Largest 5 Sectors In S&P 500 = 76.90% Weighting + Price Impact

Tech Heavy = Top Heavy



XLK Technology 25.20
XLF Financial 15.00
XLV H-Care 13.80
XLY Con. Discret 12.70
XLI Industrials 10.20

= 76.90%


XLP Con. Staples 7.50
XLE Energy 5.50
XLB Materials 2.90
XLU Utilities 2.70
IYR Real Estate 2.60
IYZ Telecomm 1.90

= 23.10%


Technology Equities [XLK] Impact = Even Greater Than It Appears As XLY [includes both AMZN + NFLX].

Including Just These 2 Stocks Into The XLK Lifts Technology Weighting To A Sky High 27.75%…Almost Double The Impact Of
The #2 Sector = XLF.

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Central Banks: More Likely To Erase Sovereign Debt Than Meaningfully Release Balance Sheet Assets To The Market

The Real End Game


Of All The External Commentary About Global Central Bankers…The Oddest = Many People Actually Believe What They Say.

So Often Central Bankers Are Incorrect + Plain Wrong.

But That’s All Right Because Forecasting The Economy = Tough Gig.

But Being Mislead…Nobody Likes That…And It Seems That Global Central Bankers Are Misleading Us…ONCE AGAIN [i.e. QE was advertised as a short term solution in 2008/09 & yet it is still being globally deployed…in some cases…more than ever.]


What Are They Currently Misleading Us About?

That They Will Eventually Release Most Of Their QE’ed Sovereign Debt From Their Balance Sheets [as global inflation emerges] Into The Market…Mostly Via Non-Reinvestment At Maturity.

And There Is “A Ton” Of Central Bank Owned Sovereign Debt [+ other financial assets].

The Chart Below Spectacularly Illustrates The Total Asset Levels + Growth of The Federal Reserve, ECB + The Bank of Japan Balance Sheets…And Note… This Does Not Even Include China [which frequently stimulates its economy via enormous liquidity injections].


And If Anybody Really Believes The Federal Reserve, ECB and The Bank Of Japan Are Serious About Quantitative Tightening…As Recently Suggested By The Mainstream Media….Then They Live In A Fantasy World…As Central Banker Actions, Rather Than Their Words, Suggest Otherwise.

Further…For Those That Claim The Federal Reserve Is Already “Tightening” Their Balance Sheet…I Challenge That Assertion As 99%+ Of Their Balance Sheet Is Still Being Reinvested At Maturity.

So The Glacial Pace Of Reduction, Although Technically “Tightening”, Is Almost Irrelevant. It Is Almost Akin To To Draining An Ocean One Tea-Spoon At A Time.

Plus…The Fed Can Halt This Slow Run-Off Of Assets…Whenever They Choose …For Whatever Reason They Want…As There Is No Practical Oversight Of Their Monetary Tactics.

In The Meantime The Bank of Japan [BoJ] and The European Central Bank [ECB] Continue To ADD To Their Balance Sheets.

The BoJ, It Seems, Will Never Stop As They Continue To Nationalize Their Sovereign Debt While The ECB Shows Little Sign Of Wavering.

Kuroda + Draghi Are “All-In”…And Judging By Their Public Statements…Seem Quite Proud Of It.


Then…How To Judiciously Shrink Central Bank Balance Sheets Without Elevating Interest Rates [via a dramatic increase in supply vis-a-vis demand]….Thus…Braking Economic Growth?

Because As Already Demonstrated, In Just 4 1/2 Months Of “Normalizing”, The Fed’s Minuscule Treasury Releases Have Already Had An Out-Sized Impact On Interest Rates.

A Little Bad Luck For The Fed Too…As Trump’s Deficit Spending Pressures The Dollar [providing even more incremental inflationary fuel]…Adding Further Impetus To Higher Yields.

So The Fed Is Too Late To The Normalization Party…And They Know It.

The Markets Smell Blood And Are Going In “For The Kill”.

Clearly…No Matter How Deliberately The Debt Assets Are Released To The Market…It Is A Virtually Impossible Task To Not Impact The Absolute Level Of Interest Rates Higher.


Thus…There Is Only One Real Way For The Central Banks To Rid Themselves Of These Debentures…That Is…To Simply Forgive Much, If Not All, Of The Sovereign Debt On Their Balance Sheets.

Voila…The Tough Task Could Be Easily Executed With Just One Decree From Each Central Bank. The Rationale = “For The Good Of The Global Economy.”

Naturally, The “Spin” From The Forgivers Would Be Brilliantly Positive…And Effected Nations Would Obviously Concur…As They Would Directly Benefit.

The IMF’s Lagarde & “Thought Leaders” Like Dalio + El Erian Would Also, Likely, Support The Move.

Ratings Agencies Would Also Have To Fortify The Decision …Which They Would…Due to Tremendous Political Pressure…Despite The Absurdity Of The Idea.

Moreover, They’ve Already Tacitly Endorsed QE By Not Directly Penalizing The Credit Ratings Of Those Countries Directly Engaged In QE.


Think About It…The Universal Money Swapping Between Sovereigns + Central Banks Is So Economically Unethical:

1. Sovereigns Issue Debt.
2. ZIRP/NIRP Base Rates On Debt, “Paid” By Sovereigns, Set By Central Banks.
3. Central Banks Buy Sovereign Debt [With Newly Minted Currency].
4. Central Banks Intentionally Over-Pay, For Debt, To Maximize Yield Suppressing Impact.
5. Central Banks Receive/Return Interest Income, From Debt Holdings, To Sovereigns.
6. Sovereigns Reduce Annual Deficits With Central Bank Remittances.
7. Sovereigns, Despite Remittances From Central Banks, Continue To Produce Annual Operating Deficits.
8. Annual Operating Deficits Continue To Grow Sovereign National Debt.
9. Debt Continues To Grow Faster Than Tax Receipts…Imperiling Sovereign Credit Ratings.



Of Course…There Will Be Some Push-Back By The Markets…And It Could Be Brutal.

1. Sudden Destruction Of Central Bank “Credibility.”
2. Inflation Sharply Increases…As Sovereigns Suddenly Freed To Increase Fiscal Spending.
3. Sovereign Debt [held by private institutions/investors] Craters In Value Due To Both Central Bank “Credibility” Destruction + Increasing Inflation Expectations.
4. As Rates Suddenly Rise…Risk Asset [equities, real estate, etc] Values Adjust Downward.
5. Legacy Fiat Currency Values Tank As The Executing Mechanisms Of Central Bank Policy Also Lose “Credibility”.


So…Despite The Clear Economic Dangers…Will Central Bankers Actually Forgive The Debt Obligations Of Their Sovereign Investment Portfolios?

It Seems Likely As They’ve Already Taken Huge Risks With The Global Economy [QE/ZIRP/NIRP/IOER/ + Debt Monetization] Showing Little Concern About Its Negative Implications.

Why Not Just Roll The Dice Again…As They Seem To Believe They Are “The Masters Of The Economic Universe” Anyway?

Furthermore…It Is Their Only Legitimate Medium Term Option…As Global Sovereign Debt Stacks Have Already Grown Above The Levels That Can Be Sustained By Even The Most Optimistic Economic Growth Forecasts.


Japan…The Country With Debt/GDP > 200% And An Aging/Shrinking Population = Decreased Fiscal Cash Flow [due to increased healthcare/pension costs + decreasing tax revenues] Will Be The First Domino To Fall.

Other Central Banks Will Then Be Forced To Follow…As The “Debt Infused Sovereign Drunks Will Be Forced To Hold Each Other Up…Rather Than All Fall Down Together.

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2 Year Greek Sovereign Debt Yields Less Than United States 2 Year Treasury Note

1. The Absurdity Of Quantitative Easing.
2. Ratings Agencies’ Evaluations Ignored By “Omnipotent” Central Bankers.


The 2 Year Greek Government Bond Currently Yields 100 Basis Points Lower Than The 2 Year U.S. Treasury.

Greece Is Rated Junk [B-] by Fitch While The U.S. Is Rated Highest Investment Grade [AAA] By The Same Agency.


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Biggest Risk For Stock Market = Urgency To Buy Simultaneously Increasing With “Sky High” Sharpe Ratio

Sharpe Ratio = Reflects Equity Nirvana


There Is Plenty Of Chatter About The U.S. Equities Markets & How Extended They May Be.

So Often I Am Asked About A Catalyst To Initiate A Downward + Meaningful Price Reversal. I Wish I Had An Easy Answer. It Could Be Many Things…Almost Anything. But Actually The Catalyst = Almost Irrelevant.

What Resonates With Me The Most, Though, Is The Multi-Year URGENCY To Buy Equities…As Measured By A Lack Of Any Meaningful, Peak To Trough, Capital “Draw-Down” Since February 2016.

The BTFD/FOMO Mentality Continues To Prevail And Is Increasingly Acute…As The Price Dips Are Less Frequent + Increasingly Brief + Shallow.

Meanwhile…Stock Prices Regularly Reach New All-Time Heights While Scores Of Technical + Sentimental Metrics Shoot Beyond Historical Summits.


The Market’s Elasticity Seems Stretched Very Close To Its Limits…But Still…Prices Continue To Surge At A Steepening Rate…Thanks, Primarily, To The Seemingly Open-Ended/Massive Liquidity Measures [QE, ZIRP, NIRP & IOER In The U.S.] Offered By Global Central Banks.

That These Liquidity Measures Also Dilute The Currencies, In Which Equities Are Specifically Denominated, Further Confounds The Parabolic Equity Advance.


The Monthly Chart Of The SPX [see above] Visually Demonstrates The Relentless Price Thrust Higher.

Furthermore, That The S&P 500’s Total Return Was Positive For Every Month Of Calendar 2017 = Simply Stunning…Resulting in 19.38% Return [ex: dividends].

Even More…Since March 2016…20/22 Months Have Yielded Positive Returns. And The Absolute Returns = Awesome = 41.25% [ex: dividends].

Fundamentally…Earnings Per/Share For The S&P 500 Constituents Have Improved But, More Importantly, The EV/EBITDA Multiples Have Also Strongly Advanced…Offering Much More Fuel To Prices Than The Decent Earnings Increases.


But What Makes The Market Return Profile Especially Remarkable…Is Not The Impressive Percentage Gains [bull markets have yielded many similar results over the past century]…But The Lack Of Volatility…As Measured By The Standard Deviation Of Prices Associated With These Returns.

It Is The Before Mentioned BTFD’ers/FOMO’ers That Perpetuate The Lack Of Standard Deviation/Volatility.

Of Course The BTFD/FOMO Behavior Is Shaped By Central Banker Behavior…That Encourages Massive Risk-Taking…Despite The Unprecedented Price Climb.


So How Best To Measure/Quantify Any Of This?

The Sharpe Ratio Is The Calibrating Gold Standard As It’s Quotient Incorporates Standard Deviation Of Returns In Its Denominator.


It Essentially Communicates The Mathematical Pathway To Returns…How Much Capital “Draw-Down”/Pain Was Endured To Achieve Returns.

And Historically…There Is Usually A Fair Amount Of Pain On This Path…Despite Monumental Efforts To Avoid Such Pain.


The Higher The Value Of The Sharpe Ratio = The Better The “Risk-Adjusted” Return Profile.

Be Advised, Though, That A Higher Sharpe Ratio Does Not Necessarily = Higher Absolute Returns.

To The Contrary…A Higher Sharpe Ratio [especially valued at hedge funds] Typically Equates To Lower Absolute Returns…As The Pursuit Of Pain Avoidance Consequently Results In Dampened Total Returns.


On The Other Hand “Long-Only” Mutual Funds + Passive Indexed Strategies Usually, Over Longer Time Frames, Cannot Avoid A More Muted Sharpe Ratio [versus hedge funds] As They Are Wholly Exposed To Downside Volatility [fully invested mandate]…That Is…UNTIL RECENTLY…As The Data Set Below Demonstrates.

S&P 500
Ending 12.17

Sharpe Ratio
1-Yr 4.36
3-Yr .88
5-Yr 1.35
10-Yr .45
15-Yr .53

Standard Deviation
1-Yr 3.89
3-Yr 10.04
5-Yr 9.46
10-Yr 15.08
15-Yr 13.26


The 1 Year Data = STAGGERING…Not Only Because Of The Stratospherically High Sharpe Ratio of 4.36 [driven by both a strong numerator + puny denominator] But Because It Is Associated With A Long Only, Non-Levered Passive Strategy…Producing Close To 20% Returns.

Remember…Higher Sharpe Ratios Are Typically Linked To Lower [Not Higher] Absolute Returns.

Plus, These Recent Results Stand On The Shoulders Of A Market Low Achieved Almost 9 Years Ago.


So…Is The Sharpe Ratio Just Another Indicator Rendered Useless By Money Printing Central Bankers?

I Think Not.

What The Current Sharpe Ratio Actually Indicates = The BTFD’ers/FOMO’ers Are Recklessly Sprinting Into A Very Mature Bull Market…Blatantly Ignoring The Increasing Probability Of A Material Price Decline.


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