2020 Year in Review

Doug Nolan


Over 350,000 Americans dead, with the Covid death toll projected to rise another 100,000 by the end of January. 

Confirmed Covid cases have exceeded 20 million (84 million globally), ending 2020 with new U.S. infections growing by a million every four to five days. 

The year ended with more than 125,000 Covid patients in overburdened hospitals across the U.S. 

There’s no sugarcoating this human tragedy. 

As a nation, we failed early on to get the pandemic under control. The federal government response was inept – incomprehensibly so. 

There was a lack of strong and competent leadership. The Trump administration was dismissive and, tragically, Covid-19 became a polarizing issue. State government responses varied from adequate to appalling. 

Across the country, masks were considered a political statement as the country was consumed by heated and pivotal elections. Disinformation flourished even more than the virus. 

The national lockdown was an enormous burden that, in the end, sure seems like a wasted effort. Lacking leadership, reliable information and the necessary resolve, pandemic mitigation measures were not sustained to the point of ensuring new infections were reduced to more manageable levels. 

For various reasons, too many failed to take the pandemic seriously. Not that we will ever adopt Chinese-style draconian measures (i.e. door-to-door dragging out of feverish individuals to be transported to makeshift detention centers). 

But there needed to have been a comprehensive plan ready to execute – with a well-thought-out communications strategy. 

The contrast between the depressing health crisis and booming financial markets could not be more stark. Record stock prices. 

Record IPOs. Record SPACs. 

Record corporate bond issuance – investment-grade and high-yield. Surging equities trading volumes, led by online retail trading. 

The retail trader community’s embrace of call buying drove record options trading volumes. 

Tesla’s stock was up more than 740%, as the Nasdaq100 (NDX) returned (price and dividends) almost 49% for the year. 

With the bears blown to smithereens, there was nothing to restrain desperately overheated markets. 

Things tend to turn crazy at the end of cycles. 

2020 settled into Epic Screwy Crazy.

Stocks were out of the blocks strongly to start 2020, with the S&P500 posting a 5.1% return by February 19th – as the bubbling NDX returned 11.5%. 

Responding to late-cycle cracks appearing in “repo” and securities funding markets, the Fed the previous September had embarked on aggressive “insurance” stimulus. 

Injecting liquidity into already speculative markets at record high prices worked only to stoke further speculative excess. The NDX returned 27% in less than five months (September 27th to February 19th).

There was no mystery surrounding a speculative marketplace’s initial disregard for mounting pandemic risk. Federal Reserve Credit expanded $418 billion between September 11th and February 19th, an unprecedented injection of market liquidity in a non-crisis environment. 

The Fed-induced Bubble had inflated to precarious extremes – straight into historic health, financial and economic crises. The Fed had exacerbated precarious Bubble excess – that came home to roost in March. 

Less than two weeks from equities at all-time highs, the Fed in an unscheduled March 3rd emergency meeting slashed rates 50 bps to 1.0%. 

Ominously, the NDX sank 3.2% on the Fed’s emergency cut announcement, with the S&P500 down 2.8%. 

The market rout was unrelenting, with the Thursday, March 12th market panic called the “Worst Day Since the 1987 Market Crash” and the “Biggest VaR Shock in History.” 

Perhaps even more alarming, it was the “Worst Week for Credit in Decades.” 

The Fed dropped rates to zero on March 15th after a second unscheduled emergency meeting. In what must have sparked panic within the FOMC, de-risking/deleveraging only intensified.

The global Bubble was bursting. 

High-yield U.S. Credit default swap (CDS) prices surged 500 bps in three weeks to 870 bps, the high since the previous crisis. 

Investment-grade CDS almost tripled to 152 bps, also the high going back to 2009. Huge outflows led to dislocations throughout the ETF complex. 

From March 5th to March 23rd trading lows, both the iShares High Yield and iShares Investment-Grade bond ETFs dropped about 22%. 

Bloomberg News responded to dislocation in the municipal debt market with the headline, “A Day of Hell: The Muni Market’s Worst Day in Modern History.” 

Over 12 chaotic trading sessions, the small cap iShares Russell 2000 ETF collapsed 37%. 

Runs on prime money market funds were gaining momentum. 

Global markets “seized up.” 

After trading at 6.54% on March 4th, Brazil’s local currency 10-year yields had spiked to 9.43% by March 24th. Dollar-denominated Brazilian yields almost doubled to 5.31%. 

Trading chaos was not limited to EM. 

Italian yields surged from 1.00% to 2.42% in two weeks, with Greek yields more than tripling to 3.67%. 

In the two-week period March 6th to March 20th, the Norwegian krone sank 20.9%, the Mexican peso 17.6%, the Australian dollar 12.8%, the South African rand 11.0%, the British pound 10.9%, the New Zealand dollar 10.2%, and the Swedish krona 9.5%. 

Levered “carry trades” and myriad hedge fund derivatives strategies were imploding.

Crude oil suffered a one-day 25% decline on March 9th, though that $27 per barrel appeared rather pricey compared to the extraordinary negative $40 experienced during April 20th trading chaos (WTI ended 2020 down 21%). 

Bitcoin collapsed 41% during the week of March 12th. 

Gold sank 8.6%, with Silver down 16% and Platinum falling 17%. 

The Bloomberg Commodities Index suffered a one-week drop of 7.8%.

In the clearest indication of the systemic nature of market dislocation, even the Treasury market fell into disarray. Thirty-year Treasury yields collapsed an incredible 59 bps on March 9th to a record low 0.70%. 

Deleveraging was fomenting extreme trading anomalies, including sharply widening spreads between “off the run” and “on the run” Treasury securities. 

The Fed later pointed to illiquidity and dislocation within the Treasury market as a key factor behind the vehemence of their crisis mitigation efforts. 

March 12 – Financial Times (Colby Smith and Brendan Greeley): 

“The Federal Reserve said it would pump trillions of dollars into the financial system in a dramatic attempt to ease stresses in short-term funding and US Treasury markets that have accompanied the spread of the coronavirus. 

The US central bank is also making changes to its programme of Treasury purchases ‘to address highly unusual disruptions in Treasury financing markets’. 

For the third time in four days, the Fed’s New York arm announced on Thursday that it would increase the size of its lending in the repo market… this time by multiples of the amounts previously on offer… 

The Fed would now offer up at least $500bn in three-month loans, beginning immediately, with another $500bn of three-month loans on Friday. 

It said it would also provide a $500bn one-month loan on Friday that settles on the same day. 

It also said it would continue to offer $500bn of three-month loans and $500bn one-month loans on a weekly basis until April 13, on top of its ongoing programme of $175bn in overnight loans and $45bn in two-week loans twice per week.”

The Fed saw no option – other than unprecedented, overwhelming, unrelenting “whatever it takes” monetary inflation. 

The Federal Reserve’s ongoing experiment in underpinning market-based finance had reached a most critical juncture. Nothing else mattered. 

The Bubble had to be reflated – and the Fed was prepared to fully embrace the previously unimaginable. 

Create Trillions of new “money” – and inject this liquidity directly into the markets to reverse de-risking/deleveraging dynamics. Purchases were commenced (directly and through ETF shares) to backstop corporate debt. 

Old financing facilities from the 2008 crisis were reinstated and new ones created. 

And, importantly, keep this massive stimulus flowing even in the face of market recovery, record stock prices and increasingly egregious financial excess. 

In not many months, the “insurance” stimulus had exacerbated Bubble excess that contributed to global financial collapse that incited unprecedented monetary inflation and even more outrageous speculation and Bubble mayhem.

In only 43 weeks, Federal Reserve Credit inflated $3.206 TN to a record $7.350 TN. 

Going back to the September 2019 restart of QE, Federal Reserve Assets had surged $3.624 TN, or 97%. 

We are now in the throes of one of history’s greatest monetary inflations. 

M2 “money” supply inflated $3.793 TN, or 29% annualized, over 43 weeks to $19.197 TN. 

A most extreme and destabilizing period of Monetary Disorder is fated. 

The most calamitous global pandemic in a century has altered history in ways not to be fully comprehended for years to come. I fear the resulting Scourge of Monetary Inflation will haunt humanity for decades. 

Fatefully, the pandemic struck in the waning days of a historic global Bubble. 

Systems – financial, economic, social and political – were unstable and vulnerable. 

The overwhelming policy response both exacerbated and extended late-cycle “Terminal Phase” excess – at home and globally. 

From my analytical perspective, it’s been a worst-case scenario beyond anything imaginable.

U.S. Non-Financial Debt (NFD) surged $5.740 TN during the first three quarters of the year, an increase of 188% from comparable 2019 growth. 

For perspective, NFD expanded on average $1.830 TN annually over the previous decade – and had not previously surpassed $3.0 TN on an annual basis. 

Outstanding Treasury Securities surged $3.882 TN during 2020’s first three quarters, with year-over-year growth of an astounding $4.329 TN, or 23.3%. After concluding 2007 at about $8.0 TN, Treasury Liabilities (from the Fed’s Z.1) ended September at $25.8 TN.

China largely matched unprecedented U.S. Credit growth. For the first nine months of the year, China Aggregate Financing expanded an unprecedented $4.535 TN ($504bn monthly). 

This was 45% higher than comparable 2019 growth. Combining growth in China’s Aggregate Financing with NFD, China/U.S. Credit expanded an astounding $10.275 TN through the first three quarters of 2020, double comparable 2019 growth.

For the first 11 months of 2020, the $5.079 TN expansion of China’s Aggregate Financing was 43% ahead of comparable 2019 and 61% above comparable 2018 Credit growth. 

Through the end of November, China’s M2 “money” supply surged $4.487 TN (to $33.0 TN), up from comparable 2019’s $1.333 TN expansion. 

With U.S. and Chinese Credit systems having come completely off the rails, Credit became unhinged around the globe – “developed” and “developing.” 

The ECB’s balance sheet expanded $3.2 TN in the final nine months of 2020 to $8.553 TN. 

In Japan, central bank assets jumped $1.5 TN to $6.888 TN. 

According to Bloomberg data, “G4” (Fed, ECB, BOJ, Bank of England) central bank balance sheets inflated $8.5 TN in nine months to $23.804 TN (up from $6.429 TN to end 2009). 

With momentous ramifications, the very foundation of global finance succumbed to unbridled inflationism like never before.

After reversing de-risking/deleveraging, the unprecedented tsunami of central bank liquidity resuscitated the global leveraged speculating community. 

European sovereign yields collapsed. 

Ten-year bund yields ended 2020 at negative 0.58%, with Swiss and French yields at negative 0.61% and negative 0.35%. 

Hopelessly indebted Italy and Greece saw yields end the year near record lows at 0.54% and 0.61%. 

Even Spain and Portugal’s yields turned negative in December before ending the year positive by a few bps. 

With negative-yielding debt globally exceeding a record $18 TN, yield- and performance-chasing liquidity streamed into about every nook and cranny of international finance. 

Even the weakest EM nations tapped over-liquefied markets to pile on debt crazily. 

December 30 – Bloomberg (Sydney Maki): 

“Emerging-market hard-currency bond sales are heading for another big year in 2021 as governments and companies try to revive growth… Governments will borrow heavily for a second year to fund health-care and poverty relief measures, while pushing the investment needed to reflate their economies. 

Companies will borrow to cash in on that renewed growth, with loose monetary policy providing the liquidity they need. ‘Our forecast assumes that financing conditions continue to be supportive for both investment grade and high yield,’ Goldman Sachs strategists… wrote earlier this month. 

But, ‘funding needs come down as the cyclical recovery takes hold.’ 

Governments and companies from developing economies sold $757.1 billion in dollar- or euro-denominated bonds in 2020, the most in more than two decades of data…”

In the middle of a devastating pandemic, financial conditions loosened dramatically throughout the emerging markets. 

Equities and bond markets rallied spectacularly. 

The popular iShares MSCI Emerging Markets Equities (EEM) ETF surged 73% off March lows to end the year at an all-time high (2020 return 17.0%). 

After sinking 27% in ten sessions back in March, the iShares JP Morgan Emerging Market Bond (EMB) ETF ended 2020 with a return of 5.4%. 

China’s CSI 300 Index finished the year with a gain of 27.2%, as the growth-oriented ChiNext Index surged 65.0%. 

South Korea’s KOSPI Index jumped 30.8%, and Taiwan’s TAIEX index rose 22.8%.

With Trillions of newly-created liquidity slushing about the system, U.S. financial conditions loosened spectacularly. 

Decisively quashing “risk off,” the Fed unleashed a powerful speculative cycle. 

Indeed, it was a system primed for “blow off” speculative excess following over a decade of extremely loose financial conditions and Federal Reserve market backstops/bailouts. 

The Goliath ETF complex has been readily nurtured, along with the Herculean options and derivatives universe. 

The upshot: What in 2020 passed for “investing” was in reality a gargantuan scheme promoting levered and trend-following speculation – the dimensions of which some time ago inflated beyond “too big to fail.” 

Retail traders had years to open online trading accounts while enjoying effortless returns. 

For institutions and the investment management industry more generally, managers more likely to be dismissive of risk (while remaining fully invested) rose briskly through the ranks to control enormous sums of assets. 

The Fed injected Trillions into a system commanded by potent and deeply embedded speculative impulses (i.e. propensity for trend-following behavior, risk-taking and leveraging, etc.). 

Arguably, the resulting chasm between inflating asset markets and deflating economic prospects was the most extreme since 1929. 

The U.S. employment rate spiked to 14.7% in April from February’s 3.5% (dropping back to 6.7% by November), as U.S. Q2 GDP collapsed at a 31.4% annualized rate.

December 31 – Financial Times (Nikou Asgari and Joe Rennison): 

“Bankers expect a steep drop in corporate fundraising next year after a record borrowing binge in 2020 that helped companies to survive the coronavirus crisis. Global bond issuance surged by nearly a quarter to $5.35tn in the year to December 22 compared with the same period in 2019. The total easily exceeded the annual record, set last year, of $4.35tn…”

December 31 – Bloomberg (Crystal Tse, Katie Roof and Elizabeth Fournier): 

“A booming market for U.S. initial public offerings shows no sign of slowing in 2021. Around $180 billion was raised from IPOs on U.S. exchanges in 2020, more than double last year’s total and far above the previous high of $102 billion set in 2000… 

Companies have been emboldened by soaring equity values, especially in the second half, while a proliferation of listings by blank-check firms has also boosted volumes. ‘In a zero interest world, one of the only asset classes that offers the hope of performance that beats inflation is equities,’ said Jeff Zajkowski, head of Americas equity capital markets at JPMorgan…”

The second-half of 2020 marked the emergence of a full-fledged market mania – stoked by retail and institutions alike. 

What began as a Fed-induced unwind of hedges and short squeeze morphed into securities prices completely detached from reality. 

Tesla with a market capitalization approaching $700 billion. Scores of IPOs – most with loss-generating businesses – seeing prices more than double on the initial day(s) of trading. 

The “Robinhood effect” – with booming trading volumes. 

The craze of call option market speculation.

December 31 – Bloomberg (Gearoid Reidy, Ishika Mookerjee and Sarah Ponczek): 

“Look at a screen at almost any point in 2020, and chances are you saw something like this: A company that nobody had ever heard of 12 months ago was in the process of trading 20 million shares in a day. Ideanomics Inc., fuboTV Inc., Vaxart Inc. -- names that would’ve elicited a collective ‘who?’ in January are obscure no longer, after seducing the retail day-trader horde whose presence defined the coronavirus era in equities. 

A mattress maker called Purple Innovation Inc. saw turnover surge 13-fold as it went from $5 to $25 in three months. Blank-check-born Fisker Inc. posted four sessions in which volume topped 40 million shares each. Buttressed by equally huge demand for older names like Eastman Kodak Co. and Carnival Corp., it added up. 

At a time when headlines were dominated by a raging virus, recession and the fastest-ever bear market, a record $120 trillion of stock changed hands on U.S. stock exchanges this year, up 50% from 2019 to a record. The average Russell 3000 stock saw average daily share volume surge 46% to 1.9 million shares.”

With ominous parallels to some of history’s great speculative manias, market “naysayers” were taken out to the wood shed and shot. The Fed fomented a historic short squeeze. 

The Goldman Sachs Most Short Index rallied an incredible 200% off March lows, to end the year with a gain of almost 50%. The estimated $38 billion loss suffered by Tesla short positions is surely the biggest ever.

Inequality was an issue in the markets as it was throughout the economy and society. 

The Fed’s Trillions were a godsend for those with exposure to securities markets – and the riskier the assets the better. The contemporary central bank doctrine of using inflating securities prices as the primary mechanism for system stimulus has been promoting wealth inequality for years now. 

Inequality took a grievous turn for the worse in 2020 – with our wealth-allocating and deficit-accommodating central bank now irrevocably implanted in political muck. 

December 31 – Bloomberg (Devon Pendleton and Jack Witzig): 

“Billionaires have always traveled in a different orbit than the rest of us. Nicer things, more power, rocket-launching stations. 

But 2020 threw that gulf into stark relief. While much of the world grappled with soaring unemployment and plunging growth, the 0.001% benefited from unprecedented wealth creation. 

The world’s 500 richest people added $1.8 trillion to their combined net worth this year and are now worth $7.6 trillion, according to the Bloomberg Billionaires Index. 

Equivalent to a 31% increase, it’s the biggest annual gain in the eight-year history of the index…”

The Fed as propagator of inequality emerged as a conspicuous issue following its fateful 2020 pandemic measures. 

In response, the Federal Reserve paid notable lip service to the issue, essentially committing to extreme stimulus measures until the unemployment rate drops back to pre-pandemic, multi-decade lows. 

While delightful music to the ears of market participants, such a policy course ensures no interruption to the perilous trajectory of systemic inequality. 

Along with the markets, economy, inflation and inequality, the Fed has added climate change to its directive. Covid was manna to the MMT crowd.

December 31 – Bloomberg (Prashant Gopal): 

“Record-low mortgage rates were supposed to make it easier for homebuyers. Instead, they’ve helped push affordability to a 12-year low. 

Buyers in the fourth quarter needed to spend almost 30% of the average wage to afford a typical house, the biggest share for any three-month period since 2008, according to… Attom Data Solutions. 

Low borrowing costs, now below 3% for a 30-year loan, have spurred a buying frenzy, driving up prices across the country as shoppers compete for a shrinking supply of listings. 

During the pandemic, prices have increased faster than earnings, leaping by double digits in 79% of the 499 counties included in the report. More than half of those counties are now less affordable than their historic averages, Attom said…”

Our younger citizens hoping to purchase homes will now be forced to take on even larger debt loads. 

The FHFA (Federal Housing Finance Agency) Housing Price Index surged to a 10.2% y-o-y gain in October, the strongest housing inflation since September 2005’s cycle peak 10.7%. 

Housing Bubbles have re-inflated. 

In ways both glaring and subtle, Monetary Disorder is aggravating already corrosive inequities between the haves (assets) and the have nots.

The issue of “sound money” is viewed as hopelessly archaic, a reality that my 20 plus years of CBBs has failed to alter. 

The challenge to warning of the myriad pernicious dangers associated with Monetary Inflation is made no easier by markets creating Trillions of added perceived wealth. 

The Fed is almost universally lauded for its crisis response. 

Memories of 2008 having faded completely away, there are these days only advocates for asset inflation.

Geopolitical tensions mirrored heightened social stress. U.S./China relations deteriorated alarmingly – and likely irreversibly. 

Two superpower rivals head-to-head battling over trade, technology, finance and global influence. 

Especially with Beijing wresting control of Hong Kong, Taiwan became a potential flash point. 

The “China virus” only inflamed growing anti-China sentiment. 

Tensions with Iran risked boiling over. 

The Russians appeared to have orchestrated the most significant hacking operation in years. The UK and European Union mustered a last-minute “Brexit” deal. 

From Beijing to Brussels to Washington, governments around the world raised the specter of cracking down on the powerful technology oligopolies. 

Climate change became increasingly difficult to dismiss. A brutal hurricane season, flooding, drought and a devastating West Coast fire season. Tens of millions of Americans were directly impacted. 

2020 was such an emotional year. I am grateful to not have suffered the grief so many confronted with the loss of loved ones and dear friends. For me, frustration and anger were for the most part still overshadowed by sadness. 

My fears for our future are being realized. Writing that our nation “lost its innocence” would be both cliché and imprecise. 

But we did lose our tolerance. We lost objectivity and sound judgment. 

We sacrificed our cohesion as fellow Americans, as we doggedly fragmented into vitriolic political partisanship. Too many times in 2020 I was reminded of the quote, 

“We had to destroy the village in order to save it,” from the Vietnam War. 

What these days passes as patriotism leaves me discouraged. It’s a terrible reality I’m sickened to document: Our nation is not what it was or what we expect it to be. 

A dark underbelly has been exposed. 

Fringe elements – on both the left and right – have been emboldened. They are undeserving of the attention and voice they have been afforded. 

At this point, it’s up to the great silent majority to rise up and safeguard our cherished American values. 

Not without justification, we lost faith in our government and institutions. As an increasingly insecure society, we gravitated to conspiracy theories and disinformation. 

What had been relegated to the fringe made alarming headway within the mainstream. 

We’ve contrived too many enemies: the media, rival politicians, law enforcement, the scientific community… Is our future one of adversary “red” and “blue” communities, business establishments, schools and houses of worship? 

The likes of Dr. Anthony Fauci and Bill Gates have been villainized – their families threatened. 

Lying, deceit and character assassination were elevated to a national ethos. 

The election and especially its aftermath have been a national disgrace. We witnessed in 2020 the worst nationwide social strife in decades. 

The popular support for social justice offers hope.

Washington completely botched the crisis response – restrictions, testing, PPE and so on – and we’re paying a dreadfully steep price. The private sector rose to the challenge with new vaccines in record time. 

And after a characteristically rocky start, hopefully the smooth distribution of vaccines will in the coming months see a return to some semblance of normalcy.

But I worry about these deepening scars. I lament the further corrosive damage inflicted upon our fragile society from Trillions of monetary inflation. 

“When Money Dies…” 

History informs us that societies become increasingly susceptible to degeneration, instability and unpredictability. I am confident we will meet the major challenge posed by the coronavirus. 

I have less faith in our capacity to recover from epic monetary inflation and resulting financial and economic debasement. History informs us that inflationism proves extremely difficult to remedy. 

I have faith in the American people, but reckless borrowing and “money printing” is placing our future in great jeopardy. 

If not for (somewhat less) reckless bouts of monetary inflation around the globe, the U.S. dollar index would surely have suffered more than its 6.8% 2020 decline. 

As a typical consequence of excessively loose financial conditions, November saw a record $84.8 billion goods trade deficit (Current Account Deficits quickly inflated to 2008 levels). 

Gold jumped $380, or 25%, to end the year at $1,899. 

Silver surged 47% to $26.41, with Copper up 26%, Platinum 11%, and Palladium 26%. 

With monetary inflation reigniting speculative zeal, Bitcoin inflated more than 300% to surpass $29,000.

It was truly a year for the history books. 

The Chinese proverb (“curse”): “May you live in interesting times.” 

When I look back on the year, I personally feel incredibly grateful. 

As a father and husband, I am thankful for my family’s good health, positive attitudes and resilience. 

As an analyst chronicling “History’s Greatest Financial Bubble” – it simply could not be a more fascinating environment. 

I’m excited for the challenges presented by the new year – and am incredibly blessed to have this opportunity to think and write during such extraordinary times. 

And I am thankful to have you readers. Thank you!

The risks that investors should prepare for in 2021

After a liquidity-driven rally on markets, central bank largesse might not be sustainable

Mohamed El-Erian

2020 has seen a widening of the disconnect between Wall Street and Main Street © Beatrice Preve/Dreamstime


What, if anything, will happen to the great disconnect between Wall Street and Main Street? 

This is a key question for investors positioning their portfolios for 2021. It is also an important question for the global economy and policymakers.

Throughout this pandemic year, we have experienced a further sharp widening of an already remarkable gap between financial markets and the economy. A rapid recovery in asset prices from the March 23 lows took major US indices to record levels, even before the recent good news on Covid-19 vaccines. 

Combined with even more accommodative central bank policies, this enabled record debt issuance at historically low levels of compensation for creditors.

Meanwhile, the global economic situation remains uncertain. Another coronavirus wave is sending parts of Europe back into recession. That is sapping energy out of the US recovery, and limiting the extent to which better performing east Asia can be a powerful locomotive of global growth. The longer this continues, the greater the risk of “scarring” that erodes longer term growth.

An uncertain economic outlook with notable dispersion among systemically important countries is but one of the key Covid-19 legacies that markets have set aside due to sky-high faith in central banks’ ability to shield asset prices from unfavourable influences. 

Markets being markets, investors have readily extended the protective nature of the umbrella to asset classes that, at best, are only indirectly supported by central bank funding (such as emerging markets). It is an extremely powerful dynamic, and one that inevitably overshoots.

Nothing is more reassuring to an investor than the knowledge that central banks, with much deeper pockets, will buy the securities they own — particularly when these buyers are willing to do so at any price and have unlimited patient capital. The rational investor response is not just to front-load their buying but also to look for related opportunities where return-seeking funds will be pushed to.

The result is not just seemingly endless liquidity-driven rallies regardless of fundamentals. It also alters market conditioning and inverts traditional cause and effect.

Based on what we know today, the challenges facing investors in 2021 are probably less about the first few weeks and more about later in the year. 

That is unless one or more disrupter is suddenly accelerated — a monetary policy reversal (highly unlikely), a market accident due to excessive risk taking (more likely but not overwhelmingly so), and mounting corporate bankruptcies (most probable but would play out over time). 

While investors will continue to surf a highly profitable liquidity wave for now, things are likely to get trickier as we get further into 2021.

Central banks’ deepening distortion of markets will be harder to defend in a recovering economy amid rising inflationary expectations. As welcomed as this recovery will be, it is unlikely to be sufficient to fully offset the impact of corporate bankruptcies or the detrimental effects of higher inequality. 

Investors might rue the day they ventured into asset classes far from their natural habitat that lack sufficient liquidity in a correction.

Navigating such a landscape will require analytical tools that would, ironically, have detracted from returns during the bulk of the liquidity-driven rally. I am thinking here of such things as highly granular credit and technical analyses, scenario planning, smart structuring, assessments of liquidity in market segments, and a better understanding of the extent of recoverability of investment mistakes. 

It also includes a willingness to re-examine some conventional wisdom. This involves rethinking the traditional portfolio construct of putting 60 per cent of funds into equities and 40 into fixed income now that yields on government bonds are so artificially depressed.

Already, the great disconnect has continued much longer than most expected. This illustrates, yet again, the unintended consequences of a policy approach that places an excessive burden on central banks. 

The hope for 2021 is that, with a vaccine-enabled economic recovery, better corporate fundamentals will start validating elevated asset prices and allow for an orderly rebalancing of the monetary-fiscal-structural policy mix. 

There are two risks, and not just for markets. First, what is desirable may not be politically feasible, and second, what has proven feasible is no longer sustainable.


The writer is president of Queens’ College, Cambridge university, and adviser to Allianz and Gramercy.

A traditional buy-and-hold portfolio is now “extremely dangerous”

BY JOHN RUBINO 


From Michael Pento, of Pento Portfolio Strategies:


When the market cap of equities reaches 183% of GDP and government bonds yield near 0%, or even less overseas, the notion that one can just buy and hold a balanced portfolio is extremely dangerous. 

The minefield is not packed with IEDs; it is actually replete with tactical nukes.

One of those land mines would be the failure to keep the government open and pass more stimulus. I have no special insight here, except D.C. is famous for brinkmanship but always opts to spend more money in the end. 

Another problem would be the failure to have a peaceful transfer of power come January 20th. Also, the failure of vaccines to prove to be safe, effective and long lasting would blow the whole recovery mantra sky high.

But by far the most dangerous mine to watch out for would be the failure of the Fed to cap long term interest rates. The Fed could make a move towards this action when it meets on December 16th. 

Let’s assume that the vaccines work and the rate of inflation and growth begins to accelerate significantly come the 2nd quarter of next year—bade effects make that easier. At the same time, the Fed could then start reducing its purchases of corporate, municipal, and Treasury bonds. 

Hence, there would be a very good chance that rates would become absolutely unglued, sending bond prices cratering and yields soaring.

To get a better understanding of how greatly distorted and far into the twilight zone yields have gone, you have to understand that the average yield on the ten-year note from the 1960’s until 2000, which is before the Fed started to embrace ZIRP; was north of 7%. 

That yield is now well below 1%. And, this is despite an avalanche of additional debt that has brought the ratio of debt to GDP from below 40% in the 1960’s, to 128% today. 

What we have now created is a Treasury that is issuing debt at all-time record-low yields yet at the same time is also bankrupt. To make matters worse, we have for the first time in history a Fed that is targeting higher inflation, which is the bane of all fixed income. 

Indeed, the worlds’ central bankers are all aggressively seeking higher inflation in the context of $18 trillion worth of negative-yielding sovereign debt.

In order to accomplish this nefarious inflation task, the Fed is creating new money at the never-before-seen rate of $120 billion each and every month and has sent MZM money supply soaring by over 20% y/y. 

M2 is up an eyepopping 25%. 

Hence, nominal long-term treasuries have an incredible amount of room to soar. That’s guaranteed to eventually happen either due to inflation or insolvency, or probably both.

But even in the immediate future, rates could rise 225 bps just based on the view that economic growth will normalize in 2021. Don’t forget; the benchmark Treasury yield was over 3.25% as late as the fall of 2018. It’s not just government debt that’s in a bubble. 

Now, junk bond yields are at a record low 4.6%! 

And, real corporate bond yields have just turned negative—meaning, after inflation is factored in you lose money. 

This is why the Fed is all in and completely trapped. 

It owns the entire treasury, corporate, municipal, and junk bond markets through the process of direct purchases. If it ever were to stop, bond prices would plunge, and yields would skyrocket; taking down the real estate and stock markets along for the ride.

The notion that rates can gradually rise innocuously as the economy heals is pure Wall Street propaganda. It wasn’t the case in 2018 during the unwinding of the Fed’s balance sheet, which sent the Russell 2000 plunging by 30% in a matter of weeks. And it certainly isn’t the case now that junk bond yields are trading at a record low spread to Treasuries. 

These bonds that are issued by zombie corporations that will crater in price once Treasury yields begin to normalize.

In fact, the coming scenario could look a lot like what happened in 1987.

On Monday, October 18, 1987, the Dow Jones Industrial Average lost 22% in one day. There are many theories as to why the crash occurred, but the simple truth is that the panic stemmed from a sharp rise in interest rates and inflation.

Rising interest rates 33 years ago were a direct result of surging inflation. The year 1987 started out with very benign inflation. Consumer Price Inflation in January of that year showed that prices were up just 1.4% from the year-ago period. However, CPI inflation surged to an annual increase of 4.4% by October. 

Rapidly rising inflation put fear back in the minds of the bond vigilantes, who remembered vividly how the former Fed Chairman, Paul Volcker, had to raise the Fed Funds Rate to nearly 20% in order to vanquish inflation just six years prior. 

The worry was that the new Chairman, Alan Greenspan, would soon be forced to follow in his predecessor’s footsteps and start aggressively raising the Funds Rate. 

That fear helped send the Ten-Year Note yield surging from just above 7%, in January 1987, to over 10.2%, the week before Black Monday.

The stock market had soared by 22% in the 12 months prior to the crash of ’87. In similar fashion, the current market is setting record highs this year despite a global pandemic. Of course, the market is significantly overvalued today as compared to 1987. 

The Total market cap of equities to GDP was an incredible 120 percentage points lower on Black Monday than it is currently.

Therefore, since interest rates are dramatically lower and debt is significantly higher today than during 1987, it seems logical to conclude that the earnings of corporations, and indeed the economy itself, are in far more unsustainable conditions.

To be honest, nobody is exactly sure how 2021 will turn out. But the interest rate reality check is real, and we are headed firmly in that direction. 

Here at PPS, we always seek to not only protect but profit from all cyclical and secular bear markets. 

The deep state of Wall St. is either ignorant or unaware of the minefield. 

But you should be keenly aware.


Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, “The Mid-week Reality Check” and Author of the book “The Coming Bond Market Collapse.”

 America’s Normalcy Delusion

After four years of President Donald Trump’s bald-faced lies, juvenile bullying, gratuitous cruelty, and perilous volatility, many voters were attracted by President-elect Joe Biden's promise to restore what has been lost. But when it comes to foreign policy, in particular, there can be no return to the status quo ante.

Jorge G. Castañeda



MEXICO CITY – US President-elect Joe Biden made a “return to normalcy” one of his election campaign’s leitmotifs. 

After four years of President Donald Trump’s bald-faced lies, juvenile bullying, gratuitous cruelty, and perilous volatility, it was certainly an appealing promise. 

But, as Biden himself has admitted, the world is not what it was in January 2017, when Barack Obama’s administration – in which Biden served as vice president – left office. So, to what exactly is he planning to return?

To be sure, Biden can certainly restore a sense of decorum and decency to the US presidency. But on concrete policy issues – especially foreign-policy issues – the status quo ante will be far more difficult, if not impossible, to revive.

Biden has pledged to recommit to some of the Obama-era international agreements that Trump abandoned, beginning with the Paris climate agreement and the Joint Comprehensive Plan of Action (JCPOA, better known as the Iran nuclear deal). 

Moreover, he intends to extend the 2010 New Strategic Arms Reduction Treaty (New START) with Russia, rejoin the World Health Organization, and re-engage with Cuba. 

He may also join the successor to the Trans-Pacific Partnership (TPP), the mega-regional trade deal which Obama negotiated and Trump rejected.

Recommitting to the Paris agreement should be the simplest of these actions. It never acquired treaty status, largely because Obama knew the Republican-controlled Senate would never approve it. 

That is why Trump was able to withdraw from it without a congressional vote; he simply had to abide by the one-year waiting period stipulated in the text. Likewise, Biden could rejoin without congressional approval, after only a 30-day waiting period.

The rest of these efforts, however, will be fraught with difficulties. The JCPOA is a case in point. Though it, too, was not ratified by the Senate, unilaterally lifting economic sanctions on Iran (mainly on oil sales) would create a furor among congressional Republicans, whom Biden needs to fulfill other promises. Israel, too, would be incensed. The move may even raise a few eyebrows in Europe.

Critics argue that the JCPOA imposes insufficient limits on Iran’s nuclear-enrichment capabilities, and leaves out critical issues – namely, Iran’s ballistic missiles and, more important, its support for the region’s anti-Israeli, anti-American forces (like Hezbollah) or regimes (such as in Syria). Without some changes, the agreement will most likely remain moribund.

Any effort to reinstate Obama’s normalization policy with Cuba will face similar challenges. This approach implies a fully staffed US embassy in Havana, no travel or remittance restrictions, and the revival of cruise-ship visits and airline connections to the island. 

It would also entail as much investment and trade as possible under the US embargo that has been in place since 1961 (which will not be lifted by the Biden administration).

Biden would presumably not ask Cuba for anything in return. After all, Obama reached a deal with the Castro regime in 2015 only because he included no concrete conditions relating to human rights, democracy, economic reform, or significant Cuban cooperation in Latin America.

But, as the last five years have shown, Cuba will not address these issues on its own. In a recent interview, former US Secretary of State John Kerry, speaking on Biden’s behalf, confessed that Cuba’s progress on human rights and economic reform since 2015 has been “disappointing.” 

In fact, human-rights conditions have deteriorated and the number of political detainees has increased. Meanwhile, the humanitarian crisis in Venezuela, where Cuba wields enormous influence, has worsened considerably, with no solution in sight.

Against this background, attempting to normalize relations with Cuba would be politically risky. In the election, Biden performed significantly worse among Cuban-Americans in Miami, which accounts for more than 10% of Florida’s voting population, than Hillary Clinton did in 2016. 

Moreover, Biden may need the support of Florida Republicans, such as Senator Marco Rubio, to fulfill his promise of creating a path to citizenship for 11-12 million undocumented immigrants.

Moreover, though Biden has made no promises regarding Venezuela, he will have to make several crucial decisions on this front almost immediately after his inauguration. Will he maintain economic sanctions against the country and its state-run oil company, Petróleos de Venezuela, S.A.? 

Will he recognize Juan Guaidó, the opposition leader who swore himself in as interim president in 2019, as the country’s legitimate head of state? Will he disregard the results of the farcical National Assembly elections that were held on December 6?

In other words, will Biden broadly uphold Trump’s Venezuela policy (excluding the hare-brained coup schemes concocted by American and local cowboys)? Or will he seek another way to address the country’s severe humanitarian crisis? Returning to Obama’s policy of “benign neglect” – a reasonable position at the time – would be problematic today.

Finally, there is the question of Asia-Pacific trade. Biden has not pledged to join the TPP’s successor, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), created after Trump’s withdrawal by the 11 countries that negotiated the original agreement with Obama. Nor has he announced plans to renegotiate it.

Biden has, however, said that he thought the TPP was not a bad deal for the US, though he may ask for further labor and environmental provisions. If he wants to revive Obama’s “pivot to Asia,” and work with allies to contain China in the region, joining the CPTPP would be a good start. But this must be approached less like a return to the past than a step into the future.

Herein lies the fundamental challenge for Biden: how to revive useful multilateral agreements or foreign policies, while recognizing the myriad ways the world – and America’s reputation – has changed in the last four years. There can be no “returning” to the past, but only adaptation of US objectives and strategies to current conditions. 

The sooner Biden’s foreign-policy team recognizes this, the better.


Jorge G. Castañeda, a former foreign minister of Mexico, is a professor at New York University and author of America Through Foreign Eyes.

High-Frequency Traders Feast on Volatile Market

Profits climb sharply with help from sophisticated computer algorithms and strategies that take advantage of rips and dips; ‘a quarter for the record books’

By Scott Patterson and Alexander Osipovich

PHOTO ILLUSTRATION BY EMIL LENDOF/THE WALL STREET JOURNAL; PHOTOS: ISTOCK


Fast-trading investors have made big profits during the market’s volatility, with strategies ranging from sophisticated computer algorithms to ones as simple as “selling the rips and buying the dips.”

High-frequency traders, which typically deploy sophisticated algorithms and powerful computers to move in and out of markets at lightning speeds, tend to do well when markets are volatile.

Virtu Financial Inc., one of the largest high-speed traders, last week said it expects to post trading income of between $509 million and $519 million in the first quarter, more than double the amount from the same period last year and its highest quarterly trading income since the company went public in 2015.


Virtu’s results are “a quarter for the record books,” Piper Sandler analyst Richard Repetto wrote in a note. Virtu’s stock is up 41% this year while the S&P 500 is down 21%. The only other publicly traded high-speed trading firm, Amsterdam-based Flow Traders NV, is up 28% year to date.

A pre-markets primer packed with news, trends and ideas. Plus, up-to-the-minute market data.

High-frequency firms have struggled in recent years amid a period of low volatility and steadily rising markets. Still, they are estimated to account for around half the trading volume of the U.S. stock market, having largely replaced the floor traders who once controlled exchanges’ ebb and flow. Virtu is a designated market maker for the New York Stock Exchange.

Like market makers, high-speed traders often make money on the difference between buy and sell orders, known as the spread, by selling high and buying low as stocks tick up and down. Spreads in heavily traded stocks, such as Apple Inc., which are typically 1 or 2 cents, have ballooned to 30 cents or more in recent weeks because of the highly volatile, fast-moving markets. 

While wide spreads indicate riskier market conditions, firms that can exploit the difference can earn sizable profits.

Some plain-vanilla rapid-trading strategies are also faring well, traders said.

“Our traders are having some of their best months in years,” said Dennis Dick, a trader at Bright Trading, a Las Vegas broker dealer that provides computer-driven trading platforms for day traders. He said one of the strategies that has worked best is “selling the rips and buying the dips”—selling stocks after big moves higher and buying after sharp downturns.

Do you think high-frequency trading is good for the markets? Why or why not? Join the conversation below.

Mr. Dick said traders are looking for stocks that get pushed too low or too high during big market swings that drag the entire market up or down. Right now, he said, many are buying stocks that are low in debt and selling stocks with lots of debt that will likely suffer as the economy deteriorates. 

If a low-debt stock gets pummeled during a big selloff, traders will swoop in and buy, expecting it to rebound.

Thomas Peterffy, chairman of Interactive Brokers Group, an electronic brokerage popular among day traders, said daily volume handled by his firm has more than doubled to more than two million trades a day in the past three weeks. New accounts are also surging, he said, a sign that people confined to their homes might be turning to trading.

The losers among the computerized trading strategies, at least so far, are those that bet on longstanding correlations between different financial instruments. Such dislocations can cause losses in statistical arbitrage, or stat arb, strategies.

Since the financial crisis, the Cboe Volatility Index — also known as the VIX — has been considered an early warning signal for market distress. But how does it work? WSJ explains. Photo Composite: Tom McCarten for The Wall Street Journal.

Among the correlations that broke down during the worst of the selloff last week were between stocks and Treasury-bond prices, which usually move in opposite directions. But during the recent selloff, investors fled both. “Treasury selloffs on big down equity days mean that correlation is finally getting challenged,” said Pav Sethi, chief investment officer at Gladius Capital Management, a Chicago trading firm.


Mr. Sethi said another breakdown in correlations has been between stocks and a broad measure of market volatility, the Cboe Volatility Index, or VIX, known as the fear index. 

Typically the VIX rises when stocks fall as fear spreads through Wall Street, and vice versa. While the VIX soared to record levels as the market plunged in recent weeks, the link hasn’t always worked as expected.

Such haywire trading patterns mean trouble for quantitative investment firms, said David Magerman, a former executive at Renaissance Technologies, one of the biggest and most successful of what are known as quant firms. 

The models the firms deploy, often based on years of returns, get scrambled as investors head for the exits all at once.

“The big jolts to the markets are a coin flip for quant funds,” Mr. Magerman said. “Once the markets calm…quant funds that are still around should clean up.”

Although volatility has mostly benefited electronic trading firms, “you can still be caught by surprise,” said Rob Creamer, CEO of Chicago-based firm Geneva Trading. 

“There are a lot of markets that have been so dislocated that it’s been incredibly challenging.”

One victim of the extreme moves was Ronin Capital LLC, a Chicago-based trading firm that incurred hundreds of millions of dollars in losses on strategies tied to the VIX, people familiar with the matter said. Futures-exchange operator CME Group Inc. said March 20 that it auctioned off some of Ronin’s portfolios after it failed to meet capital requirements.

A person reached at Ronin’s office didn’t respond to requests for comment.

Some quick-draw traders that don’t use complex algorithms are also benefiting from the market’s swings. Daniel Schlaepfer, CEO of Select Vantage, which has more than 2,000 day traders world-wide, said his firm’s top 10 record days have occurred this month. 

Daily trading volumes across the firm have doubled since markets began their slide, he said.

Traders at Select Vantage typically hold stocks for less than 15 minutes and never sit on positions overnight, he said. 

In ways, the firm acts like a vast, human-driven high-frequency firm that rapidly buys and sells stocks throughout the day.

“We’re way up. We’re up full-force,” Mr. Schlaepfer said.