Little comment necessary here except a reminder for US investors that return of capital is a higher priority than return on capital and the divergences are becoming increasingly unsustainable [5]. As investors stare blankly, pointing fingers at gold, we also address what it means when Gold and Treasuries are rallying at the same time...
Year-to-date performance...
[6]
If its earnings that US equity investors are hoping for - don;t hold your breath... Via Goldman Sachs:
So far, 46 companies have reported 1Q results (14% of total cap). 41% of companies reporting have beaten earnings estimates (below the historical average of 47%) and 9% have missed estimates.
The average EPS surprise has been 3.7%, below the 4.8% historical average. Excluding Financials, there are fewer positive surprises (40%) and similar negative surprises (9%).
Excluding Financials and Utilities, 29% of companies reporting have beaten sales estimates (below the historical average of 38%) and 20% have missed estimates (vs. average of 18%).
The average revenue surprise has been 0.7%, below the 1.3% historical average.
Since yesterday's close (despite the overnight excitement in Japanese stocks), Gold and Treasuries have been rising together...
[7]
One of the best explanations we have seen for the phenomena of Gold and Treasuries rising at the same time is from David Goldman:
Why should gold and Treasury bonds go up together?
Gold is an inflation signal and bonds are a deflation hedge.
At first glance it seems very strange for both of them to rise together.
Why should this be happening?
The answer is simple: bonds are an option on the short-term interest rate, and gold is a perpetual put option on the dollar. Both rise with volatility.
It’s like the old joke about the thermos bottle: “How does it know if it’s hot or cold?”
If the policy compass is spinning and there’s no way to predict how governments will react, you don’t know whether to hedge for inflation or deflation, so you hedge for both.
By put-call parity, if there is huge volatility in the policy responses of governments, the option-value of both gold and bonds goes up.
So today's rise in bonds and gold (and this weakness in risk assets) is not complex - it is simply a realization that "the policy compass is spinning" and government responses are increasingly uncertain once again.