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Jurrien Timmer

8 Oct, 7 tweets, 2 min read

Where are we headed on the correlation between stocks and bonds? With some renewed upward pressure on bond yields, there's a tug-of-war between nominal R-star (The Fed’s published R* rate plus the current 2-year inflation rate) and monetary velocity. (THREAD)

As you can see above, the 10-year yield is somewhere in between those two. Will monetary velocity pick up and follow nominal R* higher, or will the current inflation spike be transitory and bring nominal R-Star back down? It’s one of the existential questions of the day. /2

My guess is that yields will rise cyclically, but remain in a secular down-trend, driven mostly by demographics. But I do think that inflation will be somewhat higher over the next 10 years than it has been over the past decade, driven by wages and housing. /3

Even so, it wouldn’t surprise me if the correlation between stocks and bonds remains negative, even if we end up getting some non-transitory inflation creep from the labor and housing markets. /4

While there are several asset classes out there that are not correlated to equities (investment grade bonds, gold, bitcoin), only government bonds have provided a negative correlation. /5

So perhaps the 60/40 paradigm will live to see another day. The glory days of investors getting paid to diversify (when bond yields were higher) are likely gone. Now, we pay for protection (through a loss of purchasing power), just like we would for home or car insurance. /6

Nevertheless, if a reduced drawdown during equity-market corrections makes the difference between hanging on and getting out, then perhaps it’s worth it. /END

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More from @TimmerFidelity

Jurrien Timmer

@TimmerFidelity

29 Sep

Time to debunk that laziest of bubble arguments: the market-cap-to-GDP ratio.

It's severely lacking as a valuation metric. The ratio doesn't consider interest rates, which are at multi-year lows. It also does not consider operating margins, which are at multi-year highs. /2

Most importantly, comparing the S&P 500 to US GDP does not account for the fact that US large caps have become more and more global over the years. So let’s fix it. /3

Read 6 tweets

Jurrien Timmer

@TimmerFidelity

29 Sep

When gauging supply and demand for shares in the stock market—which determines price—it's important to consider mergers & acquisitions (M&A) since the shares of companies being acquired are removed from circulation. (THREAD)

When we account for M&As, the difference between supply of shares and demand for them becomes very lopsided. The chart below shows the 12-month rolling sum. /2

The chart below shows the cumulative supply and demand since 1982. I view the early 1980s as the start of the modern financial era, so that seems like a good place to start. /3

Read 9 tweets

Jurrien Timmer

@TimmerFidelity

24 Sep

What’s a bitcoin worth? There are many opinions on the matter, ranging from zero to millions. While many of us tend to focus on price, whether it’s for stocks or bitcoin, what really matters is valuation. (THREAD)

Whether the S&P 500 index trades at 4,000 or 3,000 is meaningless without knowing anything about its valuation. The same applies to bitcoin. What’s the significance of 50k or 10k or 100k if we don’t know what the value is? /2

How do we value a new and aspiring asset class? It’s difficult to do, which is why price discovery tends to be volatile. In my past work, I have focused on the supply dynamics (via the stock-to-flow model) as well as the demand side (its exponentially growing network). /3

Read 15 tweets

Jurrien Timmer

@TimmerFidelity

22 Sep

Typically, when the market corrects, the dispersion of sector returns spikes. So what are we seeing now? (THREAD)

The weekly series below measures the spread between best and worst relative returns. /2

We’re not seeing anything like this yet. /3

Read 4 tweets

Jurrien Timmer

@TimmerFidelity

17 Sep

In this season of market anxiety—September and October are often painful—it will be helpful to take the long view. (THREAD)

One way thinking about the long-term is the chart below. Instead of using time vs. price, I use price vs. price (the 2-year high vs. the monthly low). /2

Yes, it's a roller coaster, but the long trend remains: Up and to the right, with some stomach-turning (and career-ending) drawdowns along the way. Some are short and others are long, with the difference dictated by where we are in the secular trend. /3

Read 4 tweets

Jurrien Timmer

@TimmerFidelity

13 Sep

I used to be a “mean reverter.” These days, I’m more chill, following the math & trusting the market gods. Typically, I try to stay on the right side of the secular trend & use that trend as context to navigate the market’s inflection points. (THREAD)

Without context, most indicators are reduced to a coin toss. /2

To be sure, there are times when screaming excesses are evident but those signals are fairly rare. Most of the time, the signals are much smaller, meaning the risk of being out of the market—and missing out on compounding magic—is greater than being caught in a squall. /3

Read 4 tweets

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