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.

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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.

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Helicopter Money: A Semi-Hostile Q&A

The latest Global Investment Strategy Weekly Report entitled “Helicopter Money: A Semi-Hostile Q&A” examines this very topical issue and concludes the following points:

  • Helicopter money is coming, and once deployed, will prove to be much more successful than most people imagine.
  • Investors should stay long Japanese and German inflation swaps.
  • USD/JPY and EUR/USD are ultimately likely to reach 140 and 0.9, respectively, over the next two years.
  • The U.S. economy will remain resilient enough to make helicopter money unnecessary but a strengthening dollar will greatly curtail the ability of the Fed to raise rates.
  • Investors should overweight Treasurys relative to bunds and JGBs.
  • Helicopter money will benefit gold as well as the beleaguered European and Japanese stock markets.

To access the report entitled Helicopter Money: A Semi-Hostile Q&A, please click here.

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Hiatus In The Dollar Bull Market

The latest Global Investment Strategy report is entitled “Hiatus In The Dollar Bull Market”, and examines why the greenback has sold off this year and what the path forward is. The Weekly Report also discusses the Fed and the U.S. economy, the BoJ, and China, namely arguing the following points:

  • The FOMC statement underscored the Fed’s willingness to take a ‘go slow’ approach to raising rates. While a June rate hike looks increasingly unlikely, a September and December hike remain in play.
  • The lagged effects from the easing in U.S. financial conditions over the past few months should boost growth in the second half of the year. Diminished labor market slack is also likely to put upward pressure on wages.
  • The BoJ’s reluctance to admit that NIRP has been a flop so soon after it was launched helps explain why it failed to provide more monetary support at this week’s meeting. We expect a new round of easing measures this summer.
  • Chinese stimulus efforts should last a few more months, after which time commodity prices will resume their structural downward trend.
  • As such, while the greenback could weaken over the next few months, this will simply be a hiatus in the dollar bull market.
  • Investors should remain tactically bullish risk assets for now, but be prepared to shift to a more cautious stance in the second half of the year.

To access the report entitled “Hiatus In The Dollar Bull Market”, please click here.

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