Macro Dragon: Re-Up part III... on High Probability Pathways?
Global Macro Strategist, Saxo Bank Group
Summary: Macro Dragon = Cross-Asset Daily Views that could cover anything from tactical positioning, to long-term thematic investments, key events & inflection points in the markets, all with the objective of consistent wealth creation overtime.
Macro Dragon: Re-Up part III... On High Probability Pathways?
Top of Mind…
- Time to check back in with our Macro Dragon practice of what we feel we can say with high probability going forward. This is an exercise that, we'd encourage everyone to practice regularly as it forces us to take stock on things as they currently stand.
- The entire objective here is to try to separate higher probability signals or potential signals to be more exact - from the droning noise of data, information, news, click bait & overall swamp of cognitive biases. Its worth noting that the postulations should change as the facts, sentiment & time change.
- Obviously someone's signal is often caught up in the radar of someone's noise... as always feel free to share what you feel you can currently discern as a high probability pathway...
- Overall Debt Levels, high => higher => highest... As a lot of our VIPs have asked me over the years (especially on the family office front, given they have a multi-generation longer term approach they tend to have much deeper questions than 'Where can I make 20bp today?') at some point all this debt will all have to be forgiven, its never going to be paid back... pre-covid, KVP was thinking 5-10yr at least... now it could be in 5yrs... yet the exponential debt increase party is not even halfway through yet... & like it or not, we are all at this party. Its a global party, no invitations needed.
- Once again, we can expect the level of debt to continue to grow across the globe as both governments, through fiscal policy initiatives (see Dembik's o/n piece on France & Germany - A Promising Start...) for a mid & post covid-19 world continue to play out. Whilst we may be through the initial shock-wave of bold actions by policy makers (in some cases not so bold), the cookie jar is now open... & those debt cookies are delicious to policy makers with zero skin in the game nor accountability. Its akin to splurging on unlimited donuts, chocolate cake & vanilla ice cream... whilst someone else (read tax payers) takes the calories hit.
- We could see some potential massive positives from all of this debt issuance - IF, they actually do some decent infrastructure spend, both in magnitude & execution. In a world where we get +$3-5 trillion on Infrastructure spend in the US & also ideally across the Atlantic in the euro-zone... all of a sudden real demand (not synthetic liquid asset demand "Me Fed, me push button, button print money, money make liquidity go up, stock market go up so me smart & save day, simples... ") would be created in the global economy as an infrastructure fund of that scope would warrant multi-year demand for industrial metals & materials (think iron ore, steel, copper, concrete) as well as the equipment & work force to go with it. To be honest, its downright comical - & sad - that this has not already been done... yet the Dragon feels we will get there... simply because the economy will not hit escape velocity on trying to bounce back sustainably without it... Keep the industrial names, miners & etfs on your radar for this potential pathway
- On the monetary policy side, same same 'never different this time'. The Fed has already doubled the $4trn that they had on their balance sheet in the space of just a few wks... take a step back for that to sink in, they have gone from a Fed BS/GDP ratio of under 25% & now approaching 50%... before we are through the structural ramifications of Covid-19 in the US (Now approaching 40m that will be unemployed in a little over 2 months - the insane thing (in addition to just that 40m in c. 2 months), is that close to 80% of those surveyed think they are getting their jobs back... like seriously!? Pass us the good stuff... because that is some serious detachment from the reality of things... on the Dragon we'd be impressed if 60% of those jobs came back over the next 6m... lets call it end of 2020)...
- We are likely going to see a fed BS to GDP ratio of +75% to 100% - don't forget the denominator here has been shrinking whilst the numerator has exploded - before this is over. On the other end of the scale - to give you context - you have the BoJ that in Jan 2020 (pre-cvid) was already at +100% BS/ GDP of +$5trn.... Fed vs. BoJ, USD vs. JPY... on a structural 9-18m basis who wins the race to the bottom (devalues the most) ? Its going to be the Fed & USD hands down... yes USD assets will continue to be bid from a relative world basis... TINA (There are no alternatives... that are as good... least dirty shirt... tallest hobbit in the room, etc)... yet eventually it will structurally decline. Also the more they talk about not doing negative rates, the more certain we get of negative rates coming through. And yes, equity buying the US is very much on the table. In fact... there is everything on the table, because nothing is off the table.
- The question can the Fed (central banks) run out of ammunition? Is often asked & like most questions it is structurally flawed & reeks of framing bias... i.e. the question makes the implicit assumption that we are dealing with finite parameters, like a gun manufacturing plant... can you run out of the bullets that you can make for you guns? In this case, you are dealing with as institutions that (through the treasury/finance ministry & president/prime minister) can literally (& have done so multiple time) re-write the game & "rules" they choose to play with. One can argue very easily, that the Fed have already thrown their mandate out the window.... the only rules that current central bankers live by (that they will never admit publicly) is that they are no rules. The principle will be pathway of least embarrassment & bailing out/helping their vested interests (think wall street) & future personal-institutional interesting (think 6-figure speaking gigs, 7-figure book signing bonuses plus 6-7 figure cozy directorship roles in the financial institutions that they were supposed to be overseeing).
- The probability of a structural orchestrated devaluation of the USD is much higher than people give it credit for. It would be a savvy move for China to spearhead this proposal for Trump & the US... i.e. you guys have been moaning about the stronger USD & how it killing American exporters since Trump was in office... on top of all that you are going to be structurally issuing debt for a lot of years, yet its a tough gig to sell it to the rest of the world with the dollar so strong... so why don't we do a Covid-Accord & structurally devalue the USD by 20%... Trump gets a massive win going into the Nov election... US exporters (+farmers) will be doing back-flips.... the Europeans will join the deal, as they cannot take both the US & China leaning against them.... and EM will get a structural tailwind on all their assets from a much weaker USD
- JPY, EUR, GBP, CNH, AUD, NZD, NOK come to mind... for the initial knee-jerk move of a scenario like this... i.e. liquidity... yet obviously it would be the mother of all stretched EM currencies (for instance BRL now at ATHs vs. the USD, BZ equities are down over 50% in USD terms, politics are a mess, Covid is rampant, the president at best seems delusional - one has to wonder whether it should start to fall into the trade allocation bucket of "How much worse can it possibly get?") that would see the most titanic of returns in their reversal of the USD. Interestingly enough on Brazil, Dembik is bearish economically at least - Brazil retail sales: The worst is yet to come & on that same EM pain theme India's Economic Collapse & The unfolding of a sovereign debt crisis: OMAN
- For now... the sentiment in the market continues to be skewed to bullish news... think of it like this folks... most of the globe is still stuck at home, everyone is looking for any sign of semblance to get getting back to normal - hence you get things like the Moderna & the vaccine news... hero to zero in sub 24hrs. For now, economic & earnings fundamentals are still not a factor. With all that said, there are elements of even the equity markets where fundamentals are like a lead weight to entire sectors - in this particular case re-flagging the banks... they can run for a while... especially on squeezy days like Mon... but you cannot hide from the loss provisions & draw-downs on your capital that you will have to take over at leas the next 1-2 earnings reports... & this is simply from you balance sheet & liability exposure... we are not even talking about a world where negative rates are coming to a bank close to you... i.e. its no longer just a Japan, Swiss or German phenomena.
- Check out Garnry's piece on banks & bubble stocks...
- The class of one themes that are counter flows to the debasement of fiat, exponential debt increases & ever lower to negative yield trends continue to be gold, silver, potentially bitcoin... as well as places like Norway so think NOK & NOK assets... or Taiwan that pretty much sailed through Covid-19 with an A+... & of course tech...
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