Investment Themes - Fixed Income

Search all article by their themes/tags in the search area
below for example “Energy” or “Technology”.

Search Results

Found 722 results in Fixed Income
December 04 2020

Commentary by Eoin Treacy

Secular Bull Market Investment Candidates Review

Eoin Treacy's view -

On November 24th I posted a review of candidates I believe likely to prosper in the emerging post-pandemic market. It was well received by subscribers so I will post an update on my views on the first Friday of the month going forward. That way subscribers can have an expectation that long-term themes will be covered in a systematic manner and will have a point of reference to look back on.

Media hysteria about the 2nd or 3rd waves has not led to new highs in the number of deaths. The success of biotech companies in deploying vaccines means there is going to be a substantial recovery in the economic activity in 2021 and going forward.

The stay-at-home champions saw their sales growth surge in 2020. It will be impossible to sustain that growth rate in 2021. That’s particularly true for mega-caps. One-way bets on the sector are likely to work less well in the FAANGs going forward.



This section continues in the Subscriber's Area. Back to top
December 03 2020

Commentary by Eoin Treacy

Email of the day on inflation

With the growing expectation of rising inflation in 2021 what areas of the world markets would you choose to be positioned in if this proves to be the case? I note you only have a few trades on at present. Ae you likely to broaden these in the future?

https://www.bloomberg.com/opinion/articles/2020-12-03/five-reasons-to-worry-about-faster-u-s-inflation

https://twitter.com/Ole_S_Hansen/status/1334476194218205186

Eoin Treacy's view -

Thank you for this question. Governments are going all in on reflation and they are unlikely to stop until they get the inflationary outcome their desire. When above trend inflation is policy rather than a “nice to have” is has to be a more credible option.



This section continues in the Subscriber's Area. Back to top
December 02 2020

Commentary by Eoin Treacy

The Bull Market Rotates Away From Tech-Driven Mega-Companies

This article from Bloomberg may be of interest to subscribers. Here is a section:

At its heart, the rotation is based on the idea that there’s a lot of money in the economy waiting to be spent on things besides video streaming and online shopping. The U.S. personal savings rate was 7.2% at the end of 2019. By April it had surged to 33.7%, and it was still 13.6% in October—almost double where it started the year. Deposits at U.S. commercial banks swelled to almost $16 trillion in November, up from $13.2 trillion at the end of last year. If consumers revert to their pre-pandemic ways, that could set off what Jim Paulsen, chief investment strategist for the Leuthold Group, has called “a growth bomb,” as companies gear up to replace lean inventories.

Fund managers with a value bias say there are still opportunities to take advantage of the change in investors’ tastes. Chris Davis of Davis Funds points to the banks Wells Fargo & Co. and Capital One Financial Corp., whose prices were hammered when lockdowns began in March and still haven’t fully recovered. Davis thinks investors have overlooked how banking regulations enacted after the global financial crisis have made these lenders better able to handle recessions. “When you look at their valuations, the amount of cash they produce, the capital ratios that they have, the reserves they’ve been able to put up—they really have this characteristic of resilience and durability, and yet are priced at this sort of shockingly low level,” he says.

Eoin Treacy's view -

Value has outperformed growth over the last month and yields have been rising. That’s not a coincidence. Value metrics need a discount rate against which to make comparisons while growth sectors tend to do best when interest rates are low.



This section continues in the Subscriber's Area. Back to top
November 27 2020

Commentary by Eoin Treacy

Email of the day on the Service

I have been a subscriber for just over 30 years, and in that time, I can't recall many times when a clear and concise analysis of economic and political conditions was as important as it is today. You are doing a wonderful job at keeping the collective informed, allowing us to see a broader picture than our individual biases might otherwise give us. Thanks so much!

And

Congratulations our last subscriber commentary was exceptional. You have done wonders for my confidence and ability to help my clients. Keep up the good work. Best wishes

Eoin Treacy's view -

Thank you both for your kind words and it is enormously gratifying that subscribers find value in the Service. That’s particularly true for veterans who have been with us for decades. Given both the demand and positive response for a reasonably succinct list of thematic investments that cover the prevailing market outlook, I’ll review the list on at least a monthly basis. The first Friday of the month which would coincide with the Big Picture Long-Term audio/video makes sense to me.



This section continues in the Subscriber's Area. Back to top
November 27 2020

Commentary by Eoin Treacy

Email of day on gold

What strikes me and many other observers is that Gold is down by 1.5% to 1785 cash (just before Nov. contract expiry date…) but GDX and GDXJ are UP by 0.4% and 0.9%!

Silver is DOWN by 3% (just before Nov. contract expiry date…) while Silver miners SIL is also slightly UP!

As miners normally lead for me the dichotomy between metals and miners is probably due to the bullion banks trying to push down prices for the (RECORD!) deliverable contracts (they are short Gold by about USD 35bn!) and will allow metal prices to rise next week

If so, then this then be in tune with your Nov. 26 turn-around/bottom +- 1-2 trading days for the 10 and 20 day cycles.

Thinking about undoing my residual hedge via JDST before markets close early today….

What is your view on the above?

I much wonder if your bottom-fishing orders for PM’s were triggered today – but I suppose you want to get in at prices closer to 1700 for gold…

Eoin Treacy's view -

Thank you for this question and for pointing out this divergence between gold and gold mining stocks. The proximity of the expiry of gold contracts is relevant not least because of demand for physical metal. It is well within the realm of the possible to think enterprising institutional traders might like to see a lower price ahead of delivery.



This section continues in the Subscriber's Area. Back to top
November 25 2020

Commentary by Eoin Treacy

Inflation Regime Roadmap

Thanks to a subscriber for this report from MAN Institute which may be of interest. Here is a section:

So there’s plenty to choose from here and all seven are useful to hold in mind when thinking about inflation. For our part, we think an acceleration in inflation could now be driven by a combination of the following – the first two being critical to our case:

Monetarism – expecting persistent deficit financing causing the money stock (M2) to rise relative to GDP. Some would classify this as demand-pull inflation;

Marxism – believing that it will be impossible to re-impose austerity after the Coronavirus is over and that voters will demand rising real wages to control income inequality. Some would classify this as cost-push inflation;

Neoclassical effects – the just in time, Asia-dominated global supply chain is likely to morph into a just in case, home-grown supply chain, causing a large-scale supply-side disruption;

Environmental effects – on the basis the one should never let a good crisis go to waste, it’s likely that G7 governments now use their new-found balance sheet room to accelerate the capital investment required to make their economies ecologically sustainable, which will have the side effect of raising fixed capital costs for private sector firms.

Eoin Treacy's view -

A link to today's video commentary is posted in the Subscriber's Area.

Some concern has been expressed this week at the impending expiry of the moratorium on evictions in the USA. This is a useful graphic.

It highlights the fact that many states have 30% delinquency on mortgages/rent. Interestingly, despite the widely held view that New York is on the cusp of being denuded of inhabitants, it is far from the worst in terms of delinquency.



This section continues in the Subscriber's Area. Back to top
November 19 2020

Commentary by Eoin Treacy

The Next Phase of the V

Thanks to a subscriber for this report from Morgan Stanley. Here is a section:

#1: A global synchronous recovery: We expect a broad-based recovery, both geographically and sectorally, to take hold from March/April onwards. Driving this synchronous recovery will be a more expansive reopening of economies worldwide and the extraordinary monetary and fiscal support now in place. Global GDP, already at pre-COVID-19 levels (based on seasonally adjusted GDP levels), continues to accelerate and is on track to resume its pre-COVID-19 trajectory by 2Q21. We expect China to return to its pre-COVID-19 path this quarter, and the US to reach it by 4Q21.

#2: EMs boarding the reflation train: After a prolonged period in which EMs have faced a series of cyclical challenges, macro stability is now in check. With the COVID-19 situation improving in a broad range of EMs, their pace of recovery is catching up. EM growth rebounds sharply in 2021, helped by a widening US current account deficit, low US real rates, a weaker dollar, China’s reflationary impulse, and EMs ex China's own accommodative domestic macro policies.

#3: Inflation regime change in the US: We see a very different inflation dynamic taking hold, especially in the US. The COVID-19 shock has accelerated the pace of restructuring, creating a significant divergence between the output and unemployment paths. With policymakers maintaining highly reflationary policies to get back to preCOVID-19 rates of unemployment quickly, wage pressures and inflation will pick up from 2H21. We expect underlying core PCE inflation to rise to 2%Y in 2H21 and to overshoot from 1H22, with the risk that it happens sooner.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

With millions of people out of work it is easy to form a gloomy picture of economic potential. However, even at a US unemployment rate of 10%, there are still 90% of people with jobs. Moreover, many people who have held onto their employment have boosted savings this year.

When 90% of people come through a crisis in OK shape and a significant minority come out ahead, there is ample scope for a significant bounce back in activity. There is a great deal of pent up demand in the global economy and all that cash on the side lines is fuel for bull markets. The fact monetary and fiscal policy is aimed to improving the outcomes for the remaining 10% suggests loss credit and low rates are here to stay.



This section continues in the Subscriber's Area. Back to top
November 18 2020

Commentary by Eoin Treacy

Top Ten Market Themes for 2021: A Shot in the Arm

Thanks to a subscriber for this report from Goldman Sachs which may be of interest. Here is a section:

1.Vaccine-led Recovery to Lift Cyclical Assets
2. Navigating the Path
3. A Steeper Real Yield Curve
4. Europe: Two Steps forward, One Step Back
5. China: Forging Ahead, with Assets in Tow
6. A New Commodity Bull Cycle
7. EM Outperformance: More than Before, Less than Sometimes
8. Rotations: Cyclical, North Asia in Focus but Vaccine News Key to Near Term
9. In Search of New (and Old) Safe Havens, Hedges and Diversifiers
10. Risks from Corona and Beyond

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

If we had to distill the priorities of governments next year there is only one word captures their intentions. Reflation. With millions of unemployed people, defaults only kept at bay by massive intervention and rising public discontent economic revival is the only possible solution. That’s true of every country. No one has been left unscathed by the pandemic. Whether the challenge has been domestic or from a loss of export markets, the solution is the same. Reflation.



This section continues in the Subscriber's Area. Back to top
November 17 2020

Commentary by Eoin Treacy

Email of the day on Tesla's prospects

I remember a few years ago that you wrote in one of your articles that Tesla could well go broke! It could yet happen but they seem to have found a firmer footing since then for the time being. 

Could their joining the S&P Index be an early warning of trouble ahead for the market generally as this Bloomberg report suggests?

https://www.bloomberg.com/opinion/articles/2020-11-17/will-the-stock-bubble-burst-as-soon-as-tesla-joins-the-s-p-500?sref=O3zvoUBa

Eoin Treacy's view -

Thank you for this question. I’ve written a lot about Tesla over the last decade. It’s a highly leveraged company so there is always a risk it will not be able to achieve its goals. At its current valuation it cannot afford to disappoint. If we listen to Elon Musk, the company was about a month from bankruptcy during the ramp up of Model 3 production but it successfully pulled through. 



This section continues in the Subscriber's Area. Back to top
November 11 2020

Commentary by Eoin Treacy

Email of the day on velocity of money and inflation

Can you please help me understand the attached article that says prices are not related to the velocity of money.  It even includes a Fed chart (page 5) to support its case. 

Eoin Treacy's view -

Thank you for this question which is very relevant to the current market environment and may be of interest to the Collective. Here is a section from the article:

GDP can be thought of as Prices * Transactions or (P * T).

This leads us to: V = (P * T) / M2

Observations
Velocity can rise if prices fall if the number of transactions goes up.
Velocity can rise if prices stay the same and M2 goes down.
Velocity can fall if prices rise if M2 goes up
Velocity can fall if prices rise and the number of transactions drops.

Key Points
Prices can rise, fall, or stay the same, no matter what velocity does.
Velocity does not determine prices.
Velocity does not determine or even influence anything at all.

Velocity of Money is reported in arrears with a quarterly lag so whatever data we look at is six months out of date. I agree velocity of money does not itself lead to higher inflation. However rather than think about how velocity of money can rise or fall in the abstract let’s think about what it has been trending lower since 1997.



This section continues in the Subscriber's Area. Back to top
November 10 2020

Commentary by Eoin Treacy

Fed Rate-Hike Risk Rebounds on Vaccine Buzz

This article by Stephen Spratt and James Hirai for Bloomberg may be of interest to subscribers. Here it is in full:

Traders are building the risk of Federal Reserve hikes back into interest-rate markets following news of
the most encouraging scientific advancement so far toward a coronavirus vaccine.

The sudden improvement in the economic outlook prompted a fresh burst of trade in Eurodollar futures, which are hugely popular as a low-cost way to play the Fed outlook. As daily volumes of contracts surged to the most since March, prices tumbled sharply, reflecting a flurry of bets on higher interest rates.

As front-end rates jolted higher, overnight index swap markets -- a proxy for the Fed’s policy rate -- show pricing for a quarter-point hike around the fourth quarter of 2023, and a second by the end of 2024.

ECB Easing
Rate hikes by the European Central Bank are not on the horizon yet, though investors trimmed bets on further easing and exited haven trades following the vaccine report. Money markets pared the odds of easing by almost half by the end of next year, betting on a 6 basis point rate cut, compared with 11 basis points at the end of last week.

BOE Bets
Similarly, Bank of England easing bets have been slashed, banishing the prospect of negative interest rates. Investors, who had bet on a 10 basis-point cut by August and sub-zero rates by the end of 2021, no longer expect the BOE to cut rates to 0%. Instead, wagers are for 7 basis points of easing by the end of next year.

Eoin Treacy's view -

There is a great deal of commonality in the government bonds markets at present. That is usually a sign that what is going on in the market is not isolated to a single market but is global in nature.

The total quantity of negative yielding bonds is a handy barometer for how much demand for debt is evident. It hit a new high last week and has pulled back this week. Downside follow through next week would confirm a failed upside break and greatly increase scope for at least a reversion towards the mean.



This section continues in the Subscriber's Area. Back to top
November 03 2020

Commentary by Eoin Treacy

Correction Here. Now What?

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Manufacturing activity figures have rebounded impressively over the last month on a global basis. That’s reflective of the snapback in activity following the contraction in the 2nd quarter and will probably moderate over coming months. Nonetheless, it is supportive of the view that this will be have been a short sharp recession.



This section continues in the Subscriber's Area. Back to top
October 29 2020

Commentary by Eoin Treacy

The Great Reset

This edition of Tim Price’s always enjoyable missive may be of interest to subscribers. Here is a section:

Markets were born free but are now everywhere in chains. Cash deposit rates are now derisory, but with added bail-in risk. Bond yields are likely to remain squashed indefinitely, helped by governmental funny money. So, cash and bonds are largely out of the question. The one market too big for even the world’s central banks collectively to kick around is the currency market. So, we would not be surprised to see some kind of reset develop there. Our way of anticipating that reset is to own precious metals and the shares of sensibly priced mining concerns in “safer” jurisdictions. Because we anticipate an ultimately inflationary outcome due to those aforementioned torrents of funny money, we value claims on the real economy in the form of equity ownership of cash-flow generative businesses run by principled, shareholder-friendly management with an excellent track record of capital allocation, especially when such stocks can be bought at a discount to their inherent worth. And because we frankly have no clue how the Great Suppression will necessarily play out, we hold uncorrelated (systematic trend-following) funds that offer the potential to zig when the markets finally and conclusively zag. Our watchword: if in doubt, diversify.

Not the sort of commentary we would prefer to be sending out into the world. But sometimes spades must be identified as such. On a more positive note, some wisdom from the ages: this too shall pass. It just better gets a bloody move on.

Eoin Treacy's view -

The question for investors is whether the ECB announced additional stimulative action to support the economy or arrest the advance of the Euro. The region’s plan for climbing out of the lockdown-induced recession will be founded on exports. A weaker currency would certainly help and the ECB is delivering.



This section continues in the Subscriber's Area. Back to top
October 21 2020

Commentary by Eoin Treacy

Fed Keeps Bond-Market Tantrums at Bay With Stealth Yield Control

This article by Liz Capo McCormick for Bloomberg may be of interest to subscribers. Here is a section:

“Yields are almost behaving as if we have yield-curve control already,” said Esty Dwek, head of global market strategy for Natixis Investment Managers, which oversees about $1 billion. “The yield rise will probably remain contained because the Fed is more important than anything else and they will limit it.”

Call it stealth yield-curve control, as Fed policy makers have pushed back on the idea of capping yields. It’s a step that central banks in Australia and Japan have already taken. The Bank of Japan has been pinning 10-year rates at around zero, while the Reserve Bank of Australia targets three-year yields at 0.25%.

U.S., yields have been boxed in from both directions. On the upside, the potential for Fed action should the economic picture darken, along with overseas buying and haven demand because of worries about the pandemic, are keeping long-term yields in check. On the downside, the central bank’s reluctance to drive policy rates below zero creates a floor.

Eoin Treacy's view -

The Fed might in fact be completing its promised purchases of $120 billion a month but it is not showing up on the balance sheet. The only explanation for that which makes any sense is that the purchases are being sanitised.



This section continues in the Subscriber's Area. Back to top
October 20 2020

Commentary by Eoin Treacy

Belt up for the coming 'Global Super Cycle' and a $100 trillion World by 2023

Thanks to a subscriber for this note from EM Capital Advisors. Here is a section:

The Emerging Market (EM) share of world output in the last 20 years doubled from 19% to 38% with the EM world growing at about double the rate of the Developed world (DM). This kept the total world growth at a 3-3.5% range over the last decade despite every region in the world growing a little slower than in the previous decade.

The implications of the swings in the global deflator and the FX on businesses and global incomes was much larger than most imagined which is visible in Fig 1 above. It breaks down the nominal world output and its components showing that the world in real terms grew at a pretty even rate of 3-3.5% through most of the last twenty years, with the swing in the ‘Deflator+FX component’ creating the big booms or bust feel in the world.

We are entering another such ‘Supercycle’ which was born about a quarter ago. Our definition of a supercycle is nominal World Output growing at 8-10% for a few years lifting most boats globally. Our view on the components of this global Supercycle are essentially building in a few key assumptions –

1. The World growth in real terms continues in the 3% +/- 1% range after normalizing to pre Covid levels in real terms by 2022. This is line with the IMF and many other estimates.

2. We expect the Global deflator to stay elevated in the 2-4% range for the next few years driven by stimulative fiscal and monetary policy by most large world economies. This would be aided by a weaker US$ and concurrent to it.

3. The US$ weakens 3-4% per annum for the next few years with rising deficits, with the Chinese Yuan doing the heavy lifting on the other side. The Yuan weakness in the previous few years had prevented this from playing out earlier. This paves the way for a strong Asian and EM FX basket which together account for about half of the world output. This is in a way similar to what happened in 2003-2005.

Eoin Treacy's view -

A link to the full note is posted in the Subscriber's Area.

Thanks for this interesting missive which may be of value to subscribers. Here is an additional note from the sender:



This section continues in the Subscriber's Area. Back to top
October 16 2020

Commentary by Eoin Treacy

The US is facing a dollar collapse by the end of 2021 and an over 50% chance of a double-dip recession, economist Stephen Roach says

This article by Shalini Nagarajan Business Insider may be of interest to subscribers. Here is a section:

Additionally, Roach said, new COVID-19 infections and higher mortality rates must be part of assessing the risk of an aftershock, Roach said.

"As we head into flu season with the new infection rates moving back up again, with mortality unacceptably high, the risk of an aftershock is not something you can dismiss," he said. "So that's a tough combination. And I think the record of history suggests that this is not a time, unlike what the frothy markets are doing, to bet that this is different."

Eoin Treacy's view -

With the stock market close to new highs it is easy to conclude that the economic recovery will follow suit. The reality is it might be a while but we are quite likely past the trough. Consumer sentiment has taken a big hit. That damage is strongly correlated with the strictness of lockdowns.



This section continues in the Subscriber's Area. Back to top
October 15 2020

Commentary by Eoin Treacy

Markets Without Havens Are Becoming All Too Real

This article by Alberto Gallo for Bloomberg may be of interest to subscribers. Here is a section:

Although volatility has collapsed in the era of quantitative easing, in those periods when it has increased, it has generally risen unusually fast and created much pain for investors. Take the CBOE Volatility Index, or VIX. Even though it is more likely to stay below 20 these days, it is twice as likely to surge above 40 when it does rise. It doesn’t help that passive investment strategies make up half of all share trading, twice as much as 10 years ago, meaning there are fewer humans at the helm to make rational decisions when markets go haywire.

What’s more, market makers hold a tenth of the trading inventories they had in 2007, according to data from the Federal Reserve Bank of New York. As a result, they are unable to act as a sort of market shock absorber during periods of rapid price swings like they had in the past. That combined with capital flocking in and out of the same trades means markets are breaking down more often.

A good example comes from March, when exchange-traded funds owning investment-grade corporate bonds experienced price declines exceeding 10%, dropping 4% to 5% below their net asset values. Worried that the episode might cause credit markets to stop functioning, the Fed stepped into the markets to buy corporate debt for the first time.
 

Eoin Treacy's view -

2019 was one of the best years ever for the balanced 60/40 portfolio. That helps to highlight that it might still be premature to suggest the age of balancing bonds versus equities is dead. Obviously 2020 has been a very difficult year where risk takers have been rewarded and savers have been denuded of income. The challenge for long-term investors is the low interest rate environment distorts valuations so that momentum strategies tend to trump everything else.



This section continues in the Subscriber's Area. Back to top
October 09 2020

Commentary by Eoin Treacy

The Challenge in Valuing Gold

Thanks to a subscriber for this well-illustrated report from Gavekal which may be of interest. Here is a section:

Yet, in periods when both budget deficits and monetary aggregates have rapidly grown, gold has historically outperformed—and it is doing so now. At such times, gold also adds diversification benefits to portfolios.

Over the past few years, we have argued in numerous pieces that gold has started a bull run. And once they start, gold bull markets tend to run until either the US dollar strengthens meaningfully, and/or the Federal Reserve tightens monetary policy. Right now, neither of these two outcomes is likely. Hence, the gold bull market looks set to continue.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The Dollar declined in a meaningful manner as soon as combined monetary and fiscal stimulus kicked off in March. It staged a modest rebound in September when doubt arose about the persistence of the fiscal portion of that program.



This section continues in the Subscriber's Area. Back to top
October 06 2020

Commentary by Eoin Treacy

Trump Tells His Team to Stop Talks on Fiscal Stimulus Package

This article by Christopher Anstey for Bloomberg may be of interest to subscribers. Here is a section:

President Donald Trump told his negotiators to stop talks with Democratic leaders on a fiscal stimulus package, hours after Federal Reserve Chair Jerome Powell’s strongest call yet for greater spending to shore up the economic recovery.

“I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business,” Trump said Tuesday in a tweet.

Stocks tumbled after Trump’s posting effectively called an end to months of hard-fought negotiations between the administration and Congress. Democrats had most recently pushed a $2.2 trillion package that failed to garner Republican support in the House, while the White House had endorsed $1.6 trillion.

Eoin Treacy's view -

This decision clearly amps up the brinksmanship between the USA’s opposing political parties. It also lays a stark choice at the feet of American voters. If they vote for divided government, they can look forward to at least two more years of messy negotiations on economic stimulus. The Trump administration has obviously concluded they have nothing to gain by agreeing to bailouts for bankrupt states even if that is going to force municipals to raise taxes.



This section continues in the Subscriber's Area. Back to top
September 25 2020

Commentary by Eoin Treacy

Email of the day - on what a vaccine will mean for gold

In your opinion, will the introduction of a vaccine(s) be a headwind for the precious metals?

Eoin Treacy's view -

Thank you for this question which may be of interest to the Collective. The global economy has experienced a significant shock and millions of people are out of work. The primary way I view the effect of the coronavirus on the economy is as an accelerant. It took trends that have been in evidence for a while and exaggerated them. At the same time, it introduced new challenges which require new solutions.



This section continues in the Subscriber's Area. Back to top
September 24 2020

Commentary by Eoin Treacy

Democrats Crafting New $2.4 Trillion Stimulus Bill to Spur Talks

This article from Bloomberg may be of interest to subscribers. Here is a section:

“We are ready for a negotiation,” she said. “I am talking with my caucus and my leadership and we will see what we are going to do,” Pelosi said.

The prospect of talks helped push stocks higher briefly, with the S&P 500 extending gains after the Pelosi and Mnuchin remarks. But that optimism was tempered by reports showing a resurgence in coronavirus cases in Europe and investors pulled stocks back off session highs.

The risk of a slowdown in the recovery is rising with the lack of movement on fiscal stimulus. Initial claims for unemployment insurance remained at a level above the peak during the Great Recession of 2007-09, the latest weekly data showed on Thursday.

Fed Chair Jerome Powell reiterated his conclusion that “it’s likely that additional fiscal support will be needed,” speaking at the same Senate panel where Mnuchin was testifying.

The recovery has been faster than anticipated so far, Powell said, thanks to income support to those affected by the pandemic.

“The risk is that they’ll go through that money, ultimately, and have to cut back on spending and maybe lose their home,” the Fed chief said. “That’s the downside risk of no further action.”

Eoin Treacy's view -

The big question for investors is to determine how credible this news story is. The Fed has been very clear that it sees a need for additional stimulus and that the path out of the recession is dependent on support mechanisms remaining open ended.



This section continues in the Subscriber's Area. Back to top
September 23 2020

Commentary by Eoin Treacy

Fed Officials Warn of Economic Risks in New Plea for Fiscal Help

This article from Bloomberg may be of interest to subscribers. Here is a section:

Federal Reserve policy makers on Wednesday highlighted the importance of fiscal stimulus for an economic recovery that recently has outperformed forecasts. Chairman Jerome Powell continued to wave the fiscal flag carefully at a congressional hearing -- amid a political stalemate over a new package -- saying that more support was likely to be necessary. Others were more full-throated, with Cleveland Fed President Loretta Mester saying it was very much needed given the “deep hole” the economy is climbing out of.

Chicago Fed President Charles Evans expressed concern the stimulus he penciled in won’t be forthcoming, while Boston Fed President Eric Rosengren suggested it’ll take another wave of infections to prompt action, and likely not until next year.

Declines in the stock market, until recently attributed to a reversal of excessive tech-share gains, have increasingly been attributed in part to worries about the recovery and the need for more stimulus. The S&P 500 Index was down 1.7% as of 2:22 p.m. in New York, the fifth drop in six days.

“The most difficult part of the recovery is still ahead of us,” Rosengren said in remarks Wednesday, saying he was more pessimistic than his colleagues over how many Americans will return to work over the next 15 months.

Eoin Treacy's view -

The impending bitter dispute between the Democrats and Republicans about the latter’s determination to approve a new supreme court justice before the election has pretty much shelved any hope of additional stimulus before the election. Add to that the real potential that an election result may not be immediately available and the timeline for when an additional fiscal stimulus will be agreed gets pushed further out.



This section continues in the Subscriber's Area. Back to top
September 23 2020

Commentary by Eoin Treacy

Email of the day - on betting stocks:

I may be mistaken but I thought in one of your commentaries you listed some betting stocks.

Assuming the continue pandemic mode, sport fans may be eager to bet, same for the elections, Point bets PBH .au and Penn gaming PENN may be good idea.

DraftKings is the name that has been recognized DNKG

 Pls. confirm you had mentioned in one of your commentaries, alternatively, any ideas / opinion on the space

Best keep safe

Eoin Treacy's view -

Thank you for this question. I have spoken about the airline and tourist sectors generally but not about pure gambling plays. However, I agree that speculative fervour is a significant factor in the market today. The lack of sports events to bet on has been a factor in the surge in online stock market trading among retail investors. The buzz people get from punting is addictive so demand will likely persist for at least as long as their money lasts. The online venues are likely to benefit at the expense of physical locations.



This section continues in the Subscriber's Area. Back to top
September 22 2020

Commentary by Eoin Treacy

Email of the day on the traditional portfolios and investment trusts

I have a couple of questions for Mr. Treacy which I would be most grateful if he could answer:

1) Traditional portfolios have managed risk by allocating % to stocks and bonds. The closer to retirement someone is and presumably more risk averse one allocated proportionally more to bonds. Given that interest rates are at historical lows is this formula still appropriate? Should we look at allocation to gold instead of bonds? Thank you

2) Earlier this year Mr. Treacy shared the performance, dividend yields and length of time these dividend yields have been awarded for key Investment Trusts. I would be grateful (and perhaps other investors as well) if he could share growth performance, dividends and chargers of key ETFs. Thank you.

Eoin Treacy's view -

Thank you for these questions which may be of interest to the Collective. The rationale for investing in bonds as a stabilising force in a portfolio is a lot more difficult to justify when interest rates are zero. One comforting factor is the inverse correlation between the assets has been sustained over the last few months.



This section continues in the Subscriber's Area. Back to top
September 18 2020

Commentary by Eoin Treacy

Chapter 6: The Big Cycle of China and Its Currency

This chapter of Ray Dalio’s evolving book “The Changing World Order” will be of interest to anyone monitoring China’s evolution. Here is a section:

As a result of their longer history and their more intensive studying of it, the Chinese are much more interested in evolving well over much longer time frames than Americans, who are much more interested in making quick hits—i.e., the Chinese are more strategic than Americans, who are more tactical.  The arc that Chinese leaders pay the most attention to is well over a hundred years long (because that’s how long good dynasties last) and they understand that the typical arc of development has different multidecade phases in it, and they plan for them.  For example, the first phase, which occurred under Mao, was when the revolution took place, control of the country was won, and power and institutions were solidified.  The second phase of building wealth, power, and cohesiveness without threatening the leading world power (i.e., the United States) occurred under Deng and his successors up to Xi.  The third phase of building on these accomplishments and moving China toward where it has set out to be on the 100th anniversary of the People’s Republic of China (PRC) in 2049—which is to be “a modern socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious,” which would make the Chinese economy about twice the size of the US economy[4]—is occurring under Xi and his successors.  Nearer-term goals and ways for getting toward these goals are set out in nearer-term plans like the Made in China 2025 plan,[5] Xi’s new China Standards 2035 plan, and the usual five-year plans.[6] 

Eoin Treacy's view -

There is a quote from the movie Pirates of the Caribbean which is doing the rounds on the social media. It’s “part of the ship, part of the crew” The Communist Party equates itself with the country. That means that if you are Chinese you owe fealty to the Party. That belief is at the essence of the ruling ideology.



This section continues in the Subscriber's Area. Back to top
September 16 2020

Commentary by Eoin Treacy

Fed Will Wait See the Whites of Inflation's Eyes

This article by Yelena Shulyatyeva for Bloomberg may be of interest to subscribers. Here is a section:

A brighter economic outlook was not paired with any pulling-forward of rate-hike projections -- in fact the opposite. The FOMC is signaling via projections and upgraded forward guidance that it does not expect to raise rates even if the jobless rate hits 4%. When unemployment hit that mark during the last expansion, the funds rate was already above 1% and steadily rising.

The Fed updated policy guidance after adopting its new inflation-targeting framework. New guidance entails achieving both inflation and the full employment targets.

The Fed’s assessment of “considerable risks” surrounding the economic outlook over the medium term remained in the statement, signaling that officials have not taken much comfort from recent better-than-expected activity and labor market data.

The Summary of Economic Projections, which extended forecasts into 2023, included an upgrade to GDP growth in 2020 and a downgrade to the unemployment rate throughout the horizon. The lack of action on the fiscal-aid front likely led to less optimistic projections for 2021 and 2022. The fed funds rate central tendency forecast indicates rates remaining at the zero-lower bound in 2023.

Assuming the economy rebounds by 28% annualized in the second quarter, as we project, U.S. GDP will need to grow by 3.4% in the fourth quarter to achieve the Fed’s forecast of -3.7% for the full year. This is slightly above our projections for growth of 2.5% in the fourth quarter and -4.0% for the year.

Eoin Treacy's view -

The Fed is hell bent on ensuring deflation does not become entrenched. That means interest rates are going nowhere for years. Vaccines are likely to be permissioned in October and will be widely available early next year. As the economy opens up, cash-rich consumers are going to make up for lost time and will leap back into social activities. That will boost velocity of money reading from the incredibly depressed level it is at right now.



This section continues in the Subscriber's Area. Back to top
September 16 2020

Commentary by Eoin Treacy

12 frightful slides before Halloween: Stocks boil and bubble, investors toil and trouble

Thanks to a subscriber for this report from Stifel which contains a number of insightful charts and may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The long-term charts contained in this report are helpful from the perspective of an investor either looking to monitor the potential for a bubble to evolve in the tech sector or the potential for cycles to rebound from depressed levels as a global recovery takes hold.



This section continues in the Subscriber's Area. Back to top
September 15 2020

Commentary by Eoin Treacy

Industrials Conference: Strategy Sector Views + Analyst Stock Picks

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Media commentary continues to focus on the number of new cases of COVID-19 but that is an irrelevant figure. The numbers of hospitalisations and deaths and the fear that healthcare systems would be overrun was the reason for locking down economies. The reality today is even in countries where the number of cases is increasing, the hospitalization rate has not increased because most newly infected people are younger. Obviously, there are risks that younger people will infect older people but that is a manageable risk compared to the financial stress of total cessation of economic activity.



This section continues in the Subscriber's Area. Back to top
September 14 2020

Commentary by Eoin Treacy

The Age of Disorder

Thanks to a subscriber for this report by Jim Reid from Deutsche bank. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The fall of the Iron Curtain and ensuing spread of liberalism greatly enhanced the argument for globalisation and offshoring. The process lifted billions out of abject poverty and into the middle classes. Unfortunately, it also had a levelising effect which robbed lower middle class, less educated people in developed markets of their likelihoods.

The low-end service jobs that replaced manufacturing and mining do not offer the same compensation. That has hollowed out the middle class in much of the developed world. More reliance on social services and debt accumulation papered over some of the cracks but the credit crisis, housing busts and austerity have contributed to the rise of populism. That is a global phenomenon and is at its root a rebellion against the status quo.



This section continues in the Subscriber's Area. Back to top
September 08 2020

Commentary by Eoin Treacy

Email of the day - on private equity growth opportunities

Recently Mr. Treacy mentioned that most of the growth and yield opportunities are currently in the Private Equity. I would appreciate Mr Treacy's view on UK tax efficient Venture Capital Trusts. I am considering them as they provide exposure to early stage companies and provide tax efficient investment. Does Mr. Treacy deem this a good vehicle or would he suggest any other investment instruments?

Eoin Treacy's view -

- Thank you for this email which may be of interest to subscribers. There are plenty of growth opportunities in the regular stock market. The success of the recent IPO market is a testament to that phenomenon.

However, there is a clear trend among institutional investors towards stuffing portfolios with “alternatives”. It’s an incredibly broad sector including everything from seed capital for new companies to timberland, real estate and gold.



This section continues in the Subscriber's Area. Back to top
September 03 2020

Commentary by Eoin Treacy

A Red-Hot Treasury Trade Starts to Unwind Every New York Morning

This article by Stephen Spratt and Edward Bolingbroke for Bloomberg may be of interest to subscribers. Here is a section:

One trader in New York, who asked not to be named as he isn’t authorized to speak publicly, said the buying earlier this week was dominated by accounts taking off bets against long-maturity debt, as popular so-called steepener trades are pared down. A flurry of Treasury futures action on Thursday offers further evidence that investors are unwinding these wagers or calling it quits.

Positioning for a steeper yield curve, where rates on long-dated debt rise more than those on shorter Treasuries, has been a hot strategy in bond markets in recent months on the expectation the Federal Reserve would take a more relaxed approach on inflation -- something that came to fruition at a virtual Jackson Hole confab on Aug. 27. Yet even as Wall Street strategists reiterated their “steepener” recommendations, 30-year yields have fallen more than 15 basis points to 1.35% Thursday, having risen from 1.22% at the start of April.

Eoin Treacy's view -

The yield curve spreads, whether one looks at the difference between the 10-year and the 2-year or the 10-year and the 3-month both share a key similarity following inversions. They have both surged higher to approach wides of between 250 to 300 basis points during recessions. That has not been possible on this occasion because central banks have not had room to cut interest rates by that much and bond yields are too low to create that wide a spread.



This section continues in the Subscriber's Area. Back to top
September 02 2020

Commentary by Eoin Treacy

Bridgewater's Risk-Parity Shift Jolts a $400 Billion Quant Trade

This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section: 

“It is pretty obvious that with interest rates near zero and being held stable by central banks, bonds can provide neither returns nor risk reduction,” a team led by Co-Chief Investment Officer Bob Prince wrote in the July report.

Bridgewater’s famous All Weather portfolio has therefore been moving into gold and inflation-linked bonds, diversifying the countries it invests in and finding more stocks with stable cash flow.

The idea is to replicate the long-term positive returns typically generated by bonds while finding alternative ways to hedge a downturn in stocks, especially if higher inflation upends low-yielding nominal debt.

Risky Business
Bridgewater’s conviction that ultra-low yields are a game-changer for risk parity will resonate with many on Wall Street, who have also been fretting over the fate of traditional portfolios that allocate 60% to stocks and 40% to bonds.

According to the firm, about 80% of local-currency government bonds have been trading below 1%, which limits the room for such notes to rise in value during a bout of risk aversion since investors can simply hoard cash instead. That, combined with the potential for losses if yields jump from record lows, means that the world of government debt is potentially losing its function as a safety valve in portfolios.

Eoin Treacy's view -

Risk Parity is based on the correlation between rising stock prices and rising bond yields. The logic is that when investors are worried about stock market returns, they park excess cash in bonds. Over the years multiple strategies have evolved to size positions according to this correlation.



This section continues in the Subscriber's Area. Back to top
August 28 2020

Commentary by Eoin Treacy

BOJ Is Said to See No Change in Policy Stance as Abe Quits

This article by Toru Fujioka for Bloomberg may be of interest to subscribers. Here is a section:

While the announcement of Abe’s resignation caused the yen to gain as much as 1% in the evening in Tokyo, the BOJ will continue to closely watch market developments, according to the people. The bank maintains its pledge that it will act without hesitation if necessary, the people said.

With the economy still healing from the biggest contraction in the post war era in the second quarter, an excessively strong yen will put pressure on the central bank to act if sustained. Abe came to power in 2012 pledging aggressive monetary easing and handpicked Kuroda to deliver it. Kuroda soon launched the “shock and awe” monetary bazooka, which increased asset purchases, leading the BOJ’s balance sheet to swell significantly larger than its global peers.

BOJ watchers will be closely monitoring who will replace Abe, because Kuroda is seen to have coordinated well with the government under the premier. The latest symbolic move was a joint statement between Kuroda and the government as the pandemic battered the economy.

Eoin Treacy's view -

Abe was driving force behind the global transition to simultaneous monetary and fiscal stimulus. His policies have been adopted at least in part by a host of countries as interest rates have trended towards zero.



This section continues in the Subscriber's Area. Back to top
August 28 2020

Commentary by Eoin Treacy

U.S. soy rises for 5th day; profit taking pressures corn, wheat

This article from Reuters may be of interest to subscribers. Here is a section:  

“The lack of rain in August - plus extended heat - clipped the top end of soybean production for many areas,” Bob Linneman, broker at Kluis Commodity Advisors said in a research note. “There are many operations that watched a potentially record crop turn to a hopeful average crop.”

Eoin Treacy's view -

The agriculture sector has been plagued by uncertainty over the last few years. Record crops, trade wars, currency devaluations and weather events have conspired to create a great deal of uncertainty. None of that has succeeded in lifting prices for more than a few weeks at a time. I wonder if this time is different.



This section continues in the Subscriber's Area. Back to top
August 27 2020

Commentary by Eoin Treacy

Powell Fed Shift Allows for Higher Employment and Inflation

This article from Bloomberg may be of interest to subscribers. Here is a section:

The new strategy is being undertaken to tackle years of too-low inflation. It hands the central bank flexibility to let the job market run hotter and price pressures float higher before taking action as it may previously have done.

“They really, really, really are not going to be raising interest rates any time soon,” said James Knightley, chief international economist at ING Financial Markets. “The Fed is saying rates will be lower for longer, but don’t worry inflation is not going to be picking up.”

While it doesn’t target a specific rate of unemployment broadly or for certain demographic groups, the approach may help address other weaknesses in the economy.

During the longest U.S. economic expansion on record until the pandemic hit earlier this year, many groups benefited -- including minorities and women. With millions out of work and unrest flaring up across the U.S. over racial inequality, questions about how the Fed’s policy helps diverse communities have been raised.

Eoin Treacy's view -

The Fed is happy to run the economy hot. That begs the question what happens next? Will they attempt to support the Treasury market in what is already de facto yield curve control? As the economy responds to the trillions in new liquidity, how will the Fed react to the rise in the velocity of money? If they are willing to run the economy hot a somewhat steeper yield curve is desirable but stoking inflation can have many unintended consequences.



This section continues in the Subscriber's Area. Back to top
August 27 2020

Commentary by Eoin Treacy

Equity Insights: EU's 'Hamilton Light' Recovery Plan Marks a Paradigm Shift, and Markets Cheered

This article by Anik Sen for PineBridge Investments may be of interest to subscribers. Here is a section:

The EC’s paradigm shift

By becoming the borrower through its issuance of €750 billion of debt, the EC sets a new precedent while becoming a major new force in the sovereign debt markets. It is also expected to demonstrate maximum flexibility in managing its debt to achieve the most favorable terms for the member states. The bonds are expected to be repaid through the EU budget through the end of 2058. New tax revenues have been proposed, such as a plastic levy, a digital tax, and a review of the EU Emissions Trading System.  

The recovery plan marks a significant moment in which EU Leaders recognized the need to create a new structure for raising funds under the auspices of the EC and funded by the EU budget. This structure has a strong likelihood of becoming a permanent funding mechanism at the EU level for emergency programs and other funding needs for the fiscally weak member states. They have also acted swiftly to stem the risks to the eurozone’s stability from alarmingly high fiscal deficits, and to front-load the raising of funds in order to plug the enormous fiscal gaps into the future. They have recognized the need to move away from the failed austerity approach of the past and to adopt a pro-growth policy through grants and loans on attractive terms with light conditionality – a major departure from the past.

‘Hamilton light’ plan is an auspicious beginning

The recovery plan could well become a permanent feature for the EU, serving to underpin the debt issued by the periphery member states. This has enormous significance for the EU banking industry, which has become reliant on the ECB’s QE programs for its stability and capital adequacy. If the fear of default is truly removed for any eurozone sovereign debt, without assuming intervention by the ECB, there could be broader implications for financial system integration within Europe, with cross-border mergers and acquisitions within the EU finally taking place. This is sorely needed to drive greater scale in a banking system that has poor profitability compared to that of the US.

The recovery fund may not be quite as far-reaching as Alexander Hamilton’s re-ordering of the financial system in the newly born United States. However, the progress made by EU leaders this summer points to a measured yet pivotal step toward very similar ends. 

Eoin Treacy's view -

Europe has just created Federal bonds which will be repaid from the bloc’s budget. New taxes are being proposed to increase the size of the budget and there are aspirations for the system to become permanent.



This section continues in the Subscriber's Area. Back to top
August 25 2020

Commentary by Eoin Treacy

A Robot Tried to Fix Value Investing and Ended Up Buying Amazon

This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:

The top three holdings of the machine-guided fund in July were Amazon.com Inc., Alphabet Inc. and Facebook Inc. Those are far from the kind of undervalued stocks typically favored by a value strategy. But to Qraft, it’s just value 2.0.

“Intangible assets have become a more important factor in the actual value of the company due to the development of information technology,” founder Hyungsik Kim wrote in an email.

“It is easy to tell which of the following is more important in measuring the value of Amazon: warehouses (tangibles) or automated logistics systems (intangibles).”

It’s the rallying cry for many remaining proponents of value: The factor isn’t dead, it’s simply plagued by outdated accounting rules that treat intangible investments such as research as expenses rather than capital.

As a result, knowledge-intensive firms end up with much lower book values and higher costs, which make them look more expensive than they actually are.

The new ETF’s eye-catching backtests also speak to the variety of methods underlying even the best-known equity factors. One study estimated there are well over 3,000 different ways to define a value strategy.

Eoin Treacy's view -

Intangible values is a fascinating subject because it forms the basis for the investing in technology firms but is the reason to avoid legacy firms. The challenge in teaching an algorithm to know the difference means a great deal of labeling would be required to identify the differences.



This section continues in the Subscriber's Area. Back to top
August 21 2020

Commentary by Eoin Treacy

Email of the day on big numbers

UK National debt hits £2 trillion. As in astronomy, it is difficult to get one’s head around the numbers A financial journalist put this into some perspective this morning. Someone living in ancient Egypt at the time of the great pyramid spending a million pounds a day over the next 3000 years would still have money to spare today!

Eoin Treacy's view -

Thank you for this comparison. It is also a £30,000 ($39,240) debt for every one of the UK’s 66.5 million people. By comparison the debt per capita of the US is now $80,000 per person. As with so many items, the absolute level is often less important than the trend.



This section continues in the Subscriber's Area. Back to top
August 21 2020

Commentary by Eoin Treacy

Lyft, Uber Shares Jump on Delay in California Driver Rule

This article by Jim Silver and Esha Dey for Bloomberg may be of interest to subscribers. Here is a section:

Lyft and Uber shares erased earlier losses to jump higher after the companies were spared from having to rapidly convert their California drivers to employees by a state appeals court

Shares of both companies had dropped earlier after Lyft said it will suspend its rideshare operation in California at 11:59 p.m. Pacific time today

“We don’t want to suspend operations. We are going to keep up the fight for a benefits model that works for all drivers and our riders,” Lyft said in statement

Lyft shares rose as much as 8.7%, Uber gained 7.8%

NOTE: Earlier, Former Uber Security Chief Charged With Obstruction of Justice

Eoin Treacy's view -

Tax codes generally favour business owners. It is in the public good to foster business creation because that improves the potential for new jobs to be created by entrepreneurs. The sole proprietor gains many of the benefits of business tax treatment, but also gives up the safety net provided by companies in the form of benefits. They lose access to unemployment benefits and the old age pension/social security benefits are also not as generous. In return sole proprietors generally pay less city, state and federal taxes than corporations do.



This section continues in the Subscriber's Area. Back to top
August 21 2020

Commentary by Eoin Treacy

Email of the day - on risk appetites and the value of a subscription.

I am a pre-subscriber (financial constraints, exacerbated since Covid-19, make it impossible for me to become a full subscriber, I'm afraid, so I may not qualify for a reply. But David did reply to me on more than one occasion;  he was always so kind, and is greatly missed).

I remember your being on the panel at a money show in the conference centre in Westminster Square (I forget the name - possible Westminster Conference Centre) - it must have been about 2009 because I remember asking a question as to whether there were any "good" banks left that might be worth investing in.
  
Anyhow, in response to a question from another attendee about companies drilling for water in Australia, (or possibly into wind power or solar or even lithium miners (if it wasn't too early) - I forget exactly which), I remember you replying that you never favoured chasing these early-stage stories, and in general you have been proved right since.   

I still tend to class hydrogen fuel and battery power for vehicles in the same category, but perhaps you feel that times have changed sufficiently now?    Since I am only a pre-subscriber, and not able to read the full article, I appreciate that you may have said more on this there, or in previous Comments of the Day.
    
It seems to me that since hydrogen when mixed with oxygen is a very explosive mix (although this could also be said to a lesser extent of petrol vapour, I suppose), it would only take one careless mistake or faulty construction to cause a serious explosion.   But perhaps the design features are so tight that this would be impossible.   

At least I would trust an electric vehicle more than a self-driving one! In fact, I am a bit nervous by nature. I would never trust a Toyota now, after that stuck accelerator pedal caused a fatality. What the last minutes of those poor occupants were like I cannot face thinking about.

Whether it is possible to reply to this or not, many thanks Eoin for the comments that I am able to read daily. They give a very sane and reassuring perspective, especially in these difficult times.

Eoin Treacy's view -

David always saw value in conducting a public discourse with subscribers because it helped to educate us as much as the Collective. It also ensures we are covering topics of interest. I agree and one of the things I enjoy most is attempting to provide satisfactory answers to subscriber’ queries. However, as someone who has been familiar with the Service for at least 11 years, might I suggest you at least take a trial subscription?

If that is too much of a financial constraint it may be time to reassess your investment/trading ambitions. Investing involves a degree of risk. If you are uncomfortable with driving a Prius because of a fault corrected more than a decade ago, it might be time to conclude investing is not for you.

The response to this email continues in the Subscriber's Area. 



This section continues in the Subscriber's Area. Back to top
August 20 2020

Commentary by Eoin Treacy

Fed Blog Says Debt Buying Aided Market Without Moral-Hazard Risk

This article by Liz Capo McCormick for Bloomberg may be of interest to subscribers. Here is a section:

The unprecedented speed and scale of the Federal Reserve’s buying of Treasuries and mortgage debt to aid a severely impaired bond market has accomplished that without raising the specter of moral hazard, Federal Reserve Bank of New York researchers wrote in a note.

Pandemic-sparked volatility in March caused liquidity in the world’s biggest bond market to plunge to its worst since the 2008 financial crisis. The Fed responded with purchases of Treasuries and mortgage securities that peaked at more than $100 billion a day combined.
It’s still soaking up about $80 billion of Treasuries and at least $40 billion of mortgage securities a month, and some bond veterans warn that the central bank’s involvement in the market could potentially be encouraging risky behavior, such as excessive borrowing. But a post Thursday in the New York Fed’s Liberty Street blog argued against that.

“The magnitude of the Desk’s purchase program in 2020 ‘to support the smooth functioning’ of the Treasury and agency MBS markets marked those purchases as highly unusual,” wrote Kenneth Garbade, a senior vice president in the New York Fed’s Research and Statistics Group, and Frank Keane, a senior policy advisor.

But they also say that the tool has been used before and “the infrequency of Federal Reserve intervention suggests that relying on the Fed on those rare occasions when markets are in extremis has not materially exacerbated moral hazard.”

Eoin Treacy's view -

Reading over the Fed minutes feels like an episode of the Twilight Zone. This quote in particular is relevant. “many participants judged that yield caps and targets were not warranted in the current environment but should remain an option.”. It doesn’t have to engage in yield curve control because the market is already behaving like it is a fact.



This section continues in the Subscriber's Area. Back to top
August 18 2020

Commentary by Eoin Treacy

Dollar Erases Trade-War Gains After Sinking to Lowest Since 2018

This article by Carter Johnson may be of interest to subscribers. Here is a section:

The dollar sank to its lowest level since May 2018 on concern that the world’s biggest economy will struggle to regain momentum amid a standoff over further virus relief and as infections continue to mount.

The greenback has now erased most of the gains it built on the back of U.S.-China trade tensions that started heating up around two years ago, fueling worries about global growth prospects. This time investors see the U.S. as the potential laggard amid questions over the government’s response to the pandemic. The euro climbed to a two-year high, extending its advance since last month’s landmark European Union stimulus package brightened the region’s prospects relative to the U.S.

The dollar has been on the defensive since mid-year, with U.S. lawmakers unable to agree on measures to support the economy’s recovery from the pandemic, and with the nation’s real yields dropping to multiyear lows. On top of all that, investors’ attention is turning to the November presidential election and the uncertainty that may bring.

Eoin Treacy's view -

The primary argument to support US Dollar strength over the last few years was supply related. The Federal Reserve was raising interest rates and simultaneously reducing the size of its balance sheet.

Never mind whether that was a contributing factor in the pop in high yield spreads at the end of 2018 or the freezing up of the repo market in the autumn of 2019. The supply deficit was a central factor in boosting the value of the Dollar simply because there were fewer of them around. The situation could not be more different today.



This section continues in the Subscriber's Area. Back to top
August 17 2020

Commentary by Eoin Treacy

PBOC Adds Cash to Ease Liquidity Stress With Rate Unchanged

This article from Bloomberg may be of interest to subscribers. Here is a section: 

China’s central bank supplied liquidity to commercial lenders on Monday to help them manage upcoming government bond sales, while leaving the price of the money unchanged as the economy recovers.

The People’s Bank of China added 700 billion yuan ($101 billion) of one-year funding via the medium-term lending facility. The central bank said Friday that today’s operation is meant to offset the 400 billion yuan in loans coming due Monday and another 150 billion yuan maturing on Aug. 26.

With the economy recovering slowly, the PBOC is trying to provide markets enough funding to purchase government bonds and make loans without fostering financial risks. In addition to Monday’s money, the central bank last week offered the most short-term funds since May, replenishing a banking system which needs about $500 billion this month.

The net injection indicates “a more accommodative stance on keeping liquidity levels ample” so that commercial banks can continue to support bond issuance and to stabilize credit growth, said Liu Peiqian, a China economist at Natwest Group Plc. in Singapore. The move is “a signal to ensure policy continuity and stability” rather than a reaction to a slower pace of economic recovery, she said.

The PBOC kept the interest rate on the funds unchanged at 2.95%. The yield on China’s 10-year government bonds fell 1 basis point to 2.93%.

“The MLF injection is larger than expected,” said Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing. “The PBOC’s overall neutral monetary policy has an easing bias in August. I expect the 10-year government yield to drop to around 2.8%.”

Eoin Treacy's view -

The big unknown for the Chinese debt markets is where the natural default rate resides. It’s impossible to know since they never allowed defaults until quite recently. The current situation does not give an accurate picture either, since the aftershocks of the lockdowns are impossible to predict with any kind of accuracy. What we do know is the number of defaults is rising and has not stopped rising since the first were announced a couple of years ago.



This section continues in the Subscriber's Area. Back to top
August 13 2020

Commentary by Eoin Treacy

Now what? Gold correction or top?

Thanks to a subscriber for this report from Canaccord Genuity which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

I continue to think about my coffee cup analogy for inflation. When the cup is half full you need to stir quite quickly to get the level of liquid up towards brim without spilling over. When stirring slows down, the only way to maintain the level is to add more liquid. When stirring picks up again you had better siphon some of the liquid out or it will spill messily over the edges.



This section continues in the Subscriber's Area. Back to top
August 12 2020

Commentary by Eoin Treacy

Email of the day - on returning customers

Dear Eoin and team, I would like to thank you very much for the big difference you have made to my confidence in advising my clients, since I re-joined the service. If only I could find a way of explaining the benefit to my professional contacts! All the very best

Eoin Treacy's view -

Thank you for your kind words and welcome back. The one thing I would highlight for prospective subscribers is that in the evolving global tapestry of events, some big picture perspective is likely to be beneficial.



This section continues in the Subscriber's Area. Back to top
August 11 2020

Commentary by Eoin Treacy

Gold Heads for Biggest Drop in Seven Years on Rising U.S. Yields

This article by Justina Vasquez for Bloomberg may be of interest to subscribers. Here is a section:

“Today real rates clearly moved higher and that’s clearly what moved gold lower,” Michael Widmer, head of metals research at Bank of America Merrill Lynch, said by phone from London.

“You had stronger PPI data out and I think when that data came out the market had another look at rates and expectations.” Exchange-traded fund investors also took a breather, seeing back-to-back outflows for the first time since June. On Friday, State Street Corp.’s SPDR Gold Shares, the largest gold-backed ETF, saw its biggest outflow since March. Meanwhile, a Bloomberg Intelligence gauge of senior gold miners dropped the most intraday since March, down as much as 5.7%.

Eoin Treacy's view -

From a medium-term perspective gold does best in a negative real interest rate environment. The inverse correlation between TIPS yields and gold over the last two months has been very tight because investors have been actively seeking a hedge against devaluation of purchasing power.



This section continues in the Subscriber's Area. Back to top
August 10 2020

Commentary by Eoin Treacy

Time for Thinking

Thanks to a subscriber for this memo by Howard Marks which may be of interest. Here is a section:

The first is that many investors have underestimated the impact of low rates on valuations.  In short, what should the stock market yield?  Not its dividend yield, but its earnings yield: the ratio of earnings to price (that is, p/e inverted).  Simplistically, when Treasurys yield less than 1% and you add in the traditional equity premium, perhaps the earnings yield should be 4%.  That yield of 4/100 suggests a p/e ratio (the inverse) of 100/4, or 25.  Thus the S&P 500 shouldn’t trade at its traditional 16 times earnings, but roughly 50% higher.

Even that, it’s said, understates the case, because it ignores the fact that companies’ earnings grow, while bond interest doesn’t.  Thus the demanded return on stocks shouldn’t be (bond yield + equity premium) as suggested above, but rather (bond yield + equity premium - growth).  If the earnings on the S&P 500 will grow to eternity at 2% per year, for example, the right earnings yield isn’t 4%, but 2% (for a p/e ratio of 50).  And, mathematically, for a company whose growth rate exceeds the sum of the bond yield and the equity premium, the right p/e ratio is infinity.  On that basis, stocks may have a long way to go.

Eoin Treacy's view -

The removal of the discount rate, as a basis for valuing cashflows has an outsized effect on all income producing assets. That implies the persistent threat of deflation which allowed long-bond yields to compress to historically low levels globally will persist indefinitely.



This section continues in the Subscriber's Area. Back to top
August 10 2020

Commentary by Eoin Treacy

Navy's solar power satellite hardware to be tested in orbit

This article by Sandra Erwin for Spacenews.com may be of interest to subscribers. Here is a section:

The 12-inch square tile module will test whether power can be harvested from its solar panel and transform the energy to a radio frequency microwave. The experiment has been in the works for more than a decade.

The module converts sunlight for microwave power transmission. Depuma said engineers decided to not use optical power transmission because a lot of energy would be lost through clouds and atmosphere.

The Naval Research Laboratory said the results of the experiment could drive the design of a dedicated spacecraft to test the transmission of energy back to Earth. The Pentagon is interested in this technology to provide energy to remote installations like forward operating bases and disaster response areas.

Researchers believe that a space solar system traveling above the atmosphere would catch far more energy than it would be possible on the ground due to the abundant and unimpeded sunlight in space.

One of the concerns is the thermal performance of the hardware. “It’s kind of a tricky problem to have something that’s in direct sunlight all the time and maintain the temperature of the electronics,” said Jaffe.

Solar power satellites could provide energy anywhere in the world, he said. “So a really important component of these kind of satellites would be a device that can convert the sunlight into microwaves or some other form of electromagnetic energy that’s suitable for sending to Earth. Now is the time to test it in space and see how it performs.”

Eoin Treacy's view -

Development of SpaceX’s BFR is progressing much quicker than most people gave the company credit for. The delivery of the vehicle to active commercial service will greatly reduce the cost of lifting major payloads to space.



This section continues in the Subscriber's Area. Back to top
August 05 2020

Commentary by Eoin Treacy

Hearts of Glass

This edition of Tim Price’s letter for Price Value Partners may of interest to subscribers. Here is a section:

God only knows what the historians of the future will make of 2020. A global flu panic that results in countries shutting down entire economies sounds like the pinnacle of craziness – until you discover that Europe between the 15th and 17th centuries was periodically prone to something called the ‘glass delusion’, in which sufferers believed that they were made of glass and at risk of shattering into pieces. The French King Charles VI was one of the higher profile victims of the illness, and he would reportedly wrap himself in blankets to prevent his buttocks from breaking. Because human nature never really changes, we choose to allocate to uncorrelated investment vehicles known as systematic trend-followers, which make no attempt to predict the future, or to avoid seeming overvaluation, but which are simply content to ride such price trends as appear from time to time, both up and down, courtesy of the interests and enthusiasms of the mob.

We also allocate, at present, to precious metals-related companies, provided we can secure robust cash flows in the process from businesses trading on comparatively modest earnings multiples, and with little or no debt. As George Bernard Shaw once remarked,

“You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”

Eoin Treacy's view -

Those gentlemen in government are primed to issue a vast quantity of debt. And why wouldn’t they? Interest rates are at historic lows and investors seem willing to invest in anything with a promise of a cashflow. The US Treasury is now stretching the maturity of outstanding debt which raises some important questions. 



This section continues in the Subscriber's Area. Back to top
August 04 2020

Commentary by Eoin Treacy

Gold ETFs Top German Holdings to Become World's No. 2 Stash

This article by Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

Investors are so concerned about the global outlook that worldwide holdings in gold-backed exchange-traded funds now stand behind only the official U.S. reserves of bullion after they surpassed Germany’s holdings.

Gold has rallied to a record this year as the coronavirus pandemic savaged growth, with gains supported by massive inflows into bullion-backed ETFs. Bulls are fearful that the waves of stimulus to fight the slowdown may debase paper currencies and ignite inflation. They also point to simmering geopolitical tensions, rising government debt burdens, and lofty equity valuations.

Worldwide holdings in gold-backed ETFs rose to 3,365.6 tons on Monday, up 30.5% this year, according to preliminary data compiled by Bloomberg. That’s a couple of tons ahead of Germany’s stash. U.S. reserves exceed 8,000 tons.

Even after futures topped $2,000 an ounce, there are plenty of forecasts for further, substantial gains. Among them, Goldman Sachs Group Inc. says gold may climb to $2,300 as investors are “in search of a new reserve currency,” while RBC Capital Markets puts the odds of a rally to $3,000 at 40%.

Eoin Treacy's view -

China and India have historically been the biggest consumers of gold. However, prices are set by the marginal buyer. Right now, that is investment demand from ETFs which has jumped by more than 50% in the last 12 months. This is a totally fresh phenomenon. ETFs did not exist in prior cycles so it was impossible to estimate how much gold was owned by investors. It is reasonable to conclude that before this bull market has climaxed ETF holding will be the largest gold stockpile in the world.



This section continues in the Subscriber's Area. Back to top
August 04 2020

Commentary by Eoin Treacy

John Authers' Points of No return

This edition of the former Lex Column’s editor contains some interesting charts on the correlation between Fed intervention and stock market recoveries. Here is a section:

There is a negative correlation between what the S&P did a month ago and moves in the Fed’s balance sheet. In other words, if the S&P falls, we should expect the balance sheet to be increased about a month later. Once the Fed has made its change, we should expect the two to move in the same direction for the next month — a rising balance sheet raises the S&P, a shrinking balance sheet brings it down. The lag is clear; it takes about a month for a weak stock market to prod the Fed into a response, and once that response has been made the effect is felt in full a month later. 

So, the two are indeed related but with a lag. How strong is the link? The top chart shows us what we should expect the Fed to do in response to a 10% correction, while the lower chart shows the S&P 500’s response to a 10% shift in the balance sheet:

There was also — and this should surprise nobody — a marked asymmetry to the Fed’s actions. It responds to falls in the market with alacrity. It doesn’t seem to feel any great macro-prudential need to prick bubbles by comparison, and so the tendency to respond to a rise in stocks with a shrinking of the balance sheet, as seen at the end of Janet Yellen’s tenure and the beginning of Jerome Powell’s, was much weaker. In late 1996, less than two years before the “Put” era began with LTCM, Alan Greenspan was plainly worried about the possibility of asset bubbles, and uttered his famous warning of “irrational exuberance” (following through with a rise in rates that induced a minor stock market correction). Now, the idea of raising rates to curb share prices appears so outlandish to Powell that he said in June “we would never do this.”

Eoin Treacy's view -

The Fed is reluctant to intervene to slow or reverse the rise in asset prices for a very simple reason. They believe the easiest way to objectively measure the success of their policies is in asset prices.

The continued uptrend in bond, stock and property markets is viewed as positive from the Fed’s perspective because it signals efforts to stimulate risk taking behaviour are effective. Unfortunately, that way of thinking about markets pays little heed to egregious risk taking or the assumption bad behaviour will always be bailed out.



This section continues in the Subscriber's Area. Back to top
August 04 2020

Commentary by Eoin Treacy

Email of the day on a double dip

Read a very interesting piece in Saturday's Telegraph by financial journalist, Ambrose Evans Pritchard. In a nutshell he suggests that western governments risk making the most catastrophic error of economic policy since the thirties by pulling away the stimulus rug too soon. The pandemic is still causing havoc and stimulus is running out before the rebound can reach self-sustaining escape velocity. He suggests the crunch will come in September/October.

Eoin Treacy's view -

The prospect of stimulus being removed too early has made it onto the front page because of the politically motivated rancorous debate over extending the USA’s fiscal stimulus. It remains the base case that some form of agreement will be agreed to because neither party wants to be blamed for making the lives of tens of millions of unemployed people worse.  



This section continues in the Subscriber's Area. Back to top
August 03 2020

Commentary by Eoin Treacy

The Baupost Group Letter

Thanks to a subscriber for this letter by Seth Klarman and team. Here is a section focusing on appetite for risk:

Fed policy has been magnificently successful in achieving its objectives not only of lifting securities prices but also of altering investor behavior. The Fed wanted to influence buyers of securities to be bolder in their pursuit of return. The head of a major pension fund recently authored a piece describing how the fund had responded to lofty markets and low yields on safe debt instruments. Their reaction was not to lower the fund’s currently aggressive 7% risk-adjusted return objective to a more realistic threshold, but instead to direct more assets into “lower volatility” private investments while leveraging the portfolio. Private investments, of course, have the same underlying risk and inherent volatility as public investments – though because they are not publicly traded, their intermittent and privately determined appraisals may make them appear to be less volatile. And as for the choice to leverage up, we can only note that leverage is a double-edged sword that enhances returns in good times while sinking them in down markets. If markets falter, this fund will have not solved its problems but rather have multiplied them.  

Eoin Treacy's view -

Pension funds, life insurance companies and other firms with predictable future outlays are in a difficult position. If they do not take on additional risk, they will certainly not be able to meet their obligations. Alternatively, if they do take on additional risks, they might be able to reach their goals. However, that chance at success comes with the implied understanding that the alternative is financial oblivion.



This section continues in the Subscriber's Area. Back to top
July 31 2020

Commentary by Eoin Treacy

'An absolute necessity' Why this expert says China desperately needs a digital currency

This article by Veta Chan for Fortune.com may be of interest to subscribers. Here is a section:

How will data be used by central banks and how will the central bank reassure people about the privacy of their data?

The data you are going to collect, there are two sides to it. On one side, the data that they're going to collect, given they are going to be able to engage the complete economic activity of a country in realtime, that data will be recorded on a blockchain-type network, distributed ledger, we don't know exactly. So the government will have access to all of that. On the [other] hand, it will enable the central bank to do their job more effectively. Because rather than having a lag in economic data, they're monitoring all the spending, the transactions, money supply, inflation implications, all in realtime... Tracking where people go in the world, because CBDC will be available to Chinese as they do business in other countries. It's almost a sort of a way to track an individual. So there are big alarming questions that need to be properly considered when it comes to privacy and anonymity.

The technology is there to enforce anonymity, but it's a question of are they going to implement it? Is that something that they're going to build into their currency? Time will only tell if different central banks come up with their versions of digital currency, as they say there is no one-size-fits-all, they're all going to be different and likely to reflect the values and culture of their citizens. Are we just going to accept that all governments get to have this data like we've kind of accepted with tech giants like Facebook? No one has really done anything about it.

Eoin Treacy's view -

A classic blockchain is a public ledger. There is a clear record of all transactions, but not who participated in them.

It would be comparatively easy for a state to create a digital currency that attaches identity to the ledger.

That will allow governments to track every transaction in even greater detail than they do already.



This section continues in the Subscriber's Area. Back to top
July 30 2020

Commentary by Eoin Treacy

Big Numbers Along Make No Proper Monetary Policy

This report from DWS may be of interest to subscribers. Here is a section:

In some ways, however, that was the easy bit. The U.S. economy now enters a phase that cautiously could be described as the beginning of a recovery. However, remember that the virus is still out there. This leads to the question of how QE can continue to provide support in the months ahead? In terms of mechanics, the Fed describes the main purpose of LSAP as putting "[…] downward pressure on longer-term interest rates […]" in order to stimulate economic activity by generating attractive financial conditions.5 The key word behind those mechanics would be financial conditions. Such metrics generally try to describe the "[…] financial conditions in money markets, debt and equity markets […]" as the Federal Reserve of Chicago puts it.6 In other words, measures of financial conditions gauge the effectiveness of monetary policy.

Deriving a metric that summarizes the stance of monetary policy once the policy rate hits the Zero Lower Bound (ZLB) is not a trivial task, however. The monetary stimulus, as a combination of rates at the ZLB and asset purchases, is not directly observable. Our preferred methodology to overcome this problem would be the so called shadow short rate (SSR) as provided through the Reserve Bank of New Zealand.7 This concept mathematically derives a theoretical policy rate which is based on the evolution of the whole yield curve, therefore accounting for the impact of QE once the true policy rate is at the ZLB (see Chart 2).

Eoin Treacy's view -

Using the inflation of financial assets as a way of measuring the success of monetary accommodation is a recipe for bubble inflation. Nevertheless, it is the most expedient way to measure the impact of a central bank’s actions in fostering growth.



This section continues in the Subscriber's Area. Back to top
July 28 2020

Commentary by Eoin Treacy

Coronavirus Stimulus Plan Splits Senate Republicans

This article from the Wall Street Journal may be to interest to subscribers. Here is a section: 

The stimulus debate pits the GOP’s political pragmatists against its spending hawks, with the fate of swing-state incumbents hanging in the balance: At-risk Republican senators don’t want to return to the campaign trail during the August recess empty-handed, while fiscal conservatives recoil at any plan that they see as ballooning the deficit and conditioning the public to expect broader government assistance once the pandemic is over.

At stake could be control of the Senate and White House, some Republicans warn. The nonpartisan Cook Political Report last week released a new analysis of key Senate races that for the first time this cycle favored Democrats to take back the chamber.

Democrats already control the House and are expected to keep or expand their majority in November, making the GOP-held Senate a critical bulwark against total Democratic control of the legislature next year. Democrats need to flip three seats from red to blue to seize control of the chamber in November, or four if President Trump wins re-election.

Eoin Treacy's view -

The massive stimulus introduced during the initial lockdown with $1200 for the majority of adults and $600 a week for millions of unemployed people plugged a significant hole in consumer spending potential. It also allowed ecommerce businesses to flourish and gain market share.



This section continues in the Subscriber's Area. Back to top
July 28 2020

Commentary by Eoin Treacy

Email of the day - on inflationary expectations

Thanks to your good guidance, the month of July has (already) produced the best portfolio performance in my life-time of investing! The portfolio switch from NDX stocks to gold and silver stocks has been phenomenal (20.59% in one stock today).

Attached is a report from “Goldmoney” regarding future inflation that you have addressed in recent commentaries.  (Underlining in the article is mine) Could we expect a sudden change in the Velocity of Money to facilitate an inflationary outcome or will other factors cause inflation regardless of the VoM?

Eoin Treacy's view -

Thank you for this interesting article and congratulations on taking opportunities in the market. Velocity of Money is a major component of inflation. The fact it has been falling for so long is one of the primary reasons we have not seen widespread inflation resulting from massive money printing over the last 12 years.



This section continues in the Subscriber's Area. Back to top
July 22 2020

Commentary by Eoin Treacy

The Big Cycle of the United States and the Dollar, Part 2

This latest chapter of Ray Dalio’s book includes a number of interesting titbits to chew over. Here is a section:

The US dollar accounts for over 50% of reserves held and has unwaveringly remained the primary reserve currency since 1945, especially after it replaced gold as the most-held reserve asset after there was a move to a fiat monetary system.  European currencies have remained steady at 20-25% since the late 1970s, the yen and sterling are around 5%, and the Chinese RMB is only 2%, which is far below its share of world trade and world economic size, for reasons we will delve into in the Chinese section of this book.  As has been the case with the Dutch guilder and the British pound, the status of the US dollar has significantly lagged and is significantly greater than other measures of its power.

That means that if the US dollar were to lose its reserve status and significantly depreciate in value it would have a devastating effect on the finances of those countries holding those reserves as well as private-sector holders of dollar-debt assets.  Who would be the winners?  Those with dollar-debt liabilities and those with non-dollar assets would be the big winners.  In the concluding chapter, “The Future,” we will explore what such a shift might look like. 

Eoin Treacy's view -

The massive increase in the supply of currency since the end of the quantitative tightening regime last year is a headwind for the US Dollar. The fact the monetary and fiscal assistance programs deployed by the USA are much larger than in other countries is certainly a near-term headwind for the Dollar but the big question is whether this is a secular change?



This section continues in the Subscriber's Area. Back to top
July 21 2020

Commentary by Eoin Treacy

Wall Street Is Throwing Billions at Once-Shunned Gold Miners

This article from Bloomberg may be of interest to subscribers. Here is a section:

But junior miners are now starting to benefit. Take the case of American Pacific Mining Corp., an exploration and gold-mining firm with market capitalization of less than $20 million. The company raised $3 million in the second quarter, six times more than it had initially planned. Interest was so big that it had to turn away offers for more, said CEO Warwick Smith.

“The big boys play first, and then that money trickles down to the smaller companies, exploration companies,” he said. Revival Gold Inc., a Toronto-based exploration company, said Tuesday it was increasing its previously-announced public offering by C$3 million ($2.2 million) amid “strong demand” from investors. Spot gold prices rose 1.3% Tuesday to $1,841.94 an ounce, trading near the highest level in almost nine years.

The reasons that boosted the appeal of gold miners are the very same pushing investors away from companies digging for metals like copper or lithium, which are more dependent on economic growth. Base and industrial metals firms raised just $34 million in the second quarter, data compiled by Bloomberg showed. That’s a 40% decrease from the same period a year earlier.

Eoin Treacy's view -

Free cash flow became the bane of miners during the latter stages of the last gold bull market. They were borrowing money at such a prodigious rate and were so eager to build new production that any hope of profitability fell by the wayside. That contributed to significant underperformance relative to the gold price.



This section continues in the Subscriber's Area. Back to top
July 20 2020

Commentary by Eoin Treacy

Out to pasture!

This is potentially Edward Ballsdon’s final post for his Grey Fire Horse blog and may be of interest to subscribers. Here is a section:

Recently there has been discussion about yield curve control (YCC), and whether the FED will introduce a new policy on managing interest rates. Do not be fooled - this is a rather large red herring, as the debt is now too large in the US (as it is in most major economies) to raise rates without the increased interest cost having a debilitating effect on annual government budget figures.

There is no longer $ 1trn of outstanding US federal Bills - in June the outstanding amount surpassed $ 5trn. If rates rise from 0.2% to 2%, the ANNUAL interest cost just on that segment of the outstanding $19trn debt would rise from ~$ 8.5bn to ~$ 102bn. Naturally you would also need to also factor in the impact of higher interest rate costs on leveraged households and corporates.

This is the red herring - the size of the debt will force monetary policy. To think that the central bank can raise rates means ignoring the consequence from the debt stock. And this is the root of my lower for longer view, which is obviously influenced from years of studying Japan, and which is now almost completely priced in to rates markets. Remember that the YCC in Japan led to a severe reduction of the BOJ buying of JGBs - it just did not have to.

Eoin Treacy's view -

The Japanification of the developed world represents a massive challenge for investors in search of yield. 90% of all sovereign bonds have yields below 1% and the total of bonds with negative yields is back at $14 trillion and climbing.



This section continues in the Subscriber's Area. Back to top
July 20 2020

Commentary by Eoin Treacy

EU Closes In on Stimulus Deal With Major Obstacle Overcome

This article from Bloomberg may be of interest to subscribers. Here is a section:

After negotiating through the night, the Netherlands, Austria, Denmark and Sweden are satisfied with 390 billion euros ($450 billion) of the fund being made available as grants with the rest coming as low-interest loans, the officials said, asking not be named discussing private conversations. The total size of the recovery package is in flux, but an earlier proposal was for 750 billion euros.

The bloc’s 27 leaders will gather again at 4 p.m. in Brussels to settle the outstanding issues such as the overall size of the fund and the mechanisms for controlling its spending. A French official said that their delegation now see a path to a full deal.

“After lengthy talks last night, we worked out a framework for a possible agreement,” German Chancellor Angela Merkel said on Monday. “It’s progress and gives hope that perhaps today an agreement will be made, or at least that an agreement is possible.”

Eoin Treacy's view -

€750 billion is a substantial aid package, but is rather small when compared to the measures taken by the USA. The reluctance of creditor nations to give money away, the length of time taken to negotiate the deal, and the fact the agreement has been reached following the peak infection point for Eurozone countries have contributed to the tailored size of the package.



This section continues in the Subscriber's Area. Back to top
July 14 2020

Commentary by Eoin Treacy

Global Macro Outlook: Virus curve flattening, markets stabilizing, slow recovery

Thanks to a subscriber for this report from Deutsch Bank by Torsten Slok. It is loaded with thought provoking charts which may be of interest.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

I found the chart comparing the Swedish and US COVID-19 infection rate to be particularly interesting. It suggests that anything less than total adherence to social distancing, effective testing and contact tracing is ineffectual. That’s a challenge because while some Asian countries have been able to implement these types of protocols swiftly, not least because of their prior experience with SARS, it seems beyond the ability of most countries to do. With cases in Hong Kong and Australia rising it is looking increasingly likely this is going to be a long hard slog until a vaccine is widely available.



This section continues in the Subscriber's Area. Back to top
July 13 2020

Commentary by Eoin Treacy

U.K. Can't Inflate Debt Away, New Head of Fiscal Watchdog Says

This article by Alex Morales for Bloomberg may be of interest to subscribers. Here is a section:

The chancellor and Prime Minister Boris Johnson have repeatedly said they’re not planning on pursuing austerity policies to rein in government spending, and for now Sunak has focused on preserving jobs to avoid long-term scarring of the economy. He unveiled a 30-billion pound stimulus program last week, and plans a wider package in a budget in the fall.

Hughes said while there are upside and downside risks to inflation, they’re tilted toward it remaining below the Bank of England’s 2% target. He also warned that the debts being built up by companies to tide them over the pandemic could end up becoming a burden that leads to scarring of the economy.

“One of the concerns that we’ve had is that the longer the crisis goes on for, the more likely government-guaranteed loans becomes less of a facilitator of the recovery and more of a burden,” he said. “The more the debt is a burden on companies the less they will invest. We know from past crises that one of the reasons you see longer-term scarring on the economy is you have foregone investment, and that scarring can be significant.”

He suggested one way to mitigate for that effect would be to tie repayments of the government-backed loans to a company’s earnings and profitability.

Hughes said high frequency data pointed to a “a bit of good news,” with April representing the low point for the economy and output contracting by about 25% instead of the 35% initially forecast by the OBR. The question is how quickly the economy gets back that loss.

Current OBR projections are based on Britain and the European Union striking a free-trade agreement. If talks fail and Britain is forced onto WTO rules when the current transition period ends in December, there will be adverse “consequences” for growth and the public finances, he said.

Eoin Treacy's view -

The biggest challenge for every country as we look beyond the coronavirus-induced crisis is in what manner the debt will be paid back and how a drag on recovery can be avoided. The clear answer is to refuse to raise interest rates regardless of how powerful the economy is. Following that up with additional spending measures, to placate restive populations is also likely to be part of the solution.



This section continues in the Subscriber's Area. Back to top
July 08 2020

Commentary by Eoin Treacy

China Has Already Declared Cold War on the U.S

This article by Niall Ferguson for Bloomberg may be of interest to subscribers. Here is a section:

Yet the book that has done the most to educate me about how China views America and the world today is, as I said, not a political text, but a work of science fiction. "The Dark Forest" was Liu Cixin’s 2008 sequel to the hugely successful "Three-Body Problem." It would be hard to overstate Liu’s influence in contemporary China: He is revered by the Shenzhen and Hangzhou tech companies, and was officially endorsed as one of the faces of 21st-century Chinese creativity by none other than … Wang Huning.

"The Dark Forest," which continues the story of the invasion of Earth by the ruthless and technologically superior Trisolarans, introduces Liu’s three axioms of “cosmic sociology.”

First, “Survival is the primary need of civilization.” Second, “Civilization continuously grows and expands, but the total matter in the universe remains constant.” Third, “chains of suspicion” and the risk of a “technological explosion” in another civilization mean that in space there can only be the law of the jungle. In the words of the book’s hero, Luo Ji: The universe is a dark forest. Every civilization is an armed hunter stalking through the trees like a ghost … trying to tread without sound … The hunter has to be careful, because everywhere in the forest are stealthy hunters like him. If he finds other life — another hunter, an angel or a demon, a delicate infant or a tottering old man, a fairy or a demigod — there’s only one thing he can do: open fire and eliminate them.

In this forest, hell is other people … any life that exposes its own existence will be swiftly wiped out. Kissinger is often thought of (in my view, wrongly) as the supreme American exponent of Realpolitik. But this is something much harsher than realism. This is intergalactic Darwinism.

Of course, you may say, it’s just sci-fi. Yes, but "The Dark Forest" gives us an insight into something we think too little about: how Xi’s China thinks. It’s not up to us whether or not we have a Cold War with China, if China has already declared Cold War on us. 

Eoin Treacy's view -

The Three Body Problem is an excellent read and The Dark Forest follows on well from where it left off. The third book in the series, Death’s End, was too meandering for me and I did not finish reading it. For a non-Chinese reader, the names can be a bit of an obstacle but the story is compelling.



This section continues in the Subscriber's Area. Back to top
July 08 2020

Commentary by Eoin Treacy

Commodities and Predominant Deflation

Thanks to a subscriber for this report from Bloomberg’s economists. Here is a section on gold:

Quantitative Easing Is Strong Gold Tailwind. Gold is in the early days of resuming the bull market that started about 20 years ago, in our view. The financial crisis and inception of central-bank quantitative easing (QE) accelerated the metal's upward trajectory then, and we see parallels that are likely more enduring this time. Our graphic depicts the potential upside in spot gold toward $3,000 an ounce vs. about $1,770 on June 26, if simply following the trajectory of the G4 central-bank balance sheet as a percent of GDP. Central banks essentially printing money to spur inflation is a solid foundation for the benchmark store of value.

Gold bottomed at about $700 in 2008 and peaked near $1,900 in 2011. A similar-velocity 2.7x advance from this year's low-close near $1,470 would approach $4,000 by 2023. Rising Stock-Market Volatility a Gold Launchpad. If gold's relationship with equity volatility that's mean-reverting higher and the financial crisis is a guide, the metal has plenty more upside potential vs. downside risks. Our graphic depicts the 100-week moving average of the CBOE Volatility Index (VIX) bottoming from the life-of-index low in 2018, like it did in 2007 before the financial crisis and which accelerated gold's rally. There are potential parallels to about a decade ago. A key difference is the metal has had a substantial correction and appears to be in the early days of resuming a bull market.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Gold does best with negative real interest rates. That occurs when interest rates are held down because of fears of deflation, like now, and it also occurs when inflation advances quicker than central banks are willing to raise interest rates. That’s a scenario that could easily unfold in future considering the long-term repercussions of massive civil unrest and debt monetisation.  



This section continues in the Subscriber's Area. Back to top
July 07 2020

Commentary by Eoin Treacy

White House Wants Stimulus by August Recess With $1 Trillion Cap

This article by Jordan Fabian and Kevin Cirilli for Bloomberg may be of interest to subscribers. Here is a section:

President Donald Trump and senior White House officials have said a payroll tax cut, liability reform, tax incentives for businesses to adapt to the pandemic and a potential back-to-work bonus are priorities for the administration.

Short said the White House views liability protections as “essential” for companies to bring workers back and fully re-open the economy.

The administration wants to be sure it’s “striking the right balance between income replacement on the one hand, and ensuring that we don’t have excessively high implicit tax rates on the return to work, on the other hand,” Tyler Goodspeed, acting chairman of the president’s Council of Economic Advisers, said in a separate interview with Bloomberg Radio.

Implicit tax rates can’t exceed 100%, he said, meaning it can’t be more lucrative for workers to stay at home. But any plan will require “not allowing a big blow to household income,” which is core to the economy, Goodspeed added.

Ohio Republican Brad Wenstrup, a member of the House’s tax-writing committee, said the package should address the ability of working parents to find childcare and helping schools to reopen.

“We have a shortage of day care providers,” he said in another Bloomberg Radio interview. “I am going to look for incentives for those type of programs.”

Congress in March passed a $2.2 trillion pandemic relief program, with carve-outs for small businesses and the airline industry as well as multiple lending programs for corporations and Main Street businesses through the Federal Reserve. Treasury Secretary Steven Mnuchin sent out nearly $1 trillion in the first month after that bill became law, through checks directly to American families, forgivable loans to companies and unemployment insurance.

Still, much of that money remains unused. The Treasury Department has yet to disburse any loans from a $25 billion pool for airlines, and most of a $17 billion carve-out for firms deemed critical to national security remains untapped.

Eoin Treacy's view -

The idiosyncrasy of how data sets are reported means the rebound in economic activity probably looks better than it is. If an historic decline occurs it will necessarily result in a deep decline. If the rebound from that low is in the order of 10% it will come through as an historic percentage advance and yet the absolute level of activity may still be well below the peak.



This section continues in the Subscriber's Area. Back to top
July 03 2020

Commentary by Eoin Treacy

Are you reframing your future or is the future reframing you?

Thanks to a subscriber for this report from Ernst and Young. Here is a section on financial statistics:

To some extent, technology can help meet these new challenges. The costs of data collection and analysis are falling rapidly thanks to Internet of Things and AI. Satellites and sensors, for example, can generate highly accurate real-time data. A broader corporate data strategy aimed at collecting social and environmental cost data, in addition to the well-being of employees and local communities, might help fill significant gaps in measurement. Useful new corporate reporting that details progress toward a broader business purpose means building the prerequisite data capabilities first.

Governments also have an opportunity to leverage data generating technologies to enhance feedback. More than 20 countries from Singapore to Sweden have “smart city” initiatives, demonstrating how better measurement through data can improve public safety and citizen services, albeit not without risks. The UK’s National Health Service has dozens of partnerships with leading technology companies analyzing the vast troves of patient data to support the provision of its services.109 And big data techniques have also proved a significant part of the policymaking process when fighting the COVID-19 pandemic. Countries that successfully implemented track and-trace techniques using smartphones fared better in managing the deadly outbreak.

An inflection point is approaching, driven by necessity. Our industrial-era metrics are misaligned with the needs of a knowledge-based economy characterized by widespread technological disruption. We are on the cusp of a significant change in the way societies make policy and conduct business. Companies will either evolve to realign with new values, or risk dissolving as their social contract is withdrawn. There is no looking back.

Eoin Treacy's view -

The way in which we collect data about the economy is deeply flawed. That’s a well understood fact but we have not yet come up with a more effective way of measuring economic activity and potential. The problem with changing the status quo is it would completely upend the way in which economies are managed. That might well be inevitable because the populist uprising that continue to  spread are challenging the establishment already.



This section continues in the Subscriber's Area. Back to top
July 02 2020

Commentary by Eoin Treacy

Email of the day - on a stay at home index

“Are you able to create a Work From Home/Stay at Home index for you/us to track on a regular basis. Today has been another big day for many of these stocks with Shopify for example up another 7% in here today, clearing the $1,000 level, Netflix up 5%, Amazon 4%, Peloton up 4, DocuSign up 4, and Wayfair 11%! Regretfully I’m not involved in any of these as I can’t get my head around valuations. When will this madness stop?”

Eoin Treacy's view -

Thank you for this email which highlights the dilemma of many people on the side-lines of the broad market rebound. There is always a crisis of confidence for anyone who has missed a rebound and is presented with the choice of buying a breakout or waiting for a pullback. That is amplified during accelerations where the fear of missing out is weighed against the fear of sitting through a reversal.



This section continues in the Subscriber's Area. Back to top
July 02 2020

Commentary by Eoin Treacy

Email of the day on contrasting life experience between generations

When I read that high house prices are a problem for the younger generation, I wonder whether the historical context is considered. I bought my first house in 1974 and I finally paid off the mortgage on my current home in1999. Over the 25 years that I had a mortgage the lowest interest rate I ever paid was 10% and the highest was 15%. Yes, for a quarter century I paid 10-15% interest on my mortgage, which frequently used up more than half my monthly income. Many of my age group went through a similar experience. My wife and I hardly ever ate out, and our children were treated to many years of cheap camping holidays. I had little spare cash at any time until the mortgage was gone.

Do today's new home buyers have any idea how we lived and struggled with finances? House prices today mirror the very low mortgage interest rate and I suspect that very few (if any) 20-40 year olds are using 50% or more of their income to pay their mortgage as we did. Their money goes on things we could not afford and did not regard as essentials. It's a matter of priorities.

Eoin Treacy's view -

Thank you for this perspective which I’m sure will be of interest to other subscribers. The personal experience you highlight is a testament to what can be achieved through resilience and frugality. If more people were willing to practice delayed gratification we would be in the very different world. As I see it there are two important trends that the younger generation face relative to the older generation. These are disinflation and globalisation.



This section continues in the Subscriber's Area. Back to top
July 01 2020

Commentary by Eoin Treacy

The FDA Wants a Covid-19 Vaccine That Really Works

This article by Max Nisen for Bloomberg may be of interest to subscribers. Here is a section:

The path the FDA outlines is a long one. It’s going to take a while to recruit and enroll 30,000 people in a trial and give half of them two shots in the arm — as Moderna Therapeutics Inc. intends to do to test its candidate. And until a sufficient number of subjects in the placebo arm of such a trial contract Covid-19, there won’t be any firm results. Any number of variables could cause further delays: bad luck, a poor vaccine performance, or slowing case growth.

The FDA is by no means ignoring the urgency of the moment. Its guidance includes a variety of concessions on safety data and other issues that are meant to speed the process. But the world can be grateful the agency is willing to bend only so far.
 

Eoin Treacy's view -

Setting a high standard for a vaccine that will be administered to hundreds of millions of people is imperative. It is the minimum requirement to instill faith in the population that it is worth accepting. I have every expectation that the advances in genetic sequencing and editing will deliver a positive result this year and that a true second wave will be avoided.

The impatience many people feel is perhaps the biggest obstacle to containing the spread before a vaccine has been delivered. I even find myself being less vigilant now than I was a few months ago. That is despite the massive swell of community spread and the greater likelihood of contracting it as a result. That’s a good example of how even the most extreme situation can assume an air of normalcy after a relatively short period of time. That’s one of humanity’s greatest survival instincts, although it is not especially helpful in the short term.



This section continues in the Subscriber's Area. Back to top
June 26 2020

Commentary by Eoin Treacy

Befuddled by the Bull? The Primacy of Free Liquidity and Risk-Love

Thanks to a subscriber for this report from Bank of America/Merrill Lynch which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The biggest existential question in financial markets today is how likely are global interest rates to trend towards zero in aggregate. To date the Anglosphere countries have been adamant in their determination to avoid negative interest rates.

However, there is no avoiding the fact that interest rates are falling all over the world. Additionally, Poland, Ghana, Philippines, Chile, Turkey, Colombia, Thailand, South Africa, Egypt, Hungary, Romania, Indonesia and South Korea are all now engaged in quantitative easing.



This section continues in the Subscriber's Area. Back to top
June 25 2020

Commentary by Eoin Treacy

Occidental, AB InBev Lead Debt-Laden Firms Buying Back Bonds

This article by Molly Smith for Bloomberg may be of interest to subscribers. Here is a section:

Occidental Petroleum Corp. and Anheuser-Busch InBev SA/NV are seeking to buy back bonds through separate tender offers launched Thursday. Both are targeting debt due in the next three years.

Companies are seeking breathing room on debt payments as they contend with lower earnings amid the coronavirus outbreak, threatening to push leverage even higher. Credit raters are running out of patience: Occidental, already one of the largest fallen angels of this cycle, may be cut again by Moody’s Investors Service and S&P Global Ratings, while AB InBev was recently downgraded by S&P with a negative outlook.

Both companies largely amassed their massive debt loads by funding acquisitions. Much of Occidental’s nearly $40 billion of debt came from borrowing to help finance its takeover of Anadarko Petroleum Corp. last year, while AB InBev’s roughly $103 billion of obligations mostly stems from its purchase of SABMiller Plc in 2016.

While some firms are looking to buy back debt outright, others are pursuing different liability management exercises to push out maturities. Rite Aid Corp. launched a $750 million exchange offer Thursday, while Macy’s Inc. initiated one earlier this week. They’re also trying to amend certain covenants through what are known as consent solicitations.

Eoin Treacy's view -

Corporate debt issuance has surged over the last three years to a new all-time high and combined total of $2.4 trillion in only a couple of months. That is all aimed at ensuring they have enough capital to see them through a particularly uncertain period.



This section continues in the Subscriber's Area. Back to top
June 24 2020

Commentary by Eoin Treacy

Forecasting the US elections

This article from the Economist may be of interest to subscribers. Here is a section:

Right now, our model thinks Joe Biden is very likely to beat Donald Trump in the electoral college.

Eoin Treacy's view -

No President in modern history has been more stock market friendly than Donald Trump. Since he won the election in 2016, the Nasdaq-100 has doubled. The fiscal stimulus, tax cuts and tax holidays on foreign income, regulatory roll backs and championing of the stock market have all contributed to positive returns. The simple fact he has continually pointed to the strength of the market as vindication for his policies is a clear sign of his efforts to boost sentiment.



This section continues in the Subscriber's Area. Back to top
June 24 2020

Commentary by Eoin Treacy

IMF Forecasts Deeper Global Recession From Growing Virus Threat

This article by Eric Martin for Bloomberg may be of interest to subscribers. Here is a section:

The International Monetary Fund downgraded its outlook for the coronavirus-ravaged world economy, projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.

The fund said Wednesday it now expected global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, the fund forecast growth of 5.4%, down from 5.8%.

Having already warned of the biggest slump since the Great Depression, the IMF said its increased pessimism reflected scarring from a larger-than-anticipated supply shock during the earlier lockdown, in addition to the continued hit to demand from social distancing and other safety measures. For nations struggling to control the virus spread, a longer lockdown also will take a toll on growth, the IMF said.

“With the relentless spread of the pandemic, prospects of long-lasting negative consequences for livelihoods, job security and inequality have grown more daunting,” the lender said in its update to the World Economic Outlook.

Eoin Treacy's view -

Last night, Mrs. Treacy was looking at flights to China and Japan for sometime in August. The rates are attractive, until you realise it is impossible for a non-national to enter. The borders are closed. That’s the challenge with the rolling wave of infections all over the world, cases flare up in one area and countries on the other side of the world are forced to take precautionary measures. It is probably going to be months before borders open and even then, it will take time for sentiment to recover. Until that happens only the most necessary of travel is likely. That has a knock-on effect for every sector that demands on travelers is likely to remain significant for the foreseeable future.



This section continues in the Subscriber's Area. Back to top
June 23 2020

Commentary by Eoin Treacy

The 'Fed story' will win out over second wave and election fears, UBS says. It's time for investors to get off the sidelines

Thanks to a subscriber for this article by Callum Keown for MarketWatch. Here is a section:

The analysts, led by chief investment officer Mark Haefele, said three narratives were currently driving markets; the ‘Fed story’ — ongoing central bank stimulus — the second-wave story, and the U.S. election story. Fears of a second coronavirus wave have come to the fore in recent days, with spikes in Beijing, Germany and a number of U.S. states. The UBS team said that U.S.-China tensions fed into the election narrative, which would come into focus over the next four months.

“Overall we see the second-wave and U.S. election stories as contributing to market volatility as headlines feed investors’ hopes and fears about the speed and strength of the economic recovery. But it is the Fed story that will endure over the medium term,” they said in a note on Monday. They said they were positive on the outlook for both equities and credit, preferring USD high yield, Asian high yield and USD-denominated emerging market sovereign bonds as well as stocks in sectors that have so far lagged behind the market.

“Against this backdrop, we think the most important thing an investor can do is to be invested, rather than sitting on the sidelines. As earnings are likely to recover in the second half of the year and excess liquidity continues to support risk assets, we see further upside potential in global equities, in particular among sectors that have lagged the rally so far,” they added.

Eoin Treacy's view -

Monetary policy beats most other factors most of the time” was one of David’s favourite sayings and it has certainly helped to inflate asset prices over the last 12 years. The process began another upward cycle when the Fed reversed its quantitative tightening program last year in response to the illiquidity in the repo market. It went into overdrive when following the imposition of the lockdowns.



This section continues in the Subscriber's Area. Back to top
June 22 2020

Commentary by Eoin Treacy

Email of the day on key reversals

After watching your latest insightful and thought-provoking long term take on the markets, I noticed on Friday there were daily downside key reversals both for the Dow Jones Utilities and Transportation indices. Could this be a straw in the wind for the main US indices?

Eoin Treacy's view -

Thank you for your kind words and this question which may be of interest to other subscribers. For a key reversal to occur, we need to see a new high reached for the move, only to be reversed and for the market to fall and close below the low of the previous day.



This section continues in the Subscriber's Area. Back to top
June 19 2020

Commentary by Eoin Treacy

The Anatomy of a Rally

Thanks to a subscriber for this memo by Howard Marks for Oaktree which may be of interest. Here is a section:

Questions like these can’t tell us for a fact whether an advance has been reasonable and current asset prices are justified. Buy they can assist in that assessment. They lead me to conclude that the powerful rally we’ve seen has been built on optimism; has incorporated positive expectation and overlooked potential negative; and has bene driven largely by the Fed’s injections of liquidity and the Treasury’s stimulus payments, which investors assume will bridge to a fundamental recovery and be free from highly negative second-order consequences.

A bounce from the depressed levels of late March was warranted at some point, but it came surprisingly early and quickly went incredibly far. The S&P500 closed last night at 3,133, down only 8% from an all-time high struck in troubled-free times. As such, it seems to me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting.

In other words, the fundamental outlook may be positive on balance, but with listed security process where that are, the odds aren’t in investors’ favor.

Eoin Treacy's view -

The rise of earnings-agnostic investing has been a trend which has defined the bull market since 2008. Every major bull market thrives on a financial innovation. It would be tempting to think that in this case it was cryptocurrencies, but the answer is probably more mundane. ETFs have enabled factor investing and promoted the acceptance of Modern Monetary Theory. They have allowed companies like Blackrock and Vanguard to become titans of Wall Street on the back of value-agnostic investing.  



This section continues in the Subscriber's Area. Back to top
June 18 2020

Commentary by Eoin Treacy

Daily Observations

Thanks to a subscriber for this note from Bridgewater which includes a number of interesting discussion points on the outlook for stock market returns over coming months. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subcsriber's Area. 

There is a solid argument that the coronavirus lockdown is this generation’s Y2K. Back in the late 1990s there was a real fear electronics would stop working when the date ticked over into 01.01.2000. It prompted substantial investment in additional tech infrastructure and accelerated the rollout of the internet.



This section continues in the Subscriber's Area. Back to top
June 18 2020

Commentary by Eoin Treacy

BOE Walks the Line Between Quick Rebound and Fragile Job Market

This article by Lucy Meakin and David Goodman for Bloomberg may be of interest to subscribers. Here is a section:

Bailey said that while the overall output is holding up better than expected in May, there’s probably worse to come for employment. Jobless claims have risen sharply and the number of workers on the government’s furlough program is higher than the BOE had anticipated.

“We certainly do see signs of activity picking up,” Bailey said. But “we also have quite a strong focus on the labor market,” where the data are “quite mixed.”

The new pace of bond purchases means the total QE target of 745 billion pounds should be reached around the end of the year, and the bank didn’t indicate a possible extension into 2021.

Eoin Treacy's view -

The UK missed the narrow window to get ahead of the virus and instead has had to deal with a prolonged period of uncertainty where economic statistic volatility is creating a great deal of uncertainty. The massive decline in GDP reported last week is likely to be countered by an historic rebound which benefits from the low base effect when it is next reported.



This section continues in the Subscriber's Area. Back to top
June 16 2020

Commentary by Eoin Treacy

Consolidation happens fast

Thanks to a subscriber for this report by Tony Dwyer for Canaccord which may be of interest. Here is a section:

Eoin Treacy's view -

A link to the full report is posted in the Subscriber''s Area.

There is no question that the pace of market action has picked up. We had the quickest drop from an all-time high in history and one of the swiftest rebounds in history. On top of that, the Federal Reserve has morphed from being reactive to proactive. In so doing its actions are pre-empting weak economic figures which has helped to support asset prices.



This section continues in the Subscriber's Area. Back to top
June 15 2020

Commentary by Eoin Treacy

Global Thematic Diary June 12th 2020

Thanks to Iain Little for this edition of his investment note. Here is a section:

After the recovery from the 23rd March lows (supreme irony: the very date that many countries went into social and economic “lockdown”) and the -6% mini-crash last Thursday, we see stock markets as being in a redistribution phase as “shareholder regret” kicks in. Nervous Nellies who regret holding equities will either exit altogether (“phew, I’m out!”), or switch money into “cheaper”, lagging sectors like banks, oils, real estate, airlines. Optimists will do something similar except that they’ll be more inclined to hold onto the quality (tech, healthcare, FMCG) that has stood them in good stead. These bulls will regret not holding lower quality sectors if their relative outperformance starts to slip. So lower quality could out-perform higher quality for a while. But….Caution!

A man-made Frankenstein (Modern Monetary Theory, which means hiring monetary policy to do the job of fiscal policy) is ringing an early bell for “stagflation” (low growth plus inflation). There may not be enough global demand or monetary velocity to revive stagflation…..yet. But survivors of the 1970s know what this implies for portfolios at the end of the day: inflation-proof growth equities, index linked bonds, real assets and……gold.

Eoin Treacy's view -

We are at a very interesting point in the market. There are completely different ways of looking at the market. For those who are long, the clearest rationale is $10 trillion has been thrown into the global market and more is on the way. One way or another that is going to inflate asset prices.



This section continues in the Subscriber's Area. Back to top
June 15 2020

Commentary by Eoin Treacy

Global Strategy Weekly June 11th 2020

Thanks to a subscriber for this note from Albert Edwards at SocGen. Here is a section:

June 12 2020

Commentary by Eoin Treacy

The $10 trillion rescue: How governments can deliver impact

This impressively illustrated article by McKinsey may be of interest to subscribers. Here is a section:

Liberal-market economies

Countries with liberal-market economies face greater short-term risks than do those with coordinated-market economies but have greater flexibility for long-term dynamism. The group includes Australia, Canada, the United Kingdom, and the United States. A key feature here is a limited framework of preexisting measures to protect households—the countries in this archetype spend 17 to 20 percent of GDP on social protection. Their economies skew more heavily toward big corporations than do those with coordinated-market economies, with a comparatively smaller role for SMEs, and flexible labor policies are dominant.

The limited degree of automatic coverage for workers and businesses drives a focus on emergency support-of-wage bills for companies and direct transfers to individuals. More companies will fail in such economies, and the reliance on massive cash transfers in those countries will increase the pressure to build a robust digital infrastructure. However, creative destruction in the least resilient sectors will provide more flexibility to pivot and emerge from the crisis stronger and more competitive, provided that economic shutdowns do not last too long, as unemployment can become sticky, driving up costs and dampening consumption in the longer term.

Eoin Treacy's view -

The clear message coming through from central banks is there needs to be additional and considerable increases in fiscal stimulus to put money in people’s pockets. That is a priority to both quell popular protest but to also reinvigorate demand.



This section continues in the Subscriber's Area. Back to top
June 12 2020

Commentary by Eoin Treacy

Guindos Says ECB Hasn't Had Serious Discussion About Bad Bank

This article by Jeannette Neumann for Bloomberg may be of interest to subscribers. Here is a section:

European Central Bank Vice President Luis de Guindos said policy makers at the institution haven’t talk about creating a pan-European bad bank to manage the unpaid loans that are arising during the coronavirus crisis.

“We haven’t had any sort of serious discussion about this instrument,” Guindos said at a webinar hosted by the Institute of International and European Affairs

“I am a little bit surprised when I see this kind of information,” he said in response to a question about a report published by Reuters

Bad banks created after the last financial crisis in Ireland and Spain were “powerful instruments to clean up the balance sheets” of lenders

Eoin Treacy's view -

The potential for the EU to create a bad bank which would warehouse the large number of legacy and new bad debts is certainly a promising potential solution to the region’s systemic problems. Creation of a pan Eurozone body to issue debt and absorb regional debt would represent a significant step towards federalism. It would, however, be a massive step towards recapitalising bank balance sheets. 



This section continues in the Subscriber's Area. Back to top
June 11 2020

Commentary by Eoin Treacy

Blame the Fed for the Disconnect in Markets

This article by Jim Bianco may be of interest to subscribers. Here is a section:

“If a company like that doesn’t have market access and can’t roll over its debt and can’t have enough cash on hand to deal with its obligations, what they’re going to do is they’re going to lay people off. … So, by announcing our facility and including those companies, the ones who actually need the credit… now [have] lots of cash on their balance sheets.”

So, what if free markets do not want to finance companies with shaky operations? The Fed has decided it will effectively nationalize debt markets by removing the risk for investors so that these companies can get the funds to continue operating. In the Fed’s way of thinking, higher and vibrant markets create and save jobs.

To be sure, that is what largely happened after 2008 financial crisis as the central bank began buying bonds under a policy known as quantitative easing. A steep price was paid.

While the economy grew for almost 11 years in the longest expansion on record, annualized growth was below average. This was attributable to an economy that had become less flexible and more reliant on stimulus.

Another consequence was laid out by former Federal Reserve Bank of New York President and fellow Bloomberg Opinion contributor Bill Dudley last week: The Fed’s choices: not have a recovery, have less inequality; or have a recovery with buoyant financial asset prices and more inequality.

Eoin Treacy's view -

The natural disaster response is to do everything possible to ensure the economy is in the best place possible to bounce back. That means saving the banks, ensuring ample liquidity and supporting consumers. Without those measures we would have to resort to barter to get financial transactions done.



This section continues in the Subscriber's Area. Back to top
June 10 2020

Commentary by Eoin Treacy

Fed Sees Zero Rates Through 2022, Commits to Keep Buying Bonds

This article by Craig Torres and Matthew Boesler for Bloomberg may be of interest to subscribers. Here is a section:

“We’re not even thinking about thinking about raising rates,” he told a video press conference Wednesday. “We are strongly committed to using our tools to do whatever we can for as long as it takes.”

The Federal Open Market Committee earlier said it would increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities “at least at the current pace” to sustain smooth market functioning.

A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.

“Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully.”
 

Eoin Treacy's view -

$120 billion a month for the next two years will add nearly $3 trillion to the size of the Fed’s balance sheet. It sounds like a lot but the Fed added nearly $500 billion to its balance sheet in May, so $120 billion is a significant deceleration of support.



This section continues in the Subscriber's Area. Back to top
June 08 2020

Commentary by Eoin Treacy

Email of the day - on the potential for inflation to surprise on the upside or the downside

Greetings Eoin. Firstly, thank you for the daily commentary and Big Picture Long Term view. They remain the highlight of my weekend and are greatly appreciated. I’m interested in your comments regarding future expectations of inflation.

I hope I’m summarising you accurately, but in essence the thinking runs that the provision of vast amounts of monetary liquidity from Central Banks, combined with Government fiscal spending will at some point come home to roost, and drive up inflation.

If so, why then did we not see an inflation spike following the 2007/08 GFC, where massive (at the time) injections of liquidity and fiscal spending should have delivered the same result?

One view is that we did get inflation following the GFC, just that it showed up in asset prices, not in consumer prices. Equities, bonds, property, luxury goods, art and even later on precious metal prices all benefited from the increased liquidity following 2008. As you have previously highlighted, massive advances in technology, changes to the way we work and live, outsourcing of jobs to lower wage economies, and historically low interest rates have all combined to keep consumer inflation in check over the same period.

Are we to assume that this time is different, and we should expect consumer price inflation at some point, or is it safer to expect history to rhyme and that inflation will again show up in asset prices? If so, should we presume the liquidity will chase better returns and lower P/E multiples of Europe and Emerging Economies this time around? And finally, when investing I’m always conscious of the wise words from the famous British Economist, John Maynard Keynes “The market can stay irrational longer than you can stay solvent”. Spoken nearly a century ago, and never more relevant than today! Many thanks for your time

Eoin Treacy's view -

Thank you for this important email and your kind words. The global response to the 2008 global financial crisis was to bailout the sinners, and pass the bill on to savers. The massive liquidity provided and increases in government debt loads the bailout entailed, saved the global economy. However, it also exacerbated inequality, because, as you highlight the inflation benefitted the holders of financial and physical assets. The coronavirus has laid bare that divergence and it is fanning the flames of left-wing populism.



This section continues in the Subscriber's Area. Back to top
June 05 2020

Commentary by Eoin Treacy

Email of the day on caution at potential areas of resistance

“You have been calling for some ‘consolidation’ for equity markets for a number of weeks now (which I expected too), but this just hasn’t come to pass. Instead we have seen a relentless charge higher in virtually every market. You’ve stated that it’s liquidity driven which until recently at least, little participation from the professional money managers. Short term yields no longer can be relied upon as a risk indicator with the Fed deliberately compressing yields at the front end. To what extent, if any, has this recent episode viewed the way you look at markets through a charting lense. A despondent sceptic of this rally here, it seems the only winning strategy is just to ride the liquidity train, and rotate one’s positions towards riskier assets (travel, emerging etc) as the new safe havens (tech) reach maturity.

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. In a response to a similar email on May 12th. I led with this observation. “The best time to buy is following a significant pullback. The next best opportunity is following the first reaction from an important low. The next will be when a breakout to new highs occurs.



This section continues in the Subscriber's Area. Back to top
June 02 2020

Commentary by Eoin Treacy

Adam Tooze on the pandemic's consequences for the world economy

This article is a month old but it raises a number of important questions which I believe are worth addressing. Here is a section: 

The worry about China is the sustainability of its debt-fuelled economic growth. The basic weaknesses of the Eurozone are that it still doesn’t have a backstop for its rickety banking system and that it lacks a shared fiscal capacity; what’s more, Italy’s finances are so weak that they continually threaten to upset European solidarity. In the US, the national institutions of economic policy actually work: they demonstrated this in 2008 and are doing so again now. The Fed and the Treasury exert a huge influence not only over the US economy but the entire global system. The question is how they stand in relation to a profoundly divided American society and how their technocratic style of policymaking is received by the know-nothing nationalist right wing of the Republican Party and its champion in the White House.

Over recent years, each of these weaknesses has at various times seized the attention of the fund managers and business leaders who direct global business, and the experts and technicians who advise them. It isn’t a secret that China’s debt bubble, Europe’s divisions and America’s irrational political culture pose a challenge to the functioning of what we know as the world economy. What caused the panic last month was the realisation that Covid-19 has exposed all three weaknesses simultaneously. Indeed, in Europe and the US the failure of government has been so severe that we now face a public health catastrophe and an economic disaster at the same time. And to make matters worse, Donald Trump appears tempted to juggle the two.

Eoin Treacy's view -

This article decries the reliance of economies on central banks largesse. I think most of us have some sympathy with the fact that the swamping of asset markets in liquidity is not the most ideal scenario because of the risk of mispricing and misallocation of resources. However, it is the reality we are dealing with.



This section continues in the Subscriber's Area. Back to top
June 02 2020

Commentary by Eoin Treacy

Email of the day - on precious metals

Hello Eoin, if "liquidity trumps everything else" and assuming that governments worldwide will continue New Monetary Theory with massive deficit spending financed by monetization by central banks at essential cero or negative real interest rates, then this wall of liquidity should further propel the ongoing general "melt up" of stock and debt markets allowing a prolonged, demand driven risk-on rally.

In this case precious metals would lose their supposed unique "safe haven" status/advantage until such time that serious inflation or stagflation or a likely collapse or reset of the monetary system becomes visible to a large part of investors - if at all.

Until such (far-off?) day of reckoning, precious metals would neither be needed as protection against systemic crisis as "NMT would be working beautifully" nor for return purposes as stocks and other assets will be pushed up by abundant liquidity. For investors in precious metals/mining stocks the critical questions therefore is:

How long will stocks and other financial assets outperform and "unneeded" precious metals correct or even collapse? Looking back at 2011 and onwards, precious metals collapsed and stayed low until mid-2019 whilst continuing QE1- QEn (the predecessor for NMT) around the world made stock and debt markets boom for the next 9(!) years.

As this time round central banks and governments "shot before asking" by IMMEDIATELY providing unlimited liquidity and fiscal deficits instead of slowly finding and providing relief to financial markets as they did in 2008-2012 and onwards, the best part of the run-up in precious metals may be behind us and the place to invest is in stock markets without much regard to old fashioned valuation discipline.

Most of the performance of the past 10 years has been by way of a multiple expansion - why not have the S&P 500 trade at 25+ trailing earnings if real interest rates are negative and there is a worldwide "Powell/central bank put" as a guarantee against any serious losses?

My questions to you: 1. Why stay invested in PMs NOW and risk a serious corrections/collapse in PMs? 2. When will investors at large recognize - if at all (?!) - that NMT is and will be seriously debasing the currency and nominal values of all assets and that PMs are relatively better or at least, competitive investments/stores of value than say quality stocks (which pay at least a small dividend)?

Thank you for reflecting on the above and sharing your views with the collective. All the best, B

Eoin Treacy's view -

Thank you for this summary of the questions many investors are asking. The rationale behind any bubble is valuations don’t matter. The evolution of ETFs as trackers of indices is the clearest evidence anyone might wish for that this trend is already well underway. Market cap weighted indices are closet momentum strategies so tracking them turns everyone into a momentum investor.



This section continues in the Subscriber's Area. Back to top
June 01 2020

Commentary by Eoin Treacy

Hong Kong Stocks Rally After Trump Holds Fire on Retaliation

This article by Jeanny Yu for Bloomberg may be of interest to subscribers. Here is a section:

While the U.S. President Donald Trump’s speech Friday was heated in rhetoric, it lacked specifics around measures that would directly impact the city. He announced the U.S. would begin the process of stripping some of Hong Kong’s privileged trade status without detailing how quickly any changes would take effect and how many exemptions would apply.

“Trump’s comments gave no immediate measures on Hong Kong and leave room for negotiations with Beijing,” said Castor Pang, head of research at Core Pacific-Yamaichi International. “Trump’s comments have eased investors’ concern about the impact of potential sanctions on the Hong Kong economy.”

Eoin Treacy's view -

With significant domestic challenges the Trump administration has probably concluded that now is not the best time to further escalate tensions with China to the point where they are irredeemable. That has helped to support the Chinese markets.



This section continues in the Subscriber's Area. Back to top
May 28 2020

Commentary by Eoin Treacy

Europe's Stimulus Package Sparks "Mother of All" Market Dreams

This article by Cecile Gutscher and Ksenia Galouchko for Bloomberg may be of interest to subscribers. Here is a section:

There’s no sign yet that the stimulus package is anything more than a one-off response to an unprecedented crisis. Even so, investors are viewing it with a bullish lens. “It’s completely new territory for the European Union,” Michael Strobaek, global chief investment officer at Credit Suisse Group AG, said in a Bloomberg TV interview. “And that would make the European Union as an investment much more attractive for global investors.”

That would represent a shift for European markets, which have been unpopular compared with the U.S. For example, European equity funds suffered from outflows more than any other major region this year, losing about $31 billion, according to data from EPFR Global and Bank of America Corp.

Bond Buyers Toast EU Ambition in Moment They Were Waiting for Gary Kirk, a money manager at TwentyFour Asset Management in London, which oversees 17.8 billion pounds ($22 billion), is sticking with his U.S. bias. “It’s a bit early to get overly excited,” said Kirk, who’s waiting to see how the details are hammered out and whether it will pass muster with more austere governments in north Europe.

Eoin Treacy's view -

The Eurozone’s so-called sovereign wealth crisis arose because investments creditor nations’ pension funds made in private enterprises in the Eurozone’s periphery went bad. That was blamed on lax regulation and egregious behaviour with the result respective governments were forced to absorb private sector debts. That blew out sovereign debt ratios and caused a crisis. The response to the coronavirus could not be more different. Coupled with a willingness to loosen fiscal constraints, there is now also willingness to break the taboo of direct transfers to weaker nations. That is significant development even if it proves transitory in the near term.



This section continues in the Subscriber's Area. Back to top
May 26 2020

Commentary by Eoin Treacy

Italy Says 96% of Virus Fatalities Suffered From Other Illnesses

This article by Tommaso Ebhardt and Marco Bertacche for Bloomberg may be of interest to subscribers. Here is a section:

The coronavirus outbreak in Italy has struck overwhelmingly among the nation’s older population and those with preexisting medical conditions, according to the national health authority.

Almost 96% of the country’s virus fatalities had previous medical conditions, data from Italy’s ISS health institute show. The ISS, which publishes a range of studies on the outbreak including a detailed weekly report, confirms a trend seen since the beginning of the emergency, with the average age of Italians who’ve died from the virus at around 80.

“The latest numbers show that new cases and fatalities have a common profile: mostly elderly people with previous illnesses,” ISS chief Silvio Brusaferro said at a news conference Friday.

Eoin Treacy's view -

The coronavirus pandemic forces us to engage in some grizzly calculus to try and figure out how markets are likely to respond to unfolding events. The reality of aging is we develop chronic conditions, one of which is likely to eventually kill us. Whether that is high blood pressure, heart disease, cancer or diabetes, aging contributes to the ill effects of all these ailments.



This section continues in the Subscriber's Area. Back to top
May 26 2020

Commentary by Eoin Treacy

Swiss National Bank Investments in Gold and Silver Mining Stocks

Thanks to a subscriber for this article from economicalpha.com which may be of interest. Here is a section:

The Swiss National bank recently published their schedule of public investments for the most recent quarter ending in March: https://www.sec.gov/Archives/edgar/data/1582202/000158220220000002/xslForm13F_X01/InfoTable_Q12020.xml.

After examining their portfolio mix, just about 4% of the portfolio is invested in the Materials segment, which encompasses 175 positions totaling USD $4.5B. Of this, 24 positions are in gold mining stocks totaling USD $1.216B and 9 are in silver stocks totaling USD $26M.

Eoin Treacy's view -

The Swiss National Bank has followed an iconoclastic policy of investing directly in companies for much of the last decade. That makes a lot of sense since it helps to accrue positions in income producing real world assets which either pay dividends or retain income for further growth. They made significant purchases of US tech stocks about a decade ago and positions in gold mining shares today signal an appreciation for both value and thematic investing.



This section continues in the Subscriber's Area. Back to top
May 20 2020

Commentary by Eoin Treacy

Central Bank Leans on QE to Anchor Rupiah

This article by Tamara Mast Henderson for Bloomberg may be of interest to subscribers. Here is a section:

Bank Indonesia is using bond purchases to support the rupiah and help fund the government’s Covid-19 response. Too much quantitative easing, though, could backfire and fuel worries about the accommodation of unfettered government spending.

Critical for reassuring investors, in our view, is that the central bank stick to its pledge to cap bond purchases in the primary market at 25% and intervene only as a last resort. If these promises are broken, QE could weigh on the rupiah like a pair of cement shoes.

Emerging market central banks embarking on QE might already be skating on thinner ice than peers in developed markets. Bank Indonesia, for one, has a shorter track record for demonstrating independence from political interference.

Eoin Treacy's view -

The relative strength of the Rupiah is a standout relative in Asia and is mirrored by the stability of the Philippine Peso. Both countries have deployed quantitative easing to support their respective bond markets and short up their currencies.



This section continues in the Subscriber's Area. Back to top
May 19 2020

Commentary by Eoin Treacy

Europe's Breakthrough Recovery Plan Faces Immediate Obstacles

This article by Richard Bravo, Marek Strzelecki and Rafaela Lindeberg for Bloomberg may be of interest to subscribers. Here is a section:  

Less than 24 hours after Angela Merkel and Emmanuel Macronlaid out a radical plan that would see the European Union collectively finance its response to a virus-induced recession, countries were already expressing disapproval, threatening to doom the nascent proposal.

The German and French leaders on Monday threw their weight behind a plan to allow the EU’s executive arm issue 500 billion euros ($548 billion) of bonds, with the proceeds going to help member states affected most by the pandemic. Controversially, recipients of the funds won’t need to pay the EU back and the securities would be financed collectively. That means richer countries, like Germany, would be bankrolling poorer ones.

Angela Merkel arrives to address a joint press conference with Emmanuel Macron, attending via video link, in Berlin, on May 18.The plan represents a remarkable about-face for Germany, and the proposal, which needs unanimous approval by all 27 members of the EU, faces stiff headwinds from the bloc’s more frugal members.

“We still have to convince other member states, four in particular: Austria, Denmark, Sweden and the Netherlands,” French Finance Minister Bruno Le Mairesaid on Tuesday. “And we mustn’t hide the fact that it will be difficult.”

Austrian Chancellor Sebastian Kurz immediately threw cold water on the Franco-German plan, saying that he had consulted with his Danish, Dutch and Swedish counterparts, and that they remained opposed to any money being given to fellow countries in the form of grants. Any funds would have to be repaid by the beneficiaries, he said.

Eoin Treacy's view -

Europe needs to come up with a clear vision for its existence or it will not survive. The founding rationale for the EEC was to put age-old animosities aside and to concentrate on trade. Everyone making money and delivering improving standards of living would help to foster peace. That was successful enough to encourage further cohesion.



This section continues in the Subscriber's Area. Back to top
May 19 2020

Commentary by Eoin Treacy

China Considers More Economic Pain for Australia on Virus Spat

This article from Bloomberg News may be of interest to subscribers. Here is a section:

The office of Australian Trade Minister Simon Birmingham declined to comment. When asked about the list, China’s foreign ministry didn’t address the specifics but said the government “has always sought to find common ground while putting differences aside, cooperate to achieve win-win results and will not harm others to benefit oneself.”

“We hope the Australian and Chinese side can meet in the middle, take more measures to improve bilateral relations and deepen mutual trust, and provide favorable conditions and atmosphere for practical cooperation in various areas,” the ministry said.

Australia’s China Addiction Leaves It Vulnerable to Trade Spat

Speaking earlier at a briefing in Beijing on Tuesday, Chinese foreign ministry spokesman Zhao Lijian said China would back a resolution at the World Health Assembly later Tuesday that calls for a “comprehensive assessment” of the pandemic that differs from “Australia’s earlier proposal of a so-called independent global review.”

“We suggest the Australia side to go through the text carefully,” Zhao said. “If Australia is willing to change its course and give up the political manipulation of the pandemic, we will welcome that.”

Eoin Treacy's view -

Asking for an independent review of the origins of a virus which has ravaged the global economy is reasonable. That’s particularly true when it comes to trying to figure out where the next pathogen is likely to arise from and acting to prevent it. China has already razed and sanitised the wet market in Wuhan. That was completed in February so they have no intention of allowing an investigation.



This section continues in the Subscriber's Area. Back to top
May 15 2020

Commentary by Eoin Treacy

The Case for Deeply Negative Interest Rates

This article by Kenneth Rogoff for Project Syndicate may be of interest to subscribers. Here is a section:

Now, imagine that, rather than shoring up markets solely via guarantees, the Fed could push most short-term interest rates across the economy to near or below zero. Europe and Japan already have tiptoed into negative rate territory. Suppose central banks pushed back against today’s flight into government debt by going further, cutting short-term policy rates to, say -3% or lower…

,,,A number of important steps are required to make deep negative rates feasible and effective. The most important, which no central bank (including the ECB) has yet taken, is to preclude large-scale hoarding of cash by financial firms, pension funds, and insurance companies. Various combinations of regulation, a time-varying fee for large-scale re-deposits of cash at the central bank, and phasing out large-denomination banknotes should do the trick.

Eoin Treacy's view -

This is the economic equivalent of “use it, or lose it” when applied to money. The idea of forcing banks, pensions and insurance companies to invest is fine on paper but takes no account of the credit worthiness of the assets being purchased. The time to institute this kind of policy is after a major decline when bankruptcies have washed away high leverage and investors need an incentive to speculate. At today’s valuations, where asset prices have already been rising for 12 years, forcing speculation is a recipe for an asset bubble of epic proportions.



This section continues in the Subscriber's Area. Back to top
May 14 2020

Commentary by Eoin Treacy

Email of the day on working from home

I can only agree with you having worked from home since the early 2000s (maybe you remember my office at home when you were with Bloomberg in Luxembourg). It fits well with businesses like ours where financial data et al. are immaterial or small ones focused on selling on internet. It is more difficult for activities where in situ interpersonal relationship is more important (journalism for example).

However, the time spent in endless and useless meetings where their organization or required presence has more to do with politics than business. Undoubtedly, working from home will increase productivity and reduce cost due to less space required at offices. As for retail, this should affect office prices.

Eoin Treacy's view -

Thank you for sharing your experience. I’ve always thought of commuting as the greatest waste of human productive capacity imaginable. Spending half an hour in the morning with my head in someone’s else armpit was never my idea of fun. If remote working becomes more acceptable, it will result in a significant loss of income for cities from corporate taxes and ancillary business income declining. That is an obvious risk in cities where property prices are at historic peaks.



This section continues in the Subscriber's Area. Back to top
May 13 2020

Commentary by Eoin Treacy

Druckenmiller Says Risk-Reward in Stocks Is Worst He's Seen

This article by Katherine Burton and Melissa Karsh for Bloomberg may be of interest to subscribers. Here is a section:

“The consensus out there seems to be: ‘Don’t worry, the Fed has your back,’” said Druckenmiller on Tuesday during a webcast held by The Economic Club of New York. “There’s only one problem with that: our analysis says it’s not true.”

While traders think there is “massive” liquidity and that the stimulus programs are big enough to solve the problems facing the U.S., the economic effects of the coronavirus are likely to be long lasting and will lead to a slew of bankruptcies, he said.

“I pray I’m wrong on this, but I just think that the V-out is a fantasy,” the legendary hedge fund manager said, referring to a V-shaped recovery.

Druckenmiller’s remarks are among the strongest comments yet by a Wall Street heavyweight on the bleak outlook facing the U.S. They also stand in contrast to the optimism that has pushed the S&P 500 Index to rally almost 30% since its March low even as the pandemic has brought the economy to a standstill, seized up credit markets and ended the longest bull market in history.

The damage spurred the Federal Reserve to unveil a raft of emergency lending programs and Congress to unleash almost $3 trillion in stimulus funds. But those programs aren’t likely to spur future economic growth, Druckenmiller said. “It was basically a combination of transfer payments to individuals, basically paying them more not to work than to work,” he said. “And in addition to that, it was a bunch of payments to zombie companies to keep them alive.”.

Eoin Treacy's view -

Have we just seen an impressive countertrend rally in an evolving medium-term bear market, or are we on the cusp of seeing an additional down-leg which could see new lows posted? It’s a multi-trillion Dollar question but another related one is how are investors responding to Jay Powell’s statement today.



This section continues in the Subscriber's Area. Back to top