"Dreams are often most profound when they seem the most crazy." - Sigmund Freud
The meme that is out there now is that we may be in a correction, and that what happens next is perfectly normal for markets. I vastly disagree. What is happening now, with hindsight, may be a profound a structural turning point for markets worldwide.
Those who have read my writings since 2011 know that I have at times said that there is one "Last Great Bubble" - faith in central banks to fix all problems. This belief has resulted in many considering Kuroda, Draghi, and Yellen (Bank of Japan, European Central Bank, and Fed respectively) as rock stars given groundbreaking and non-traditional monetary policies used in an effort to increase growth and inflation. Yet, despite trillions of dollars and unprecedented stimulus, I'm fairly certain there isn't much to show for it. Of the top 5 largest countries by Gross Domestic Product (GDP), three of the five (Japan, Germany and France) are likely in recession right now. No one apparently has any idea what China's growth is, and the U.S. has continued to exhibit mediocre economic activity.
All this is happening despite incredible stimulus. In recent writings, I have argued that a "Fall Epiphany" is coming whereby risk matters, volatility returns, and equities begin to price in the chance of deflation as bonds have. I believe that seasonal call has only just begun to turn into reality, as our equity sector ATAC Beta Rotation Fund (TICKER: BROTX) positioned all-in on defensive sectors given that our risk triggers were flipped prior to last week's big decline. Take a look below at the price ratio of the PIMCO 7-15 Year U.S. Treasury Index ETF (TENZ) relative to the S&P 500 SPDRs ETF (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/TENZ is outperforming (up more/down less) the denominator/SPY. Note the trend in bonds outperforming stocks appears to only have just begun.
Why is this profound? Because the source of the correction may be the sudden realization by equity investors that bonds all along have been screaming that growth and inflation expectations are massively disconnected from what stocks think about the future and central bank belief about where we are in the cycle. With yields already low, I believe the above ratio likely needs to rise not through PIMCO 7-15 Year U.S. Treasury Index ETF rocketing higher in price (the numerator) but rather from the S&P 500 SPDR ETF breaking down substantially (the denominator). The problem with this is that it is happening with immense stimulus as the backdrop, and economic data which is only worsening in everything around the US.
Twenty years ago you could have said don't fight the Bank of Japan. Two months ago you could have said don't fight the European Central Bank. Are we at the point now where the time has come to fight the Fed? Is the Last Great Bubble finally beginning to burst?
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Mutual fund investing involves risk. Principal loss is possible. Because the Funds invest primarily in ETFs, they may invest a greater percentage of its assets in the securities of a single issuer and therefore is considered non-diversified. If a Fund invests a greater percentage of its assets in the securities of a single issuer, its value may decline to a greater degree than if the fund held were a more diversified mutual fund. The Funds are expected to have a high portfolio turnover ratio which has the potential to result in the realization by the Fund and distribution to shareholders of a greater amount of capital gains. This means that investors will be likely to have a higher tax liability. Because the Funds invest in Underlying ETFs an investor will indirectly bear the principal risks of the Underlying ETFs, including but not limited to, risks associated with investments in ETFs, large and smaller companies, real estate investment trusts, foreign securities, non-diversification, high yield bonds, fixed income investments, derivatives, leverage, short sales and commodities. The Fund will bear its share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds. The Beta Rotation Fund is new with no operating history and there can be no assurances that the fund will grow or maintain an economically viable size.
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Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
The fund as of 10/10/2014 does not invest in any of the following investments: TENZ, and SPY. Fund holdings are subject to change and are not recommendations to buy or sell any security. Current and future holdings are subject to risk.
MA(4) = 4 week moving average
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