Enis had a great post this morning on rising correlations among risk assets (here) with the conclusion that the recent “risk 0n/risk off” nature of global markets was reminiscent of the price action in 2010 and 2011 when we were in the throes of the European Sovereign Debt Crisis. This increased macro correlation is likely to cause an uptick in volatility, after a period of benign and declining volatility over the last two years. The five year chart of the VIX below shows the ever decreasing magnitude and length of the flare ups since the height of our financial crisis in early 2009:
Which leads me to some contrarian trades that no one wanted to own. Despite the SPX only being off about 1.5% from the all time highs, and the VIX basically flat on the year, Bonds and Gold have been two of the best assets to own in 2014. (We’re long a couple precious metal assets – GLD here, and GG here.)
As a proxy for Treasuries, let’s look at the TLT, the iShares 20 yr ETF, which closed 2014 on the dead low (circled below), down about 18% from the May highs when the Fed signaled that they may taper QE:
Look at the 3 month chart with the almost 5% rally in the last 3 weeks since TLT closed at a new 52 week low:
Now let’s look at Gold, as measured by the GLD, the most commonly traded etf tracking the shiny metal. Again, closed well off of the highs of 2013, down 29%, and closed within a percent of the 52 week low and the 3 & 1/2 year lows on the final day of 2013. But since then, GLD has also rallied about 5%, potentially having formed an impressive double bottom:
The main point of this little exercise is to take Enis’s thoughts one step further – that investors in risk assets had become super complacent over the last 12 months, and that they pounded into the ground once perceived “safe haven” trades, as if there was no possible reason on the horizon to own them. Obviously U.S. Treasuries are the ultimate safe haven trade, and gold merely a concept trade. BUT, the ytd action in bonds in the face of the largest single buyer of bonds over the last 5 years (the Fed) lessening their purchases by 11.5% per month, and possibly another such cut at next week’s meeting (as hinted by the WSJ’s Jon Hilsenrath the other day) has not even caused investors to bat an eye.
In that sense, maybe, just maybe, the Fed’s impact might not be as strong as the market thinks. Now wouldn’t that be the ultimate surprise in the new year.