Notes From Underground

There are few questions about the one-dimensional nature of the driving force of markets around the world. Cheap money sustains equity markets as the vast amounts of central bank liquidity continues to provide support for low-cost borrowing and a lack of alternatives for investors. A subset of the cheap cost of capital has been the “hoped” for resolution to the China/U.S. trade conflict which without question has disrupted global trade. South Korea’s recent economic performance is a reflection of the impact suffered by key components of the global supply chain driven export-oriented economy.

There was an article in the Financial Times Friday titled, “South Korea Set For One of Worst Growth Periods in Half a Century.” As the story notes “with exports representing 45% of the country’s GDP and China accounting for a quarter of the country’s outbound shipments.” The South Korean economy provides a glimpse into the friction from the trade but even though it’s slowing, equity markets power higher.

The precious metals had a MISERABLE November despite the continuation of central bank action as the equity markets provided the most bang for the buck. Stock buybacks continued along with heightened interest in corporate takeovers as low cost of money spurs the drive for consolidation.

We’ve seen the rotation out of metals into equities before. I did a podcast in February 2013 with Greg Hunter of Watchdog USA in which I said GOLD was a TIRED BULL given that the stock market provided an alternative — the metal was at $1630. Did last month’s decline in gold signal that the precious metal is a tired bull? I don’t believe so as the world’s central banks are terrified of moving away from historically low interest rates (yes, that includes the negative ones). [Note: Here’s the link to the podcast.]

There is no comfort in hiding out in fixed income for the risks of BOND values declining is FAR GREATER than experiencing much more appreciation as long yields are already extremely low. Is the U.S. equity market a TIRED BULL?

This is the question that has to be answered. Is the story for 2020 to be that on a relative basis that the U.S. equity markets underperform much of the world? Every market tires after an extended period of BULL or Bear, but as Keynes so beautifully maintained, “markets can remain irrational for longer then you and I can remain solvent.” But the global rotation can provide profit opportunities by taking advantage of potential investments in other regions.

An example of such potential may lie in Europe, particularly Germany. On Friday, the FT reported that German unions and businesses were calling for a 450 billion investment boost. The German BDI, a powerful business lobby, joined with the main labor federation, DGB, to push for an infrastructure development program. There is a push for Germany to get or the SCHWARZ NULL or black zero budget rules.

Plus, bad news for Chancellor Angela Merkel over the weekend. Coalition partner, SPD, elected two leftists to lead the party, spurning well-known Finance Minister Olaf Scholz. There is no definitive answer as to how this resolves itself. Will the Merkel coalition be dissolved and new elections called? Maybe. But other outcomes certainly exist. Most importantly, the weakening of the MERKEL fiscal austerity regime will be a boost ECB President Christine Lagarde’s plans. Previous president Mario Draghi needed Merkel to promote the QE programs and whatever it takes expansive monetary stimulus to save the EURO.

Now Lagarde needs fiscal stimulus to save the EU. Promoting significant FISCAL STIMULUS will provide investment potential for European businesses, especially as ultra-low interest rates support the rational for massive spending. I have been adamant that Lagarde has a dual mandate: Create a EUROBOND and promote massive fiscal stimulus programs. Lagarde has been promoting huge government spending for developing a GREEN ENERGY REVOLUTION to diminish the carbon footprint of the entire EU.

In a speech Lagarde delivered last week in Frankfurt, the ECB president invoked the wisdom of St.Francis: “Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.” Will Lagarde’s mandate provide investment potentials? This has to be considered with the idea of the U.S. being  a tired BULL.

***On Monday night the Reserve Bank of Australia will announce its overnight interest rate decision, which is currently at  0.75%. Consensus calls for NO CHANGE. Since the Aussie dollar is at three-month lows versus the KIWI there is little reason for the RBA to cut rates. Unemployment in Australia is moderating but until the Chinese economy gives some renewed sense of slowing the RBA will hold off on further action.

***Last week Peter Boockvar had a paragraph in one of his daily missives that appropriately sums up the behavior of FED over the past decade.

“Finally, I have to include this quote from Janet Yellen from a piece written by Jeff Cox at CNBC. This comes from a former Fed member who as Governor and Chair presided over and voted for putting rates to zero, keeping them there for 7 years and embarking on multiple rounds of QE. ‘Some of the most disturbing notes came from people who said, ‘I work and I played by the rules and I save for retirement and I have money in the bank, and you know, I’m getting absolutely nothing.’ Savers are getting penalized.It’s true.'”

As Boockvar maintained, the Fed hung savers out to dry and Jay Powell and Co. seem intent on doing it again if needed.

The bottom line is why would you lengthen DURATION RISK with the guardians of the nation’s money supply being question. I am staying invested as short as possible and putting on steepeners. The 2/5 curve in the U.S. is trading at 2 basis points. Duration risk is a fool’s errand. If US rates were to go back to zero or lower there will be far greater opportunities in the global macro realm.

Tags: Angela Merkel, CDU/SPD, Christine Lagarde, ECB, Equities, Fed, fiscal stimulus, Germany, Gold, Janet Yellen, Mario Draghi, Olaf Scholz, Reserve Bank of Australia, South Korea, trade

This entry was posted on December 1, 2019 at 1:00 pm and is filed under ECB, Equity, Germany, Gold. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.