The RVP Weekly Hack May 5th - Real Vision
The RVP Weekly Hack May 5th Information overload drowns out what is relevant. Adam Newman, CEO of Real Vision Publications, draws upon the expertise of the Contributors to RVP to cut straight to the most important issues and investment opportunities. Here to keep you ahead of the market.
If You Look At Only One Chart… Time is short, so here is one chart to get you thinking in a new direction.
How many times must I tell you? It’s all about the USD Net Foreign Sovereign Treasury Bonds & Notes Purchases (Bill. USD)
h/t @TTMYGH
Source: Dept of the Treasury
Foreigner are shunning US Treasuries. Who is going to pay for Trump’s stimulus plan?
Right Here, Right Now The best trading ideas of the week from RVP Contributors.
Buy EUR vs USD Say Mike Oliver @ MSA Mike Oliver of MSA is the second seasoned technical analyst on RVP in the last fortnight to recommend going long EURUSD. Peter Brandt made the same call the week before. Both technical veterans take long time horizons with their calls, looking for powerful rallies after a change in trend. This is a game of probabilities, not certainties. Big calls such as these are only made when the stars align and probabilities are in your favour. The other piece of the puzzle is the USD. The DXY (USD index) sits on key support at 99. Break this to the downside on monthly close and MSA’s view on the USD becomes outright bearish and increases the conviction on this trade. The other part of the trading strategy is risk management. Don’t be stubborn, cut your losses when a trade goes against you. Watch out, the French election this weekend has a chance to upset the apple cart.
Adam’s Portfolio Picks I have picked only the most compelling and highest conviction trade ideas of our RVP Contributors and will track them in a portfolio for you to follow.
Trade
Date
Time Horizon
Up/Down
Long TLT
7th April
1-3 months
Up
Long Eurostoxx / Short S&P
18th April
3-6 months
Up
Long Sensex
21st April
2 years +
Up
Short Oil
28th April
3-6 months
Up
Buy Bitcoin
5th May
2 years +
Up
Note: This is not investment advice. You understand that no content published, as part of the services, constitutes a recommendation or a statement that any particular investment, security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The Big Call Legendary hedge fund manager Stanley Druckenmiller said when you see something in the market that really, really excites you, "Bet the ranch on it." These are the Big Calls, the investment themes that can make or break you. Think differently from the crowd and have a different time horizon, and you have an edge. RVP, with its crack team of financial minds, identifies the Big Calls and guides you through the investment opportunities when they present themselves.
USD: Where Next For The USD? Will the USD cause the next crisis?
The USD is a key tenet of most any global macro framework. As the global reserve currency, what happens to the USD affects monetary policy around the world. The USD started rallying hard in May 2016 and rallied more than 10%. But since the end of 2016 the rally has stalled. More recently we have seen a decent pullback in the USD driven by Trump’s currency agenda and a weakening US economy. The milliondollar question: Is the USD bull run over? What are the bullish arguments for the USD? Using history as a guide, this USD bull run looks like it may be only half done. Previous bull runs in the early 1980s and late 1990s were much greater in magnitude.
USD bulls will argue (correctly) that the USD carry trade is the largest the world has ever seen: ~$10tn. The world is effectively short USD, so when these debts must be repaid, it will create a squeeze on the USD. Throw in to the equation Donald Trump’s inflammatory policies concerning tax and repatriation of overseas earnings (that run counter to his rhetoric of wanting a weaker USD) and USD bulls have some damning evidence.
What have the bears got in their locker? The bulls argue the US economy is the cleanest dirty shirt, i.e., the best of a bad bunch. Looking at PMI’s, GDP, inflation, etc., I am not sure that is even true. But leaving that aside, the issue is that markets are a relative, not an absolute game. Even if we agree the US economy is doing the best, in a relative sense it is slowing. This weakness in the US economy could pressure the USD. The USD bull run has been driven in part by anticipation of, and subsequently by actual, monetary tightening. Hell, the Fed is even talking about reducing their balance sheet, something I discussed in the Weekly Hack two weeks ago. For the record, that’s something I do not expect to happen. This confidence in the economy is not shared by the bond market or confirmed by most real-time data. Importantly, the Fed has never tightened into an economy that is weakening this noticeably without triggering a recession. History has not been kind to the global economy during times of significant USD strength. In 1985 USD strength resulted in the Plaza Accord. Last year there were rumours of a tacit Shanghai Accord to weaken the USD. Tacit or otherwise, my sense is that policy makers understand the destruction USD strength would cause and will move early to avoid such a situation. To me this caps USD strength. There is great debate about whether the USD is losing its global reserve status. These things take decades to play out, so it is unlikely the USD is going to be replaced with anything anytime soon. Not the SDR, not gold, and not Bitcoin. Though any or all may play a greater role in the currency markets going forward. That said, there appears to be a conscious shift away from the USD, and we have seen many bilateral trade deals signed in foreign currencies, particularly out of Asia and the Middle East. This is unlikely to be a passing phase, as countries are looking to diversify risk. One Belt One Road will expedite this process and is likely to continue to influence the chart at the top, Foreign Flows to US Treasuries. Nothing is conclusive yet. The USD bears have the upper hand for now, but markets can swing violently when everyone is on the same side of the boat. Keep an eye on positioning, relative economic strength, and Trump’s agenda. This story is likely to have many twists and turns to go. Check out the USD carousel on the RVP platform to deep dive in the bull and bear cases for the USD.
Are You On This Yet? In such a fast paced world staying on top of relevant market news and developments is tough. RVP scours the globe for the most interesting stories and distils them, keeping you ahead of the crowd.
The Retirement Crisis – Part 2 This is THE crisis of the next decade. Forewarned is forearmed. Credit cycles are repetitive, and while they differ in duration and amplitude there are generic characteristics that transcend them all. Invesco highlight these 4 distinct phases below. A month ago, I introduced what I see as one of the most important stories of the next decade in our Weekly Hack: the retirement crisis. This is an issue that everyone should care about and want to understand –it will affect us all.
This is not an easy story to tell as it’s the culmination of so many factors: demographics, previous crises, regulation, global monetary policy, etc. It all swirls together in a potent mix that means the average person simply won’t have enough money for their retirement. Furthermore, savers are being forced up the risk curve to try and cover the shortfall – the difference between savings and forecast expenditures – to maintain their standard of living. People are being pushed to take undue risks at exactly the wrong time in the cycle. People must save more or spend less. Either way, the impact of these structural shifts in behaviour will have a profound effect on consumption. Consumption in the coming decade will collapse as a result. Danielle DiMartino Booth has been on top of this story. Her latest piece does a fantastic job of outlining one of the biggest issues we face today, issues that very few people want to talk about. “Returns have been too low for too long, as have interest rates, to rectify what ails pensions. To compensate, as has been more widely reported by the media, to its credit, pensions have been making investments in illiquid, expensive private equity funds. We’re talking $350 billion since 2007. To be clear, a pension fund manager is fiduciarily responsible to ensure that adequate funds are on hand to meet the obligations promised to beneficiaries, that assets are on hand to satisfy future liabilities. Period. Why on earth, mandated by that seemingly simple tenet, would any pension manager in their right mind, or with the best interests of their entrusted pensioners at heart, be investing in a distressed real estate or illiquid credit fund? And at this juncture in the cycle?
Maybe you can help connect the dots. We’re in the third longest economic expansion in post-war history. Stocks have enjoyed their second longest bull run ever. Public pensions are loaded up to their eyeballs in risky assets because there are no alternatives aside from the alternative investments they’ve piled into that will give them no cover in a downturn. How exactly does this story have a happy ending, for pensioners and 401k-holding taxpayers alike?” Danielle’s full report can be read here. To supplement thinking around this topic, there is a fantastic website, Pension Tracker, that does a deep dive on the state of the US public pension system. Below is a snapshot.
The simple point here is that the funding gap is already huge based on actuarial assumptions – $1.3 TRILLION. But is this accurate? Actuarial assumptions use a discount rate (an expected rate of return) of ~7.5%. This discount rate is used to forecast assets and liabilities. In the past, an expected rate of return of 7.5% may have been a reasonable assumption. What about today? 3% is the interest rate on a US 30year bond. Based on this rate, the liability shortfall (see market basis above) increases fivefold to $5.6 TRILLION!! What is the correct rate of expected return? Perhaps it is somewhere between 3% and 7.5%. Either way the shortfall is HUGE, almost unfathomable. All this assumes we don’t have a market correction, which, given the length of this bull market and economic cycle, is becoming less and less likely. Pension funds cannot afford a market correction – they have never been more exposed to the equity market than they are today. Whichever way you cut it, the maths doesn’t work. There simply isn’t enough money to satisfy these pension liabilities. People will get a pittance compared to what they were promised. We are starting to see pension funds in the US cut benefits, as the Teamsters’ pension plan did back in January 2017. This story is just the tip of the iceberg; this type of news will get much worse.
Tesla: Elon Musk The Marmite of Investing Love him, hate him, everyone has an opinion on him. At the risk of puzzling non-British readers, I had better clarify my Marmite analogy. Marmite is a food spread that is brown, sticky, and has a strong flavour. Sound nice? From Wikipedia: “Marmite's distinctive and powerful flavour had earned it as many detractors as it had fans, and it was known for producing a polarised "love/hate" reaction amongst consumers. Marmite launched a "Love it or Hate it" campaign in October 1996, and this resulted in the coining of the phrase "Marmite effect" or "Marmite reaction" for anything which provoked strong and polarised feelings.” Start a conversation with someone about Elon Musk or Tesla, and Marmite is exactly what you get. He is the guy who is going to send people to Mars, the visionary who created the aspirational battery-powered car. To others he is full of hot air. None of his companies make any money or appear likely to do so anytime soon. Tesla just reported numbers that the bulls will cling to as positive – revenues went up – while the bear case remains: This is a company that loses money on every car they sell and requires ever-increasing amounts of debt to stay afloat. Tesla only have access to all this capital since we are living in a ‘risk-free-capital’ world. Tesla is the ultimate expression of the central bank risk-free bubble: People are throwing endless money at highly capital-intensive ideas dreamt up by the messianic figure of Elon Musk. When risk re-enters the market, this level of capital indiscipline will be punished ruthlessly. The VIX hit 2007 levels this week. Nobody is valuing risk here. Mark Spiegel of Stanphyl Capital, reportedly one of the biggest Tesla bears, certainly appears to have done his due diligence. Mark thinks Tesla’s equity will go to zero, for 3 reasons: • Current financials are horrible, with NO direct long-range EV competition, yet MASSIVE competition is coming. • Tesla has no meaningful proprietary technology – it open-sourced all its patents (as far as I know, no one’s using ANY of them) and its hard assets are worth significantly less than its $6 billion of debt (including SolarCity). • A ”bet on Elon” is a bet on someone who can’t be trusted – he has a long track record of making hugely misleading statements. For Mark’s full 152-page slide deck, you can click here.
Similarly, with Michael Lewitt there is no love lost for Elon Musk. In his recent piece on RVP, Michael (page 5 onwards) had this to say about Tesla:
“Cult-following stock Tesla comes fully equipped with a larger-than-life CEO, a sexy and politically correct product, and a stock price that bears so little resemblance to economic reality as to put the most ridiculous stocks of the internet era to shame.” Up till now Mark and Michael have been called out, with Tesla stock continuing to defy gravity. I have a feeling that this is a story that is only in its first act. Tesla has some serious growing to do to justify its valuation today. How the hell do you even value a company like Tesla? Certainly, traditional metrics fall short of capturing Elon Musk’s vision. When you burn cash as fast as Tesla does, you need people to buy in to the vision more than ever. I have a feeling that Tesla will become the poster child for the current bull market, which has been built on a proliferation of passive investing, low interest rates, and zero capital discipline. Is the Tesla a great car? Absolutely. But if you can’t make any money out of it, the Tesla cannot survive. The big car manufacturers are hot on Tesla’s heels, and competition will heat up. Is Tesla a short? Probably not until this bull market in stocks is over.
Staying Ahead There isn’t time each week to discuss everything that is going on in markets. Here we piggyback on previous RVP Weekly Hack talking points and let you to explore some stories further.
Bitcoin: The Future of money? The Evolution of Money h/t Pension Partners @CharlieBilello
VIX: Why so low? Do volatility tracking securities keep the vix artificially low? VIX_A misleading measure of risk h/t 720 Global
Until next time
If You Look At Only One Chart… Time is short, so here is one chart to get you thinking in a new direction.
How many times must I tell you? It’s all about the USD Net Foreign Sovereign Treasury Bonds & Notes Purchases (Bill. USD)
h/t @TTMYGH
Source: Dept of the Treasury
Foreigner are shunning US Treasuries. Who is going to pay for Trump’s stimulus plan?
Right Here, Right Now The best trading ideas of the week from RVP Contributors.
Buy EUR vs USD Say Mike Oliver @ MSA Mike Oliver of MSA is the second seasoned technical analyst on RVP in the last fortnight to recommend going long EURUSD. Peter Brandt made the same call the week before. Both technical veterans take long time horizons with their calls, looking for powerful rallies after a change in trend. This is a game of probabilities, not certainties. Big calls such as these are only made when the stars align and probabilities are in your favour. The other piece of the puzzle is the USD. The DXY (USD index) sits on key support at 99. Break this to the downside on monthly close and MSA’s view on the USD becomes outright bearish and increases the conviction on this trade. The other part of the trading strategy is risk management. Don’t be stubborn, cut your losses when a trade goes against you. Watch out, the French election this weekend has a chance to upset the apple cart.
Adam’s Portfolio Picks I have picked only the most compelling and highest conviction trade ideas of our RVP Contributors and will track them in a portfolio for you to follow.
Trade
Date
Time Horizon
Up/Down
Long TLT
7th April
1-3 months
Up
Long Eurostoxx / Short S&P
18th April
3-6 months
Up
Long Sensex
21st April
2 years +
Up
Short Oil
28th April
3-6 months
Up
Buy Bitcoin
5th May
2 years +
Up
Note: This is not investment advice. You understand that no content published, as part of the services, constitutes a recommendation or a statement that any particular investment, security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The Big Call Legendary hedge fund manager Stanley Druckenmiller said when you see something in the market that really, really excites you, "Bet the ranch on it." These are the Big Calls, the investment themes that can make or break you. Think differently from the crowd and have a different time horizon, and you have an edge. RVP, with its crack team of financial minds, identifies the Big Calls and guides you through the investment opportunities when they present themselves.
USD: Where Next For The USD? Will the USD cause the next crisis?
The USD is a key tenet of most any global macro framework. As the global reserve currency, what happens to the USD affects monetary policy around the world. The USD started rallying hard in May 2016 and rallied more than 10%. But since the end of 2016 the rally has stalled. More recently we have seen a decent pullback in the USD driven by Trump’s currency agenda and a weakening US economy. The milliondollar question: Is the USD bull run over? What are the bullish arguments for the USD? Using history as a guide, this USD bull run looks like it may be only half done. Previous bull runs in the early 1980s and late 1990s were much greater in magnitude.
USD bulls will argue (correctly) that the USD carry trade is the largest the world has ever seen: ~$10tn. The world is effectively short USD, so when these debts must be repaid, it will create a squeeze on the USD. Throw in to the equation Donald Trump’s inflammatory policies concerning tax and repatriation of overseas earnings (that run counter to his rhetoric of wanting a weaker USD) and USD bulls have some damning evidence.
What have the bears got in their locker? The bulls argue the US economy is the cleanest dirty shirt, i.e., the best of a bad bunch. Looking at PMI’s, GDP, inflation, etc., I am not sure that is even true. But leaving that aside, the issue is that markets are a relative, not an absolute game. Even if we agree the US economy is doing the best, in a relative sense it is slowing. This weakness in the US economy could pressure the USD. The USD bull run has been driven in part by anticipation of, and subsequently by actual, monetary tightening. Hell, the Fed is even talking about reducing their balance sheet, something I discussed in the Weekly Hack two weeks ago. For the record, that’s something I do not expect to happen. This confidence in the economy is not shared by the bond market or confirmed by most real-time data. Importantly, the Fed has never tightened into an economy that is weakening this noticeably without triggering a recession. History has not been kind to the global economy during times of significant USD strength. In 1985 USD strength resulted in the Plaza Accord. Last year there were rumours of a tacit Shanghai Accord to weaken the USD. Tacit or otherwise, my sense is that policy makers understand the destruction USD strength would cause and will move early to avoid such a situation. To me this caps USD strength. There is great debate about whether the USD is losing its global reserve status. These things take decades to play out, so it is unlikely the USD is going to be replaced with anything anytime soon. Not the SDR, not gold, and not Bitcoin. Though any or all may play a greater role in the currency markets going forward. That said, there appears to be a conscious shift away from the USD, and we have seen many bilateral trade deals signed in foreign currencies, particularly out of Asia and the Middle East. This is unlikely to be a passing phase, as countries are looking to diversify risk. One Belt One Road will expedite this process and is likely to continue to influence the chart at the top, Foreign Flows to US Treasuries. Nothing is conclusive yet. The USD bears have the upper hand for now, but markets can swing violently when everyone is on the same side of the boat. Keep an eye on positioning, relative economic strength, and Trump’s agenda. This story is likely to have many twists and turns to go. Check out the USD carousel on the RVP platform to deep dive in the bull and bear cases for the USD.
Are You On This Yet? In such a fast paced world staying on top of relevant market news and developments is tough. RVP scours the globe for the most interesting stories and distils them, keeping you ahead of the crowd.
The Retirement Crisis – Part 2 This is THE crisis of the next decade. Forewarned is forearmed. Credit cycles are repetitive, and while they differ in duration and amplitude there are generic characteristics that transcend them all. Invesco highlight these 4 distinct phases below. A month ago, I introduced what I see as one of the most important stories of the next decade in our Weekly Hack: the retirement crisis. This is an issue that everyone should care about and want to understand –it will affect us all.
This is not an easy story to tell as it’s the culmination of so many factors: demographics, previous crises, regulation, global monetary policy, etc. It all swirls together in a potent mix that means the average person simply won’t have enough money for their retirement. Furthermore, savers are being forced up the risk curve to try and cover the shortfall – the difference between savings and forecast expenditures – to maintain their standard of living. People are being pushed to take undue risks at exactly the wrong time in the cycle. People must save more or spend less. Either way, the impact of these structural shifts in behaviour will have a profound effect on consumption. Consumption in the coming decade will collapse as a result. Danielle DiMartino Booth has been on top of this story. Her latest piece does a fantastic job of outlining one of the biggest issues we face today, issues that very few people want to talk about. “Returns have been too low for too long, as have interest rates, to rectify what ails pensions. To compensate, as has been more widely reported by the media, to its credit, pensions have been making investments in illiquid, expensive private equity funds. We’re talking $350 billion since 2007. To be clear, a pension fund manager is fiduciarily responsible to ensure that adequate funds are on hand to meet the obligations promised to beneficiaries, that assets are on hand to satisfy future liabilities. Period. Why on earth, mandated by that seemingly simple tenet, would any pension manager in their right mind, or with the best interests of their entrusted pensioners at heart, be investing in a distressed real estate or illiquid credit fund? And at this juncture in the cycle?
Maybe you can help connect the dots. We’re in the third longest economic expansion in post-war history. Stocks have enjoyed their second longest bull run ever. Public pensions are loaded up to their eyeballs in risky assets because there are no alternatives aside from the alternative investments they’ve piled into that will give them no cover in a downturn. How exactly does this story have a happy ending, for pensioners and 401k-holding taxpayers alike?” Danielle’s full report can be read here. To supplement thinking around this topic, there is a fantastic website, Pension Tracker, that does a deep dive on the state of the US public pension system. Below is a snapshot.
The simple point here is that the funding gap is already huge based on actuarial assumptions – $1.3 TRILLION. But is this accurate? Actuarial assumptions use a discount rate (an expected rate of return) of ~7.5%. This discount rate is used to forecast assets and liabilities. In the past, an expected rate of return of 7.5% may have been a reasonable assumption. What about today? 3% is the interest rate on a US 30year bond. Based on this rate, the liability shortfall (see market basis above) increases fivefold to $5.6 TRILLION!! What is the correct rate of expected return? Perhaps it is somewhere between 3% and 7.5%. Either way the shortfall is HUGE, almost unfathomable. All this assumes we don’t have a market correction, which, given the length of this bull market and economic cycle, is becoming less and less likely. Pension funds cannot afford a market correction – they have never been more exposed to the equity market than they are today. Whichever way you cut it, the maths doesn’t work. There simply isn’t enough money to satisfy these pension liabilities. People will get a pittance compared to what they were promised. We are starting to see pension funds in the US cut benefits, as the Teamsters’ pension plan did back in January 2017. This story is just the tip of the iceberg; this type of news will get much worse.
Tesla: Elon Musk The Marmite of Investing Love him, hate him, everyone has an opinion on him. At the risk of puzzling non-British readers, I had better clarify my Marmite analogy. Marmite is a food spread that is brown, sticky, and has a strong flavour. Sound nice? From Wikipedia: “Marmite's distinctive and powerful flavour had earned it as many detractors as it had fans, and it was known for producing a polarised "love/hate" reaction amongst consumers. Marmite launched a "Love it or Hate it" campaign in October 1996, and this resulted in the coining of the phrase "Marmite effect" or "Marmite reaction" for anything which provoked strong and polarised feelings.” Start a conversation with someone about Elon Musk or Tesla, and Marmite is exactly what you get. He is the guy who is going to send people to Mars, the visionary who created the aspirational battery-powered car. To others he is full of hot air. None of his companies make any money or appear likely to do so anytime soon. Tesla just reported numbers that the bulls will cling to as positive – revenues went up – while the bear case remains: This is a company that loses money on every car they sell and requires ever-increasing amounts of debt to stay afloat. Tesla only have access to all this capital since we are living in a ‘risk-free-capital’ world. Tesla is the ultimate expression of the central bank risk-free bubble: People are throwing endless money at highly capital-intensive ideas dreamt up by the messianic figure of Elon Musk. When risk re-enters the market, this level of capital indiscipline will be punished ruthlessly. The VIX hit 2007 levels this week. Nobody is valuing risk here. Mark Spiegel of Stanphyl Capital, reportedly one of the biggest Tesla bears, certainly appears to have done his due diligence. Mark thinks Tesla’s equity will go to zero, for 3 reasons: • Current financials are horrible, with NO direct long-range EV competition, yet MASSIVE competition is coming. • Tesla has no meaningful proprietary technology – it open-sourced all its patents (as far as I know, no one’s using ANY of them) and its hard assets are worth significantly less than its $6 billion of debt (including SolarCity). • A ”bet on Elon” is a bet on someone who can’t be trusted – he has a long track record of making hugely misleading statements. For Mark’s full 152-page slide deck, you can click here.
Similarly, with Michael Lewitt there is no love lost for Elon Musk. In his recent piece on RVP, Michael (page 5 onwards) had this to say about Tesla:
“Cult-following stock Tesla comes fully equipped with a larger-than-life CEO, a sexy and politically correct product, and a stock price that bears so little resemblance to economic reality as to put the most ridiculous stocks of the internet era to shame.” Up till now Mark and Michael have been called out, with Tesla stock continuing to defy gravity. I have a feeling that this is a story that is only in its first act. Tesla has some serious growing to do to justify its valuation today. How the hell do you even value a company like Tesla? Certainly, traditional metrics fall short of capturing Elon Musk’s vision. When you burn cash as fast as Tesla does, you need people to buy in to the vision more than ever. I have a feeling that Tesla will become the poster child for the current bull market, which has been built on a proliferation of passive investing, low interest rates, and zero capital discipline. Is the Tesla a great car? Absolutely. But if you can’t make any money out of it, the Tesla cannot survive. The big car manufacturers are hot on Tesla’s heels, and competition will heat up. Is Tesla a short? Probably not until this bull market in stocks is over.
Staying Ahead There isn’t time each week to discuss everything that is going on in markets. Here we piggyback on previous RVP Weekly Hack talking points and let you to explore some stories further.
Bitcoin: The Future of money? The Evolution of Money h/t Pension Partners @CharlieBilello
VIX: Why so low? Do volatility tracking securities keep the vix artificially low? VIX_A misleading measure of risk h/t 720 Global
Until next time
