✓ Entry price: 12.62 ✘ Exit price: 27.25 ▲ Theoretical gain: 115.95%
The broad dollar weakness of 2020 provided an ideal scenario to leverage precious metals. In March, we flagged the RSI on the gold/silver ratio was back to 55-year highs and suggested we enter one of our favorite trades. In May we watched the outperformance of silver vs gold, feeding our narrative of economic recovery and a move towards “value”.
In August we called the exit, advocating taking partial profit on longs at 27.25.
What Happened Next?
From August 18th to September 18th, 2020, Silver dropped 3.2% from our exit price, supporting our views on the long trade’s timing.
✓ Entry price: 12,790.49 ✘ Exit price: 10,356.7 ▲ Theoretical gain: 21.23%
✓ Entry price: 83.88 ✘ Exit price: 60.56 ▲ Theoretical gain: 27.80%
Our analysis of the KBW Bank Index and the S&P REIT Index (BKX/REIT) showed that it tends to track US 10yr yields. In March 2020, the divergence was at the lows of late 2008, just before the BKX dropped 56%.
March 5, 2020, we made the call to enter the trade at 87.86. Ultimately, we feared that US banks would remain expensive versus their global peers and, given the collapse in yields, would eventually go a lot lower. Less than three weeks later, we called the exit at 60.56.
What Happened Next?
From March 20th, 2020 to May 20th, 2020 BKX appreciated 14.05% from our exit price, reinforcing our conviction on the short trade’s timing.
✓ Entry price: 86.04 ✘ Exit price: 69.75 ▲ Theoretical gain: 18.93%
February 2020, HYG was holding up remarkably; only down 3% from the highs despite a pretty substantial drop in shares outstanding.
February 28, we made the call to enter the trade at 86.04. Yet, we believed there was a downside; especially if (as we feared) recessionary risks started to rise. By March 5, credit had become the weak link in the trade. Just two weeks later, on March 20, we suggested exiting at 69.75.
What Happened Next?
From March 20th, 2020 to May 20th, 2020 HYG gained 16.2% from our exit price, reinforcing our conviction on the short trade’s timing.
✓ Entry price: 1275.52 ✘ Exit price: 1499.15 ▲ Theoretical gain: 17.5%
Precious metals are a play on a weaker dollar, inflation, and, in April 2019, were sitting close to 20-year, relative lows. Following our call to enter the trade on April 10, Gold responded rapidly to the prospect of US monetary easing. We saw Gold strengthen against a range of currencies, including the USD.
By September 9 prices had surged since we first suggested buying Gold. However, they had become vulnerable to a bout of reflation. We called the exit at a price of 1499.13.
What Happened Next?
From September 9th, 2019 to November 9th, 2019 XAU slumped 2.68% off our exit price, reinforcing our conviction on the long trade’s timing.
✓ Entry price: 12,790.49 ✘ Exit price: 10,356.7 ▲ Theoretical gain: 21.23%
Earlier this year, the DAX was breaking key support of a major wedge that had held the market since the end of Q3 2019. February 25, we made the call to enter the trade at 12,790.
In terms of the potential size of the fall, we watched the divergence between the DAX and Siemens stock. Given current levels, we targeted a fall in the DAX to just under 11,000.
By March 12 we were staying the course, moving the stop to a close above 10,780 before suggesting an exit on April 6.
What Happened Next?
From April 6th, 2020 to June 6th, 2020 DAX appreciated 27.52% from our exit price, reinforcing our conviction on the short trade’s timing.
A Proven Track Record, Making Calm Out of Chaos
The MI2 Research Team has presciently called major moves in everything from inflation, bonds, the dollar, and equities.
It’s partly because of our wide lens and deep bench, providing insight across instruments (FX, equities, commodities, fixed income) and regions (Europe, Asia, the Americas).
Every trade has a deeply researched narrative that is stress-tested within the existing framework and models.
Our research team has decades of market experience through bull and bear markets so when the chaos comes, we help you navigate through it.
In particular, our clients have thanked us for our accurate calls on inflation. Here’s how we were ahead of consensus with some uncannily accurate predictions…
January 5- Inflation: The Key Variable in 2021
“… the reality is that, despite Powell’s summary dismissal of the risks, his faith in the idea that “elevated readings are likely to prove temporary” looks misplaced. Indeed, when we examine the five specific arguments that underpin his sanguine stance, they wilt under interrogation from our trusty charts, ironically many of them based upon the Fed’s data. Hence, our concern is that the gentleman doth protest too much and that the Chairman is just winging it until there is greater economic clarity. “
· “Bottom line, after Friday’s speech, it’s arguable that when it comes to inflation, Powell is at best clueless or at worst disingenuous and a pawn in the Biden Administration’s political agenda. At this stage, we think that is too harsh. Instead, we hope the speech was simply a reflection of genuine uncertainty in central bank circles”
· “Unfortunately, if we have parsed the macro picture correctly, then in marked contrast to risk-assets price action since Friday, we believe the speech increases market uncertainty. As we have proved, the inflation arguments set out in JP’s speech are flimsy if not outright wrong. Obviously, just as May’s 53.4% rise in US Retail Sales was mathematically unsustainable, headline inflation will peak at some point. Yet for Powell to double down on the transitory argument, when policy remains at maximum accommodation, core price pressures are likely to remain uncomfortably high well into 2022, Owner Equivalent Rent is accelerating, and inflation expectations are already rising is dangerous.”
“… with pent-up consumer demand, strong employment, robust wages and near record-low customer inventories, we just don’t see weak demand. That, in turn, suggests that firms with pricing power will continue to pass through prices, which means that inflation is the most likely outcome. For markets, that suggests that as we move into yearend and 2022, the transitory narrative will look increasingly laughable and central banks will look increasingly behind the curve.”
While inflation was the focus of our research in 2021, the spotlight shifted in 2022 to volatility, beginning with the piece “2022: Accelerative Oscillations”. Since then, we’ve continued to guide our clients through market fluctuations, creating calm out of chaos.