Financial markets are never easy to trade, or even to rationalise. However, the current environment is a proper head wrecker. My senses are being bombarded by very strong financial signals but they tell very different stories. Let’s start with the good stuff and I don’t even have to mention crypto currencies or metaverses. Dare I say that the real world and real money are dazzling all on their own. Check out the following:

  • The S&P 500 equities index hit an all-time high for the 62nd time this year
  • The Dow Jones index broke the 36,000 mark 22 years after Glassman and Hassett’s ‘Dow 36,000’ hit the book stores.
  • Despite COP26 talk, oil prices are back at levels not seen since 2007.
  • Logistics bellwether and shipping giant, Maersk, tripled its profits in Q3 and is looking to expand its services.
  • Savills have reported that the total value of global real estate reached an all-time high value of $326 trillion in 2020.
  • US Private equity exit values through Q3 2021 are an estimated $638 billion and are already 50% higher than the next highest annual figure.

So, financial assets and businesses are telling a positive economic story. Of course, central banks pumping $10 trillion of capital into the global economy will have a significant positive impact but deep down in the plumbing of the financial system things are beginning to creak. In particular, I am watching interest rate markets and the debt instruments which reflect changes in rate expectations ie the cost of money.

My former debt market trading colleagues tell me they are seeing some really extraordinary moves. One doesn’t need to understand fully the following products or markets but believe me if they are experiencing “multi standard deviation” events then you can take it the moves are massive and not seen since 2008. Note that wasn’t a great year for the plumbing of the financial system. Anyway, consider these seismic moves:

  • Australian 2 year bond yields made the biggest one day upward move in 20 years.
  • Canadian, Swedish, British and US 2 year and 5 year bond yields have experienced 2 standard deviation moves in the last 24 hours.
  • Ahead of Federal Reserve “taper” statements, US swap spreads and TIPS instruments experienced supra-normal pricing moves 

Arguably, a “hot” economy and asset market would lead to higher interest rates so why the confusion? Well, it’s probably the ferocity of the moves and the rapid action of the smaller central banks from Poland to Brazil who are hiking rates in quick succession. Typically, that would spook equity markets but not this time. So, we now have a situation where the equity/real asset markets see no risk while the money/debt/bond markets are seeing ghosts of inflation past not seen for 40 years. In fact, many of today’s traders have never experienced a bond bear market. The 40 year bond bull run to almost-free money has been very very good for the asset rich. However, the millennials and Gen Zs of today might have a very different perspective.

That generation are definitely not asset rich. In fact, US thirty somethings are the poorest they have been for more than 70 years. The prospect of owning a house is minimal(sound locally familiar?), they have no savings and existing financial assets are at all-time high valuations which implies relatively low long-run returns (<5%). Something needed to change. It did. As well known macro commentator, Raoul Pal, put it on a Twitter thread:

“Then the pandemic hit and everything changed. We gave them free money and they collectively said “feck it” let’s take risk because their stake was free…..But they didn’t buy our precious gold miners, or our discounted value businesses. Why? Because they don’t care about 10% returns. The only way to level the playing field was to take MASSIVE risk.”

So here we are. In the US alone, 86 million millennials had the opportunity to dip their toes into financial markets for the first time. They didn’t look at the Financial Times, CNBC or a Goldman Sachs research report. Nope, they went to /wallstreetbets on Reddit, watched Davey Day Trader, talked TikTok and celebrated on Instagram. They also had fun. In fact, they still are having fun. Just this week I rolled my eyes, shook my head and confessed to confusion. How else can I rationalise the following:

  • Avis, the rental car competitor of meme stock favourite Hertz, saw its share price rocket 250% in one day.
  • A crypto trader in spoof cryptocurrency, Shiba Inu, grew his $8,000 stake to $5.7 billion in just 400 days and laid claim to the “greatest trade ever” badge.
  • Sotheby’s sold a non-fungible-token(NFT) of a CryptoPunk pixel image at auction for $11.8 million.
  • Another meme stock favourite, Bed Bath and Beyond(BBBY), doubled its share price after its earnings report – not a takeover bid!
  • In El Salvador after just 54 days of official currency status, more citizens now have Bitcoin wallets than traditional bank accounts. 

You can shake your head, scoff at millennial nonsense and talk about risk. However, this generation might not care so much. In fact, the Boomers seem to have stopped caring too as stocks and property assets rocket in the face of tightening money conditions. Maybe the Boomers and the Gen Zs are on the same page after all? I ’m sure there’s a TikTok dance out there for history, rhyming or repeating……