Who will win?
As far as the our funds are concerned it doesn’t really matter who wins the next US election. Biden would likely outspend Trump initially, so we marginally favour him from a performance perspective. Longer term, no difference.
Whoever wins will look to pass a large and popular stimulus bill so we could get huge spending in the “first 100 days” that are now so popular with politicians. US Debt at $30 trillion by mid next year is entirely possible. That is an awful lot of new money.
Biden, should he win, might also reach for loan forgiveness on student debt and other instruments and that could have a significant impact on the capital markets. If investors are forced to take a haircut rather than the debt being directly nationalised the impact could be profound. Trump on the other hand is more likely to spend his way out of trouble, the playbook of loud noise and borrowing from the last four years being likely to continue.
One thing is certain, there will be many more US dollars in circulation by 2024 and there will still only ever be 21 million bitcoins.
Looking at the odds, Biden is a clear favourite. He moved from a 56% chance of winning to a 62% chance after the first debate. It’s a betting market with over $150m matched, so it’s a big move.
The erosion of quality
In 1980, over 50% of bonds were rated A or higher. AA and AAA are higher but A means that despite being impacted by economic conditions the “obligor’s capacity to meet its financial commitment on the obligation is still strong.” Generally, whatever happens, you are getting paid.
Now it’s 2020. A and higher rated bonds account for only 17% of outstanding bonds. Over 50% are officially junk bonds, that is “non-investment speculative grade” or lower.
30% are rated B, which sounds good, after all it’s right next to A. But B is actually defined as “speculative or highly speculative”. No doubt many of the B’s will pay, but many will not.
The whole thing looks like a casino with no consequence. For 40 years, it has made complete sense to lever up, buy stuff and hope they keep going up and they have. The pinnacle of this casino might just be Donald Trump as President. This is exactly how he has built his empire, simply with massive leverage into rising prices. It’s not a criticism of him, why not ride the wave if you can? But it does show you that it is a system with no real consequences. Borrow as much as you can for as long as you can, then it’s heads you win and tails you might need to wait five years to have another crack (depending on your jurisdiction).
Maybe that is capitalism, but when the price of the borrowing is subsidised by everyone else, the game looks rigged. How does it end?
One possibility is in a series of cascading liquidations. We nearly got this in 2008 when Lehman Brothers fell over, its default ran riot through the banking system and meant that governments intervened in an unprecedented way to prevent the cascade of bankruptcies that would have ensued.
In a small way we saw that happen in Bitcoin in March this year, a mini economy all on its own. Traders buy bitcoin with leverage, up to 125x, believe it or not. There was so much leverage in the system, that when the price started falling it kicked off a cascade of margin calls, people sold, prices fell, more margin calls, more price falls and pretty soon leveraged traders were wiped out and some funds closed the following week. The price fell 45% in three days and then recovered in two months, without the leverage. That to me is capitalism because there were some major losers in that period and the system was cleansed. Bitcoin traded 24/7 without bailout or assistance and the price simply was what it was.
In the “real economy” if such a thing exists, once asset prices start falling the system starts to creak. Banks are horribly exposed to property (particularly in Australia). Ask anyone on the street though and they will tell you property prices only go up. I cannot disagree with that, other than to say that things that never happen have a strange habit of happening.
In the end though, there are only three ways to eliminate debt, pay it off, go bankrupt, inflate it away. We know that governments around the world aren’t paying off national debt, we also know that countries can’t really go bankrupt – they can default but they cannot declare bankruptcy. They have only one option and they are pursuing it vigorously and they will continue to.
Despite the deflationary pressures of the next few years, they will eventually succeed in spectacular style.
Look at the state of you
For that reason, as well as the huge deficits incurred by the states this year, Standard and Poors has suggested the Reserve Bank might need to step in and buy some of the debt the states will need to issue. A policy referred to as “Monetary Financing”. This policy means simply printing money and buying the bonds directly from the Treasury. It is all the more remarkable because it has very powerful friends in no less than former Prime Minister Paul Keating. As you would expect, Mr Keating’s argument is compelling on the face of it:
“the central bank ought to remember its role is to ensure full employment, and in an economic emergency that means breaking with orthodoxy and doing what is sensibly required to achieve that goal.”
“the RBA should be funding the mountainous sums of government spending required to support the corona-ravaged economy, and it should not rule out the policy option of buying government bonds directly from Treasury to do so.”
Keating went further, accusing the Reserve Bank of indolence and conservatism in what turned into a direct attack on the Governor, Philip Lowe. As I have said before, Dr Lowe is one of the few central bankers with a shred of credibility left.
It’s quite the stoush. Very rarely in Australia do you get a clash like this between thoughtful people. Keating is formidable, even at 76 years of age. At the other end of the temperament spectrum sits Dr Lowe, no less intellect but much quieter.
I’m calling the winner now. It will be Dr Lowe. For his whole life he has played a very long game, I doubt he is about to be blown of course by a former Prime Minister. He has given an outright no to negative interest rates and I seriously doubt that he is about to start printing money to buy the bonds of profligate Australian states. In July he said it was “not an option under consideration in Australia”.
Incidentally, Keating has form. He wrote a letter to Prime Minister Bob Hawke once which was pretty withering. Worth a read on the long weekend.
Moving to matters cryptographic. Cryptocurrency exchange Binance has been on a huge run this year. It is the second largest component of our Managed Fund and having added it at $8 in 2018, we increased our exposure in the January this year at $16.
While some of their products are questionable in my view (for example the offer of 125x leverage on bitcoin), they tend to benefit from everything that happens in this space. As an exchange, buying or selling suits them either way. New tokens suit them, whether they succeed or fail.
The main thing though is their speed of release. They appear to be able to build very highly sophisticated products in months. The website and the platform are totally unrecognisable from 12 months ago, indeed we are running an experiment trading 40 pairs of perpetual futures via their API, mostly because it’s incredible that is even possible.
I am reminded of Amazon when I think of Binance. You know that whatever the product is you are looking for in this space, they will have it. They are volatile like everything in this sector but I am just so impressed with their products, their apps and their brand. Predictably though, customer service is awful. For a fast growing company I guess that is no surprise and is much easier to fix than a bad website.
Currently, they have an incredible 482 vacancies. This is going to be massive company. Even more impressive is the global spread of the opportunities. The BNB token currently stands at $29, below its all time high of last year of $31. I don’t see that record lasting long though.
Europe for dessert, as usual.
European banks since 2008 have effectively been trading insolvent. There have been multiple bailouts across Europe since then, referred to in political parlance as “recapitalisations”. In the first chart we have the Spanish Stock Index IBEX, followed by its largest constituent, Banco Santander.
The Spanish Index is down 55% from it’s peak and is sitting at 1996 levels, the country and many of its companies are simply bankrupt without EU support. Then we have the once mighty Banco Santander. It has 200,000 employees around the world and even after the share price fell 90% from its peak, it remains the largest company in Spain. Back in 2007 its market cap was the equivalent of 20% of Spanish GDP.
The list of weak banks in Southern Europe is long: Santander, BBVA, Caixa, Bankia, Banca Popolare di Vicenza and Veneto Banca. I won’t go on but I could list 20 at least. Even more worrying, the strongest of them all in Northern Europe, HSBC is wobbling. Their shares have halved in the last year but no time to cover their issues here. Anyway, it’s bleak.
Against this backdrop the European Central Bank has launched support measures known as they CSPP (Corporate Support Purchase Programme) and the PEPP (Pandemic Emergency Purchase Programme). Both of these involve the ECB buying both government and corporate bonds across Europe to support “prices and stability”.
This week a Member of The European Parliament, Mr Paul Tang of the Netherlands, wrote to the President of the ECB and although his letter isn’t public, the reply is.
From the reply I would guess he has asked the following:
“Dear Scarf Lady, which bonds do you hold and how much are they worth?”
The bonds are the property of the people of Europe, so it is reasonable for an elected official to ask this question.
The reply is a work of art: