Five Hundred Words 12/06/2018

Thursday, December 6, 2018

Daily Writing

Questions I would like to answer eventually

  • What is the current bull case for the overall economy, and global equities in particular?
  • What events in the late 1980’s led to the collapse of the Soviet Union?
  • Are there any parallels between USSR in late 1980’s and China today?

Market Overview

The United States has requested the extradition of the CFO of Huawei, Wanzhou Meng, from Canada.  Meng is also the daughter of Huawei founder Ren Zhengfei.

How did Canadian authorities have the right to arrest Wanzhou Meng?

US law prohibits the exports of specific US-origin technologies in certain countries.  When Huawei pays to license specific US tech, it promises not to export to certain countries like Iran.  So it is not unreasonable for the US to punish Huawei for flouting this US law.

The Dow opened down 400 points amid China trade tensions stemming from the arrest of Meng, and fears of economic slowdown.

I believe there are strong headwinds coming stemming from China, and our view is that a recession is on the horizon.  To be wrong would require a major turnaround in the Chinese economy, and interest rates must remain at historic lows.

We’ve exited all positions to mitigate risk and we now sit solely on cash.  We do not have any equity or bond positions.

From Bloomberg:

“The biggest qualm is the trade war escalating and this is haunting the markets,” said Naeem Aslam, chief market analyst at Think Markets U.K. in London, in an email. “It is arduous to find bulls in the market and it seems to me that this game is about to become uglier.”

US 10-year Treasury yields continue pushing lower, threatening to break through 2.80%

 

Parallels between economies of modern China and late-1980’s USSR

  • Economic statistics unreliable and often outright fudged
  • Steps taken to liberalize economy via centralized policy
    • USSR: Perestroika
    • China: 1980 economic reforms, 2019 opening of Chinese financial sector
  • Increasing influence of regional elite beyond central authorities
    • USSR: Ethnic minority regions
    • China: Xinjiang
      • From Beijing’s perspective, Xinjiang represents an existential threat to the CCP
  • Entrenched industrial, military, and legacy regime interests

“Political paralysis produced by the powerful forces who opposed economic reform was the ultimate cause of the Soviet Union’s collapse.”

Hypothesis:

Xi Jinping is terrified of losing authority over the military and regional elites in China.  If China enters economic downturn, Xi will lose his ability to influence these groups.  Therefore, Xi has no choice but to continually consolidate his power to ensure his total control.

I’m most interested in studying the collapse of the Soviet Union to gain an understanding of how modern superpowers decline.  I want to understand what sorts of events transpire on the ground during a period of economic turmoil.  Who are the victims?  Who are the aggressors?  Who gains, who loses?  Which groups or individuals have the most to lose from collapse?  Which individuals or groups stand the most to gain from collapse?  These are the types of questions I am hoping to answer before I go to China.

 

Market Data

Resource Commodities

  December 6, 2018 December 5, 2018 December 4, 2018 December 3, 2018

Gold Spot

NA
1238.00
1230.30
1228.28

Silver

NA
14.505
14.355
14.385

Gold/silver

NA
85.47
84.84
85.29

Platinum

NA
802.00
806.00
806.00

Copper

NA
2.7555
2.8075
2.8571

Crude(WTI)

NA
52.12
53.25
52.97

 

Global Government Bond Yields

  December 6, 2018 December 5, 2018 December 4, 2018 December 3, 2018

US 10 year

2.87%
2.91%
2.95%
3.02%

US 30 Year

3.13
3.17%
3.38%
3.38

UK

1.24%
1.31%
1.31%
1.33%

Germany

0.23%
0.27%
0.28%
0.31%

Brazil

10.00%
10.09%
9.95%
9.82%

Italy

3.20%
3.05%
3.15%
3.12%

Japan

0.05%

 

0.06%
0.06%
0.07%

 

 

Major U.S. Indices

  December 6, 2018 December 5, 2018 December 4, 2018 December 3, 2018

VIX

23.53
CLOSED
16.84
16.04

DOW

247.27
CLOSED
257.53
257.80

S&P 500

265.97
CLOSED
278.34
280.38

NASDAQ

7114.10
CLOSED
7158.43
7421.77

EM USD

1060.39
CLOSED
1059.93
1054.71

 

 

Currency Cross Rates

  December 6, 2018 December 5, 2018 December 4, 2018 December 3, 2018

USD/JPY

112.4800
113.2100
112.8100
113.590

EUR/USD

1.1389
1.1344
1.1339
1.1334

AUD/USD

0.7224
0.7268
0.7338
0.7369

USD/MXN

20.494
20.5130
20.356
20.0611

USD/CNY

6.8815
6.8545
6.8342
6.8893

USD Index

97.00
97.08
96.97
97.02
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Five Hundred Words 11/30/2018

Friday, November 30, 2018

Daily Writing

10:14 AM

Today is the final trading day of November.  Yesterday we exited our short US 10-year Treasury position as it is becoming clear that yields are struggling to keep their head over the 3.00% support level.  Although the historical volatility of the PST exchange-traded instrument was within a tolerable range of 7.00% to 9.00%, the underlying narrative was struggling to hold up after Jerome Powell’s announcement on Wednesday that interest rates are inching closer to a range considered to be “neutral”.

We are focusing on outperforming the SPX benchmark.  Our primary goal into the next year is focusing on exceeding this benchmark.  Our methodology will focus on large-cap, high dividend U.S. equities. We expect portfolio allocation of U.S. equities to fall within 50 – 75%.  At least 60% of portfolio allocation will consist of low beta assets, aiming for below average correlation to the S&P 500 benchmark.

Market Data

 

Resource Commodities

November 30, 2018

November 29, 2018

November 28, 2018

November 27, 2018

Gold Spot

1223.90

1220.70

1214.60

1221.60

Silver

14.285

14.285

14.120

14.190

Gold/silver

85.76

85.39

86.13

85.81

Platinum

818.00

822.00

831.00

842.00

Copper

2.824

2.7955

2.75

2.73

Crude(WTI)

50.52

51.07

51.23

51.58

 

Global Government Bond Yields

November 30, 2018

November 29, 2018

November 28, 2018

November 27, 2018

US 10 year

3.02%

3.02%

3.06%

3.07%

US 30 Year

3.38%

3.33%

3.33%

3.32%

UK

1.36%

1.34%

1.37%

1.39%

Germany

0.31%

0.32%

0.35%

0.35%

Brazil

9.89%

10.05%

10.08%

10.10%

Italy

3.21%

3.22%

3.26%

3.25%

Japan

0.08%

0.08%

0.09%

0.08%

 

Major U.S. Indexes

November 30, 2018

November 29, 2018

November 28, 2018

November 27, 2018

VIX

19.18

NA

18.87

19.41

DOW

253.39

NA

248.33

246.40

S&P 500

273.98

NA

269.61

265.76

NASDAQ

7296.39

NA

7120.56

7081.85

EM USD

1053.73

NA

1048.40

NA

 

Currency Cross Rates

November 30, 2018

November 29, 2018

November 28, 2018

November 27, 2018

USD/JPY

113.5300

NA

113.6300

113.6300

EUR/USD

1.1316

NA

1.1367

1.1326

AUD/USD

0.7306

NA

0.7304

0.7242

USD/MXN

20.226

NA

20.2442

20.623

USD/CNY

6.95557

NA

6.9538

6.9486

USD Index

97.20

NA

96.84

97.15

Five Hundred Words 11/09/2018

Friday, November 9, 2018

Daily Writing

1:05 PM

Markets are down today overall.  The question is whether the past week was a false breakout to the upside or if will see continued momentum higher toward the end of the year.  The price of crude oil continues to drop as we are now retesting February lows.  If crude oil drops below $60/barrel it would have disastrous effects on the U.S. shale industry, as prices need to remain above $60/barrel for the industry to remain solvent.

Bond yields ticked higher throughout the week.  While yields on the 10-year U.S. Treasury note remain elevated, it is not clear if the yield will continue to move higher and eventually break through the 3.25 level for the long term.  Bond yields have been artificially suppressed for quite some time, and it seems reasonable to believe that we could see bond yields move into the 3.50% to 4.00% range, at least temporarily.  Side note: Brazilian U.S. Treasury yields ticked steadily higher throughout the past week.

Market Data

Resource Commodities

 

 

November 9, 2018

November 8, 2018

November 7, 2018

November 6, 2018

November 5, 2018

Gold SPOT

1223.50

1226.10

1226.50

1230.60

1232.20

Silver

14.420

14.540

14.495

14.610

14.715

Platinum

861.00

871.00

867.00

864.00

NA

Copper

2.78

2.72

2.81

2.8034

2.8099

Uranium

28.80

28.90

27.85

NA

NA

Crude(WTI)

60.19

61.60

62.61

63.23

63.49

 

Global government bond Yields (10 year)

 

 

November 9, 2018

November 8, 2018

November 7, 2018

November 6, 2018

November 5, 2018

U.S. 10 year

3.19%

3.22%

3.19%

3.20%

3.19%

Germany

0.40%

0.45%

0.45%

0.42%

NA

Brazil

10.37%

10.31%

10.26%

10.19%

NA

Italy

3.40%

3.41%

3.35%

3.40%

NA

Japan

0.11%

0.11%

0.11%

0.12%

NA

 

 

Major U.S. Indexes

 

 

November 9, 2018

November 8, 2018

November 7, 2018

November 6, 2018

November 5, 2018

VIX

16.87

16.18

18.03

19.84

20.18

DOW

261.49

261.80

257.85

254.52

254.44

S&P 500

277.76

281.01

277.55

273.36

271.89

NASDAQ

7406.90

7570.75

7442.00

7378.25

7356.99

 

Currency Cross Rates

 

 

November 9, 2018

November 8, 2018

November 7, 2018

November 6, 2018

November 5, 2018

USD/JPY

113.7800

113.6800

113.2900

113.2900

113.1600

EUR/USD

1.1315

1.1426

1.1476

1.1407

1.387

AUD/USD

0.7213

0.7292

0.7285

0.7229

0.7204

CHF/USD

1.00590

0.9971

1.0021

0.9964

1.0044

USD/CNY

6.9552

6.9366

6.9165

6.9166

6.9273

USD Index

96.90

96.23

95.87

96.29

96.45

 

Five Hundred Words 11/06/2018

Tuesday, November 6, 2018

Daily Writing

9:21 AM

The U.S. mid-term elections take place today.  The outcome is uncertain but there is a strong possibility that the Democrats retake the house of representatives.  This opens the door for Trump impeachment in 2018.  The markets have not fully priced in a democratic agenda for 2019.

Bond yields reflect the health of a state’s balance sheet.  Is this a fair way to approach government bond yields?  Brazil’s 10-year government bond currently yields more than 10.00%.  Will we see lower yields as newly elected right-wing candidate Jair Bolsonaro’s policies begin to take root in Brazil?  Bolsonaro is widely viewed as a right-wing fascist who will be willing to sacrifice capitalism in favor of dictatorship and “rule of law”[1].  At 0.42% Germany’s balance sheet looks quite “healthy”.

Most Asian bond yields are ridiculously low.  Japanese Government Bonds (JGB’s) currently yield 0.12%.  Isn’t this effectively a negative yield?  Why would anyone buy Japanese bonds?  (No one does apparently).[2]

The price of WTI crude has dropped considerably since the start of October.  What could be the cause of this?  Is Saudi Arabia facing heightened pressure to increase demand after the Khashoggi incident?  What is the impact of newly enacted U.S. sanctions against Iran on global oil prices?

Volatility continues to tick downward, with the CBOE Volatility Index falling below 20.00 for the first time since September 2018.  However, things can change drastically tomorrow following the results of the mid-term election.  Our thinking is that the market does not like surprises, if the market is surprised by the election outcome (i.e. Republican victory in the house race), then we could see a considerable spike higher in volatility.

Yesterday European Union Ministers called on Italy’s populist government on Monday to engage in talks with Brussels on a revised draft budget for 2019, backing the European Commission’s view that the plans violate previous commitments by Rome to shrink the deficit next year.  The populist Italian government does not view the EU’s terms favorably.  What does Italy want to include in its budget that the EU is opposed to?  Italy wants to include three things in its budget that fall outside of EU rules: flat tax, reduced retirement age, and citizens’ income.  In its current form, Italy’s 2019 budget deficit will balloon to 2.4% of GDP, well outside the 0.8% cap mandated by EU authorities.  Things could get ugly here if the issue is not resolved.  We are following the deeper impact on the Euro.

[1] https://www.commondreams.org/news/2018/10/29/after-win-brazilian-fascist-jair-bolsonaro-worlds-capitalists-salivate-over-new

[2] https://www.cnbc.com/2018/04/09/something-strange-is-happening-with-japans-bond-market-hardly-anyone-is-trading-it.html

 

Market Data

Resource Commodities

 

November 6, 2018

November 5, 2018

November 2, 2018

November 1, 2018

October 31, 2018

Gold Spot

1230.60

1232.20

1232.55

1218.30

1215.20

Silver

14.610

14.715

14.77

14.38

14.33

Platinum

864.00

NA

NA

NA

NA

Crude(WTI)

63.23

63.49

63.34

65.16

66.35

 

Global Government Bond Yields (10 year)

 

November 6, 2018

November 5, 2018

November 2, 2018

November 1, 2018

October 31, 2018

U.S. 10 Year

3.20%

3.19%

3.18%

3.16%

3.15%

Germany

0.42%

NA

NA

NA

NA

Brazil

10.19%

NA

NA

NA

NA

Italy

3.40%

NA

NA

NA

NA

Japan

0.12%

NA

NA

NA

NA

 

 

Major U.S. Indexes

 

November 6, 2018

November 5, 2018

November 2, 2018

November 1, 2018

October 30, 2018

VIX

19.84

20.18

19.24

20.96

22.72

DOW

254.52

254.44

254.84

252.42

248.75

S&P 500

273.36

271.89

274.75

271.64

267.77

NASDAQ

7378.25

7356.99

7407.46

7332.72

7161.65

 

Currency Cross Rates

 

November 6, 2018

November 5, 2018

November 2, 2018

November 1, 2018

October 31, 2018

USD/JPY

113.2900

113.1600

113.28

112.750

113.240

EUR/USD

1.1407

1.387

1.1385

1.1405

1.1318

AUD/USD

0.7229

0.7204

0.7193

0.7192

0.7086

CHF/USD

0.9964

1.0044

0.9955

0.992

0.993

USD/CNY

6.9166

6.9273

6.8893

6.9346

6.9737

USD Index

96.29

96.45

96.53

96.41

97.13

Five Hundred Words 11/05/2018

Monday, November 5, 2018

Daily Writing

10:24 AM

The most palpable tension is stemming from the uncertainty over the outcome of tomorrow’s mid-term elections.  The outcome is uncertain.

The price of U.S. West Texas Intermediate (WTI) crude fell by more than 6.6% for the week.  Oil prices posted their fourth consecutive weekly loss.  It is still not entirely clear to me what determines the price of oil.  My intuition tells me that oil trading is susceptible to numerous exogenous factors that cannot be predicted by oil traders.

The price of gold continues to hover around the $1200.00/oz level, silver remains bound between $14.00 and $15.00/oz.

On Saturday (11/03/2018), Berkshire Hathaway Inc reported that its operating profit nearly doubled from the year prior due to stronger insurance results and lower taxes.  It is reported that Berkshire Hathaway repurchased $1 billion of its own stock in the third quarter of 2018.  Net income jumped to $18.5 billion from $4.1 billion just a year ago.

Looking at the bond market: “not one point on the Treasury yield curve is priced to deliver a positive, after-tax, real return when adjusted for the consumer prices you actually pay but that the Bureau of Labor Statistics neglects to incorporate in its carefully curated inflation indices.”[1]

[1] Grant’s, Vol. 36, No. 21, “What Corrections Correct”

Market Data

Commodities & U.S. Treasuries

 

 

November 5, 2018

November 2, 2018

November 1, 2018

October 31, 2018

October 30, 2018

Gold SPOT

1232.20

1232.55

1218.30

1215.20

1222.90

Silver

14.715

14.77

14.38

14.33

14.49

Crude(WTI)

63.49

63.34

65.16

66.35

65.64

US 10yr

3.19%

3.18%

3.16%

3.15%

3.11%

Major U.S. Indexes

 

November 5, 2018

November 2, 2018

November 1, 2018

October 30, 2018

October 30, 2018

VIX

20.18

19.24

20.96

22.72

24.20

DOW

254.44

254.84

252.42

248.75

247.00

S&P 500

271.89

274.75

271.64

267.77

266.23

Nasdaq

7356.99

7407.46

7332.72

7161.65

7124.74

Currency Cross Rates

 

November 5, 2018

November 2, 2018

November 1, 2018

October 31, 2018

October 30, 2018

USD/JPY

113.1600

113.28

112.750

113.240

112.861

EUR/USD

1.387

1.1385

1.1405

1.1318

1.14105

AUD/USD

0.7204

0.7193

0.7192

0.7086

0.7114

CHF/USD

1.0044

0.9955

0.992

0.993

0.997

USD/CNY

6.9273

6.8893

6.9346

6.9737

6.928

USD INdeX

96.45

96.53

96.41

97.13

96.79

 

Five Hundred Words 11/02/2018

Friday, November 2, 2018

Daily Writing

10:24 AM

U.S. average hourly earnings rose 3.1% in October.  Rising rates are central bank’s worst nightmare because it forces central banks to raise interest rates.  We think it is quite possible we see another rise in the federal funds rate in December.

Market Data

Commodities & U.S. Treasuries

November 2, 2018

November 1, 2018

October 31, 2018

October 30, 2018

October 29, 2018

Gold SPOT

1232.55

1218.30

1215.20

1222.90

NA

Silver

14.77

14.38

14.33

14.49

NA

Crude(WTI)

63.34

65.16

66.35

65.64

NA

US 10yr

3.18%

3.16%

3.15%

3.11%

NA

 

Major U.S. Indexes

 

November 2, 2018

November 1, 2018

October 30, 2018

October 30, 2018

October 29, 2018

VIX

19.24

20.96

22.72

24.20

NA

DOW

254.84

252.42

248.75

247.00

NA

S&P 500

274.75

271.64

267.77

266.23

NA

Nasdaq

7407.46

7332.72

7161.65

7124.74

NA

Currency Cross Rates

 

November 2, 2018 November 1, 2018 October 31, 2018 October 30, 2018 October 26, 2018

USD/JPY

113.28

112.750

113.240

112.861

112.368

EUR/USD

1.1385

1.1405

1.1318

1.14105

1.1407

AUD/USD

0.7193

0.7192

0.7086

0.7114

0.7046

CHF/USD

0.9955

0.992

0.993

0.997

0.99849

USD/CNY

6.8893

6.9346

6.9737

6.928

6.945

USD Index

96.53

96.41

97.13

96.79

96.73