if someone is under 59.5 years old, hit by the Corona crisis and withdraws up to $100,000 from their retirement savings from passive managed funds, i.e. index funds. The window closes at the end of the year. Many households left high and dry because of the Corona crisis could use the opportunity to cash in.
Dollar alert in the money flood
And what should investors look out for when they are looking for a warning signal of a correction? First and foremost, the dollar. Investor Sven Henrich from NorthmanTrader.com recently pointed out an interesting correlation, which you have of course also noticed long ago: Dollar down, market up. And vice versa. Specifically: “I’m not a currency trader, but like it or not we are all currency traders now as the movements of the dollar and equities are tightly linked.”
In a world that no longer sees any risk, a sell-off threatens if the greenback regains strength. In November and December, for example, the dollar dipped enormously, which is not surprising given the extraordinary expansion in the money supply. Literally: “This acceleration in M1 money supply in 2 weeks is the most aggressive in US history yet, even more vertical than during the height of the crash in March. Why now? Why is the Fed not confronted with this? What are the consequences? Why is nobody asking these questions?” We think: Rest assured that a lot of professional investors are wondering how long this steep curve can continue to shoot north.
The looming Biden disaster
“The Hill” sees disaster looming – Joe Biden is pitiful, he is like a dog that has finally caught the bus and will now soon end up as roadkill. Monetary policy cannot make up for deficits in his realpolitik. And all the announcements, for example of a New Green Deal, could not be financed.
Biden’s only message was that he is not Trump, wrote political veteran Grady Means, once an adviser to Vice President Nelson Rockefeller. “The deadly trap is that Trump did very well on many key measures and Biden inevitably will do much worse, creating a failed Biden presidency.” For example, he said, Trump has ensured a gigantically fast availability of Corona vaccines – Biden will have to take over the complicated distribution. The tax increases announced by Biden and the hidden tax of inflation, which would be pushed by the various Corona stimuli, were further dangers: Just as under Barack Obama, they would lead to a flight of capital and higher unemployment. All this in comparison to the enormously successful predecessor: “Trump delivered spectacular growth to the economy, record private-sector jobs and record low unemployment for Blacks, Hispanics and women. Real wages rose under Trump and the wealth gap got smaller.”
We add: These are all strong factors for a bear market on Wall Street. In addition, China will probably push the USA to the wall. Biden is no match for Beijing because of his clan’s corrupt dealings in the Middle Kingdom. Which is ultimately worth considering a China long trade. The Bernstein Bank wishes good timing and successful trades.
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