The Signal From Commodities

Concerns over the Chinese economy, a withdrawal of speculative demand, and strong supply growth have all weighed on commodity prices over the past few months. All three of these forces should ebb over the coming months, providing a more benign cyclical backdrop for commodities and commodity-related investment plays.

To access the full report entitled “The Signal From Commodities”, please click here.

Strategy Outlook Third Quarter 2016

Our Global Investment Strategy service recently published their Q3 Strategy Outlook, which discusses the major investment themes and views we see playing out for the rest of the year.

Key take aways from this quarterly report include:

  1. Global Macro Outlook: The Brexit vote was a wake-up call for policymakers across the developed world; reflate growth/wages, and reduce/reverse the surging income inequality that gave rise to this populist anti-globalization revolt or be voted out of office. This report chronicles how a global savings glut and now dearth of capital investment have been so deflationary as to drive interest rates to record lows.
  2. Credit-Sensitive Fixed Income: Maintain a neutral overall spread duration position for now. Corporate spreads may perform well as sentiment improves post-Brexit, but U.S. corporate balance sheet erosion will limit excess returns; European corporates, by contrast, will continue to benefit from the ubiquitous search for yield and ECB support.
  3. Equities: Incrementally reflationary policy in response to political uncertainty and populist pressure will boost global growth relative to expectations, which, admittedly, may remain subdued through the summer until the European growth fallout from Brexit becomes clearer.
  4. Currencies: The dollar bull market remains intact; the U.S. labor market has tightened sufficiently to expect some wage pressure to materialize, which, in conjunction with looser fiscal policy, will boost growth enough above trend to warrant moderate rate hikes that markets do not yet discount.
  5. Commodities: The cure for low commodity prices will ultimately be low commodity prices, but the prospective growth in Chinese demand for base metals is unlikely to absorb the glut of excess capacity too quickly.

To access the full report entitled “Strategy Outlook Third Quarter 2016”, please click here.

A Trump Victory Would Be Bullish For The Dollar

The latest Global Investment Strategy Weekly Report entitled “A Trump Victory Would Be Bullish For The Dollar” challenges the notion that a Trump win would be bad news for the dollar. All three of Trump’s signature policy proposals – increased deficit-financed infrastructure spending, a more restrictive immigration policy, and trade protectionism – are dollar bullish. These policies could cause the U.S. economy to overheat, forcing the Fed to raise real rates more than it otherwise would. In terms of other asset classes, equities could rally in the near term following a Trump victory, but are likely to face stiff longer-term headwinds. Treasurys would still suffer modest losses, while, ironically, the one asset that could suffer the most from a Trump victory is gold.

To access the report entitled “A Trump Victory Would Be Bullish For The Dollar”, please click here.


China Needs More Debt

The latest Global Investment Strategy Weekly Report entitled “China Needs More Debt” focuses on the premise that China has fallen into the same sort of “fiscal trap” that ensnarled Japan in the 1990s. Unprofitable investment projects undertaken by Chinese state-owned enterprises are a necessary evil, comparable to Japan’s “bridges to nowhere”. China’s underlying problem is not that the economy suffers from overinvestment. Instead, the country is demand deprived; discussions of overinvestment confuse the symptom with the disease. Structural factors will ensure that China continues to churn out ample savings for years to come. Any efforts by the Chinese authorities to curb credit growth will result in a sharp economic downturn. China will continue to generate excess capacity and export deflation to the rest of the world, which is positive for bonds. The government will stealthily backstop bank loans in order to ensure that banks keep lending without the embarrassment of having to undertake highly-dilutive capital raises. We recommend going long the most hated equity sector in the world: Chinese banks.

To access the report entitled “China Needs More Debt”, please click here.