Markets have been left reeling after the Fed’s ‘hawkish’ cut and President Trump’s escalation of the US-China trade war. Stocks have tumbled, the dollar has rallied, and bond yields are falling to new lows.
Our first two podcasts break down these major events. Seasoned market strategist Juliette Declercq criticizes the Fed’s limited action. She argues that tight dollar liquidity conditions are contributing to weak global growth. Meanwhile, former central banker Adam Posen argues that the US’s trade policy is at the heart of global uncertainty and that the Fed should not act again.
Elsewhere, UBS’s Head of Asset Allocation America, Jason Draho, makes the case for investing in longer-dated bonds when portfolios have large allocations to equities. We also feature a podcast on the issues facing the Chinese Communist Party as it approaches its 100th anniversary: President Xi Jinping is increasingly worried about the recent unrest in Hong Kong and Taiwan.
Finally, we turn to the world of start-ups and the boom in Fintech ventures shaping the future of the big banks. Some 15,000 newly founded firms are disrupting the space and scrambling for funding.
And if you are worried that your summer break is slipping away too fast, try rethinking your perception of time – I explore the idea in my latest podcast.
Juliette Declercq: Powell should be fired! (Macro Voices, 14 min listen) Juliette Declercq, the founder of JDI Research, considers Powell’s 25bps cut last week as a precious bullet that missed its target. She agrees with Trump that Powell fails to understand domestic forces at work and consequently wrongly aimed at the demand-side of the economy rather than the supply-side. The former is essentially consumer sentiment, driven by absolute levels of employment and compensation rather than year-on-year changes – it’s therefore relatively insensitive to the end of the business cycle. The supply-side (business and CEO confidence) portrays the opposite behaviour, being driven by earnings growth and necessity to deliver on valuation levels. The two indicators are diverging, forcing the Central Banks to bridge the gap through the provision of cheap borrowing (Fig.1). Declercq also explains the importance of the interest rate ‘impulse’ driving economic activity, rather than the interest level itself. The Fed must deliver on rate cut promises that the market has already consumed. She also claims that the ongoing global slowdown is due to a lack of dollar liquidity worldwide. The Fed had the capacity to turn the dollar around last week but instead drove it to 2-year highs. Despite these developments, Decelrqc believes recent dollar strength is still, ultimately, unsustainable.
Why does this matter? Whether a supporter or a critic of the Fed rate cuts, it’s worrying to hear that Powell might be getting the big picture wrong. This could be, of course, politically driven, but is important to keep in mind for incoming monetary decisions.
Top of the Morning: ‘Assessing stock-bond portfolios’ (UBS On-Air, 14 min listen) A simple 60/40 portfolio holding consisting of S&P500 equity and US government bonds would have performed impressively both last year (+13%) and in the past twenty. Jason Draho, who is Head of Asset Allocation America at UBS, starts with the basics: the strong performance is not only due to the general bull market in equities and bonds, but also because bonds show less volatility than stocks. This reduces overall portfolio risk. Furthermore, Draho points to a negative correlation between the two products, offering a natural hedge. But he raises an important point: not all safe treasury bonds are made the same when it comes to portfolio diversification. In theory, longer-term bonds return more, with strips reaching yields of 20%. Draho recommends adjusting the type of government bonds you hold based on how much equity risk you are willing to take. The more stock with which you fill your portfolio, the riskier the bonds you should hold. Diversification isn’t always perfect, however – bonds sell-off when interest rates are rising, but rate hikes are also generally bad news for equities, as we saw in 2018.
Why does this matter? This week we saw investors fleeing to safety spooked by escalating trade wars, with gold up 2% – hitting its highest level in six years – and treasury bond yields sliding. Volatility indexes such as the VIX are surging. In light of the recent Fed rate cut, investors can protect themselves against a stock market rally by allocating the right type of treasuries. UBS recommends shifting away from shorter-dated bonds into much longer-term debt or even strips to offset the equity losses that they see incoming.
Talking Politics Guide to … The Chinese Communist Party (Talking Politics, 28 min listen) In 2021 the Chinese Communist Party will celebrate its 100th anniversary, enjoying the longest standing communist rule in recorded history. In this podcast, historian of China Hans van de Ven discusses the roots of the movement and its extraordinary rise to a single-party power – which he claims involved a lot of luck. The CCP didn’t become a Maoist party until World War II when Mao began focusing on expansion and successfully attracted typically neglected supporters – those in the countryside, the youth, and the scholars. Today, the Party is still dominant in Chinese life, even though market reform has allowed commercial powerhouses such as Alibaba and Tencent to emerge. As van de Ven explains, however, the CCP still calls the shots on all big decisions. Technology is transforming communication and transparency, and in light of the incoming anniversary President Jinping is worried that the dark side of the party’s growth will come to light.
Why does this matter? It’s easy to see the one party rule in China as an unbreakable norm, but in light of their 100 years of rule, young, educated Chinese people are questioning their history and the status quo. Jinping has aggressively concentrated power, but is now contending with a slowing economy, trade issues with the US, independency calls in Taiwan, and Western criticism of his treatment of Uighurs. This has had a considerable effect on the economy: this week, the Renminbi hit its lowest level in 11 years. Beijing should expect to face some difficult questions.
The Trade War and the Fed, with Adam Posen (Trade Talks, 20 min listen) On Wednesday the Fed cut interest rates 25bps for the first time in more than a decade. A day later Trump announced a further tariff at 10% on Chinese imports, ending the month-long truce in the US-China trade war. In this podcast, Adam Posen, a former central banker, considers the impact of these two moves. The rate cut is strongly related to the definitive shift in the Fed’s approach to economic policy, which now seems to focus on the collective wellbeing of international economic development. Posen explains that Trump’s rash behaviour in the US-China trade war, combined with his apparent disregard for the US consumer, contributes to a pool of uncertainty. He also points out that despite a positive economic outlook, this uncertainty has led to poor quality economic growth in the US. Overall, though, he doesn’t believe there will be another interest rate cut as a knee jerk reaction to the latest slap of tariffs. Posen does, however, bemoan the lack of macroeconomic modelling tools or Fed insight to forecast the effect of these tariffs. Posen reveals that his team is working on building a better model for this.
Why does this matter? While it is true that trade uncertainty is weighing on growth, the Fed has been reluctant to stay on the side-lines. Indeed, in the most recent Fed meeting they cited trade as a reason for being dovish. We wouldn’t be surprised by dovish comments from the Fed in coming weeks.
Businessweek Extra – Hans Morris (Bloomberg Businessweek, 23 min listen) Hans Morris, the founder of Venture Capital fund Nyca Partners, discusses how the Fintech start-up boom is shaping the future of finance. Founded in 2014, the fund’s goal was to bridge Silicon Valley and Wall Street – the latter at the time still unaware of the powerful tech wave emerging. Now there are some 15,000 VC-backed Fintech ventures. The catalyst for growth was the availability of technology but also the advent of the cloud, reducing infrastructure costs. Most importantly, however, was the mindset change from mass doubt to mass trust in online security. Morris’s roles as a President at Visa and CFO at Citigroup prepared him for investing in Fintech, but he explains that it’s complex to handpick a winner. He then explains his fund’s unique network base of 55 senior LPAs (Limited Partner Advisors), who both act as investors and an invaluable source of experience and advice to founders. The list includes Osama Bedier from Google and Brian Finn From Credit Suisse.
Why does this matter? Nyca Partners just raised a fresh $210m for its third Fintech focused fund, riding the surge of Fintech start-ups – last year, investment in the space reached an all-time high of more than $12 billion, with Robinhood, Coinbase, and Plaid all raising multi-hundred-million-dollar rounds. As a recent KPMG report discusses, regulators are waking up to the expansion and are calling for strict data protection and risk management.
(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.)
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