My tentative playbook/recommendations for this scenario:
Long homebuilders (ETFs: ITB, XHB; pair against short SPY if you want to be beta-neutral) Long gold/gold miners (ETFs: GLD, GDX, GDXJ....)
This is a super difficult question. I’d be hesitant to immediately jump to long vol or flight-to-safety trades as offering the best reward-to-risk here.
Another March-style liquidity crisis seems much less likely, given we have a better understanding of COVID as a medical condition, of the nature of its economic impacts, and—perhaps most importantly—how policymakers are prone to respond.
Basically the recommended trades could do very well in an environment in which there is pressure for real interest rates to decline coupled with a Fed that is game to move to a more accommodative stance on the margin.
COVID is fundamentally a real shock and not a sharp monetary disequilibrium. People (rationally) want to defer consumption. Housing is already quite hot, as it is minimally impacted by COVID and, as the archetypal long-lived durable asset, is actually a great vehicle for people to defer consumption. If the Fed is with the market (as it would likely be), homebuilders could continue to outperform if a greater-than-expected COVID resurgence drives more on the margin to seek to defer consumption and increase real housing demand.
To first-order, gold benefits from real-interest rates declining. Fundamentally, when there is high demand to defer consumption (i.e. to save) and low-demand for investment, long-term real interest rates could (somehow) decline even futher and continue the favorable environment for gold. Yes, it has rallied quite strongly since 2019, so we’d have to be wary of chasing here. But just eyeballing the charts for this, I think there are attractive levels to add this risk on slight dip from current levels (e.g. 1820-1840ish in spot gold.
Also, the broader monetary policy reaction function is always critical to consider in my opinion. The FOMC would be more likely to extend the weighted-maturity of their asset purchases if it looks like COVID is resurging in an unexpected way. Bigger picture, they may look to make more credible commitments to overshooting 2% inflation post-COVID in order to hit their new average inflation target objective.
Obviously, a main risk I see to these trades is that these are just a continuation of COVID trades from this year (no real special view here) and we could potentially just be chasing after already-crowded trades which are prone to squeeze against us if we’re wrong.
Also, the broader monetary policy reaction function is always critical to consider in my opinion. The FOMC would be more likely to extend the weighted-maturity of their asset purchases if it looks like COVID is resurging in an unexpected way.
Wouldn’t this make the long long-term treasuries attractive?
My tentative playbook/recommendations for this scenario:
Long homebuilders (ETFs: ITB, XHB; pair against short SPY if you want to be beta-neutral)
Long gold/gold miners (ETFs: GLD, GDX, GDXJ....)
This is a super difficult question. I’d be hesitant to immediately jump to long vol or flight-to-safety trades as offering the best reward-to-risk here.
Another March-style liquidity crisis seems much less likely, given we have a better understanding of COVID as a medical condition, of the nature of its economic impacts, and—perhaps most importantly—how policymakers are prone to respond.
Basically the recommended trades could do very well in an environment in which there is pressure for real interest rates to decline coupled with a Fed that is game to move to a more accommodative stance on the margin.
COVID is fundamentally a real shock and not a sharp monetary disequilibrium. People (rationally) want to defer consumption. Housing is already quite hot, as it is minimally impacted by COVID and, as the archetypal long-lived durable asset, is actually a great vehicle for people to defer consumption. If the Fed is with the market (as it would likely be), homebuilders could continue to outperform if a greater-than-expected COVID resurgence drives more on the margin to seek to defer consumption and increase real housing demand.
To first-order, gold benefits from real-interest rates declining. Fundamentally, when there is high demand to defer consumption (i.e. to save) and low-demand for investment, long-term real interest rates could (somehow) decline even futher and continue the favorable environment for gold. Yes, it has rallied quite strongly since 2019, so we’d have to be wary of chasing here. But just eyeballing the charts for this, I think there are attractive levels to add this risk on slight dip from current levels (e.g. 1820-1840ish in spot gold.
Also, the broader monetary policy reaction function is always critical to consider in my opinion. The FOMC would be more likely to extend the weighted-maturity of their asset purchases if it looks like COVID is resurging in an unexpected way. Bigger picture, they may look to make more credible commitments to overshooting 2% inflation post-COVID in order to hit their new average inflation target objective.
Obviously, a main risk I see to these trades is that these are just a continuation of COVID trades from this year (no real special view here) and we could potentially just be chasing after already-crowded trades which are prone to squeeze against us if we’re wrong.
Wouldn’t this make the long long-term treasuries attractive?