The Eurodollar Market is one of the most influential and least understood drivers of financial markets. We explore the origins and developments of the Eurodollar market and conclude that without efforts to fully understand it, we’re unlikely to successfully control US Dollar inflation.

January’s activity in the equity markets broke many records, helped by the increased participation of retail investors. But if history is of any help, retail investors tend to underperform, and we believe it’s unlikely that they’ll continue to be as active as they’re now in the medium to long term.

The reflation narrative has become the overwhelming consensus view for 2021. This implies a weaker dollar, higher bond yields, and outperformance from emerging markets and commodities. As always with consensus opinions, several risks lie ahead of this narrative, chief among them is the potential for a stronger US Dollar.

US Tech, Gold, and Bitcoin did very well, whilst the US Dollar and Crude Oil were the big losers. Markets rewarded businesses that did well during the lockdown (Digital and Logistics) at the expense of those who were severely affected by it (Airlines and Retail).

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, the latter narrative is weaker and should make market participants more cautious.

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.

Deteriorating fundamentals will lead to a globally synchronized move away from the USD as a reserve currency. Inflation, Momentum, Purchasing Power Parity, Mean Reversion, and the Global Commodity Production cycle all pulling the USD down in this current down cycle.

Whilst the most common argument against MMT refers to the risks of growing inflation, 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 a less productive economy overall.

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.

Having recently read Lord Mervyn King’s book, The End of Alchemy, we thought it would make sense to share some of his ideas given the relevance of his experience as Governor of the Bank of England during the GFC. Probably the best book that came out of the 2008 Financial Crisis.

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.

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. Moreover, the US Dollar had the worst-sell off in July since September 2010.

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.

Passive investing, systematic selling of volatility and illiquid markets are the primary drivers of the current market structure. And the drivers of the current market structure are what mainly explains market performance, which then informs regulators and influences reforms and regulation.

U.S. government debt has grown to +$26 trillion today and for the first time in history, total debt to GDP will rise above 100% in 2021 (potentially 2020 depending on continued COVID response). Unsustainable growth in debt levels will, at some point force the current system to change.

We’ve seen a huge amount of new retail investors joining the financial markets, with the ambition of finding opportunities to “buy the dip”. We’ve started to study the potential solutions for the economic and financial distress we’re facing, which ends up driving political and social tensions across the globe.

The increase in bankruptcies will primarily take place amongst small, often family-run businesses who struggle to secure emergency funding. Struggling large-cap listed entities, on the other hand, can tap into the capital markets and benefit from the intervention of central banks.

We are witnessing one of the largest divergences between the financial markets and the real economy, in history. Understanding the divergence exists is paramount to understanding what potentially comes next.

Governments and central banks will do everything in their power to help the economy stay afloat, but the current backdrop is one of fragile debt, low levels of inflation and slower demographic growth. In the short to medium term, the global economy is likely to see deflation.

The shifting of bankruptcy risk from corporations and investors to society may fundamentally force us to rethink modern capital structure theory, as well as the long-term societal impacts. We explore a potential ‘fix’ that may work in a new, slightly more socially responsible, future.