By Bilal Hafeez 05-11-2019
In: post, Newsletter

Macro Hive Podcast Playlist: Buy Gold / Secularly Low Inflation / VC Sins

(6 min read)


Despite stocks markets trading at highs, a bearish strain runs through this week’s podcasts. Hedge fund manager Alex Gurevich predicts a good chance of another Fed cut in December and is very bullish gold. Lauren Goodwin from NY Investment Management doesn’t see rate cuts stopping an inevitable recession. She also thinks Elizabeth Warren’s tax proposals are ludicrous and will wreck stocks. Then we have the Economist’s Henry Curr give his take on secularly low inflation.

This week also saw SoftBank announce tighter governance rules for the companies they invest in. And with a good reason (yes, WeWork). It’s an excellent time, then, to listen to Scott Kupor from leading venture capital firm, Andreessen Horowitz, discussing the drawbacks of a venture-dominated market.

With increasing optimism over US-China trade talks, our final podcast covers international trade. But rather than goods, the podcast focuses on the trade in services, which are increasingly important.

Finally, in my personal podcast, I discuss the importance of looking after your body, not just your brain. Our education system and broader culture puts a premium on brain power, often at the sacrifice of good health.

Enjoy!

Bilal

 

Alex Gurevich: Stop This Conversation and Pause This Interview, Go Buy Gold! (Macro Voices, 66 min listen) Alex Gurevich, Founder and CIO of HonTe Investments, gives his in-depth and insightful views on the Fed cuts, gold, and treasuries. He currently sees yields continuing to fall, FED rates spiralling to zero, and longer-dated treasuries being historically much cheaper than any other assets while continuing to generate return.

He also sees Fed moves and commentary as irrelevant for long-term market moves. E.g., rates would have rallied anyway because it’s all priced in already. Contrary to most commentators, Gurevich sees the probability of a fourth cut in December as 50/50. Finally, he shares his secular bull market on gold. He views the commodity as definitely holding up above 3000 five years from now and today is the time to buy.

 

Why does this matter? Gurevich is a seasoned investor who has lived through three major easing cycles in his career: his views on the current markets are therefore valuable. Strong recommendations for investing in safe havens such as gold are usually predictors of a downturn.

 

How U.S. Yields Could Go Negative (What Goes Up, 34 min listen) Lauren Goodwin, a portfolio strategist from NY Life Investment Management, shares her bearish, defensive view on the markets. Investors are pricing in even more rate cuts next year given that we are on the last leg of the expansion cycle and the Fed has simply bought everyone some time. But once we see the corporate debt burden wake up and profit margins squeezed, things might get dangerous.

Goodwin sees term premia reaching zero or negative. She then discusses the tech giants’ earning season. The FANGs have achieved strong results and high margins despite a relative slowing in growth, but we haven’t seen them hold up in a recession environment yet. Towards the end, the discussion moves to predictions of Wall Street doom and gloom should Warren continue gaining popularity.

 

Why does this matter? With the increasing bearish sentiment around markets, the recent Fed cuts might do little to perpetuate the cycle. We also recently featured an in-depth piece on Why Warren Doesn’t Need Much To Beat Trump and we now see an increasing number of Wall Street warnings that the S&P would drop 25% if Warren is victorious. Her policies are considered to be anti-capitalistic, unproductive, and plain ludicrous. However, it’s worth remembering that the same cataclysm was predicted before Obama and Trump’s elections and none of it materialised.

 

 

Henry Curr on Inflation, the Philips Curve, and A New Monetarism (Macro Musings, 63 min listen) David Beckworth of the Mercatus Center is joined by Henry Curr, the economics editor for The Economist. They discuss the worryingly low inflation rate prevalent in a majority of the large economies and whether the Philips curve is dead – Curr thinks it still holds but is problematic. They also consider the link between inflation and technology. Curr does not think the rise of Amazon is particularly relevant; he believes there are productivity increases resulting from the provision of free services, search engines, and smart phones. Therefore, we miss some deflation in the figures because these products replace things for which people used to pay cash.

 

Curr also believes the current inflation statistics publicly available have actually been overstated. He concludes by suggesting three major reforms that central banks needs to implement: a make-up strategy going forward as the zero-bound is likely to become commonplace in the future, a way to work under a new Philips curve, and lastly, the need to be more in tune with fiscal policy.

 

Why does this matter? Inflation rates are at an all-time low and it is important to consider the ramifications of this on policies. Is it part of a global trend? And how will policy have to adjust to this? Furthermore, the decreased reliability of the Philips curve as an economic resource means we must consider how much to depend on it now. There have been some talks of Phillips Curve 2.0, that presumes there’s a trade-off between the difference between total and structural unemployment, and the difference between actual and expected inflation.

 

 

Scott Kupor on VC funding (FT Tech Tonic, 31 min listen) Scott Kupor from Andreessen Horowitz talks about conditions needed for start-ups to grow, the future of venture capitalists (VCs) in a globalised world, and the potential drawbacks of a VC-dominated market. Entrepreneurs now have more choice when identifying financiers. Kupor suggests that VCs try coaching, mentoring, and providing post-investment solutions for their portfolio companies. In return, entrepreneurs should understand venture capitalist logic. Companies with better ‘founder-product’ fits and storytelling skills are more likely to succeed.

Looking ahead, Kupor argues that areas including computing-driven biotech, financial services, and core enterprise infrastructures interest him. On a global scale, the VC scenes in China and India are growing fast, but both markets are hard to break into. Europe has a well-developed ecosystem but is subject to the free flow of human capital post-Brexit. Finally, Kupor warns against the current wealth transfer from the public into the private market in the US, saying this creates inequality problems and is detrimental to the US economy in the long run.

 

Why does this matter? Having brilliant ideas turned into products or services that impact the lives of many is always good news for the economy. But is the entrepreneur’s business model solid enough to create value? And are VCs’ financing decisions rational enough? The recent flops of high-profile unicorns in the public markets one of many notable testaments to Kupor’s comments. As tech giants such as Alphabet also aim at areas that Kupor has interests in, we can anticipate new fields from which economic vitality stems. Finally, for the public-private market power struggle and the resulting inequality in wealth, recent moves from the Federal Reserve have shown that regulators are expected involve themselves in this issue and prompt policy-level reforms.

 

 

Trade Talks 107: Making Services Trade Great (Peterson Perspectives, 21 min listen) This year’s World Trade Organisation report focuses on the trade of services and in this podcast Alan Beattie from the Financial Times explains why services trade receives so little media coverage. The impact of goods trade is more tangible to most people and also lobby groups of the goods sectors are better organised. Then Stela Rubinova and Roberta Piermartini from the WTO introduce four major modes of services trade: buying services from entities in another country, going in person to another country to purchase services, companies setting up foreign affiliates to sell their services abroad, and finally, individuals going abroad to sell services but not employed by a local subsidiary.

 

Services Trade

Services trade has grown more quickly than the trade in goods and currently distribution services, banking, and telecommunications are the biggest players. But areas like education, healthcare, and construction – led by China’s Belt-and-Road initiative – have lots of growth potential. Services trade is also the most education-centric area across economies because human capital is extremely important for this sector.

 

Why does this matter? Against the backdrop of an upcoming global downturn, a growing services trade appears like a strong rope we can hold onto. Maybe it is time for investors to pay a bit more attention to the broader notion of ‘international trade’. The intangible side of this business certainly deserves more credit as it essentially brings together investments, exports, and consumption on a cross-border scale. If the WTO outlooks regarding the potential of services trade are well recognised, it will be worth anticipating how services trade is going to be the next crucial driver of global growth.

 

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)