Fundamentals, positioning, or both?

The sell-off continues for another day and no one knows why, but it's sure fun to speculate

• did anything actually change? not fundamentals, that’s for sure—latest fundamentals from mortgage market is . . . more of the same

• the BOJ is experimenting with creative destruction

• so what happens? it’s anyone’s guess.

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Fundamentals or positioning (or both)?

Another big selloff in the public markets, and speculation abounds.

Brutal day in the neighborhood.

Is it just market positioning around one of the many ‘crowded’ trades (i.e. unwinding the carry trade, and/or short-vol, and/or long big tech)? Or is the selloff because we are we heading towards a recession as a result of bad economic fundamentals?

Random Walk doesn’t know the answer (and neither does anyone else), but I am fairly confident, at least, that fundamentals haven’t really changed.

Like, if investors are spooked by rising unemployment or cautious consumerism . . . those trends have been building for the better part of a year, by now. No new information has entered the picture, other than “it’s still true that the economy is mucking along, now that the pandemic tailwinds have gone away.”

Here’s another little recent tidbit on that slow, downward slide:

• Hey look, mortgage delinquencies are super, super low . . .

  

• . . . unless you’re a riskier borrower, in which case, delinquencies are going up:

  

ICE Mortgage Monitor

While overall mortgage delinquency rates remain very low, FHA and VA mortgages have been trending gradually worse.

Is this normalization or deterioration? Again, no one knows, but there is nothing that would point one way or another (for now).

That things are generally fine, but everyone is trading down (and riskier, lower-income borrowers are getting into trouble, albeit as a small portion of the overall landscape) is just part of the same old story.

BOJ’s creative destruction

So then it’s gotta be positioning, right, and that means we’ll all be fine, right?

I mean, the one actual thing that really did change--such that the sell-off could plausibly be a response to new information--was pretty substantial rate hikes from the BOJ (and QT). That certainly favors the “positioning” hypothesis.

It doesn’t always end well, however: