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AB-NORMAL TIMES

AB-NORMAL TIMES 800 546 Quantyx

The second wave of contagion has arrived and the markets, once again, take no notice. They are not interested in the “here and now” of the real economy, only in the certainty that central banks will do everything they can to save “Wall Street” and governments will do everything they can to save “Main Street”. The markets remain in the grip of the “digital revolution” and de-carbonisation mania, but will soon be forced to re-evaluate the “brick economy” as well.

A half-year has passed since the sensational and belated volatility purge of last March, which saw one of the most violent, rapid and partially ephemeral bear markets in financial history, and the “bosses” of Wall Street are tackling the last quarter of the year with the conventional good dose of caution, which limits but does not cancel out a more than justified underlying optimism.

Prudence is part of the physiology of financial storytelling, it is the raw material that fuels healthy upturns; it never disappears, not even when sanity turns into conscious madness. The markets are always “worried” and the current situation is no exception.

On the one hand, in fact, the post-Covid period has inflated a considerable bubble in the segment of the so-called gorillas’ of the ‘new economy(to use a terminology that was very much in vogue at the turn of the millennium), which feeds the greed of the rediscovered people of online trading and performance anxiety of professional managers. On the one hand, the phenomenon fuels the spectres of memory and historical recourse, while on the other, it garners authoritative justifications[1].

On the other hand, the American presidential elections are looming, the outcome of which remains uncertain and difficult to translate into perspective, regardless of the winner; finally, the news of the pandemic is rampant, with second waves, vaccines appearing and disappearing like mirages in the desert, and predictions on the new or next normal. But what if we were in the midst of an ab-normal? At this point, the reference to Mel Brooks’ 1974 masterpiece Frankenstein Junior is inevitable.

As for the fate of the equity markets, an unshakeable but justified underlying optimism remains dominant. This is largely dependent on the reassuring dominance of the Federal Reserve. The sacred institution has long been “technically” chained to the moods and wishes of Wall Street, not the other way around.

If the indicators of “financial stress” soar – the best known of which is the equity risk premium, which rises when markets fall – the Fed responds with increasing immediacy and intensity and the merry-go-round starts again, faster and faster. Despite high volatility, the US stock market is now[2] finding it increasingly difficult to lose even a few percentage points. Never before has the slogan “so much the worse, so much the better” proved so true as it has in recent weeks: if the horizons for the economy and businesses are clouded over, the central banks and governments are immediately left with infinite room for manoeuvre. For the former, in a whisper, many “experts” are even suggesting direct purchases of shares (there is no shame any more…), as the central banks of Japan and Switzerland have been doing for some time.

It is not only the market of Amazon, Apple, Google and company, but also that of the big asset managers and their clients, of Blackrock, Vanguard, Goldman or JPMorgan, who pull the strings in Washington and ‘catch’, as always, the controllers.

Central banks have kindly given us negative rates and yields

bonds on ice. A gift for whom?  Certainly for the new rentiers of equity investment; the others, those accustomed to “clipping coupons”, should prepare to change their ways or go through an interminable via crucis, paved with negative real rates and inflation that will slowly return.

The time of revenge for public spending is fast approaching. In the eurozone, the Recovery Fund and more are on the way. In the US, the first round of “truly excellent and innovative[3] aid will soon be joined by others to the tune of USD 1600-2000 billion. For Powell, the real risk is that of spending too little, not too much. Even the Monetary Fund[4] is throwing fiscal austerity policies overboard and is calling for a boom in public investment in developed countries, starting with the modernisation of crumbling infrastructure.

But if this is the frame of reference, schematic as it may be, there really is no alternative to equity investment: the acronym “TINA”, “there is no alternative“, is precisely CNBC’s mantra.

But where and how? The Chinese figures are impressive: the recovery there has been driven, as always, by investment, not subsidies. China, Japan and Korea are coming out of the pandemic well and are excellent solutions for a minimum of geographical diversification in equities. Moreover, Beijing’s sovereign bonds, with yields of 3%, are good for part of the bond portfolio.

Growth sectors and markets (US and technology) deserve less exposure than in the past, precisely because some caution is called for, but without exaggeration.

For the last few enthusiasts who like to go against the wind (the ‘contrarians‘), the ‘value‘ index par excellence is the UK index (the FT 100 capitalises less than Apple alone) and, for the more courageous, that of Piazza Affari.

But the time is also coming for infrastructure, and not only for alternative energy, as public investment will be back on the agenda.

We will see what happens to the dollar after the elections, but the much-vaunted depreciation is yet to be proven. Gold, the yen and the Swiss franc remain points of reference, both for the dark times and in the long run, should real inflation arrive to reduce the real value of the mountain of debt which, tirelessly, continues to grow.

Disclaimer
Quantyx Advisors S.r.l. Via Valera 18/C 20020 Arese (MI)

This publication is distributed by Quantyx Advisors. While every care has been taken in the preparation of this publication and its contents are believed to be reliable, Quantyx Advisors accepts no responsibility for the accuracy, completeness or timeliness of the data and information contained herein or in the publications used for its preparation. Consequently Quantyx Advisors declines any responsibility for errors or omissions.
This publication is provided to you for information and illustration purposes only and does not constitute an offer to the public of financial products or the promotion of investment services and/or activities either to persons residing in Italy or to persons residing in other jurisdictions, a fortiori when such offer and/or promotion is not authorised in such jurisdictions and/or is contra legem if addressed to such persons.
Neither Quantyx Advisors nor any company belonging to the Quantyx Group shall be liable, in whole or in part, for any damages (including, but not limited to, damages for loss or loss of earnings, business interruption, loss of information or other economic loss of any kind) resulting from the use, in whatever form and for whatever purpose, of the data and information contained in this publication.
This publication may only be reproduced in its entirety and exclusively by quoting the name of Quantyx Advisors, all commercial use being prohibited. This publication is intended for the use and consultation of Quantyx Group’s clients to whom it is addressed and, in any event, is not intended to replace the personal judgment of the persons to whom it is addressed.


[1] Carlyle Digital revolution.

[2] The volatility wake up call for investors, El Erian.

[3] Powell says too littlestimulusis worse than toomuch.

[4] https://www.imf.org/en/Publications/FM/Issues/2020/09/30/october-2020-fiscal-monitor.

THE ENIGMATIC “NEW NORMAL”

THE ENIGMATIC “NEW NORMAL” 1000 569 Quantyx

In the ‘post-Covid’ world, irresistible and partly unpredictable forces are at work: it is the ‘next normal‘. Everything is changing with accelerated speed in a framework in which, at least on a business level, the winners take everything, even more than before, and the losers either disappear, or survive on the margins, subsidised by the state. After the wage, comes the citizenship bonus.

There is a part of us that runs faster and faster to survive or prosper. For the rest of us, we are left with rents for the smartest, public handouts or expulsion from the market. How long can this last?

The behaviour patterns of companies, the state and households are being transformed. Consumer demand and the supply model of more flexible companies is undergoing a metamorphosis. Underlying it all is the acceleration towards digital adoption, both in the BTC and BTB worlds.

According to McKinsey[1], the factors shaping the future are the evolution of spending behaviour,   the state, which is increasingly ‘sovereign’.

Let us not be influenced only by the macro data certifying the collapse of consumer and investment spending and the surge in the household savings rate. Several sectors are booming.

Investment in technology is galloping, as is demand for furniture and home devices. Businesses are spending, anticipating the perhaps permanent effects of the pandemic: cloud computing, cybersecurity, machine learning and data mining remain the focus. Households are spending (see graph, Source: McKinsey) on new connections, broadband, innovative devices, online services and products, gaming, but also tables, chairs and sofas. Above all, governments spend money that they “create” with debts that may never be repaid. But this is how it is today.

Work organisation and company logistics are changing. The resilience of business processes is increased, with a more considered assessment of the underlying risks: supply chains are secured, onshoring is back in fashion, financially weaker business partners are protected, cash levels are increased through new long-term debt and divestment of non-essential assets.

In the meantime, there is an accelerated transition to remote working[2] (see graph, source: McKinsey), which implies the adoption of new organisational structures focused on effectiveness and speed in decision-making.

The emphasis is on cutting hierarchical levels and “flat” organisational structure, taking responsibility and empowering talent to focus on priorities. Radical flexibility is needed to accelerate ‘time to market‘.

The raw material of the companies of the future, the ‘human resources’, the Marxian ‘workforce’ of post-modernity, is participating despite itself in the never-ending challenge based on the search for talent, with ever lower geographical barriers: it will always be possible to find someone ‘smarter‘ than you behind a home workstation wherever they are, from Alaska to Vietnam.

While populist politics rants about the banality of ‘one is worth one’, the world of work, at least at the level of global corporations, seems to be going in a completely different direction. On the other hand, in Italy, for decades a ‘corporation free‘ country, who cares?

The next normal‘ is Wal Mart, which is joining Microsoft in bidding for Tik Tok‘s US business. The giant of traditional commerce is looking for space online, imagining the video platform for teenagers as a means of previewing the evolving tastes of consumers of the future, developing advertising and online sales, possibly creating its own alternative ecosystem to Amazon and E-Bay, a digital marketplace in which to bring together the products of its suppliers. And the deal is on the table at the behest of Trump, the standard-bearer of national interest, border closure and economic protectionism.

After the “L”, the “V”, the “U” and the “W”, some storyteller has invented the “K” shaped recovery: some go up, some come down. The pandemic, like and better than leverage, amplifies the competitive advantages of the oligopolistic masters of the digital economy and related sectors. The 2020 meteorite drastically separates losers and winners with activities in even contiguous sectors in a seemingly arbitrary manner. Many had bet on commercial real estate: the winners were those who bet on the warehouses of goods that feed the online distribution network; the losers were those who invested in infrastructures supporting tourist or corporate mobility.

The consequences are also radical for deciphering financial market trends. Macro analyses, if they were ever of any use at all, lose their value. This is all the more so given the turnaround of central banks (financial repression ancillary to deficit financing) and public policies, with the state once again assuming, after at least four decades, a key role, now undisputed, of support, direction, investment and redistribution (see chart opposite). In short, a remake of the old ‘tax & spend’ of the[3] 1970s, which some claim to repaint as an ‘innovative’ state. We shall see if it is capable of producing ‘good’ debt [4]or, as has always been the case in our latitudes, ‘bad’ debt.

In the stock market, the microeconomic narrative wins, the separation between the ecosystem of digital giants and (almost) everything else. It is the ‘inconceivable’ world of the continuous growth of ‘network’ and stock market returns; the oxymoron of ‘parallel divergences’ comes to mind: in the long run, (almost) all stock prices rise, but some always rise more than others, regardless of GDP, rates, exchange rates, governments and so on. On the other hand, over the last thirty months, while sales and profits of the FANG+ index have grown by 80 and 140% respectively, those of the MSCI ACWI global index have remained flat and fallen by 20%.

It is hard for the elderly not to look back at historical events. The climate is very reminiscent of the “TMT” bubble of 2000 (see graphs): at that time, too, the clamorous divergence between the valuations of stocks linked to the Internet, broadband expansion and the convergence of media and telecommunications and those of the so-called “old economy” was macroscopic, but justified by many. It must be said that the situations are only apparently comparable. Back then we were faced with thousands of start-ups, very few of which survived (including Amazon and Google); today we are faced with the global domination of apparently unassailable giants. We shall see if the ending is different.  

Disclaimer
Quantyx Advisors S.r.l. Via Valera 18/C 20020 Arese (MI)
This publication is distributed by Quantyx Advisors. While every care has been taken in the preparation of this publication and its contents are believed to be reliable, Quantyx Advisors accepts no responsibility for the accuracy, completeness or timeliness of the data and information contained herein or in the publications used for its preparation. Consequently Quantyx Advisors declines any responsibility for errors or omissions.
This publication is provided to you for information and illustration purposes only and does not constitute an offer to the public of financial products or the promotion of investment services and/or activities either to persons residing in Italy or to persons residing in other jurisdictions, a fortiori when such offer and/or promotion is not authorised in such jurisdictions and/or is contra legem if addressed to such persons.
Neither Quantyx Advisors nor any company belonging to the Quantyx Group shall be liable, in whole or in part, for any damages (including, but not limited to, damages for loss or loss of earnings, business interruption, loss of information or other economic loss of any kind) resulting from the use, in whatever form and for whatever purpose, of the data and information contained in this publication.
This publication may only be reproduced in its entirety and exclusively by quoting the name of Quantyx Advisors, all commercial use being prohibited. This publication is intended for the use and consultation of Quantyx Group’s clients to whom it is addressed and, in any event, is not intended to replace the personal judgment of the persons to whom it is addressed.


[1] McKinsey & Company, Covid-19, Briefing Materials updated 6th July 2020.

[2] A recent market survey carried out by the British company CCS confirmed that more than 34% of respondents (730 top managers) expect more than 50% of the workforce to be able to work in smart working in the future.

[3] “Tax and spend is the new economic orthodoxy”, Financial Times, https://on.ft.com/2C12GdS

[4] Indirect reference to Mario Draghi’s much-quoted recent speech at the 2020 Communion and Liberation meeting.

MARKETS: BROADWAY OR WALL STREET?

MARKETS: BROADWAY OR WALL STREET? 1000 569 Quantyx

Executive summary
There is Covid, but the markets do not seem to see it: they are looking ahead, amidst soaring economic data and economists’ forecasts that are perhaps too pessimistic. The balance is precarious, and volatility remains too high. As always, the signals are contradictory. Stock markets are experiencing a “V-shaped” recovery that remains highly uncertain: equity investments should be viewed with greater caution, even in a context where equities and liquidity remain the reference assets. There is a growing feeling that Europe, with better control of the pandemic and fewer political risks (US presidential elections looming), could finally do better than Wall Street.

Broadway or Wall Street?
It is a new spectacle, which surprises us every day, despite the fact that the score is always the same: we are only going up, supported by the Central Banks (and, on this occasion, by government activism at planetary level), in good times (expanding economies) and bad (recession watered down by policy makers).

It is estimated that over the next two years, even in the least pessimistic scenario, more than five years of real growth in per capita income would be lost in many advanced economies: this would be the fourth most severe recession in the last 150 years, after 1914, 1930-32 and 1945-46 (dates associated with two world wars and the rise of totalitarian regimes). The hypothesis seems irrelevant to the masters of the markets, who look ahead and see different scenarios. Assuming and not conceding that financial asset prices still have a predictive meaning. There is no shortage of contradictions, and explanations and justifications that bring everything back to rationality[1] abound.

Interest rates, still at their lowest in years, mostly negative even in nominal terms, would signal continued deflationary pressures. Or would it? Central banks now even manipulate ETFs that replicate the junk bond market; in Japan, the BoJ has been buying equity ETFs for years.

Conversely, the “equity risk premium” implicit in the Standard & Poors 500 index, which has returned to levels not far from 4%, would “in normal times” reflect expectations of sustained and stable economic growth, perhaps even inflation, not an economy hit by a tsunami. But these are not normal times and, above all, the “new normal post-Covid“, apart from the most obvious trends (and therefore taken for granted by the markets), is still to be imagined.

Memories

The fact remains that we are here to record a quarter with Wall Street posting +18.5% (but the DAX did even better, see table below), the best performance since Q4 1998, better even than Q2 2009.

The comparison between the three periods is not accidental, there is a thread linking them linked to the transformation of the Central Banks: from lenders of last resort to illiquid but solvent counterparties, they have turned into puppeteers of the markets (the “godfathers”), endowed with unlimited capital, conscious agents of the mutation of a financial ecosystem now dominated by the great managers of global capital (the “masters”).

The 1998 episode followed the rescue of the famous hedge fund Long Term Capital Management, the ‘Nobel Prize fund’, the first to use leveraged arbitrage on a large scale, with tens of thousands of open positions financed by repo agreements. [2]The 1998 episode followed the rescue of the famous hedge fund Long Term Capital Management, the first to use leveraged arbitrage on a large scale, with tens of thousands of open positions financed by repo agreements. Its impending insolvency threatened to paralyse the money markets on Wall Street. A foretaste of what would happen ten years later. The bailout, hastily organised by the New York Federal Reserve, with the participation of all the major US[3] investment banks, was followed by an overwhelming injection of liquidity[4] that took the stock markets back to their highest levels (the S&P 500 rose by 21.5% in the last quarter of the year), starting the run-up to the great ‘TMT’ bubble that[5] exploded in the spring of 2000.

The second quarter of 2009 saw [6]the start of what was to become the longest-lasting bull market in history, which lasted until February of this year. In September 2008, the failure to rescue Lehman Brothers accelerated the crisis in the global financial system, which had been corrupted by the excesses of structured finance and speculative overexposure to real estate. The Federal Reserve and the US Treasury managed to save the system even then, weaving a rescue net based on moral hazard. After Lehman was allowed to fail, all other financial institutions were bailed out and the first quantitative easing operation was launched. This was followed in the next decade by many other operations by the central banks of the main advanced countries. It is no coincidence that the term ‘QE infinity[7] has been used.

The second quarter of 2020 was no different (see graph). But each time the stakes, and the risks, get higher[8]. With the arrival of the Coronavirus meteorite, which caused the fastest and deepest recession in living memory, the Monetary Authorities were very quick, in the two central weeks of March, to orchestrate an intervention of exceptional intensity and effectiveness, aimed at nipping market tensions in the bud (skyrocketing volatility and soaring spreads); at the same time, governments also intervened, for once in direct (and we shall see how temporary) support for household income and corporate liquidity. The market immediately took note of this and reacted accordingly.

Who will pay the bill, and how?

In the mid-2020s, a year that will go down in history, the impact of ongoing economic policy interventions in the major economies is far greater than in the 2008 – 2009 period. Fiscal initiatives alone imply an average worsening of budget deficits by around 8% in 2020, with estimates still very divergent (see charts).

Monetary policy interventions were the most rapid – more and more often now Central Banks are filling gaps in the responsibility and proactivity of governments – and the most significant in terms of size. The result of the coordinated activism of the major Central Banks (G3 countries) has made available to the market an increase in their balance sheet assets of some $4.4 trillion, or 10.7% of their countries’ total GDP. The net result is an increase in G3 central bank assets of 23% over the course of 2020 and corresponds to more than 3.5 times the global liquidity expansion experienced at the time of the Great Financial Crisis. In addition, the Monetary Authorities are ensuring that interest rates will remain at zero for what market participants see as an infinite amount of time. [9]What alternative do institutional investors and their private clients (who belong to the highest fifth percentile of the wealth distribution) have but to pour a flood of money into ETFs [10]representing the major stock indices that then trickles down to the riskiest and least liquid assets?  

The combined effect of the growth in central banks’ balance sheet assets and the surge in the private prudential savings rate is causing the greatest expansion of liquidity in recent history (see graph). This liquidity, in one way or another, continues to flow to the financial markets and stagnates there, encountering countless obstacles that prevent it from flowing to the real economy. [11]

The objective of reflating the economy, so dear to the Central Banks as to be unrealistic, is moving further and further away, and is only having an effect on financial asset values. Real inflation, assuming and not conceding that it is a desirable objective (once the genie is out of the bottle it becomes uncontrollable), will start with the direct monetary financing of public deficits: we will get there, sooner rather than later, when savers understand that investing in government bonds, with increasingly negative real yields, has become the classic trap for frogs immersed in the pot of cold water on the cooker.

Here and now: the immediate market outlook

The perennial battle between the bulls and the bears became fiercer in June, with volatility remaining fairly high (VIX stable above 35). As always in recent years, the cyclical “value” sectors’ attempt to recover seems to be already losing steam.

On the other hand, the improvement in the performance of European markets seems to be more solid than that of the US, despite the stainless momentum of the technology sector. Uncertainty also conditioned the movements of other reference assets: the dollar, after a brief period of weakening, stabilised at 1.12 against the euro; gold continued its moderate positive trend; oil stabilised, pending positive news on the demand front, while currencies and bonds of emerging countries remained chronically weak.

The trend in the main risk-off indicators, US treasuries, continued to signal the expectation of an uncertain economic recovery (30-year yields fell further from 1.6% to 1.4% over the month, while 10-years returned to the 0.6% zone, with implied real interest rates expected to be between -0.8% and -1%). The reliability of these indicators is extremely doubtful, for reasons already mentioned: prices are literally made by the Federal Reserve, which continually intervenes with words (“forward guidance“) and deeds (purchases on the market, including the junk segment).

Wall Street’s temporary stall reflects the dichotomy between nowcast indicators signalling a strong recovery in consumption, activity and mobility post lockdown and the still worsening medium-term outlook.

The gradual reopening of activity fuelled a sharp rebound in the coincident PMI indicators of economic activity in both manufacturing and services. The latest IHS manufacturing data from early July, very close to the 50 mark, which separates growth from contraction, even saw China and France surpass that mark.

In advanced countries, household sentiment indicators are soaring, not least because many jobs are only temporarily lost: immediate government support has had a positive impact on household incomes. However, uncertainty reigns supreme: as time has gone by, tempers have cooled as there is growing evidence that the pandemic is not yet under control, as outbreaks have rekindled everywhere, and as infections have surged in US Sun Belt states (see chart) and South America. About 40% of US households see the reopening process either suspended or reversed.

 The medium-term economic outlook remains hazy, but clearly worsening, and is subject to extraordinary variability compared to ‘central’ expectations.

The Monetary Fund has revised down its 2020 global growth forecast from -3% to -4.9% compared to April, with a recovery in 2021 of 4.8% (see graph). The World Bank “sees black”, with -5.2% followed by +4.2%. The OECD is even more pessimistic: in the base scenario it estimates a 6% squeeze this year, followed by a 5.1% recovery; in the most negative scenario,

which foresees a second pandemic episode at the end of 2020, global economic activity would contract by 7.6% this year and remain well below pre-crisis levels at the end of 2021.

It remains to be seen how reliable the estimation models used (essentially the same for everyone) are in the face of an exogenous shock of this magnitude and the truly impressive reactions of policy makers. The impression is that the peak of pessimism has been reached, and that the ex post outcomes will be less catastrophic than is currently expected.

The markets, given the apparent valuation levels[12] (opinions differ as always), seem to be discounting a rather rapid recovery. This scenario would see economic activity recovering to the pre-covid level expected by the end of the year and profits more or less fully recovered by the second half of 2021. The alternative scenario, the one espoused so far by most international institutions, sees these targets pushed forward by 12 or even 18 months.

All in all, the guidelines proposed in recent months remain sustainable.

The preference for equity exposure, sustained mainly by the stimulus provided by policy makers (which will regain vigour and brutal incisiveness if a possible resurgence of the pandemic were to occur) remains valid, especially in the absence of credible investment alternatives, but greater caution should be exercised in view of the greater risks that characterise the US market, which remains the main global benchmark.

Washington and Wall Street: dangerous relations.

First of all, the medium-term economic outlook could worsen further due to the pandemic, which is out of control in the southern states: according to the OECD, US GDP will fall by 7.3% (8.5% in the worst scenario) in 2020, with a recovery of 4.3% (1.9%) in 2021. These expectations are much worse than in April.

Then there is the issue of the glaring asymmetry that now characterises the main Wall Street indices, dominated by the capitalisation of a very few digital multinationals (see graph). How long this situation, in some ways aberrant, will last remains a mystery. The absolute prevalence of the sectors that represent the present and future engine in terms of technological innovation and the ‘green’ revolution is justified, but the measure has been exceeded.

In proposito citiamo testualmente un noto analista di borsa statunitense che, di recente, ha ben rappresentato i possibili (dicotomici) sviluppi: “Last Wednesday, the Nasdaq composite exceeded by 2% its pre-Covid-19 high of 9817, set on February 19, but then fell back sharply. If the Nasdaq now rebounds above last week’s 10,000 level, history suggests that the bull market will resume, and many more intrinsically worthless companies will soar to unimaginable heights. If, on the other hand, the outbreak of madness on Nasdaq turns out to mark a double top, the post-Covid equity bubble could deflate very quickly and the next big event for investors could be a test of the March lows. Which will it be? I have no idea, but I am pretty sure that market psychology, rather than monetary policy or economic data, will decide the answer”.

However, the speed of recovery and technical market issues are likely to take second place to political events: the presidential elections are fast approaching, with Trump about 14 percentage points behind Biden in the polls. In the coming months we can therefore expect all kinds of things from the outgoing president, on his favourite battlegrounds: the leading rhetoric at home, focused on the mantra “low & order” and that of continuous international provocation, with the focus of the crosshairs this time on Europe, without neglecting China and the border countries. The first steps have already been seen: the Administration has suspended negotiations with the EU on the Digital Tax Plan and blocked any attempt at tax reform that might affect digital multinationals, threatening retaliation if the EU goes ahead. Meanwhile, Washington is considering new tariffs worth around $3.1 billion on a wide range of products exported by France, Germany, Spain and the UK, in retaliation to EU subsidies to Airbus. With China, it is thought that Potus may throw out last year’s agreement and raise tariffs again.

Apparently the Wall Street bosses, who love continuity, especially when it is pro-big business, are hoping for a second term (however dangerous it may turn out to be). The Biden alternative, assuming he keeps his promises (which is always doubtful) and has a majority in the Senate, could be “punitive“. It is hard to imagine that a democratic president would not intervene to try to contain if not reduce the great advantages accumulated by one per cent of the population over the last thirty years and the oligopolistic power of global corporations. Significant fiscal interventions will be necessary both for corporations and for the wealthiest, also to contain the budget deficit that is estimated to be between 13 and 16% of GDP in 2020.

In conclusion, despite the Federal Reserve‘s relentless activism, US markets may be less attractive to international investors than in the recent past.

Brussels, safer port?

Against this backdrop, a rebalancing towards European assets (in addition to Japan and the Asian tigers) is appropriate and is already under way, supported by recent economic trends and the recovery of credibility of European institutions. While it is true that medium-term expectations are still negative[13], the balance of power must also be

tipped towards the much improved economic data and the management of the pandemic, which is much more efficient and less erratic than in the US. But the decisive factor is the signals coming from Brussels and Berlin. The European institutions have finally shown a surprising capacity to react, thanks to Chancellor Merkel‘s turnaround, by defining how the ESM is to be used and, above all, by approving the “Next Generation EU“, a maxi plan for recovery worth 750 billion euros, 500 billion of which in the form of contributions and 250 billion in loans. The Fund is linked to the new EU budget 2021-2027 (the “multiannual financial framework”), which has a total scope of 1,850 billion.

However, the European Commission’s proposal was not unanimously approved by the 27 member states at the EU Council meeting on 18-19 June due to opposition from the ‘frugal countries’. It was decided to postpone everything until mid-July. In spite of the difficulties, the impression is that, with the agreement of France and Germany, the Recovery Fund could get under way and that it could represent an epoch-making turning point, the birth of true European budgetary sovereignty.

We will see, in mid-July, how it will end.

Milan, 2 July 2020

Enrico Ascari                                        

Disclaimer
Quantyx Advisors S.r.l. Via Valera 18/C 20020 Arese (MI)

This publication is distributed by Quantyx Advisors. While every care has been taken in the preparation of this publication and its contents are believed to be reliable, Quantyx Advisors accepts no responsibility for the accuracy, completeness or timeliness of the data and information contained herein or in the publications used for its preparation. Consequently Quantyx Advisors declines any responsibility for errors or omissions.
This publication is provided to you for information and illustration purposes only and does not constitute an offer to the public of financial products or the promotion of investment services and/or activities either to persons residing in Italy or to persons residing in other jurisdictions, a fortiori when such offer and/or promotion is not authorised in such jurisdictions and/or is contra legem if addressed to such persons.
Neither Quantyx Advisors nor any company belonging to the Quantyx Group shall be liable, in whole or in part, for any damages (including, but not limited to, damages for loss or loss of earnings, business interruption, loss of information or other economic loss of any kind) resulting from the use, in whatever form and for whatever purpose, of the data and information contained in this publication.
This publication may only be reproduced in its entirety and exclusively by quoting the name of Quantyx Advisors, all commercial use being prohibited. This publication is intended for the use and consultation of Quantyx Group’s clients to whom it is addressed and, in any event, is not intended to replace the personal judgment of the persons to whom it is addressed.


[1] As has always been the case in the past before the subsequent bitter acknowledgements.

[2] LTCM’s principals included Robert Merton and Myron Scholes, who were awarded the Nobel Prize for economics in 1997, as well as a number of leading figures from the Salomon Brothers bond house.

[3] Except Lehman Brother, who refused to participate and perhaps paid the price ten years later.

[4] It then became fashionable to use the periphrasis ‘Greenspan put’ to indicate the then Fed Governor’s propensity to intervene to ‘save’ the markets (the ‘put’ was first activated with the 1987 crash).

[5] The acronym TMT stood for technology, media, telecommunication.

[6] The Anglo-Saxon specialist press shamelessly spoke of the ‘end of the market’ and the ‘death of capitalism’.

[7] If the Central Banks’ purchases of securities at maturity are renewed and subscribed to an increasing extent, with a continuous growth of the balance sheet assets, they are in fact “printing money” in a covert way (subscribing to increasing shares of securities issued by the Treasury).

[8] This is also because for years now, the players have been eating their leaves and the golden rule for winning on the stock exchange has become that of buying on every downturn (even if the timing remains difficult to interpret).

[9] “We’re not thinking about raising rates. We’re not even thinking about raising rates,” Fed Governor Powell recently said, certifying that at least until the end of 2022 interest rates will remain on ice.

[10] It should be noted that these instruments are increasingly issued and managed by global asset managers (Blackrock, Vanguard, Fidelity, etc.), who have by now consolidated an oligopoly that also indirectly exerts an enormous power of conditioning on the US Administration.

[11] It has to be said that expanding economic sectors require high knowledge rates but low capital intensity. The picture may change in the future if the expected large-scale infrastructural interventions and the green conversion of fossil fuels take place.

[12] The graph on the left shows a scenario of the expected earnings performance of the S&P 500 in a historical comparison; the graph on the right (source: Goldman Sachs) shows a historical comparison of various valuation metrics to demonstrate that the US market is overvalued, but not to an alarming degree.

[13] For the ECB, the Eurozone’s GDP is seen as falling by 8.7% in 2020 followed by a recovery of 5.2%, for the IMF it is -8%; the OECD, in the base scenario, assumes a fall of -9.1% in 2020 followed by a recovery of +6.5% in 2021; in the worst scenario it is -11.5 and +3.5%. Goldman Sachs is not far behind, hypothesising -11% for the EU, France, Spain, Italy between -13 and -14%, and Germany at -9%.