Everything is too high (except the stuff that should be…. yet)

This macro piece, whilst not exactly Greek mythology does bear some similarities to the story of Icarus who flew too close to the sun and died.

We tend to forget the rest of the myth. Icarus was told by his father not to fly too high as his wings would melt AND also not too low as the sea’s dampness would also ruin his wings.

The piece tries to identify which assets and market expectations are too high and which too low and why perhaps they may switch places.

Which asset classes are too high?

The obvious one is first world equity. The second is the USD. The third is bond prices. The fourth whilst not a market driven value is the level of debt in the world.

The last high is not an asset, it is an expectation. It is the expectation that interest rates in The US are inevitably going to rise soon.

Which are too low?

The obvious one is virtually every currency as measured against the USD. The second is bond yields. Remember they are inversely correlated to price.

Third comes commodity values.

Lastly an expectation. The expectation amongst market participants that the above can reverse.


Post the FED announcement last week market participants have begun a wild speculation spree as to when rates are going to rise and by how much. The lemming consensus is for short term rates to rise to 3% by 2017 from zero. Whilst rates will rise they will not rise by 300%. Why, because there is far too much debt in the world. The raising of rates in The US will have such deep repercussions globally at a time of such economic fragility coupled with extreme elevated equity values that will make the 2007/08 calamity seem like a picnic party.

40% of earnings by the S&P500 companies are derived overseas. Raising of US rates exports deflation which is then imported back into The US. It is an interconnected world we live and play in.

The interest rate consensus expectation is beginning to leave its mark. Equity values in The US have stalled their upward trajectory and the USD has continued its exponential rise especially as the rest of the first world including China cuts rates. The interest rate differential between The US and the rest is expected to continue growing in the USD’s favour. Until recently.

So to recap, interest rates will rise, the USD will rise, risk assets will slow their ascent. There is however always a spoilsport at every consensual party. In this case bonds. They just do not buy this story and continue rising. Bonds know better than anyone/thing that the lofty interest rate rise expectation is exactly that. Lofty.


Every currency in the world when measured in USD terms is virtually on its knees. Expectations are that they will go lower as the interest rate differentials continue to widen.

In our last MACRO piece we looked at YEN versus the USD. We repeat the graph here because it is important.


Commodities are on their knees. A rising USD tends to do that to commodity values. Again in last week’s piece we compared gold to YEN. We repeat the graph here.


Our last graph compares the USD against itself. This is a very important one.


Expectations that any, let alone all of the above can reverse is at an acute all time low as measured by fund flows, COT reports, analyst recommendations and most importantly bond yields which have remained aloof from the nonsense by remaining low.

To conclude this labyrinth we fear expectations have once again turned too extreme. Interest rates will rise but not the expected extent. The USD will fall in anguish, commodities will rise and assets driven higher by the USD strength including US equities will suffer. We may have already begun to see the first signs of this happening.

The more important conclusion however is that the market is a labyrinth. Apt really as in Greek mythology the labyrinth was created by a certain Daedalus.

He was Icarus’ father.


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