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Climbing Above The Start of The “Death Zone” …

Updated: Feb 25, 2023

BentinPartner Weekly

Looking at what markets delivered last week, we are left wondering if bonds, stocks and commodities shared the same news flow.

They certainly did not agree…

Bonds traded lower in response to higher-than-expected US inflation (and rising fed hike expectations) while stocks kept squeezing higher, especially risky rate sensitive unprofitable ones- despite muted earnings, higher rate hike expectations and a still possible -if not likely- recession.

Commodities did not buy the higher inflation or solid growth story either, trading mostly down on the week.

This was particularly true for oil that traded lower (as did metals and mining) in a move that was admittedly driven by additional releases from the (now running low on reserves) US strategic petroleum Fund and the belief that the global economy and the Chinese reopening are weaker than generally believed or hoped for.

Mike Wilson’ (Morgan Stanley) week end observations said it all and were supported by a great analogy:

“…While scaling Everest has some highly technical aspects, the most dangerous feature is its sheer size. The peak is 3,000 feet above the start of the “death zone” – the altitude at which oxygen pressure is insufficient to sustain human life for an extended period. Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents.

This is a perfect analogy for where equity investors find themselves today, and quite frankly, where they’ve been many times over the past decade. More specifically, either by choice or out of necessity investors have followed stock prices to dizzying heights once again as liquidity (bottled oxygen) allows them to climb into a region where they know they shouldn’t go and cannot live very long. They climb in pursuit of the ultimate topping out of greed, assuming they will be able to descend without catastrophic consequences. But the oxygen eventually runs out and those who ignore the risks get hurt.

This most recent ascent began in October from a much safer place of lower valuations (15x P/E and an equity risk premium of 270bp). It also was based on a reasonable narrative that China’s long-awaited reopening was finally about to begin and could provide an offset to the slowing US economy. As a result, this rally was led by more economically sensitive stocks like global industrials, financials and China equities, and we were happy to go along for that stage of the climb. However, by December, the air started to get thin again with the P/E back to 18x and the ERP down to 225bp, so we decided to head back to base camp alone. In the last few weeks of the year, we lost many climbers who pushed further ahead in the death zone.

With the turn of the new year, the surviving climbers decided to make another summit attempt, this time taking an even more dangerous route with the most speculative stocks leading the way. The new narrative was that the Fed was finally going to pause its rate hikes at the February 1 meeting, and even begin cutting rates by the second half of the year. This assumed that inflation would continue the rapid fall that began last summer. It was like a shot of oxygen and, all of a sudden, the death zone felt like base camp. Investors began to move faster and more energetically, talking more confidently about a soft landing for the US economy. As they have reached even higher levels, there is now talk of a “no landing” scenario – whatever that means. Such are the tricks the death zone plays on the mind – one starts to see and believe in things that don’t exist.

With the P/E now at 18.6x and the ERP at just 155bp, we are in the thinnest air of the entire liquidity-driven secular bull market that began back in 2009. Meanwhile, interest rates are breaking out to the upside with inflation turning back up and a Fed pause now off the table. In fact, additional rate hikes have been priced into the markets’ expectations, with the terminal rate reaching 5.25%.

Bottom line: the bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn’t coming. And, while the economic situation appears to have improved at the margin, this will not forestall the earnings recession that has a long way to go, based on our negative operating leverage scenario that is well under way. As the Fed is tightening, financial conditions are continuing to loosen thanks to the liquidity provided by other central banks (mainly the PBOC and BoJ), China’s reopening and a weaker US dollar. Since October, global M2 has increased by a staggering $6 trillion, providing the supplemental oxygen investors need to survive in the death zone. While this oxygen supply can last a bit longer and help the climbers go farther than they should, it can also trick them into thinking they are safer than they really are, which leads to them getting hurt.”

Sector-wise, energy fared worst last week, shedding -6.3%, followed by gold mines declining -4.1% while retailers (read Tesla overcrowding this sector) fared best with a 3% gain. China also underperformed dropping -2.4%, breaking its bullish channel for now. The worst performance was Energy, oil and China Tech with a 3% loss on Friday.

Eco data last week showed hotter than expected CPI/PPI reports and resilient retail sales that were accompanied by hawkish Fed rhetoric

Tesla continued to defy the tape, adding 3.1% even as the Nasdaq gave its best effort at trying to tame itself in light of rising bond yields, increased rate hike expectations being priced and constant efforts of the Fed to talk tough (especially non-voting FOMC members!).

The problem (and possible answer to M. Wilson) is that the market can see where the economy is going (…down) at the same time as (service- labor cost related) inflation remains sticky but they are not ready yet to trade defensively as anyone doing so this year has been trailing badly…(fomo).

For the year, Tesla (+89%), Bitcoin (+48%), Nvda (44%) and Meta (44%) are the best performing sectors/stocks, bringing evidence that there is a beta chase going on among traders that must displease the Fed to little effect so far. This comes on top of the explosive growth of 0day options that are used to leverage the market on a daily basis, adding systemic risks to the market (see article here). This means that a correction, when (if) it ever happens will be flash/crash-like leaving little to no time to hedge/exit positions. This will perhaps be a source of concern at some point to those working at deflecting systemic risks.

Bonds traded lower again on Friday, causing an initial sell off but warning from ECB board member de Villeroy that bond yields are too volatile (read going higher to fast), had traders run for the hills and cover shorts. The ECB also said what most investors firmly believe that after the 50bps penned down or March, there is no uncertainty or automatism or guidance engaged.

With the rate differential between EUR and CHF near an all-time low, there is a possibility for further CHF outperformance. The absolute laggard in DM currencies remained JPY, weighed down by BoJ YCC policy, an extremely loose policy that the next BoJ Governor will find extremely difficult to extricate himself from.

EM currencies are showing two distinct fairly bullish signs. They have started decorrelating with both risk appetite and commodity/energy prices which suggests that a period of structural DM underperformance might be in order.


Click on the Picture below for our latest Leaders & Laggards Report:

Over the past week, the S&P500 dropped -0,2% (6,5% YTD) while the Nasdaq100 gained 0,5% (13,1% YTD). The US small cap index gained 1,5% (10,8% YTD). AAPL gained 1,0% (17,4%).

Cboe Volatility Index sold off by -2,5% (-7,6% YTD) to 20,02.

The Eurostoxx50 gained 1,8% (13,1%), outperforming the S&P500 by 2%.

Diversified EM equities (VWO) dropped -0,9% (4,4%), underperforming the S&P500 by-0,7%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,4% (1,0%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,8% (0,8% ).

10Y US Treasuries underperformed with yields rising 8bps (-6bps) to 3,81%. 10Y Bunds climbed 8bps (-13bps) to 2,44%. 10Y Italian BTPs underperformed rising 9bps (-42bps) to 4,30%, underperforming Bunds by 1bps.

US High Yield (HY) Average Spread over Treasuries climbed 12bps (-43bps) to 4,26%. US Investment Grade Average OAS climbed 3bps (-8bps) to 1,35%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (-14bps) to 0,85%.

Gold dropped -1,2% (1,0%) while Silver dropped -1,2% (-9,3%). Major Gold Mines (GDX) shed -4,1% (-0,9%).

Goldman Sachs Commodity Index sold off by -2,7% (-4,7%). WTI Crude sold off by -4,2% (-4,9%).

Overnight in Asia,,,

  • S&P500 flat; Nikkei flat; CSI300 +1.2%; Hang Seng +0.4%

  • A. Blinken and China’s State Councilor Wang Yi traded barbs on everything from the balloon and Taiwan to North Korea and Russia in their first meeting since the high-altitude craft traversed the US, Bloomberg reported. It all underscored how, for all the claims from President Joe Biden and President Xi Jinping about their desire to steady ties, neither side seems capable of doing so, the report added.

  • Just as the surge in stocks fuelled by China’s reopening lost momentum amid escalating geopolitical tensions and an uncertain outlook for the economy, Goldman strategists expect the selloff in Chinese stocks since late January to reverse as the nation’s economic reopening delivers windfall profits for businesses.

  • Decisions on training Ukrainian pilots on F-16 fighter jets and joint EU purchases of ammunition are expected to follow the Munich Security Conference, where Ukraine and its allies grappled with the likelihood of a prolonged war, Bloomberg reported. The reality on the ground increasingly defers from what has been painted as a sure defeat for Russia and more action seems guaranteed to avoid Nato and the West to lose face, raising the risk escalation ever more as well. This is “just another risk” that markets have chosen to igno

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Marc Bentin serves as Economic Advisor to Blue Lotus Management,

a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.

BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.


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