The trade war with China has been more pernicious than Trump originally thought.
On the surface, the Chinese government does not need to come to terms with the US president, if the terms and conditions are not amicable. And Mr. Xiang is not constrained by elections, like president Trump is. However, we must not forget that despite their enormous reserves, Chinese economy is also suffering under Trump’s pressure and this president does not do business in closed chambers. The US president is trigger happy when it comes to Tweets and for some rather unpredictable. That being the reason, why most of the so called “World Leaders” are not happy with him. This president does not take prisoners and that not even in his own senate. Is he the best president ever or a mere rogue business man, tinkering with the next world war? On the other hand, we must not forget that this is not the first time a US president is crossing swards with worlds mighty. It was Kennedy with Russia in the 60’s and now Trump with China. Although, this war is being fought with economical rather than nuclear weapons. As mentioned before, Trump is a business man and not a warmonger. Therefore he will do all he can, in order to bring stability in the financial markets.
And at the end of the day, the facts is that greed never changes its face … only the players.
Back to Earning Money
The Federal Reserve dropped the Interest rates, yet again by 25 basis points (bps), in September. Is such monetary policy the most effective tool for keeping the US economy alive?
“Keep your powder dry” some shout from the side-lines, thinking that the FED is wasting some unnecessarily. After all, the US economy is in good shape with the lowest unemployment rate ever measured in recent history and consumer is strong.
The resent FED actions are all about risk management, in order to safeguard against the downside risk to the US economy. Which showed signs of slowdown in the third quarter. Hence, the argument for “Keeping your powder dry” can be rather ambiguous. Against all the headwinds, from the Trade talks with China, the Brexit and certain disagreements with Europe, US needs to keep its expansion alive and the consumer on track. And hence the Trump’s call for more rate cuts. Cutting rates too aggressively however, as preferred by some FED members and academics, might level out the inversion of the 10 – 2’s but at the same time it can send the wrong signal to the world as a whole. Indicating that the US economy is in a bad shape.
Therefore, we do agree with the recent measure take by Chairman Powell, who will, almost certainly, reduce the Federal Funds rates for the third time, this year by another quarter of a percent, shaving 75 basis points off the funds rate this year. And as we have learned from Professor Friedman, “Monitory policy acts with long and variable legs”. Therefore, we believe that the effects of the FED’s action will bear fruit starting in the first half of 2020.
Short Term Financing and the Equities
To stabilise the Lending Market, the US FED will conduct daily REPO operations, through to October 10 2019.
Therefore, in such low yield environments, you will have to go with the defensives stocks. Having said that, they are not cheap and exactly for that reason. Defensives provide cushioning for your investments, on the tactical basis and you will have to know why you are buying into these. Such investments are software, healthcare, consumer discretionary and staples, financials and so on. Going forward therefore, any central banks rate cutting is positive for the equities market.
Financials
Although, the US Financials have far out run their European counterparts, they have not been the favourite trade on the street. And as such have taken a massive beating due to the flattening of the long term treasury yields.
The major American banks, the likes of Goldman Sachs, bank of America and JP Morgan are trading at PE ratios of 8.3 to 11.7 (as of Oct. 2019). Which compared to their European counterparts are still very reasonable. The current price to book ratio for the Deutsche bank is 0.2 and that of IMG around 0.7, for UBS it is also not that much higher at 0.73.
In Europe, capable management has been working tediously to trim their business models, like UniCredit and Barclays. But it is a tough stand with the rates ultimately so low and sinking. Hence some capacity has to come out of the banking system here and it will. Because, there is no other way that banks could lend and offer credit to economies that need it.
Therefore, one can assume that globally, right now it is only the US that offers a safe haven. The US stock market and the Dollar are feeling the flow of money to the US of A, as we are feeling the Global slowdown in Europe. We therefore believe that the US banks are too correlated with the moves in the yield curve. Banks have become sensitive to yield curves, to credit trends, to regulatory issues that may happen therefore, there is not much that can get better. Banks on the other hand are fundamentally. It is exactly because of this that investing in banks has become frustrating. Hence, there is not much reason to own them, except those macro trends. As a portfolio manager therefore, there is no much value there and we all know where the yield curve is headed to.
Rates can go lower until they become a problem with respect to deposit costs and credit. The US banks right now are therefore in this sweet spot, compared to their European rivals. They benefit without any of the downside. From a valuation point of view, therefore, the US banks are not that expensive relative to their historical values. At Swiss Wealth Solutions, we take a barbell approach on the banks. On the spread basis, it is very difficult to trade them tactically unless you time it perfectly. In which case, like any trade you can make some money for sure.
The Noise around Recession
The current US economy has a lot going for it. In US we see a relatively strong economic growth and hence we do not subscribe to the belief that the US tax cuts made a substantial difference. However, we do believe that a lot of things look pretty good for the US consumer. Despite this, we do see the sings of weakness that are beginning to appear and the consumers are beginning to feel some pains from the tariffs. And it is also true that only if they get worse, the US might end up in recession. Perhaps, exactly because of this the Chinese delegation is headed for the US, this week. Having said that, the US is far from recession and the fundamentals at the moment are not bad.
And as we mentioned previously, the worry about the inversion, this time around, is mere Technical. In the global bond market, there is up to 16 Trillion dollars’ worth of negative yielding debt. Therefore, where else one can go except to US Treasuries. If the trajectory continues to deteriorate due to the outstanding tariffs, it can destroy the nice picture that is out there now. It is however worth mentioning that first and foremost it is the present US president who cares most about the markets. Therefore, we do not believe that he will allow recession to show its ugly face.
Potentially, there seems to be fluff around the corporate markets but this does not seem to be systematic on the FED policy side of things. With the present US inflation, the two and a half percent FED rate where it was earlier this year, it is nothing like what Volker effect did in the 80s, in order to fight inflation. And we all know that the present FED is accommodative and data dependent.
Recently, Macy’s sales figures came in lower than expected but why is it so important for the US markets that is driving the global economy. And you may rightly ask why?
The answer is Because:
- The US consumer sustains some 70% of its local economy. Therefore, they don’t need anyone to survive.
- The US government is one of, if not the most powerful governments in the world
- The US FED provides the only liable world currency in the world.
Putting 1, 2 and 3 together, Trump in his shine naivety and claim, has made US GREAT AGAIN!
So here we are, the wealth effect and that’s why the FED backed off and that’s why for the answer of when is the next recession, we will watch the S&P500. Where that goes, will tell you where the next recession is.
The Misunderstood Bitcoin
Some call it the digital Gold or is it merely the fool’s Gold?
Let’s look at its definition, according to Wikipedia “Bitcoin is a cryptocurrency. It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries“.
Any coin in your pocket is there while it represents some value, otherwise can fill your pockets with metal washers and feel wealthy. Therefore, national coins are propagated by a central authority, i.e. the central banks. These authorities use to base their currencies upon a central value holding commodity, i.e. Gold in the past, which is now replaced (for the good or worse) by their GDP, again pointing towards a central value holding authoritative Institution/Administration. Bitcoin, as per its above definition, is everything but a value Currency or a Coin. Even the prehistoric Homo sapiens, who were holding Seashells as an exchange medium, had understood that it had to have a central value, i.e., originating from the sea and hence rare and valuable. With the rise of intelligence and know-how, the earlier Homo sapiens left seashells and opted out for a more valuable commodity i.e., Gold.
Besides all these, a monetary unit that does not replace another will lead to huge Inflation, world-wide. Otherwise, Europeans would not have replaced their local currencies, i.e., the likes of Deutsche Mark, the French Franc and the Italian Lira with Euro. Additionally, if the movements of a currency is not centrally regulated, it will open itself to all kinds of misuse, covert operations and black market transactions. And all that in these days, when abiding costs of regulatory compliance for financial institutions worldwide amounts to millions of US dollars each year.
The same goes for Facebook’s Libra. Although, these clever clogs are trying to link its value to a basket of currencies and hence act as if it is bound to some kind of a value emitting authority, the argument about inflation still holds. And who is the world-wide authority, who will govern the amount of circulating Libra out there? An independent no named authority in Geneva? Why not another one in New York and the next in London? And why are we leaving Frankfurt, Hong Kong, Singapore and Beijing out of this? Why aren’t we setting up organisations emitting currencies for Google, Amazon and Alibaba? The answer, to all these, is simple “BECAUSE NOT THE ENTIRE WORLD HAS GONE CRAZY”. Only a few IT Nerds…
And how much Libra or Bitcoin are allowed to be in circulation? Apparently, they have solved the amount in circulation for Bitcoin by the amount of energy it consumes to produce one and the security behind its crypto algorithm. And hence the next coin, which consumes more energy and is better protected, by even a more powerful algorithm, is to have a higher value and where is it all to stop?
We therefore, advise these Digital primitive Homo sapiens to either pick up a book and read about the basics of the global economy or listen to the likes of Warren Buffett and Jamie Dimon. They will soon come to realise that such digital coins are nothing but the modern Seashells.
We do not deny that such digital methods, routines and algorithms, i.e., the crypto mechanism can be future transport/transfer mechanisms, (for example, providing a safer and faster base for SWIFT). At their present state, however, today’s crypto currencies can never hold any value.
With our traditional logic, unless a crypto currency is backed by a sovereign that will use it to replace a certain amount of its currency, in circulation by its digital equivalent, it will never have any value to an investor.