• Home/
  • Fixed Income

David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    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.

    Read entire article

    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?

    Read entire article

    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. 

    Read entire article

    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.

    Read entire article

    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.

    Read entire article

    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.”

    Read entire article

    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.

    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.

    Read entire article

    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. 

    Read entire article

    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.

    Read entire article