By Bilal Hafeez 16-07-2019
In: post, Newsletter

Macro Hive Podcast Playlist: Lev Loan Troubles / Democrats Weak Dollar / Bitcoin De-energised


(total reading time: 5 mins)

There’s mounting nervousness over the Fed’s pivot to dovishness and its potential impact on asset markets. In our first podcast, therefore, JPMorgan analysts warn of repeating a 1970s policy error. But this time, rather than seeing inflation, we could see asset markets tumble. The analysts are especially worried about the leveraged loan markets. Similarly, in our second piece – a Bloomberg podcast – veteran market watcher John Authers argues that high stock valuations are only being supported by low interest rates and that the earnings fundamentals of companies are in fact poor.

The other big policy focus for investors this week is the US’s apparent weak dollar policy. And it’s not just President Trump touting one, Democrat presidential candidate Elizabeth Warren wants a weak dollar, too. She referenced the work of Joe Gagnon, a senior fellow at the Peterson Institute, so we feature an interview of him where he argues that currency intervention by the US would be better than using import tariffs.

Elsewhere, we feature a podcast on Bitcoin’s energy problem: mining for the coin is putting strains on countries’ electricity grids. This could lead not only to financial regulators clamping down on crypto markets, but also the imposition of energy regulations. We also have a podcast arguing that US Attorney General Barr may be more anti-trust than many investors think, which is important in light of Congressional move to bring forward anti-trust actions Big Tech.

Finally, I wrote a tongue-in-cheek note on England winning the cricket World Cup on Sunday and my attempts to spot a possible impact on markets. And on a serious note, you may find my latest podcast on how to become a super-forecaster of interest. It’s only 6 mins long, but it will raise your investing game.

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Food Fights at the Fed and in the Leveraged Loan Market (Eye on the Market by J.P. Morgan, 9 mins) It’s now certain that a Fed cut is coming soon, but what’s driving it? This short, punchy podcast weighs up the probability of legitimate economic reasoning or political bullying. We can draw parallels to the 1970s, when the then Chairman of the Fed, Arthur Burns, caved into Nixon’s pre-election demands to boost the economy, only to end up with stagflation that took a decade to resolve. Fortunately for Jay Powell, Chairman of the Fed, there are a number of structural forces pushing inflation down that didn’t exist 50 years ago – de-unionization, globalization, and internet transparency. Instead, there might be an asset bubble forming. Of note, is the growing covenant-lite loan market, now representing 80% of the whole US leveraged loan market. These could be hiding a decline in underlying quality. Also, practices such as artificially ‘massaging’ earnings using EBITDA add-backs are becoming more common.

Why does this matter? The timing of a default crisis may be postponed with Fed easings, but when those easings happen the loan recovery rates are likely to be much lower – possibly closer to 40% than the historic norm of 70%.

 

TINA’s Back in Town? (What Goes Up, 36 mins) TINA, or ‘There Is No Alternative’, to lower rates is the theme of the day. Bloomberg senior market editor, John Authers, wants a renewed focus on Shiller’s CAPE measure of equity valuation. This uses ten-year trailing earnings of stocks rather than just one year. Recently the measure has started to decline as the poor earnings of the 2007-8 crisis years are falling out of the trailing window. But that could prove temporary as the outlook for earnings season is gloomy – 80% of companies have guided lower, often citing trade tensions. Instead, it appears valuations are becoming more reliant on low interest rates. Authers believes emerging markets could be the outperformer in this context and he remains perplexed by negative yields on high yielding corporate debt and several EM debt markets.

Why does this matter? Some have clung to a drop in CAPE as a supportive factor for equities, but that decline is probably temporary. Instead, valuations are entirely reliant on rates staying low for long.

 

Joe Gagnon on Currency Manipulation, Trade Imbalances, and Libra (Macro Musings with David Beckworth, 53 mins) A weak dollar policy has entered US political discourse. First it was President Trump, and now Democrat presidential hopeful Elizabeth Warren has also called for a weak dollar to reduce the US trade deficit. In her justification, Warren referenced Senior Fellow at the Peterson Institute Joe Gagnon’s work on the subject, so we’ve brought you Macro Musings’ interview of him. Gagnon argues that over one third of trade imbalances across countries can be explained by both their currency trade activity and fiscal policy. As a precaution, The US actually has an Exchange Stabilisation Fund of $100bn, which could be used to offset the currency intervention of other countries. He argues this is more effective than imposing import tariffs on specific sectors. Currently, however, Gagnon does not believe any major countries are manipulating their currencies. Turning to Facebook’s Libra, Gagnon sees it as a potential safe haven which is likely to be based on the IMF’s currency (Special Drawing Rights).

Why does this matter? A weak dollar policy could have support in both US parties, which suggests that the election may not derail it. In the mid-1980s, a weak dollar policy was a critical driver of the dollar, and it seems that we could be entering a similar phase again.

 

Bitcoin’s Energy Bill (The Indicator from Planet Money, 9 mins) Globally, Bitcoin miners use more electricity that the whole of Austria. Although the cryptocurrency is currently valued at $11,000, the electricity bill for a single coin can vary significantly – from $26,000 in South Korea to $4,000 in the US. Since this energy accounts for between 90-5% of bitcoin mining costs, location plays a critical role in determining profitability for the cryptocurrency’s miners. As this podcast explores, however, Bitcoin is designed with such inefficiency in mind in order to prevent easy mining flooding the market with coins.

Why does this matter? On top of concerns around money laundering and illegal cross-border flows, bitcoin investors now also need to worry about crypto markets being caught up in tougher environmental regulations. China has already shut down some bitcoin miners on excessive electricity usage. Meanwhile, the EU is reviewing its energy policy which could target these markets.

 

Behind Barr (The Information’s 411, 30 mins) US Attorney General William Barr has the final say in whether or not the Antitrust Division takes actions against the likes of Google or Apple. This podcast explores how Barr’s past roles on the board of Directors of Verizon and Time Warner may impact his approach to the anti-trust actions. Tech investors appear to trust his independence, especially as the Time Warner/AT&T merger went ahead even with White House opposition, yet Barr ended up making $1.7m selling AT&T stock. At 19 mins in, the podcast switches to the financial woes of Bird, the dominant player in the rental electric scooter market. As a seasonal business, they had a bleak winter, losing $100m on $15m revenue. Investors are now questioning the company’s $2bn valuation.

Why does this matter? Tech investors may have a false sense of how friendly AG Barr will be on anti-trust actions. His anti-trust philosophy may turn out to be bigger risk than initially anticipated. Meanwhile, more doubts are coming to trendy loss-making companies – the latest is Bird, but others like Uber will probably follow.

 

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