Despite St. Louis Fed president James Bullard’s warning to investors not to expect a 50 basis point rate cut at the July FOMC, the fact remains that the January 2020 Fed Funds futures contract implies a yield of 1.60%. This means Wall Street, seriously spooked by the synchronized global economic downturn, expects the Federal Reserve to cut its policy rate by a cumulative 75 basis points – three rate cuts – in the next six months. The yield on Uncle Sam’s ten year note has slipped below 2%. No less than $11 trillion in government bonds in Europe and Asia trade at negative yields. China’s GDP growth has fallen to 6%, the lowest since 1990, amid a trade war with Washington. Six months ago, the financial markets had speculated about the end of the easy money bonanza that defined the post-Lehman decade as the Powell Fed hiked rates four times in 2018.
Now Wall Street angst focuses on a potential US recession, a slump in nonfarm payrolls, muted inflation pressure and the worldwide plunge in government bond yields. Mario Draghi bluntly stated that "additional stimulus will be required” even though the ECB policy deposit rate is a negative 0.4% amid a Paris-Berlin chasm over naming the hard money zealot Bundesbank head Herr Doktor Weidmann as his successor. Yet the foreign exchange markets, mesmerized by the prospect of a tighter fiscal policy and a kinder, gentler, rate cutting Powell Fed bid the Euro higher to 1.14. After doing squat for three years, gold has surged to $1430 an ounce, even as the US and Iran trade diplomatic threats, cyber-warfare assaults and tighter sanctions in the Gulf and pro-democracy protests in Hong Kong escalate. As the ancient Chinese curse puts it, “may you live in interesting times”.
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My conviction buys on Microsoft at year end 2018 at 97 were vindicated with a vengeance now that the Evil Empire of Redmond trades at 135, the most valuable company in the Milky Way, ahead of Apple. A 37% profit on the ultimate software/cloud computing megacap colossus is a gift from Mr. Market (and Mr. Nadella) but I would book profits as the next six months suggest storm cloud for an overvalued Mister Softy. At 120 – 124, I promise to write another column on Microsoft if the stars, dear Brutus, are once again aligned in our favour, the cosmic dance of risk-reward metrics that enable my brain to strategize hypothetically, conditionally and, hopefully, profitably!
I will also book profits on the US real estate investment trusts (REIT’s) that have been such spectacular performers in 2019 in my favourite segments – data centers, industrial logistics, senior housing, cold storage, FDA biotech trials/medical facilities and prisons (no occupancy ratio issues there as the growth of the privatized prison gulag in Trump’s Amerika attests). As the old rap song goes, , baad boy, bad boy, what you gonna do when they come for you! The plunge in interest rates and 3.2% GDP growth was wildly bullish for listed real estate equities on Wall Street.
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The macro zeitgeist is still tilted towards growth, not value, though, I would ask my friends in the Gulf to heed the immortal words of Guns n Roses in November Rain. “Nothing lasts forever. We both know hearts (risk appetites) can change. It’s hard to hold a candle in the cold November rain” As a manchild of 1990’s New York, the macro milieu of 2019 evokes eerie echoes of 1998 to me. After all, 1998 was the year Indonesia went bankrupt, Russia defaulted on its rouble debt, India and Pakistan conducted nuclear tests and fought a war in Kargil, Shweta Shetty won my heart with her hit video “Johnny Johnny Joker”, the LTCM hedge fund was bailed out by Wall Street – and the Greenspan Fed slashed rates thrice even though the US economy was not in recession.
The lessons of 1998 tell me that Big Tech will remain the flavor de jour on Wall Street. It is probably a good idea to avoid high yield debt as the US shale oil output surge above 12 MBD and a slump in global petroleum demand makes $40 Brent inevitable. After all, no less than 20% of the US high yield debt market is oil and gas – and this is no time to leverage dodgy credit bonds (heresy of heresies to Dubai Private Bankerjis who needs to skim 1 full point from client account per trade “idea”). For now, I expect the yield on 10 year US Treasury debt to fall to 1.80%, the US Dollar Index decline to 93 – 94 and gold rise to $1500 an ounce, the highest since 2013.
Shorts? Uber at 45 and Beyond Meat at 170 make strategic sense, though I find no shortage of overvalued sectors (US homebuilders, regional banks) or countries (India, GCC banks, Colombia).
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As a global investor, I am neurologically programmed to heed the smoke signals of central banks as I formulate strategy, calibrate risk and switch asset classes/sectors/credit strata. So 1996 was the year of “irrational exuberance” (Greenspan), 2007’s howler was “subprime will be contained” (Bernanke. Yeah right, it was contained all right – just ask the ghosts of Lehman!). 2012 gave us “I have a big bazooka and I will do whatever it takes to save the Euro” (Dottore Draghi) and 2019 was Jay Powell’s promise to be “patient” about rate hikes after his four 2018 Fed Funds rate hikes triggered a vicious 20% fall in global equities between Halloween and Christmas last year. Yet the Fed has removed the word “patient” from the June FOMC statement. What exactly is Chairman Powell smoking in his monetary philosophers pipe? Like Greenspan and Bernanke, will Powell bequeath the world a speculative mania, an asset bubble and an epic bust with his full throttle easy money policy? The lessons of 1998 and 2007 tell me yes. In times of panic, markets turn to Mommy (the Fed) but what if Mommy feeds baby a poisoned chalice, as the Powell Fed obviously did with four rate hikes amid a global slump/trade war in 2018? Then the lender of last resort makes Wall Street go Mamma Mia!
I am a nervous bull on emerging market bank shares in Southeast/North Asia (Lion City, Kingdom of Siam, Hermit Kingdom, Renegade Province). If the world does not end in Osaka, Alibaba ADR and the Luckin Coffee IPO are my two E-commerce/consumer growth proxies in the Middle Kingdom. I am also bullish Brazil (pension reform) but bearish Argentina (Peronistas return to power and Christina, the latest incarnation of Evita/Isabelita, replaces Macri). I will not voice my views on South Asian equities as I get accused of bias on both sides of the Radcliffe Award – a honour in my contrarian worldview. After all, Mohandas K Gandhi once observed “consistency is the virtue of an idiot" – and I desperately hope I am no idiot!