John Cochrane has a fascinating idea to fund the massive increase in US debt issuance. He argues the US should issue perpetuity bonds, which have no fixed maturity date. They’re repaid on an as-yet-unnamed future date when there is a government surplus. His reasoning is very simple: right now, the US funds its debt primarily through short-term issues, which exposes the Treasury to refinancing risk. If the inflation outlook changes unexpectedly, the US would face a bond market crisis, imperiling US finances. By shifting to longer-term debt — which is still historically cheap — we remove that risk. His idea takes into account that we have no idea when the inflation situation will change. But, when it does, it will have a pronounced effect on national finances.
Active management doesn’t work in the long run. The following table is from the 2019 SPIVA report: This table shows what percentage of funds underperformed their respective indexes over specific time periods. While smaller-cap funds are more likely to outperform indexes in the short term, the possibility they’ll continue to outperform decreases over time. By the 10 and 15 year time, the probability that the indexes will win is very high. The conclusion is very clear: don’t try to beat the market. Instead, manage risk and volatility.
Existing home sales declined for a third straight month (emphasis added):
Total existing-home sales,1Existing-Home Sales, completed transactions that include single-family homes, townhomes, condominiums and co-ops, slumped 9.7% from April to a seasonally-adjusted annual rate of 3.91 million in May. Overall, sales fell year-over-year, down 26.6% from a year ago (5.33 million in May 2019).
“Sales completed in May reflect contract signings in March and April – during the strictest times of the pandemic lockdown and hence the cyclical low point,” said Lawrence Yun, NAR’s chief economist. “Home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”
The following chart is from Calculated Risk:Hopefully, low interest rates will slow or stop the slide in the next few releases.
Let’s turn to today’s performance tables:Today the equity indexes were up modestly. The QQQ had the best gain, but it was only up 1.22%. Smaller-cap indexes were in the next two slots, but, again, modest gains. The SPY rose 0.69% while the long end of the Treasury market was near unchanged.The decent rise in technology shares accounts for the QQQ’s gain. Consumer discretionary and utilities were also higher, but after that, the gains taper off.
The charts show continued very modest moves, but, more importantly, more consolidation.
The 5-day IEF chart shows a clear upward move. But the chart only covers a single point (120.75-121.75), so the advance isn’t much to cheer about. The SPY has a clear downward trajectory. But as with the IEF, the overall range is eight points, so the total move isn’t that impressive.The IWM’s 5-day chart shows a modestly stronger move lower, but, again, not much of a total point move.
Over the 2-week time frame, it’s possible we’re seeing an extended cup and handle pattern:The SPY formed the “cup” the week before last while the handle — which is very long at this point — has been forming over the last week.The IWM is also forming an extended cup and handle pattern. However, the handle is very long at this point.
The bottom line is that not much has really happened over the last few weeks, which is another way of saying, “consolidation.” Considering some of the volatility we’ve seen this year, that’s not exactly a bad thing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.