In-depth. Balanced. Finance.
1-2 pieces of (unpretentious) investment grade content delivered to your inbox every week.
Despite a challenging year, financial markets mainly returned positive results (unless you’re 100% oil or the US Dollar). This has mainly been possible due to the unprecedented intervention of central banks and governments to support the economy and financial markets. Fiscal stimulus might be the catalyst that breaks the 40+ years disinflationary trend, which could drive significant adjustments to portfolio allocations (towards commodities) and performance outlooks.
Whilst the potential for inflation has been on the rise recently, we still feel it’s unlikely that we’ll see any undesired increase in price levels at least for the next year. With inflation risks out of the way, the narrative for fiscal stimulus will drive the reflation case. With that, it’s important to identify the type of reflation we’re expecting. Do we expect reflation to be driven by global economic growth, or by “lower quality” drivers such as fiscal spending and weaker USD? Whilst the impact on asset prices might be similar (higher Emerging Markets and Commodities), the latter narrative is weaker and should make market participants more cautious about their “return to normality” expectations.
The surprise gridlock between the presidency and the Senate (to be revisited in January) resulting from the US elections decreases the likelihood of higher taxation, increased regulation and of a reflationary environment boosted by unprecedented fiscal spending. What the US elections result has taken away from the reflationary narrative has been more than offset by the vaccines headlines. Recent news from Pfizer/BioNTech and Moderna have ignited one of the biggest rotations towards value in the history of financial markets, as well as potentially present a case for a continued steepening of the US yield curve. That being said, it is far from certain that the move will be sustained.
The US Dollar is the most important currency in the world. Current fiscal spending in the US seems to have created a bearish narrative around the greenback, but many argue that the bear market had started a while ago, and for different reasons. Will the negative sentiment continue, and if so for how long? We look at the discussion in detail, and identify the main arguments for why some believe that this could be the end for the US Dollar as the global reserve currency.
In the last Macro print, we concluded that, given the current levels of stimulus, Austerity measures won’t be enough to cover the bill. Extreme fiscal spending financed by unconventional measures (such as Modern Monetary Theory) is in vogue and a key proposition for the post-Covid world. For this to materialize, we’ll likely need to move to a more centrally planned economy, and history has not voted in favor of this kind of regimes. Unfortunately, whilst the most common argument against MMT refers to the risks of growing inflation (which we share), we believe that the larger risk to consider is the increased size of the government’s share in the economy, which is likely to lead to the misallocation of capital and, to a larger extend, a less productive economy overall.
Election years have historically been positive return years for markets, and since 1944 we only had two election years that were not positive… 2000 (Dot-com Crash) and 2008 (GFC). Given the strong market performance throughout summer, the political uncertainties ahead, and the risks of the current short gamma positioning of many market participants, we believe that risk is skewed to the downside and that volatility is likely to pick up in the near term.
Lord Mervyn King was the Governor of the Bank of England from 2003 to 2013, meaning that he ran the central bank through the Global Financial Crisis and its aftermath. The reason why we enjoyed the read is the sober and balanced analysis that he put together about structural economic imbalances, the reforms needed to the financial system, the creation of money and the need for trust, themes that are frequently thrown around by people who have no understanding of the system, or ability to talk about it. We only focused on covering his thoughts on structural imbalances, but the whole book is well worth a read.
Given the recent $20 trillion of stimulus sponsored by governments and Central Banks all over the world to keep the global economy afloat amidst the COVID pandemic, we asked ourselves who and especially how are we going to pay for this spending regime. Austerity measures, which target a decrease in government spending and an increase in taxation, are unlikely to be enough to cover the current level of spending.
The US market is still following the same Fed and Government stimulus narrative of the last months, which end ups benefitting the larger and already dominant companies of the US equity market (#tech). Despite a non-eventful month, gold is up 20% since June and has now reached nominal all-time highs. We wonder if this finally signals a potential return to inflation? Early to say, but definitely interesting to follow.
Many global data points appear to be carving out a V-shaped recovery. This is deeply misleading, merely reflecting the depth of the economic decline, rather than the success of the rebound. Leaders are already preparing to add yet more stimulus.
We leverage Mike Green’s understanding of the current market structure to get a sense of how passive investing, the systematic selling of volatility, and illiquid markets became the primary drivers of transactions in the financial markets and, thus, of price.
We’re taking a deep-dive, holistic view of the unsustainable growth in U.S. government debt to try to understand what comes next as historical sources of budget financing begin to thin out. Existential forces such as Baby Boomer retirements and re-domesticating supply chains in a post-COVID world may force the Fed’s hand to continue purchasing U.S. debt, ad infinitum, to keep the budget alive. We don’t know where this all leads, but we know one thing: the future will most certainly not look like the past.
The combination of new retail investors flooding the market and a huge liquidity surplus that is already in the market, with a lot more dry-powder sitting on the sidelines, has pushed markets up and up, some to new all-time highs, even amidst growing COVID concerns of a second infections wave (really just an extension of the first wave that never reset. Thanks Florida). Where we go from here is almost solely up to the Fed, and our willingness, or not, to work through another potential full economic shutdown.
Decades-long loose central bank policy has led to many unintended consequences, most acute as of recent however, is the increase in zombie firms that are unable to service their debt loads with current and forecasted cash flows, as well as the growing chasm of wealth inequality being blown wide open. The capitalist construct that drove wealth creation over the past few decades now resembles more of a wealth transfer mechanism via asset price inflation, than a wealth creation one.
The divergence between economic datapoints and the performance of the financial markets has rarely been so acute. There are reasons for that to be the case, and even more for that to continue to be the case. Could we end up in a world with financial markets at all-time highs whilst we have an economic depression?
Inflation and deflation, the stuff of Econ 101, has become a tribal debate among financial markets participants. We believe that, despite monumental monetary and fiscal stimulus from central banks and governments, we’re more likely to see deflation than inflation in the short to medium term (unfortunately).
We’ve witnessed a huge backlash against the bailout of U.S. airlines especially given the amount of buybacks they’ve done in the last decade. We went beyond the headlines and analyzed what drove management to financially engineer their balance sheets. The problem is more systemic than you think.