ALTERNATIVE MARKETS UPDATE - MACRO AND POLITICAL OUTLOOK SEPTEMBER 2020

Alternative Markets Update September 2020
Last week, tech stocks have experienced the first major loss since the start of the pandemic, after which they recovered enormously fast and reached new record levels. The recovery was mostly caused by the financial stimuli of central banks and the shift from companies to home office and similar reactions to the pandemic. Figure 1 shows the debt-to-GDP levels in 2020 and a projection of 2030. It is expected that all those will fall going towards 2030, except for the US. UK and France will likely remain at the level they are currently. Japan is currently by far at the highest level with also reaching a level of 250. One of the big topics is inflation, due to unprecedented money printing around the world, but especially in the US. Figure 2 shows the historical inflation since the global financial crisis in the US. The average during this time of the headline and core CPI are 1.6% and 1.8%, while they are currently 1.0% and 1.6% after their substantial fall when the crisis emerged.

Debt-to-GDP Levels, Source: Andrews Gwynne, International Monetary Fund & Oxford Economics, September 2020

US Inflation Since the Global Financial Crisis, Source: Andrews Gwynne & U.S. Bureau of Labor Statistics, September 2020

September PREVIEW by Macro Eagle
Famously, September is the cruellest month for equity markets, with the Dow down 41/70 times since 1950. Apart from the ongoing issues mentioned above the key events in the month ahead are: Treasury issuance and unemployment figures this week. ECB and Russian regional elections next week. New Japanese PM, TikTok deadline and FOMC during the 3rd week. Italian election during the fourth week. And the first US presidential debate in the last week. All while capital markets get hit by an avalanche of IPOs (Airbnb, Ant Financial, DoorDash, etc.). And don’t forget NATURE. In August we got fires and blackouts in California, hurricanes hitting the Gulf (Laura and Marco), the last ice shelf in Canada’s Artic breaking up and China/North Korea being hit by floods. But it is September when the hurricane season normally peaks.​

September Preview, Source: Macro Eagle, September 2020

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RESEARCH PERSPECTIVE VOL. 139 September 2020 Alternative Markets Update September 2020 Last week, tech stocks have experienced the first major loss since the start of the pandemic, after which they recovered enormously fast and reached new record levels. The recovery was mostly caused by the financial stimuli of central banks and the shift from companies to home office and similar reactions to the pandemic. Figure 1 shows the debt-to-GDP levels in 2020 and a projection of 2030. It is expected that all those will fall going towards 2030, except for the US. UK and France will likely remain at the level they are currently. Japan is currently by far at the highest level with also reaching a level of 250. One of the big topics is inflation, due to unprecedented money printing around the world, but especially in the US. Figure 2 shows the historical inflation since the global financial crisis in the US. The average during this time of the headline and core CPI are 1.6% and 1.8%, while they are currently 1.0% and 1.6% after their substantial fall when the crisis emerged. Figure 1: Debt-to-GDP Levels, Source: Andrews Gwynne, International Monetary Fund & Oxford Economics, September 2020 Figure 2: US Inflation Since the Global Financial Crisis, Source: Andrews Gwynne & U.S. Bureau of Labor Statistics, September 2020 Cryptocurrencies had a very strong recovery as well and had a YTD of more than 60% for Bitcoin (BTC) and more than 150% for Ethereum (ETH) at the end of August. Nevertheless, cryptocurrencies suffered too when tech stocks lost approximate 5% in one day. BTC dropped from around $12k to $10k and ETH from $450 to almost $300. BTC is trading at $10,238 and ETH at $351 as of 9th September 2020. Our crypto strategies are performing very well in 2020 so far, with YTDs of 86.6% for the Digital Asset Discretionary / Systematic Long Short strategy, 78.1% for the Token strategy and 57.5% for the Bitcoin Altcoin Actively Managed strategy. In private equity markets, biotech companies surpassed exits of software companies for the first time in ten years, as shown in Figure 3. Private debt is seeing more and more interest, as venture debt is booming is currently and it is expected that family offices are targeting venture debt even more going forward. The outlook for the real estate market is less positive, as offices are still empty or not used as much as before the crisis. In the UK for example, it is expected that 73% of businesses will downsize their office. Alongside with these developments, it is likely that commercial property prices will fall further in the near future. Figure 3: Exited Companies by Industry from 2006 to June 2020, Source: Pitchbook, September 2020 Macro and Political Outlook September 2020 by Macro Eagle Welcome to SEPTEMBER. 1 – August REVIEW With US equities recording their best August in 34 years, the market is basically telling us: “don’t fight the government (stimulus), the central bank (cheap money) or structural change (technology)”. This “melt-up” has been so strong (and lopsided towards BigTech) that sceptics across the board have been “forced out” (short interest on the NYSE is at a 16 year low) and benchmark-driven institutional money “forced in” – both fuelling further gains. In short: PARTY TIME! If it wasn’t for that whiff of “irrational exuberance”: stock issuances (IPOs) are up 85% year-on-year and a big pipeline of Tech unicorns is lined up to hit the market this autumn, an implicit recognition that valuations are highly attractive (for the seller). Or take Tesla/Apple, which surged on the mere news of a stock-split, that shouldn’t make any difference to valuations. At the same time equity markets have been shrugging at higher yields and an increasingly cloudy geopolitical picture. Bottom line: hold that drink tight! Figure 4: August Review, Source: Macro Eagle, September 2020 2 – GEOPOLITICS in August No shortage of head-shaking on the (geo) political front. Let’s start with the US, where it is ever more likely that the election ends up in a nasty “draw” (more below). Also, with China the bipartisan punchbag of choice, the Sino-American tensions continue to escalate. Latest: Trump’s executive orders against TikTok and WeChat (Aug 7th); US Health Sec Azar’s trip to Taiwan (Aug 10th), a first since 1979; and finally China’s response in the form of a missile practice in the South China Sea (Aug 29th). Otherwise we had the Belarus election (Aug 9th) followed by widespread riots. That in turn made Moscow nervous (Navalny poisoning, Aug 19th). We had a coup in Mali (Aug 18th), which matters as this is the EU’s first-line-of-defence when it comes to Sub-Saharan migration and counterterrorism. Then we had the Turkish-Greek spat over exploration rights. And if all of that wasn’t enough we had one of the largest non-nuclear explosions in history (Beirut). Markets largely unimpressed. Figure 5: Geopolitical Actions Around the World, Source: Macro Eagle, September 2020 3 – September PREVIEW Famously, September is the cruellest month for equity markets, with the Dow down 41/70 times since 1950. Apart from the ongoing issues mentioned above the key events in the month ahead are: Treasury issuance and unemployment figures this week. ECB and Russian regional elections next week. New Japanese PM, TikTok deadline and FOMC during the 3rd week. Italian election during the fourth week. And the first US presidential debate in the last week. All while capital markets get hit by an avalanche of IPOs (Airbnb, Ant Financial, DoorDash, etc.) And don’t forget NATURE. In August we got fires and blackouts in California, hurricanes hitting the Gulf (Laura and Marco), the last ice shelf in Canada’s Artic breaking up and China/North Korea being hit by floods. But it is September when the hurricane season normally peaks. Figure 6: September Preview, Source: Macro Eagle, September 2020 4 – Looking BEYOND September … … we will most likely get a US fiscal stimulus package by the end of September/early October, in time for the first presidential debate (Sep 29th). I would also think that Trump is pushing hard for a vaccine breakthrough during October (the FDA is hosting a “Vaccine Advisory Committee” on Oct 22nd … that’s the same date as the last debate). If history is a guide, markets should trade sideways into the election, as most of this is already in the price. It is the AFTERMARTH that matters most. If the election result is too close (as the my current model implies), then social unrest is almost pre-programmed. Add to that the expiration of pandemic-emergency-measures (unemployment, evictions) and the rise in bankruptcies … and you get a “winter of discontent”. More below. Figure 7: Outlook of the Remaining Year, Source: Macro Eagle, September 2020 5 - US ELECTION Paradoxically, the domestic violence (Portland, Chicago, Kenosha) has provided Trump with a the campaign slogan he didn’t have: “law and order”. And it is working, especially in crucial battleground states like Minnesota and Wisconsin. The danger with this tactic is obviously that it is one thing to hate “outsiders” (China, Mexico, Islam), but very different to see the enemy “within” (‘bad, evil people’). Especially in a country where firearm sales are at record highs. At the same time, Biden’s “grandfatherly/nice guy” image is fast becoming a liability (“Trojan Horse for the radical left”), especially with his memory-loss becoming increasingly visible. Add to that the Democrats’ inability to monetize Harris’ reputation as a tough prosecutor and you see why they are suddenly playing defence.   Bottom line: Biden is still ahead, but the gap is narrowing. In August alone he lost 1/3 of his lead in the polls and ½ of his lead in the odds. If this momentum continues then we are currently heading for the worst of all outcomes: an undecisive result, recounts in marginal states and disgruntled voters on Main Street. Hence, I do expect the Democrats to change their tactics, as playing it safe or underestimating Trump didn’t work for Hillary … and they know that. For those of us observing from the side-lines: get out the popcorn. Figure 8: Odds and Polls of the Presidential Candidates Being Victorious, Source: Macro Eagle, PredictIT and RealClearPolitics, September 2020 6 – COVID update While cases and deaths numbers globally continue to rise (graph1), the death rate (graph 2) is declining fast as testing becomes more ubiquitous and healthcare systems have learnt to cope. Hence even if we get a 2nd wave in the winter, it is unlikely that any developed healthcare system will risk collapse, which in turn means that “total lockdown” won’t come back. The bad (but necessary) news is that pandemic-relief-measures will have to be terminated, which in turn will see various zombie companies hit the wall in Q4, with the unfortunate side-effects of rising unemployment. Figure 9: Global Cases and Deaths of Covid-19 and the Percentage Deaths, Source: Macro Eagle, WHO, John Hopkins & Bloomberg, September 2020 7 – THE BIG QUESTION: INFLATION? How come US equities are trading at record highs, while consumer confidence remains close to record lows (graph 1)? Why is the US housing market on fire, even though the economy just crashed (graph 2)? The answer lies in the vast amount of cheap money (graph 3) pumped into the economy that makes people want to buy “real assets” (equities, commodities, real estate, land). The big question now is if all this cheap money will ultimately be inflationary. I believe so, because unlike after the Great Financial Crisis of 2008, cheap money is now flowing directly to corporates and consumers and not being horded by Banks (to improve their capital ratios).   Notice how the US inflation print reported in August was twice the consensus expectation and the biggest increase since 1991. Bottom line: short-term deflation (due to rising unemployment) but medium-term inflation. Own real assets. Figure 10: Impacts of the Covid-19 Crisis on the S&P 500, Consumer Confidence, US Home Sales and the Money Supply, Source: Macro Eagle, September 2020 8 - LONG EUROPE? Stretched valuations in the US and geopolitical tensions in Asia have made Europe the investor’s “overweight” geography of choice. As a consequence, speculative accounts have piled into long Euro positions, which now feel rather stretched (see graph 2). Here is why I would be cautious on becoming too Europe-bullish: (1) the equity market celebrates Big Tech for its growth potential, but Europe hardly has any. (2) If history is a guide, government money will mostly be used to keep “old industry” alive, mainly to protect jobs, as that is what gets politicians elected. (3) As for the Rescue Fund … Germany might have dropped its insistence on “responsibility before solidarity”, but that doesn’t mean it has dropped its demand for “fiscal responsibility” altogether. In fact, so far, we have only tested the South’s willingness to take money – not its willingness or ability to reform. That test is yet to come. Bottom-line: stay cautious. Figure 11: EUR Trade-Weighted Index and Speculative Long Positions in EUR, Source: Macro Eagle & Bloomberg, September 2020 9 - PORTFOLIO As mentioned above, we have this strange combination of euphoric equity markets built on a very narrow and lopsided base (BigTech), coupled with worrying socio-political prospects as we head into the US election. I’m staying strategically long real assets (equities, commodities, real estate), but turning tactically defensive on everything else. Buffett seems to agree with the “real asset” view as all his recent purchases seem commodity related (Dominion Energy, Barrick Gold, Japanese trading companies). Keep a close eye on long-term US yields and the Dollar. Figure 12: Comparison of the S&P 500 and Large Tech Stocks and the 10Y US Breakeven Inflation, Source: Macro Eagle & Bloomberg, September 2020 Have a great SEPTEMBER … and MAY THE MARKET BE WITH YOU. Bobby The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Bobby Vedral MacroEagle E : info@macroeagle.com M : +447899996595 Bobby is a macro-political analyst who runs his own fund MacroEagle. He is also the UK representative of the German Economic Council (Wirtschaftsrat Deutschland) focused on the German-British relationship post-Brexit. Bobby left Goldman Sachs in March 2018, where he was a Partner and Global Head of Market Strats. His previous responsibilities included Systematic Trading Strategies, eProduct and FX/EM Structuring. In his external functions he was Member of the ECB's FX Consulting Group. 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