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The globally harmonized deleveraging in charts

Updated: Nov 11, 2022

Hey friends! It's time for a big chart deck to demonstrate the systematic deleveraging across multiple asset classes.

In the above chart we can see TLT (20+ year Treasury bond ETF), QQQ (NASDAQ 100 ETF), ARKK (Cathie's innovation ETF), HYG (high yield corporate debt ETF), LQD (investment grade corporate debt ETF), and Bitcoin (cryptocurrency) are reasonably positively correlated. The drawdown over the last six months shows a globally harmonized sell-off across multiple asset classes with similar downward velocity.

US stocks have lost over $10 trillion in market capitalization since mid-2021. Significant outflows from managed and passive funds have led the way lower.

Over the couple of months global stocks posted the worst back-to-back weekly declines on record. This is more evidence of globally harmonized deleveraging as it is not just in the US or US-centric assets.

Growth factor stocks have meaningfully underperformed value since mid-2021 as the Fed's credit cycle has progressed toward its eventual conclusion. Another bit of evidence of risk appetite fading.

Fund managers are the most short tech since August of 2006, another sign of not only low risk appetite, but directional bets against a riskier sector rising to significant levels. Even exceeding negative positioning extremes during the Great Financial Crisis.

Part of this extreme positioning against tech is the assumption that extreme valuations will compress, which is indeed a reasonable assumption in an environment of high inflation and tightening financial conditions.

We also see fund managers surveyed have the highest cash balance since 9/11, which is another sign of deleveraging as they raise cash from selling assets.

The NASDAQ, meanwhile, is experiencing the largest drawdown since the Great Financial Crisis as longer duration higher risk stocks meaningfully underperform the broader market.

In fact the NASDAQ is having its worst sequential week over week drawdown since 2011, exceeding the COVID correction and the 2018 tightening tantrum.

Another sign of de-risking is the number of NASDAQ biotechs trading for less than cash! A rather extraordinary statistic that exceeded the Great Financial Crisis and other recent extremes.

Treasuries have also been thoroughly routed since mid-December of 2021, with the worst selling in two decades. This has destroyed the 60/40 equity/treasury portfolio balance, and also has brought real rates meaningfully higher. In doing so financial conditions have tightened and this has led to further deleveraging.

Meanwhile, demand for T-bills, using the 1-3 month ETF as a proxy, has reached demand levels we haven't seen since the COVID crash. A positioning indication of extreme fear, an emotion that compels deleveraging.

In closing, low rates bring about high multiples, and high rates bring about low multiples. As rates rise, deleveraging is likely to continue bringing about multiple contraction from current historical extremes.


Andy Featherston
Andy Featherston
May 22, 2022

‘US equities have lost over 10 trillion in market capitalization since mid 2021…’ That’s more than the GDP of every country on earth except the US and China.

Unknown member
May 23, 2022
Replying to

Quite incredible how much leverage there is within the global financial system.

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