WorldoutofWhack

Congrats are for anyone who came into August convinced that the bond rally had (much) further to run, despite 10-year US yields having already fallen some 80bps in the first seven months of 2019. When it was all said and done, US Treasury’s posted their best monthly gain since the Lehman crisis in August, spurred along by the intensification of global growth fears, trade escalations, Brexit jitters and hedging flows into a thin market.

A benchmark index for US debt returned more than 3% for the month. I mean WOW

Central Bank Actions in August… Hong Kong: 25 bps cut New Zealand: 50 bps cut India: 35 bps cut Thailand: 25 bps cut Philippines: 25 bps cut Peru: 25 bps cut Mexico: 25 bps cut Paraguay: 25 bps cut Indonesia: 25 bps cut Jamaica: 25 bps cut Iceland: 25 bps cut Global easing……as if interest rate cuts is going to help the indebted economies get out of stagnation The world’s reserve currency (USD) also strengthened against all but one major emerging-market peers since the Federal Reserve cut interest rates in July. The trade-weighted dollar index (which is broader based than just dollar index) touched an all-time high, pushing past a peak seen in 2002.

And we thought Dollar is the only reserve currency. Gold prices denominated in 27 major countries (including INR) touched an all-time high.

This is surprising because Gold and Dollar generally have negative correlation, but I will again reproduce an excerpt from my favorite analyst Russell Napier below.

So if you read the above you will realise the importance of Dollar and Gold rising together.

There is an added headwind of China. I don’t trust any data coming out of china, but it is an undeniable fact that Developed world assets (Bonds and Properties) over last 10 years has seen a huge influx of Chinese money looking to diversify. So, the following news from Chinese regulator along with depreciating currency just add one more dimension to the problem Global economy face at the current moment.

Market outlook

Every asset is a function of Dollar Liquidity (more dollar are good for risk assets and less dollar bad for risk assets) and as Mehul at Nedbank writes “Global $-Liquidity indicator (US $-Liquidity + Proxy for Offshore $-Liquidity) remains in negative territory and will keep on declining (deflationary bust) – the world needs liquidity”

We are at the cusp of a big change in market characteristics and it has already started with Central bankers admitting that lowering interest rates is not working anymore. There is just too much debt in the world and interest rates alone will not pull the global economy out of stagnation. What is needed is a fiscal spending to kickstart the global economy. The murmurs of spending are already getting louder in the most fiscally conservative economy in the world i.e. Germany. I think in more and more countries burden of growth will shift to Govt from central bankers.

I look at markets from Capital flow perspective and not from technical or fundamental point of view. I continue to believe that US is the cleanest dirty shirt in the world and Capital will flow from rest of the world (periphery) to US (Core). US does not see any benefits in sharing its GDP with any other country and hence picking fight wherever it has trade deficit. This only increases the allure of Dollar in the short term because most countries and corporates outside US have dollar denominated debt and global trade is still settled mostly in US Dollar.

Short answer is Interest rates and with public part of yield curve inverted, the cost of owning GOLD is actually less than cost of owning a bond and that’s why GOLD is rising along with US Dollar.

The other reason is that negative interest rates are spreading across the globe which again makes GOLD a risk free asset to hold.

Part 2 is the “meat” of the series. Part 1 began with the high level political argument for why Digital Currency will change the world. Part 2 goes deep on monetary concepts and distributed ledger technology.

Ironically, Eric Townsend book was released on the same day Christine Lagard fulfilled one of its predictions by publicly calling for CBDCs. The central prediction of this video is that the U.S. Dollar will be replaced by a new digital global reserve currency. Now on the very day that he released these videos, BOE chief Mark Carney pitched the idea of a digital reserve currency [the central prediction of my book and these videos] at Jackson Hole.

This two-part series explains the Digital Currency Revolution to Central Bankers, Elected Officials & Government policymakers. The focus is NOT on cryptocurrency, but rather what’s coming next, AFTER cryptocurrency. This series explains why all money will be digital within 25 years, and why government has been slow to understand the sea change already in motion.

Anatole Kaletsky writes in “when the world goes to hell”

The most convincing reason, “why equity investors should disregard the bond market’s apparently bearish message. Let us suppose that that bond markets really do know more than equity investors or economic forecasters about the economic outlook and that yield curve inversion actually is a reliable indicator of recession. In that case, the Fed and other central banks around the world are certain to keep cutting interest rates, or if their rates are already zero or negative are certain to restart QE. And, even more importantly, both short-term and long-term interest rates are certain to remain near zero for the next ten years or more. In that case, even if the world does experience a recession, the discount rates applied by equity markets to cyclically-adjusted corporate profits, the cap rates assumed by property investors and hurdle rates used by business managements, are bound to keep falling and will eventually end up near zero. In other words, if bond markets are right in predicting a world in which interest rates will stay forever near zero, then US equities on a cyclically adjusted price-earnings ratio of 29—equivalent to an earnings yield of 3.4%—are still quite cheap.

Larry summers, the former treasury secretary and an influential policy maker in US write in Project syndicate op-ed

“If reducing rates will be insufficient or counterproductive, central bankers’ ingenuity in loosening monetary policy in an environment of secular stagnation is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Instead of more old New Keynesian economics, we hope, but do not expect, that this year’s gathering in Jackson Hole will bring forth a new Old Keynesian economics.“

The German finance minister also acknowledged the failure of monetary policy when he was quoted

“Finance Minister Olaf Scholz suggested Germany could muster 50 billion euros ($55 billion) of extra spending in an economic crisis, putting a number on a possible fiscal stimulus for the first time.”

what is missing from a picture is “Recession”

In my view we might not have to wait more than couple of months to see Germany slipping into recession.

The other country which is in news for slowing growth” India” also takes some measure for boosting growth and this is over and above monetary policy easing and will entail higher fiscal deficit.

Winds are changing and whereas monetary policy was instrumental in creating Asset inflation… we might be at an inflection point in world where baton is passed on to fiscal policy for growth revival.