Good morning.. Markets fairly subdued in Asia after US techs dragged US markets higher yesterday but we now wait to hear what Powell wants to say to us… The Republicans stepped up and agreed on their version of what the bailout package should look like last night and it is far less than the massive spending the Democrats want to see. The Republican plan is for $1tn in new stimulus that would cut emergency unemployment benefits by two-thirds. I can’t see the Democrats backing this at all. The clock is ticking as they break for summer in the first week of August. Brexit talks resume today between Frost and Barnier so look for headlines there and I am keeping the long EURGBP recommendation for now but have raised the stop to entry level. The USD meanwhile remains near the lows but we are due for some profit taking and I think it makes sense to take profits here in EUR at 1.1735 (over 500 points but will look to buy again). But I have focused this morning on the demise of global trade as Trump forces a break in globalisation and I am not sure at all that the implications are priced. Not much in the way of data today as we wait for the FOMC.

Keep the Faith.

Details 28/07/20

Where do we go to hunt for yield? The trade war and the implications of the impact on global growth.

–

Central banks are destroying free markets and to be honest, may even be creating potential instability as the hunt for any kind of yield forces many into high risk assets where no risk premia exists anymore. This misallocation of funds is dangerous and the Fed knows it and leverage can be a dangerous tool when exposed to volatility. Led by the ECB and the Fed, central banks are flooding markets with worthless paper and a day of reckoning is ahead at some point in the future but who cares as those making these decisions will likely be long gone when it matters? Roughly 86 per cent of the $60tn global bond market tracked by ICE Data Services traded with yields no higher than 2 per cent — a record proportion — with more than 60 per cent of the market yielding less than 1 per cent as of June 30. The fact remains that central banks and especially the Fed have eradicated risk premia; how can that NOT be dangerous and irresponsible? In a world of negative real yields, gold yielding absolutely nothing, stands out! Tomorrow, the Fed is expected to suggest they will keep the money presses humming and promise to keep rates lower for longer. The USD debasement continues and is seeing a concerning leap in the likes of bitcoin!

The Fed has launched a number of emergency programmes to shore up an unprecedented range of securities, including junk bonds and municipal debt; they also now clearly monetise government debt. Investors expect additional stimulus measures to be announced at either this week’s Fed meeting or the next one in September and is probably why stocks remain bid and we saw tech stocks back in charge yesterday although the banks took it on the chin. But do the markets need this extra stimulus as all it seems to do is prop up equity markets and debase the US dollar. (Death cross in the BB USD Index.)

I fully understand why the government is being pushed hard to support the real economy but do markets really need constant feeding like this from the Fed and at what cost? The USD is starting to show some signs of stress with this constant debasing stress and ever-ballooning deficits. We know that QE has little impact on the broad economy with rates already pegged to zero and with zero demand for more domestic loans and so do the central banks and yet they keep going, following the broken path of the BoJ. Hunting for a yield is becoming an endangered sport as there is so little left. Even high-risk assets trade at the same yield as US bond yields in some cases.

There are two things investors will be looking for this week and they are any progress between the two US political parties over a fiscal stimulus package of around $1trln for helping those made unemployed from he virus (but still some wrangling going on there) and whether the Fed will make any further announcements to help prop up an already strong US equity market. As far as more that the Fed could do, we are told they are still discussing the merits of YCC but negative interest rates have been ruled out for now but other unconventional measures are on the table. The first is explicit forward guidance about the path of interest rates, under which moves are tethered to inflation outcomes or unemployment levels. Fed officials discussed this option at length at their previous meeting, leading some to believe this will be the next policy to be rolled out. Personally, I think the Fed will leave everything alone and wait and see what happens into the September meeting. But sitting behind these potential “positives” are some real dangers as we are still to see the full force of company closures and bankruptcies and I am not sure the massive loan provisions set aside by the banks will be enough. The virus is still spreading rapidly in parts of the US and Unemployment will rise again soon as many that do survive cut costs and their workforce.

The Republicans stepped up and agreed on their version of what the bailout package should look like last night and it is far less than the massive spending the Democrats want to see. The Republican plan is for $1tn in new stimulus that would cut emergency unemployment benefits by two-thirds. I can’t see the Democrats backing this at all. Democrats in the House of Representatives, who approved $3tn in additional government aid for the economy two months ago, said the Republican proposal fell short of what is needed. One of the main differences is the amount that unemployed workers should receive, which to date has stood at $600 per week. Republicans feel this discourages many from working and want that amount cut to $200 per week and from October, workers would receive 70% of previous wages. 30mln Americans were relying on that $600 and all of them are voters! I am surprised that the Republicans, so close to an election, chose this path. Some form of compromise has to be found before they all break for a summer recess on August 4th but the gap is wide.

Also, we still have only just entered phase2 of the trade war and the negative implications for the global economy and thus, any significant recovery, are enormous in my view. The reality is that we still do NOT have a vaccine and the virus is as strong as ever ahead of the winter. I also note with some concern the US street violence and social unrest with chilling pictures coming from mainstream American towns. Over the weekend and over the last 48 hours, there have been eruptions of violence in major cities such as Seattle, Portland, Atlanta, Chicago, New York, Los Angeles, Oakland, Louisville, Austin and Richmond. At this point we have seen sustained protests and rioting for nearly two months and it looks like the chaos isn’t going to disappear any time soon. America seems to be imploding! Make no mistake, this is serious and will hit the economy if this spreads much deeper and there are real rifts in society that do not seem fixable. The wealth divide is just one of the issues but BLM is also playing a role now. Parts of the US are a tinder box waiting to catch. Unemployment is not going to help and again I see this as central to what is part of America’s inability to grow out of this crisis anytime soon. The last thing the US needs is a President who is trying to choke off global growth through de-globalisation tactics. I am afraid I have been warning that this civil unrest was coming for a very long time and it is eventually going to get much, much worse no matter who wins in November. Something is broken inside America.

New data published by CPB Netherlands Bureau for Economic Policy Analysis on Friday reveals world trade fell 1.1% in May after a 12.2% plunge in April. No V-shape there then!

This is the reality that you are looking at and I fail to see the positives for a global recovery. “Although the full impact of the pandemic is not yet reflected fully in trade statistics, it is expected to be very substantial”, said WTO director-general Roberto Azevedo, who presented the trade report to its 164 member states on Friday. To get a better sense of what collapsing world trade means for global stocks. Here is world trade volume versus MSCI World index.

I am sorry but I think equity markets may have got ahead of themselves. Yes, I get that stocks are higher on a lack of alternatives and Fed stimuli but in reality, at some point, earnings may matter and I fail to see how they start recovering in a global recession which may still be with us for some time.

Get your history books out and you will see that the first half of the 20th century saw global trade, as a proportion of total economic activity, go down between the onset of World War I and the 1960s. That was a near 50-year run of declining global trade and life was not easy to say the least. With what the WH administration is trying to pursue with stopping China’s technical advancement, could another half-century contraction of global trade happen again? At the moment, it seems very well possible that one has already commenced. Just last month, for instance, cargo volume at the Port of Long Beach declined by double digits. Trump is breaking down the globalised trading world that has seen us all prosper for decades. I am sure everyone is aware that the impetus for the trade contraction is both a politically motivated trade war and an economic coma induced by the government lockdown orders. But the long-term ramifications of these developments could persist for decades; not months. But for now, the local public officials and equity investors are counting on a strong recovery and future growth; based on what exactly? The “magic money tree” that the Fed is shaking? I don’t think so.

In June, for the third month in a row, US money supply growth surged to an all-time high, following new all-time highs in both April and May that came in the wake of unprecedented quantitative easing, central bank asset purchases, and various stimulus packages, none of which will have much impact on the broad economy as this money has no velocity. This is purely to prop up markets and in particular, the fragile credit markets.

Although some observers will likely claim that the current economic crisis is a result solely of the COVID-19 panic and resulting government-forced shutdowns, several indicators do suggest that the economy was primed for a recession beforehand. The decline in TMS is one of these indicators, as is the late 2019 liquidity crisis in the repo markets. The Fed’s moves to drop interest rates and to once again grow its balance sheet speak to the weakness of the economy leading up to April 2020. Here is a stat for you; The Fed’s assets are now up more than 600 percent from the period immediately preceding the 2008 financial crisis. Blimey and we are still on life support; did we learn nothing from Japan? The irony is, that it will be the recovery that may see all the debt issues come into view; if we get one.

—————————————————————————————————————-

Strategy:

Macro:.

Long EUR @ 1.1210.. Taking profits at 1.1735 ?

Long EURAUD @ 1.6250 stop at 1.6080

Long EURGBP @ .9020 Stop at .9020

Brought to you by Maurice Pomery, Strategic Alpha Limited.

—————————————————————————————————————-

Strategic Alpha Report Disclaimer

Doo Prime endeavor to ensure the reality, adequacy, reliability and accuracy of all the information provided, but do not guarantee its accuracy and reliability. All the information, analyses, comments, statements, and/or data provided in this report is for information purposes only. Client’s use of any contents of the report as the basis for the transaction, the client shall fully aware of the risks and agreed to bear all the risks. Client shall cautiously judge the accuracy of the information. Doo Prime has no liability for any loss caused by any inaccuracy or omissions of the contents and subjective reasons of Client.

Risk Warning

This information is powered by Strategic Alpha. Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice.