In this presentation, we outline our argument for gold entering a new structural bull market.

We believe the risks of an intermediate decline are higher than average and would advocate a more cautious stance toward equities right now.

As funding strains appeared in March, the USD surged. Then the Fed stepped in with massive foreign exchange swaps as a way to lend USD to foreign central banks, intended to ultimately be lent to borrowers in need of USD.

Since the March 23, 2020 low, when the Federal Reserve announced basically unlimited liquidity via a variety of programs, corporate spreads have narrowed, and the stock market has risen substantially. In the chart below, I overlay US investment grade spreads over the S&P 500 Index.

While not 100% correlated, there tends to be a pretty good relationship between movements in the S&P 500 and credit spreads, both investment grade (IG) and high-yield (HY).

Despite the relief rally yesterday, financial conditions have tightened significantly in the last couple of weeks. This likely explains why the Fed just made an emergency 50bps cut to the fed funds rate.

Fed funds futures are on the move today, with longer dated futures now pricing in now two 25bps rate cuts by the end of the year. However, the market does not seem to be pricing in, yet, any material chance that the Fed cuts at its March meeting.

This morning the monthly job openings and labor turnover (JOLTS) report was released, and it came in significantly shy of expectations. While Bloomberg’s consensus estimate was for 6.925 million job openings, the actual number came in at 6.423. It is important to keep in mind that this is December data, so it doesn’t yet reflect the impact of the coronavirus on business operations.

Sell-offs can start for any number of endogenous or exogenous events. A mentor used to tell me, “There are a million reasons to sell a stock, but one reason to buy.” What he meant was that there are always personal reasons to sell...

10-Year US Treasury yields are down about 30bps so far this year, continuing the trend of lower rates that began in the fall of 2018 and confounding investor expectations for rising rates which would validate a turn up in economic activity.

US corporate profits are down from the 2014 peak. In this mid-quarter special report, we dive deep into corporate profits, taxes, profit margins and the increasing government debt levels that have propelled stock and bond prices higher, in our view, leading to rising equity and government bond valuations.

As hopes for a trade deal fade, similar to May and August, the CNY is devaluating against the USD again. In our work there are a handful of fairly mechanical relationships that should follow if the CNY continues to devalue.

In our mid-quarter update, we highlighted the plunge in the University of Michigan’s consumer confidence indicator, suggesting that “good feelings” among consumers were starting to fade. Often surveys offer a leading glimpse into economic activity. A more confident consumer is more likely to make those big-ticket purchases, like homes and cars, as well as consuming more services.

In this mid-quarter special report, we do a deep dive into the University of Michigan survey and discern what it may mean for the vigor of the consumer moving forward, prospects for a recession and consequences for asset allocation.

Germany’s second largest bank, Commerzbank, reported a fourth straight quarter of falling revenue and projected lower profit for the year, suggesting clients have been impacted by trade tensions.

On January 3, 2019, Chinese stocks made a v-shaped bottom and surged into a peak on April 19, 2019. Since then, stocks have corrected by about 7%, dropping, recouping about 6% of the peak to trough decline that ended on June 6, 2019.

Yesterday BASF, the largest chemical company in the world, announced its earnings would fall well short of analyst estimates in the second quarter. Earnings season in the US begins in a few weeks. So, we ran through our charts to harvest any insights about how corporate earnings may play out.

So far this week, we’ve received a few data points that reinforce the manufacturing slowdown taking place in the US. Below is a calendar of events for the last couple days.

The IMF made news yesterday by announcing its latest updates to 2019 GDP growth around the world. It guided global growth down and made an especially large cut to Eurozone growth estimates, bringing them down 30bps since January to 1.3%.

Yesterday’s stocks reacted to a raft of overnight foreign economic data that it perceived positively. In this note, I’ll run down the data and my doubts about that reaction. The hits began with China’s Markit manufacturing PMI jumping to 50.5.

Credit markets often move before the equity markets, and this can offer helpful information about the near-term path of equity prices. In general, I like to see credit confirming what the equity markets seem to be saying. When credit stalls, like it is now, I take notice.

Knightian uncertainty is named after University of Chicago economist Frank Knight (1885–1972), who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit. The concept of a separation between risk and uncertainty is an important one right now given how severely politics are driving markets.

The slide in oil prices in October accounted for most of the move in 10-Year US Treasury bonds via the inflation risk component of the term premium. The two series are always highly correlated and this is a mechanism through which oil price changes are incorporated into US Treasury pricing.

The S&P 500 experienced a waterfall decline in December, something rarely seen. Measuring the decline using a 30-day Wilder Relative Strength Index, it is clear the extremes recently experienced.

Oil prices have swung drastically over the last couple months. The market was unprepared for the US to grant waivers amounting to nearly one million barrels/day to fill the void expected to be left by the drop in Iranian exports. Instead of Iranian exports plunging to almost zero by November...

Energy is the best performing sector in four of six market-regions. (From two market groups, Developed and Emerging, and three regions, Americas, EMEA, Asia, we get six market-regions.) Among Developed Market sectors, energy is 5^th YTD, down about 5% less than the MSCI All Country World Index.

Overnight, new data released in China suggests businesses are having a tough time lately. Cheung Kong University produces an alternate PMI Business Conditions Index in association with the China Federation of Logistics and Purchasing. The latest data point plunged more than 10 points from its end of July reading and is currently sitting at 41.88, deep into contraction territory.

The Chinese stock market is closed this week for the Golden Week holiday. On this side of the Pacific the markets have been busy this week with US Treasury bond yields breaking out and stocks selling off—especially technology—based on the revelation that China implanted devices in technology products shipped to the US.

Among the major groups of stocks around the world that we follow, US small-cap stocks have been the best performer over the last decade as the USD experienced a strong bull market. US small caps have outperformed our mid/large group of developed companies by almost 40% over the last 10 years.

Over the summer, some groups within the global equity market sold off sharply, leading to the current trends of poor performance and weak breadth. Foreign stocks, cyclicals and value-oriented sectors were the hardest hit.

As many have documented, the main channel of transmission for the Fed’s quantitative easing policy was via the term premium component of US treasuries. As the Fed’s balance sheet doubled from 2010 to 2015, the term premium embedded in US Treasuries fell from 2.5% to -75bps. The Fed is now shrinking its balance sheet, which on the surface would seem to suggest a rising term premium.

Most commodities have suffered lately with the backdrop of tariffs and China’s devaluation. But some have fared worse than others, and there is information content to the relative move in commodities. While copper catches many of the headlines (i.e. Dr. Copper, the metal with a Ph.D in economics) the most significant decline has occurred in lumber.

We calculate statistics for all developed and emerging equity markets around the world. For our mid/large cap indexes, we take the top 85% of all stocks in a given region or country and convert all prices into US Dollars.

Stock and currency markets often take their cues from the credit markets, so we find it instructive to keep a close eye on credit spreads and credit default swaps (CDS). Looking at the credit markets in the emerging markets, we think there may be initial signs that the storm that has engulfed emerging market assets may be over.

There has been considerable discussion lately about the slowly inverting yield curve and what it may signal for growth prospects going forward. Commonly used as a proxy for the yield curve is the spread between 10-Year US Treasury yields and 2-Year US Treasury yields.

The US shale boom has led to a surge in the production of crude oil, and much of this production has been exported in recent years. In the chart below, I plot the gross exports of crude oil from the US. Beginning with almost nothing several years ago (in part because crude exports were banned until December 2015), US daily crude exports have eclipsed two million barrels per day.

The Chinese Yuan has fallen precipitously in the last 10 weeks raising concerns of whether China was using the currency as a weapon to preemptively mitigate looming tariffs.

Yesterday, someone threw in the towel on EM bonds. The Van Eck JP Morgan Emerging Market Local Currency Debt ETF (EMLC) is the largest and most liquid vehicle to invest in emerging market local currency bonds.

Talk of a trade war with China has recently dominated the discussion in financial markets, overshadowing the other major story playing out in the US economy—normalization of the energy markets. I thought I would answer the question of whether trade with China or oil was a bigger economic issue.

Venezuela has experienced a collapse in oil production this year as the country sinks into chaos. Daily production is down from 1.7M barrels/day at the end of last year to just 1.44M barrels/day at the end of May. Year-over-year production declines are even larger, down about 500k barrels/day.

Semiconductor and semiconductor capital equipment stocks have been stellar performers lately, a trend we have been a bit slow to recognize. So, I decided to do a deep dive on semis and semiconductor capital equipment stocks to see if there is opportunity left to capture.

Yesterday we got the latest glimpse into US corporate profitability. Depending on the series observed, corporate profits are either flat-lining or rising. Before-tax corporate profits, the blue series in the chart below, are actually net down by $32 billion from the peak in 2014.

John Williams, one of the newest members of the Federal Open Market Committee, wrote an article titled “The Future Fortunes of R-star: Are They Really Rising?” where he summarized his views on real neutral interest rates.

Ten-year US treasury rates broke out this week on the back of news that looks unequivocally like an inflationary boom. Earlier in the week the Atlanta wage tracker ticked back up to 3.3% year over year. Wages moving higher, check. Oil prices broke above $71/barrel. Commodity prices higher, check.

There are two basic drivers of the London Interback Offered Rate (LIBOR): 1) policy rates and 2) a variable premium. Starting with the policy rates component, in the chart below I compare the interest rate on excess reserves (IOR) and USD LIBOR.

With the European Central Bank dragging its feet to begin the monetary tightening cycle, the difference between US and German rates has opened up to record levels. In the chart below, I show the yield on 10 Year US Treasury Bonds and 10 Year German Bunds.

Bitcoin made a closing high on December 18, 2017 at $18,764 and then proceeded to fall to the closing low for the year, $6,604.48 on April 6, 2018. Since then, it has rebounded almost 50% to today’s level of $9,670, having broken back through the 50-day moving average.

Price excesses have built up over a long bull market. Stocks are expensive, and the volatility shock wave is traveling the globe. This quarter, we discuss the risks correlated with the current volatility, potential new sources of instability, and the sectors that could be the performance beneficiaries of these trends.

Last night the China Shanghai CSI 300 index fell a bit more than 1.6%, taking out February lows and setting a new YTD low for the index. This is important since the global equity markets have a very high correlation to Chinese stocks.

Recent weak data emanating from the Eurozone has been weighing on German Bund yields. The significant drop in the Eurozone Citigroup Economic Surprise Index (CESI) has pressured German Bund yields lower.