(These are solely the views & opinions of KVP, & do not constitute any trade or investment recommendations. By the time you synthesize this, things may have changed.)
MD WK 51: 16 CBs, Fed, Year-End to 2021 Trade Views + Thanks for 2020!
Top of Mind…
- Happy & gratitude filled Monday from the Asia Pacific, welcome to WK #51 & likely the last wkly Dragon for a while!
- For those of you who break for the year-end right about now, last wk or next wk, from the Dragon’s House to yours… wishing you & your loved ones a phenomenal year end, filled with whatever it is you get up to, Hanukkah, Christmas, Yalda, Boxing Day, Dongzhi, Kwanzaa, Omisoka, etc… We are all one.
- From the rest of the SaxoStrats & Saxo Squad Family – we’d like to thank you all for your support this year, the banter, the constructive dialogues & overall being part of the Tribe.
- KVP would also like to personally thank his peers, colleagues & frenemies across the entire firm & globe, with a special shout-out to our RMs (Marcus, Ben & Brandon in particular), our awesome GST team (including Mahesh who runs APAC, Seagrave who runs Global & the gents + ladies that make the European daily morning huddle – thx for the banter, rants & chants), the CXO squad that makes us all look like Rockstars (shout out to the APAC marketing team run by the Highlander himself, McGuire), & of course the SaxoStrats Squad where literally everyday, there is something new that KVP learns. As well as the real game-changer in KVP’s view across multiple business streams, Luke Levine who is patient zero on the interaction of SaxoStrats Research & Other content, platforms, websites, GST, RMs, Strats, etc.. Hats off mate, so glad your part of the team.
- Lastly to the people that just make this the most esoteric, challenging, fun, at times frustrating (which is good, this is normally a function of growth) & constantly learning role that it is; our incredible clients, partners, peers & in many cases now friends & mentors – many thx. Thank you for the countless months of conversations, be they in the midst of the fears of the markets sell-off in Feb & Mar, or the disbelief & euphoria of the bounce in Apr & May, whether it was having the courage & responsibility to go over one’s investment framework & approach, or to trade views on investment thesis – In addition to family, you gals & guys are a big part of what helps KVP stretch & work harder on the craft. Obrigado & Nakushukuru.
- Make sure you all rest up into the year-end, as markets could be in for some serious moves in the 1st wk of Jan – can you imagine if the Dems pull two donkeys out the hat & win the two remaining senate seats in Georgia? Trump & Co will have a hernia… & if you think risk-assets are on fire… just wait for it.
- Lastly if there is one thing Covid-19 taught the Dragon household is once again how precious this planet is, our time on it, as well as our responsibility in how we allocate our resources & in particular time. Everyday we vote by our actions &/or lack thereof...
- This was a great year to recalibrate the type of people we’d like to have more bandwidth for in our lives & perhaps even more importantly, the type of people who we have moved to have zero bandwidth for. We are a function of the ecosystems that we build around us (tacitly or/& proactively). It is not an obligation, but a phenomenal opportunity – there is only Limitless Upside. To be true to others we must first be true to ourselves. This is why integrity is the foundation principle.
- May the winds of Global Macro gently carry you & your loved ones into the year-end & give you all a hell of a boost out of the port in 2021. Just like 2020, in 2021 there will be numerous opportunities to make money, as well as the mistakes & losses that come with that. Yet the things are are truly celestial are the spaces between. Experience > Materials, Process > Outcome. Enjoy the ascent.
Year-End & Into 2021...
- It should go without saying that whilst the Dragon view is still very much a bullish one – has been for wks since going into US election Nov 3 & doubling down on Nov 9 Vaccine news – & KVP continues to think the melt-up continues into year-end. Lets reflag some high conviction views that are top of mind (by no means exhaustive):
- CMDs & in particular Energy – yes oil & energy names are up 6wks in a row, but guess what?
- Oil is still -24% YTD (Brent got over $50 last wk & WTI over $46), energy etf XLE $41.12 -32% YTD, Exxon (XOM) $43.80 -37% YTD, BP 275.25 -42% YTD, Woodside Petroleum (WPL) 23.09 -33% YTD.
- KVP think the energy complex can do +50% to 100% over the next 6-18m, as a levered play on world reopening, vaccines, value, low valuation, contrarian & under owned (i.e. real money takes a while to move. For context global HF AUM, the so called ‘smart money is c. +3 trillion dollars, one real-money asset manager such as Blackrock has over $7trillion – this is an important fact that is not being appreciated into the potential continuation of the moves in the commodity complex & EM… Real Money takes a while to change investment themes, let alone allocate).
- Could we see a -5% to -10% on the energy complex, a lot of folks would hope so as they missed the initial leg of this rally – kudos to those that resonated with this & tacked exposure on, all the way back from early Nov, your sitting on +30% gains on direct exposure & in some cases +4x to +7x on options exposure.
- UK Assets & in particular equities – Garnry our equity strategist does a great job of highlighting the risks here: Are financial markets really prepared for a hard Brexit?
- From KVP’s viewpoint, this is a multi-generational opportunity for long-term strategic holdings. UK equities are under owned, contrarian, cheap relative to their US & tech counterparts, the FT100 has a heavy commodity component & on the other side of Brexit, a lot of capital will flow into the UK.
- Remember UK is embarking on serious Fiscal, that is going to get its budget deficit to c. 19% of GDP… sounds like asset inflation to KVP… we’ve seen this movie before on the back of GFC & earlier this year in Apr & Mar. Oh & guess what, whilst the vast majority of equity indices are either at ATHs or YTD/multi-year highs… FTSE100 6,550 is still -10% YTD, with broader FTSE 250, 20,000 -14% YTD.
- And yes, don’t think the vaccine news is baked in, remember they starting to vaccinate people last wk in the UK. So yes, a hard Brexit may even see FTSE100 getting back to test the pivotal 5,900 lvls (c. -10%) from these 6,500 lvl… yet the risk-reward is to the upside & the Dragon continues to feel strongly that we are in the 7,300 to 7,900 (+10% to +20%) range easily in the next 12m. In fact, the ‘harder’ the Brexit, the more bullish KVP gets on UK upside.
- Worth noting, like a lot of things in the markets, team internally is very divided on this view. Given UK recession, countless Brexit headlines, probability of negative rates & explosion in debt.
- EM FX & in particular laggards like BRL & RUB – yes one can point to the BRLUSD futures $19.50 & say its up c. +5% in the last two wks, with critical closes on both wks above the 200DMA. Yet from a total rtns perspective, no other EM FX has lagged vs. the USD like BRL at -19% YTD.
- Next two are TRY 7.86 & RUB 73.07 at -12% & -11% (worth noting the Dragon flagged both of these when they were down YTD in the high teens as well). Lastly the BRB flagged last wk, that they are moving away from their dovish bias, putting the Jan 21 central bank meeting a key one for potential slightly hawkish skew on their fwd guidance. For now the mkt is estimating a c. +100bp rise in the key rate from 2.0% to 3.0% for 2021. This monetary policy divergence is a key one to watch as theme next year & we flagged that in the presentation that we did in the back end of Nov (attached for those on the VIP mailing list). EM will lead it & selectively G10 countries will follow, ECB, FED, BOJ & BoE likely to be the last four horsewomen.
- Lastly on TRY watch Dec 24, for the Central Bank of Turkey to potentially deliver a Christmas gift to those with USDTRY puts or USDTRY shorts. There is some chatter about ‘diluted’ US sanctions finally coming through – how much of that is priced in & what will Erdogan make of it… depends to be seen. Most important part here is the steps Turkey (read Erdogan, who self-inflected all this on the country himself) have taken to change CB governors (hence +4.75& hike in last mtg) & firing of “The Son-In-Law” who was head of the
cookie jar finance ministry.
- For RUB the CBR is meeting this wk on Fri where rates are expected to be kept on hold at 4.25%.
- Bitcoin & Digital Assets – yes, once again its all about the $20,000 lvl… when is irrelevant & If, is not even in the equation. KVP reckons 2021 could see a +4x to 6x year for Bitcoin (remember we did +14x in 2017, the dropped c. -80% after), which could put us in the USD 80K to USD 120K range from these lvls that are just south of $20K. And if you think that is stunning… you should check out the rest of the space. Remember talking about Bitcoin, is like only talking about the S&P 500 – there is a universe of other incredible tokens & digital assets that are taking the use of blockchain to the new worlds. Not to mention there is also swampland of nefarious names that make Nikola [NKLA] look like a saint.
Macro Dragon: Bullish on Bitcoin? All About $20,000... We Ain't Seen Nothing Yet...
Rest of the Week
- Whilst there are 16 central banks on the docket, key one will be Fed & from the Dragon’s view it’s a question of potential tail risk to the upside – IF, they make some dovish moves, in one form or another. There is also just as good a riposte for them to be less dovish – US economy continues to hold up well, +$1trn in Consumer Savings, we now have visibility on Vaccine roll-out, New POTUS, etc. Yet likely biggest concern on the Fed is going to be withdrawing support too quickly – i.e. are all those jobs gonna’ roar back? As we have see a reversal in continuing claims & jobs data to the bearish side, plus we also are embarking on winter as well as renewed Covid-19 lockdowns.
- Other key banks worth watching out for are BoE & BoJ… yet Norges Bank may be more interesting – if you recall from the presentation KVP did a few wks back, Norges Bank, BoC, RBA & RBNZ could be some of the main CBs (outside of EM) that diverge from the ultra dovish stance that we are in. The juice in Macro is in the inflection points… the sauce is in the sizing… the playbook is in the process.
- We also have key minutes out of Australia’s RBA & Brazil’s BCB.
- Econ data wise: Its flash PMI themed wk, we got monthly data out of China, GDP out of NZ & German IFO out of the EZ.
- Brexit, US Stimulus, US gov shutdown (yawn), Santa rally, Trump last day spasms (today is the day the electors vote for Biden & Harris – just imagine the nuclear disaster if they voted for Trump! Boy oh boy…), Vaccine daily news (both breakthroughs & frictions), as well as swelling Covid-19 restrictions & numbers (which “no longer matter” for risk assets) will continue to dominate the scene into year end.
- Don’t forget Dec 21 is marks Tesla entering the S&P 500, this is a big special situations trade for the index arbs & event-driven folk… something that could skew the pathways of the S&P going into this date (at the very least, it should hold up volatility till after the event) Think the even more interesting effects could be on the consumer discretionary sector, i.e. will have a much bigger impact there.
- Goes without saying year-end always has the usual lack of liquidity shenanigans, which again makes the Dragon love the high conviction structural USDJPY short call that much more. Its not often you can get a macro thesis (The great Abenomics unwind), that can also act as an overall hedge to a book that is long risk assets. KVP continues to feel these 104 lvls on USDJPY will look like a godsend when back-end of 2021 sees us well into the 85 to 95 range, that’s
- Busy working on the edits of the next two Dragon Interviews – both very different & equally exceptional in their respective crafts – that should hopefully drop in the next 2wks.
- We will be speaking with someone who has made tens of millions of dollars trading for banks since the 80s. As well as another individual who is managing their own money & has made +6x in the last 4yrs across a number of different strategies (Liquid & Illiquid) & yes, big girls money.
- In case you the first Dragon Interview which seeks exceptional professionals with skin-in-the-game, across different strategies, asset-classes & backgrounds, check out the first with Ash. Whilst most folks in this space just talk about it (don’t get me started on the “Value
marketers Hedge Fund” managers out there), Ash has demonstrated that over the last 4yrs he can deliver returns of c. +40% with volatility lower than government bonds (Sharpe c. +2x). Just for context, the sharpe on S&P is closer to 0.50. Now that is bang for buck.
- Singapore Based, AVM Global Opportunity, run by the talented & always exceptional Ashvin Murthy is in KVP’s view, world class in his approach, process & even more importantly trade construction & money management. If the process is pristine & consistent, the returns will take care of themselves overtime.
- Worth noting since the interview, the fund has also been nominated for the Singapore’s Best Hedge Fund of 2020, given its consecutive five straight positive months at the start of this volatile year, that saw the mkt’s volatility flip a number of times.
Please click here for interview link.
You can follow & learn more about AVM here.
Start-to-End = Gratitude + Integrity + Vision + Tenacity | Process > Outcome | Sizing > Idea.
This is the way