Hive Intelligence Report: Markets TikTok-ing To Crash?

We had some lively discussions across our network this week. There were divergent views on the negative implications of the US’s attack on China tech. It was noted that equities are reaching very high levels vs GDP. There were also some views on Turkey and Russia. Then, we had a discussion on inflation, pensions and central banks. And remember, these are views from people across our networks, rather than my view or that of Macro Hive!

Implication of Trump banning TikTok and WeChat

• Everyone seems to have missed a potential bombshell: the TikTok & WeChat ban could mean worldwide removal on android and iPhones. The language in the executive order is identical to that of sanctions. Depending on the definition of ‘transaction’, Apple and Google might have to remove them even in the CN store.
• ‘The executive order appeared to have been drafted hastily: the company it names as a target for the ban, Tencent Holdings Ltd, Shenzhen, China does not exist. Tencent Holdings is the name of the Hong Kong-listed parent, while Tencent Technology is the Shenzhen-based company. Some lawyers disputed whether the ban would hit only WeChat or all of Tencent’s businesses in the US.’ (FT)
• As for TikTok and WeChat, I doubt China will retaliate as American social media has been blocked in China for years.
• What’s more interesting is the upcoming half-year review of the US-China trade deal. I don’t know how that will go. More generally, my best guess is that China will keep calm as long as the polls show a Joe Biden win.
• Biden has been pretty quiet aside from saying he’d keep tariffs and be more multi-lateral vs China. I wonder if that is more negative for China, esp. if Biden gets the EU onboard.
• Biden said he would remove Donald Trump’s tariffs on imports from China, which are taxes on US consumers and companies
• For China, no one is worse than Trump. And I don’t trust the European allies to grow a spine suddenly. If you thought the EU agreeing on a joint debt deal was hard, wait until they have to come up with a common foreign policy.

Markets

Equities

• All stocks are now worth more than 100% of global GDP for the first time since 2018, pointing to stretched valuations. For Warren Buffett, a Market Cap to GDP Ratio >100% means stocks in bubble territory.

Source: Bloomberg, Holger Zschaepitz

• Buffett Bought Back His Own Stock While Selling Others.

Source: Bloomberg

• Amazon founder and CEO Jeff Bezos sold $3.1 billion worth of Amazon shares in the first few days of August.
• The average stock probably does seem to represent what is happening in the economy this year. The problem is in the index structure.

• S&P dividends averaged 4.2% over the last 140 years. The last 50 years have seen the average fall to 2.9%, and the last 20 years to just 1.8%.

Why is gold rallying?

• For the year, gold stocks are rivalling the performance of the FANG and large-cap tech technology sectors of the markets.
• Although the gold price today is precisely where it was 9 years ago, the financial world has completely changed. Over that time, the Fed’s balance sheet has advanced 137% to total nearly $7tn. The European Central Bank’s (ECB) balance sheet has grown 145% to reach $4.6tn. The Japan Central Bank’s (JCB) balance sheet growth leads the pack, having advanced 365% to reach 640tn yen.
• There is a historical relationship between the size of a central bank’s balance sheet and the price of gold going back to the Federal Reserve’s establishment in 1913, even adjusting the Fed’s balance sheet for excess reserves.

Twitter Poll

Source: Macro Hive

• The Everything Rally in 1 chart

Source: Bloomberg

Implication of Turkish Lira Sliding

• Does anyone know the EU bank exposure on Turkey? It usually tends to be concentrated in Austrian, Hungarian and German banks.
• Spain’s BBVA, Italy’s UniCredit, France’s BNP Paribas, Dutch bank ING and Britain’s HSBC are the most exposed to Turkey and vulnerable to its free-falling currency.
• Turkey’s Economy Resembling Crisis-Hit Lebanon, BlackRock Director Says.
• Barclays Says Lira Still Below-Level That Would Prompt Rate Hike.
• Goldman Sees Weaker Lira, Warns on Risks of ‘Discontinuous Move’.

Helpful infographic on Twin Risk of CNY and TRY devaluation

Source: Macrobond, Bloomberg, VPatelFX

Why is RUB weak recently?

• Dividend payment outflows amid a smaller CA surplus?

Not really

• Dividend payments are a small drag on RUB FX rate this year as most of the banks and large companies have postponed them until better times. Given the current oil price, I think the RUB is undervalued.
• Everyone expects the RUB to weaken in August because this is what happens typically. But this year is atypical. Russian tourists are not going to spend billions abroad as they usually do. As such, the reasons behind the general seasonal RUB weakening are all but absent. So the recent bout of depreciation is a bit of self-fulfilling prophecy and should peter out soon.
• Russians are now allowed to travel to three countries: UK, Turkey and Tanzania. The list is not long enough to generate strong demand for FX. Sanctions related to Nord Stream are unlikely to do much damage directly.

Deteriorating Oil fundamentals (demand softening and supply improving)

• Sales of diesel, the most widely used petroleum product across India, plummeted in July by 13% m/m after m/m gains across May and June.
• Sales of gasoline also declined m/m by 1%.
• Singapore’s front-month time spread has flipped into a ~23c/bbl contango, flipping from a backwardated market not long ago. That is the deepest contango since H1 June.
• Singapore’s 10ppm gasoil crack spread narrowed to $5.92/bbl from last week’s high of more than $7/bbl.
• Asia’s gasoil market could stay depressed on expectations that China exports more fuel as floods hamper domestic logistics.
• BP dividend halved.
• Based on all of the above, this Brent should be $35-40.
• A Generational Opportunity in Commodities? – nice article, bullish commodities.

Macro

Will Inflation make a comeback?

• Grant Williams Podcast: Russell Makes the Case for Inflation in the United States Hitting 4% Before the End of the Year.
• The bank credit guarantees are the trigger to inflation (and he’s a super-long-term disinflationista!) It’s MMT by the back door.
• I agree it’s coming, but first, they need to scare us one more time via an asset deflation move to signal the helicopters.
• Yes. But at the moment, that is a small part of the money supply. It needs to expand and keep going. They need to make it permanent. But this is the direction, Julia Coronado and Simon Potter say recession insurance bonds could activate payments and bypass political wrangling in a crisis.
• The Fed is planning to go direct and deposit money in household accounts when the next crisis hits. This is CBDC in all but name (Fed calls them recession insurance bonds).
• Inflation in the 21st century is much more a supply-side than a demand-side (monetary) phenomenon.

But wait

• For inflation to pick up, the money needs to be spent. And for that to happen, it needs to be better targeted to the people who need it. There is too much cash, but it is ‘hoarded’.

‘It is habitually assumed that whenever there is a greater amount of money in the country, or in existence, a rise of prices must necessarily follow. But this is by no means an inevitable consequence. In no commodity is it the quantity in existence, but the quantity offered for sale, that determines the value. Whatever may be the quantity of money in the country, only that part of it will affect prices, which goes into the market commodities, and is there actually exchanged against goods. Whatever increases the amount of this portion of the money in the country, tends to raise prices. But money hoarded does not act on prices. Money kept in reserve by individuals to meet contingencies which do not occur, does not act on prices. The money in the coffers of the Bank, or retained as a reserve by private bankers, does not act on prices until drawn out, nor even then unless drawn out to be expended in commodities.’

John Stuart Mill, Principles of Political Economy, Book III, Chapter VIII, par.17, p.20.

• If a person hoards $100 and spends $50, only the $50 that is spent makes an impact. However, if that same person’s stash just went from $100 to $500, there’s no reason to think that still only $50 will be spent.
• The marginal propensity to consume out of financial wealth decreases as we move from the bottom of the wealth distribution to the top of the distribution. Monetary policy needs to be targeted to have any hope of affecting inflation. The ECB is finally doing that but just scraping the surface. PBOC is doing it, not sure how successfully, but Fed is oblivious at the moment.

Source: Goldman Sachs

How is ECB and PBoC doing it?

• ECB through TLTROs, PBOC through various targeted lending programs; see the table. The US is trying to do it through the various Fed/Treasury programs, but they are not too successful, judging by the low volumes on most of them.

Source: Goldman Sachs

• TLTROs aren’t that well-targeted, but I agree, it’s more targeted than corporate bond purchases.

Brewing Pension Crisis

• There is no risk-free return, and there is no secure income product; income can only be generated (now) by selling risky tails either dicing with high yield solvency or equity gamma.
• In an environment of surplus capital, should there be a secure income product in the first place? Isn’t that what the market is supposed to do, balance the supply and demand for capital?
• The fund manager advertises their skill based upon generating income with little volatility; in reality, they offer secretarial services upon yield products. This underlines their inability to react either due to mandates or ability.
• The demand for income is vast. This is in part due to demographics, stored asset retention (housing), and in part due to real-world Inflation. So these asset-rich, cash-poor pensioners demand income, and their numbers are growing as longevity and demographics come home to roost.
• Exxon Halts Contributions to Employee Retirement Plan. Interesting, they are not cutting the dividend like its peers but are taking measures like this. If Exxon pulls this off, every company in the country will follow suit. Class warfare on the horizon.
• Universities on Strike Alert After Funding Drought Wilts Pensions.
• Fed Policy Could Leave Retirees Broke After Crisis.

Source:FT

Solutions

• I think we are going down the road where, if you are a pensioner, you are entitled to free basic living resources. In many countries in Europe, pensioners already get a discount on many goods and services (like free public transport – you don’t need to present €1 of ‘income’ to use it, but, preferably, just your pensioner card). In my opinion, unless a major disaster, like war or natural calamity, which wipes out surplus capital, occurs, the concept of saving will change dramatically.
• I feel the concept of a multi-generational debt product such as a 100-year plus mortgage for which the PV is traded by the lender is the natural evolution. The same coin, but the other face.

Interesting links and Charts of the week

The Risks of High Public Debt Despite a Low-Interest-Rate Environment.

How is the Grand EU Recovery Fund Allocated?

• Each EU member remains responsible for the EU debt. It’s circular, it’s hardly material, and I wonder to what extent increased EU issuance will compete with periphery issuance.
• I see Bunds Btp spread a tad wider, and maybe more people are starting to wonder what the fuss was all about.

Fed Says America Needs Instant Payments As Soon As Possible.

The Dirty Secrets Of ‘Clean’ Electric Vehicles.

Which Earnings Groups Have Been Most Affected by the COVID-19 Crisis?

Should the West Be Worried About Belarus?

Lockdown Savings Push UK Millennials into Stock Markets.

Lack of Yield Opportunities

Source: Goldman Sachs

Lovely table of the Fed people and their views around YCC and AIT

Source: Deutsche Bank

Source: Visual Capitalist

Reals and earnings yields (US, EU Japan)

Source: JP Morgan