Monday, April 4, 2016


Reading over Yellen’s uber-dovish speech on Tuesday felt roughly like stepping into a ring with an enraged bull while wearing a big red target on our backs and with no rodeo clown to save us.  The abundance of positive economic data points that flooded the media later in the week left us asking ourselves the same two questions being debated by every strategist at the moment: “just exactly what data the Fed is reviewing as part of its commitment to being “data dependent” and “if not now, when?”

Everyone’s debating what it means to be “credible” and whether the Fed can still be said to be that will haunt us at least until the next FOMC press conference but ultimately the question of who was right and who was wrong won’t be decided in the financial blogosphere, although if you want some solid insight into the Chairwoman’s thought processes, we’d encourage you to visit the Macro Man’s recent posting “When Doves Fly" -  Then again, it’s been clear to the markets for some time that Janet Yellen is her own woman and where her predecessor backed off on QE3 well before attaining the 2% inflation target; she’s more than prepared to accept overshooting that living with the specter of deflation and her comments last Tuesday did have their intended effect of putting more downward pressure on the dollar.  And for many investors, that was the best of all possible outcomes.

How do we know?  Start by looking over our recently update fund flows data because while everyone’s been talking about the strong returns for certain commodities in the first quarter, when you look at where the money is flowing to the story becomes less about commodities and almost exclusively about precious metals funds.  We track six broad categories of commodity funds and of the approximately $9.3 billion in new assets they brought in Q1, over 90% of the inflows went to precious metals funds!  Even that doesn’t quite capture the magnitude of this major momentum shift so we’d like to point out that $8 billion of that $9.3 billion went to just two funds, the SPDR Gold Shares (GLD) and iShares COMEX Gold Trust (IAU.)  Hardly a deep and broad recovery for commodity funds although that’s perhaps not overly surprising given the relative weak global outlook or woes afflicting the energy sector after Iran said it wouldn’t adhere to any production cap until restoring its output to pre-sanction levels.  Plus unlike most commodity funds, GLD and IAU have very low tracking error making them the perfect vehicle to use if you feel that that Fed will be forced to back off its rate hike plans or that more volatility is ahead.

However, that isn’t to say that ALL the money went to gold funds last quarter but what didn’t make it to the Austrian’s favorite alternative currency went largely to two different places, emerging market funds and bonds, as investors decided to put the Fed’s lack of resolve to work in their favor.  EM equities had a strong quarter with the iShares MSCI Emerging Markets Fund (EEM) outperforming the S&P 500 by close to 600 bps, its widest margin since late 2012 and raising its AUM by close to $400 million but that pales in comparison to the iShares MSCI Brazil Fund (EWZ.)  Once upon a time (like last year), EWZ was hovering close to the bottom of our behavioral score rankings but Yellen’s dovish stance barely fazed the fund last week.  In fact, there were almost no major changes worth noting in our ETFG Quant Movers Report because the market had already anticipated the Chairwoman’s viewpoint so today EWZ is still holding down the #1 spot after delivering an almost unbelievable (until you remember how volatile it can be) 27.2% return in the first quarter which helped deliver over $300 million in new assets.  Even the smaller and more diverse iShares Latin America 40 (ILF) saw over $24 million in positive inflows after a strong 18.7% advance last quarter.

But even $300 million is just a drop in the bucket compared to how much money made its way into certain bond funds last quarter in what may be the most direct investor challenge to the Fed’s credibility on being able to either create inflation or adhere to any plan of rate hikes given the Fed’s unwillingness to stomach higher market volatility.  After all, you expect funds like EWZ and ILF to attract a certain kind of investor who covets their high volatility for the possibility of subsequently high capital gains, but both the iShares Core U.S. Aggregate Bond ETF (AGG) and the iShares 20+ Year Treasury Bond ETF (TLT) took in billions in new capital last quarter and you’d have to have either a very dim view on the recent market recovery or the Fed’s willingness to ever hike rates again to consider going long at these levels.  And that might be proven right, that post by the Macro Man included a very tongue-in-cheek breakdown of the reasons why the Fed can’t possible hike in 2017 including the upcoming Brexit vote and U.S. presidential election.

So again we’re left asking, if not now, then when?

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