ALL THINGS BIG AND SMALL 2.0

Chart 1: Treasuries yield rise across the board                                                                                                  Chart 2: Normalised Principal Component Analysis loadings show Treasuries rise while USD falls  Chart 3: 30 year yield minus 3 month, 1 year, 5 year and 10 year yields Most retail investors invest in the Equities market. But in this increasingly inter-connected financial markets environment, its important to look at the Bond Market and the US Dollar to understand the situation in the Equities market. The rise in the SP500 is unsustainable if bond yields rise and is even more unsustainable if...

 The chart below shows the US Dollar Index.  This is the Federal Reserve Bank of Saint Louis version- Nominal Broad U.S. Dollar Index (DTWEXBGS) which I find more accurate than the widely used DXY maintained by Intercontinental Exchange. In financial markets terminology, a Dead Cat Bounce refers to  a temporary relief rally that occurs following a significant sell-off of a financial instrument caused by changes in its fundamentals and economic environment.  The gruesome analogy relates to the belief that even a dead cat will bounce if thrown from a sufficient height and the higher the throwing point, the greater the bounce. Here we see the US Dollar's Dead Cat Bounce.  😰Note that with each bounce, the low gets lower, and the most recent bounce was from the greatest height i.e if previous cats were thrown from increasingly taller HDB blocks, this recent cat was thrown from Trump Tower, NYC. Click on image to see the dates on the X axis.

  In Economics and Finance, there is the concept of risk-adjusted rate of return on investment. When Investment analysts calculate risk-adjusted rate of return on investment, formulas like the Sharpe Ratio and the Sortino Ratio are widely used. These  have an input component called the 'risk-free rate of return. (see Sharpe Ratio formula in image below). For decades, because of the dominance of the USD  in trade and its status as a safe heaven currency, and because the size of USD Treasuries market is so huge (much bigger than all the stock markets put together) and therefore infinitely liquid, the risk-free rate of return was assumed to be US Treasuries. However, the current antics of the MAGA Man has caused the USD to plummet, and the yield on US Treasuries to rise (which means their prices fall. Bond prices fall when yields rise) Would you hold US assets denominated in USD? So US Treasuries are no longer risk-free and the classical texbooks on Economics and Finance nee...