Macro Dragon Special S1E2 - Foundation & Backdrop...
Global Macro Strategist, Saxo Bank Group
Summary: This is the first of a series of Macro Dragon Specials that will come through over the year - in this first series we will attempt to capture KVPs current thoughts on global macro and cross-assets over 2020, current outlook and assumptions, current strategic positioning views, risks, hedges and contingency plans... as well as what seems to be consensus vs what the market does not seem to be focusing on. Note these are very different from the daily Macro Dragon cross-asset views
Macro Dragon Special S1E2 - Foundation & Backdrop...
Current 2020 Macro Ideas, The Craft, T-Views, Contingency Plans, Risks…
This is the first of a series of Macro Dragon Specials that will come through over the year – in this first series we’ll attempt to capture KVP’s current thoughts on global macro & cross-assets over 2020, current outlook & assumptions, current strategic (long-term) positioning views, risks, hedges & contingency plans… as well as what seems to be consensus vs what the market does not seem to be focusing on (yet). Note these are very different from the daily macro dragon cross-asset views
This is MDS S1E2, as always all thoughts / comments / constructive feedback appreciated
Foundation & Backdrop: Facts, observations & data…
(Ideally the points here are both highly certain & high probability)
- We are in the tail-end of the longest business expansion recorded in modern day history, with the backdrop of the biggest QE & loose monetary policy that we have ever known. This has led to the paradoxical combination of more debt through the system (primarily through DM governments, and for EM across consumers, corporates & governments) yet at such record low rates, that the overall interest payments are lower than previous cycle highs.
- This has fed into asset class inflation, as well as inflation in things not measured in traditional central bank models & filters – which for the most part are based on dogma & frameworks from the 60s & 80s & littered with academics that have never worked a real day in the modern world. There seems to be a big disconnect to the state of today’s changing demographics, technological deflationary forces, as well as vastly more interconnected international flow of goods & capital.
- To say that QE has warped the markets in ways we cannot even see phantom now is an understatement.
- Europe is seeing mortgage debt holders being paid for taking out loans to buy their assets, that are going up in value because yields are moving lower & asset prices are moving higher – in any other situation this is a straight ponzi scheme. Yet how is it a ponzi scheme if you can technically never run out of money?
- Intuitively at some point those fiat money will have less value & lose credibility, yet what assets do you then allocate your wealth to, that cannot be diluted by the indebted government? Also this does not happen over night which makes it much harder for the most of society to appreciate
- How is it legal, for CEOs of companies to borrow money for virtually nothing, then turn around buy their stock which is trading at high valuations & pay themselves in stocks options? The financial engineering in the system will not be fully appreciated until the next bear GFC & dot/com like bear market, which could still be years away.
- No one knows how this party ends, yet we do know that it is in “ everyones’ ” interest to keep the game playing. A client once asked KVP what would have to happen to see risk-parity really blow up. My response was (thinking of the trillions of pension & insurance money all in the same strategy), if risk-parity really blows up… you will have worse things to worry about than your market portfolio.
- Its kind of like the goldbugs who don’t appreciate what the actual cost is of them being right on gold going to USD 10,000 in a year. And by the way, if you’re a doomsday prepper – arsenal over the yellow stuff.
- Policy makers will do everything they can to forestall, mitigate, dilute, deny the inevitable showdown of the debt in the system.
- Which given that we cannot grow out of – like in the previous century – will have to be a combination of continued financial repression, financial haircuts, debt restructuring, debt forgiveness, higher taxes (for everyone) & as history has shown many times, re-write the rules. Yet this is probably 3-5yrs out at the earliest more like 5-10yrs in KVP’s view, the timing around this is definitely not one of high certainty. Yet he feels strongly that QE is like the slow motion special effects in an action movie.
- We seem to be in the blow-off top – the final years of the business cycle & bull market, where equities turn into crypto & go parabolic. Yet if QE is any guide, this may also end up being the longest blow-off top recorded. One key characteristic of this bull market is that it always seems that there is large number of participants waiting for the show to drop.
- Growth across the globe is looking stronger in 2020 compared to 2019, expected to rise to 3.3% from 2.9% (IMF Jan 2020). The current consensus view at the start of the year seems to advocate higher growth in the RoW vs. the US – hence positioning allocation recommendations favoring EM, JP, other DM with an underweight to the US.
- Whilst KVP is still on the fence on a 1H20 bounce, global PMIs are off their lows of 2H19 plus our Global Economist Chris Dembik assures us that the credit impulse will turn positive again around mid-2020 – which will be the first time since 2018. If this plays out (& that’s an assumption), the we could see sustained growth, higher liquidity (lower funding constraints) & a weaker USD. Ceteris paribus.
- From a sector basis – given the consensus expected bounce in 1H20 global growth – there is a preference for cyclicals over defensives, which have also put the cyclical heavy equity markets of Taiwan, South Korea, Japan, Germany & Australia in the spotlight. And one again we are hearing the underweight US vs. EM, historical siren calls, this time based on: EM Under-performance, US overvaluation & EM erns growth expansion to be better than US erns growth expansion.
- Lastly whilst the consensus view is for accommodative monetary policy, the expected uptick in growth is also expected to push yields higher, which is likely to damped the shine on gold & silver & potential could also suggest we have some upside inflation in 2020.
- Geopolitically the consensus view is that social unrest, bi-polarization & overall lower citizen satisfaction with their own governments has never been higher.
- And bear in mind this social unrest that flows from Chile, up across the Americas, to Europe, Middle East, Africa & Asia – is happening when there is global growth. Imagine where the volume gets turned up to when we are eventually in a global recession?
- On top of this, the likely biggest known unknowns in political risk this year will be around the US elections. Where the market seems very complacent on (more on this later) & currently seems to suggest that its either a Trump re-election or Biden democratic victory which is still pro-business.
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