Macro Dragon Special S1E2 - Foundation & Backdrop...

Macro 4 minutes to read

Kay Van-Petersen

Global Macro Strategist

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


(These are solely the views & opinions of KVP, & do not constitute any trade or investment recommendations. By the time you read this things may have changed.)

 

2020-Jan-26

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.
    Disclaimer

    The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

    Please read our disclaimers:
    - Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
    - Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

    None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

    Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

    The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

    This advertisement has not been reviewed by the Monetary Authority of Singapore.