Posts

Is this the Y2.02K Bubble!

Danger?! Is the Y2K Dot-Com Bubble Being Re-blown?The short answer is ‘no’. We are not saying that liquidity is unimportant. Far from it. But looking inside the standard P/E multiple shows that several other things are going on that look very different to the Y2K bubble. True, liquidity is similarly buoyant, but US equity allocations have fallen from last year and profitability is at a cyclical low. Adjusted valuations show a more benign stock market rally that can keep going.See our latest published research, Global View - Danger?! Is the Y2K Dot-Com Bubble Being Re-blown? – September 2020

The Treasury Bond Bubble

Will MMT Work And Can the US Fed Control the US Treasury Bond Market?We have long-standing concerns about the US Treasury market. Bonds are in bubble territory and look vulnerable to the use of MMT and the absence of an effective YCC. 10-year Treasury yields could get forced upwards towards 2% given the scale of the economic rebound and the whopping size of Treasury issuance.See our latest published research, Global View - Will MMT Work And Can the US Fed Control the US Treasury Bond Market? - August 2020

Capital Quits The Dollar

Global Capital Is Quitting The DollarEvidence from capital flows indicates a sharp slowing and signs of a reversal in capital flows into the US dollar. Capital is swinging towards Europe and at the same time capital outflows from Asia are stabilizing. These outflows do not represent a loss of confidence in US economic prospects. Rather they reflect the changing supply conditions: both the increased supply of dollars printed by the US Fed and the step-up in European ‘safe’ asset supply, as part of the COVID response, as well as the likely slowdown of capital flows from China into US assets following the renewed ‘capital war’. Our conclusion is that at least a 10% and may be a 20% fall in the US dollar is possible.See our latest published research, Global View - Global Capital Is Quitting The Dollar - August 2020

Gold is still cheap

What Drives Gold Prices?We previously targeted gold to hit US$2,500/oz. The target is getting closer. Many investors are excited because they associate falling real interest rates with higher gold prices. Not only does the statistical evidence point to liquidity rather than real interest rates as the causal factor, but, with nominal policy rates already effectively at the zero-lower bound, much higher inflation is anyway needed to justify even today’s gold price. Instead we focus on the effect of a liquidity trend on gold, with cyclical swings explained by investors’ risk appetite, Fed QE policy, and accelerations and decelerations in the rate of inflation. This model suggests gold is currently ‘fair-value’ at US$2,100/oz. and could even test US$3,000/oz. by late-2021.See our latest published research, Global View - What Drives Gold Prices? - August - 2020

It’s Now Asia’s Turn

Asia Is The Liquidity Cycle To WatchAsian investments have disappointed for several years. This can be explained by the long-term slide in regional liquidity, itself the result of the strong US dollar and tight Chinese monetary policies. Looking ahead, the key news is that the Asian Liquidity Cycle is finally picking up strongly for the first time in 8 years. What's more, it looks set to outpace similar liquidity cycles in the US and Europe by lasting possibly up to three years longer. It looks like a great time to re-invest in the region.

This is not another Y2K bubble!

No Asset Is Cheap, But Stocks Are Certainly Not ‘Expensive’. This is Not Y2KMany claim this is a dangerous liquidity bubble, but the data do not bear this out. Valued against liquidity, multiples are undemanding. What’s more, there appears to be a demand for long duration assets that only equities can easily fulfil. Admittedly, it is hard to make a case that stocks are cheap, but, in terms of risk premia, Wall Street is far less stretched than US bonds and the US dollar.

High debts makes gold look 40% cheap

Could Gold Be 40% Undervalued?Gold is a liquidity phenomenon. More liquidity drives the gold price higher. The 2020 liquidity surge helps to explain the strong recent rally in gold bullion. Still greater gains lie ahead, because liquidity must keep expanding. While the US Fed led the latest liquidity stimulus, China (the other key Central Bank) is now following. Ultimately, the future supply of liquidity is determined by the whopping stock of debt. In our view, debt is still too high versus current levels of liquidity and the gold price looks too low compared to strongly rising Global Liquidity. Large debts require more liquidity and more liquidity will drive gold higher. Assuming that balance is restored back to long-run averages, gold bullion needs to rise to around US$2,500/oz., i.e. by some 40%.