The majority of investors get tricked into consensus trades the majority of the time. The majority of consensus trades tend to fail miserably, with the majority of investors left behind, believing in a narrative that is outdated and hoping the trend will reverse (which it hardly ever does). That’s the dominant dynamic of financial markets two centuries ago, last century, this centuries, and for many centuries to come. That’s how the minority of market participants create outrageous investing success while the majority continues to chase narratives, as explained in Tsaklanos his 1/99 investing principles. Case in point: common belief that rates (Yields) would continue to rise, fueled by financial mainstream media, appeared to be false, leaving the majority of those who were ‘short Treasuries’ behind while the market reversed.
We have been warning since many months that “higher interest rates” was a consensus viewpoint that created a narrative. Moreover, based on factual data, we could see that this consensus viewpoint did translate in a consensus trade: ‘everyone and his uncle’ was short Treasuries / long Yields.
Once again, the market knew what was coming and ensured that the consensus viewpoint was amplified, only to reverse at ‘peak consensus’ which is how it always goes.
There are very important lessons to be learned from this case. Consensus trades are a nasty trap for investors. That’s why we build it up again, for readers to use this as a learning opportunity.
On Sept 24th, 2023, we asked the question whether rates could move much higher to break markets. This was our answer:
Rising 2-Year Treasury (negatively correlated to Yields) seems to be an overcrowded trade as evidenced by the following statistic:
Traders are Short the Two-Year. Speculator positioning on the 2-Year Treasury as measured by the weekly Commitments of Traders Report hit its most net short level in the history of the series dating back to 1990 in the release as of 9/8/23. That means that futures traders are betting the yield on the 2-year will continue to go higher even after it has risen from 0.22% up to just under 5% in the last two years. (Source: CFTC)
What we do know, from history, is that the consensus trade mostly does not work out. While yields may continue to move higher, we believe it will not get out of hand which is the overarching sentiment currently.
In sum, will rates continue to move higher and break markets? We don’t see that happening, certainly not in 2023 which is how far our current cycle & chart readings go.
On Nov 2nd, we looked at the question whether inflation would continue to push markets lower in November.
Our short answer: no, inflation will moderate, with a significant decline expected in October’s headline inflation data, providing support to markets in November of 2023.
We followed up on Nov 5th, asking the question whether rising rates is concerning for investors in 2024 & beyond. This was our answer:
The consensus belief is that rates will continue to rise in 2024, making markets vulnerable for more downside. We are not convinced it will be that bad.
On Nov 12th, we released this piece in the public space: Ready For A Headline Inflation Surprise That Will Fuel The 2023 End-Of-Year Rally?
The last 2023 inflation reports might bring a pleasant surprise which markets will welcome, fueling the 2023 end-of-year rally.
What we are saying is that the data was suggesting that inflation peaked along with Yields. That’s not what mainstream media was selling. It was also not what positioning was showing as long Yields / short Treasuries was an overcrowded trade. This consensus view was fueled by so many sources and people. Why? Because it sells well.
What is the intuitive reaction of every investor that is positioned in a certain market? Investors tend to look for news and analysis that confirms their viewpoint. That is the one and only habit that may be intuitive but horrible as a practice. You should exclude (or not) what the opposite viewpoint is valid, so you should look information that validates (or not) the contrarian viewpoint, always!
Those that were long Yields / short Treasuries could have seen what an overcrowded trade it was. That’s publicly available data, everyone has access to it.
We covered this point extensively in our piece 7 Secrets of Successful Investing. We urge you to read again this paragraph: “Successful investing secret #2. Narratives create tremendous bias and result in unawareness.”
That said, in our premium services, we did take serious bets against rising rates. One of the most rate-sensitive areas are precious metals. Within the precious metals space, one metal (silver) is wildly and unusually bullish as per recent leading indicator data. You can check it out in our new service S&P 500, gold and silver price analysis or simply read [Silver] Peak Disappointment Is Here, The Market Loves It, It’s Evidence of a Turnaround.
