Bullish Gold, Dollars & Bitcoin at the Same Time

Paul Brodsky, a veteran investor and macro strategist, has been and remains bullish on gold, the US dollar and Bitcoin – the crypto currency Brodsky says investors love to hate. Is he hedging his bets? Or is there a cogent rationale that unifies bullishness for money forms most would consider incongruous and at-odds with each other? These are the questions Brodsky poses to his readers in this note. Investment research comes in different forms, and we would put Brodsky in the ”original thinking” bucket, always challenging his clients to question the ‘group think’ we find often too prevalent in the investment research community. Click below to request access to some of Brodsky’s notes. He is happy top provide on a case-by-case basis.

How Much Slack is There in the Chinese Economy?

The output gap, defined as the difference between actual and potential output, is an important link between real economic activity growth and inflation in many economies, and in turn future policy measures, writes Maggie Wei from Goldman Sachs. Despite the importance of the output gap, measuring it has always been a tricky task, because the level of potential output and the related output gap are not directly observable. Measuring the output gap seems particularly difficult in China, says Wei. Due to these difficulties, measures such as capacity utilization, typically calculated for the manufacturing or broader industrial sector, are often used to complement the estimation of output gaps. Goldman have conducted extensive research in this area, and in this latest report they supplement this research with an analysis of capacity utilization in manufacturing, construction, and selected service sectors, using a “bottom-up” approach to gauge economic cycles. Their findings are that while there has been an increase in capacity utilization, the absolute level of capacity utilization still appears lower than the level in 2013-2014. With activity growth weakening in April, and PPI inflation starting to moderate, we expect policy makers to back off slightly from the aggressive tightening earlier. Goldman clients can view the full report on Goldman 360.

GCC; Peak Prosperity

CreditSights, the premier credit research firm, have just published a piece on the six countries of the Gulf Cooperation Council (GCC) today entitled: GCC: At $50 Oil, Some Are Far More Vulnerable). Oil prices at $50 a barrel have big implications for the public finances and external funding of the six Gulf states of the GCC which have already had to dramatically increase bond issuance in the past two years in response to lower oil. The report’s author, Richard Briggs, argues that absent a big rebound in oil the six Gulf countries which make up the GCC are going to need to borrow or sell some of the financial hoard they have accumulated in recent years to cover their budget deficits and maintain their exchange rate pegs. If you’d like access to the report click below to request directly from CreditSights.

How Good Is Your Compliance

Joe McMonigle from Hedgeye Potomac Research, a former International Energy Agency Vice Chairman, is an astute observer of the political machinations of OPEC. In this 14 minutes conference call, held shortly after the OPEC ratified a 9-month deal extension, McMonigle explains the key points of the deal and the agreement with non-OPEC participants. The post-meeting press conference is emphasized in this recording as having a major significance since the Saudi oil minister now serves as OPEC President.  McMonigle believes Saudi Arabia and other Gulf producers will maintain high levels of compliance during the 9-month extension but compliance may be a challenge for others. Clock below to request the recording.

Myth Busting Low Volatility and the Fed

Ned Davis Research have produced a steady stream of work on volatility in recent months, attacking the themes from a variety of angles. In this piece they note that the recent VIX low on May 8 was the fourth lowest level on record. The previous three occurred in December 1993. Here they seek to address the implications of the ultra-low readings, based on previous history. One commonality stood out: they overlapped with tightening cycles, with the VIX staying low through the tightening cycle but breaking out afterward. If you’d like access to the report click below to request access directly from NDR.

Peak Euphoria: Macron Trade Already Stronger than Trump Trade

After ranking European Equities as their asset allocation leader in the last two months, active weight shows some interesting patterns in Harlyn Research’s recommended Eurozone portfolios. Investors are happy to take big country bets in the Eurozone bond market, but do not want to replicate these bets in the equity market, says Simon Goodfellow. This report presents some country and industry specific global asset allocation recommendations now that political risk seems to have faded away.

Hedging and Fading Geopolitical Risk

The conventional wisdom around geopolitics and markets is sanguine, writes John Normand from JPMorgan. That’s because risky markets eventually recover crisis-induced losses, and so accounts typically remain invested. While this is sensible over the long-term, it’s unhelpful over shorter time horizons given the enormous volatility that some events trigger. Normand argues that patience around politics is akin to arguing that one shouldn’t worry about recessions, because risky markets always recoup losses from extreme cyclical events too. Normand reminds the reader that through the oil prices channel, geopolitics has caused four of the last six US recessions. Therefore, this piece of excellent analysis attempts to better address this issue of drawdown through a two-part framework for managing volatility. Part 1 is an event study examining the returns and volatility of currencies, commodities, bonds and equities around two dozen major geopolitical events since World War II. Part II proposes a daily Geopolitical Anxiety Index (GAI) to measure complacency and fear, and to recommend tactical positioning at the extremes (hedge when anxiety/volatility are low, fade when fear/volatility are high). To keep the task manageable, JPM’s study limits itself to a subjective definition of geopolitical risk as distinct from general political risk. To JPM’s mind, geopolitics involves international relations and conflict, whereas general political risk refers mainly to domestic issues. The paper is intended as a complement to the Geopolitical Flashpoints series launched by J.P. Morgan Research in 2016. JPM clients can view the piece on Morgan Markets

The 3D View on Liquidity and Country Allocations

Cross Border Capital are specialists in global liquidity analysis. Their asset and country allocation models follow a systematic risk-based approach to investing, preferring to allocate monies to markets where risks are low. These models take a three-dimensional view of risk by using three broad quantitative factor inputs: (1) exposure risk – how ‘crowded’ is the investment class; (2) liquidity risk – how easily can existing positions in the market be re-financed if necessary, and (3) forex risk – what are the odds of devaluation? Their latest country readings show risk above average in South Africa, the US, Switzerland and Japan. In contrast, the Eurozone, Sweden and the UK, and Emerging Asia and Brazil enjoy low risk readings. These risk models favour the Euro over the US dollar.

”Abundant caution” Around Long Carry and Short Vol

In 2006 J.P. Morgan introduced VXY and EM-VXY, the FX industry’s first benchmarks for implied volatility in G10 and emerging markets. VXY Global followed in 2011 to track volatility across all currencies. These indices are liquidity-weighted averages of 3-month implied volatility based on USD-based pairs’ options market turnover as reported in the BIS’s Triennial Central Bank Survey of foreign exchange and OTC derivatives markets. They’ve just rebalanced these indices which provide some interesting results. For instance, VXY Global is 1.5 % pts. too low versus fair value, amounting to a 1.0 std. error undershoot. JPM recommend abundant caution around long carry and/or short vol strategies. Meantime, in assessing DM versus EM, they find that relative value between VXY G7 and VXY EM suggests meaningful G7 vol cheapness (1.0 % pts.) relative to EM. JPM clients can view the full note on Morgan Markets.

US Inflation Volatility: “Strangle” Suggests Complacency

Mark Capleton is a veteran inflation researcher and one of the most respected. He’s produced an excellent piece on inflation vol that provides a fresh take assessing relative levels of vol across asset classes. His key takeaway is that the market is very confident about where inflation will be in February 2018. This conclusion is based off the pricing of inflation strangles. The piece points out that one could have bought an inflation “strangle” at the current price (shown chart format within the piece) – with strikes set 25bp either side of the prevailing 1-year inflation swap rate – every month since 2010, the average expiry value would have considerably exceeded the premium cost. Capleton wonders whether arguments that might be made for lower implied volatility in securities are necessarily applicable to a future CPI print anyway. He concludes that heightened dispersion in the inflation rates of the components making up CPI suggest such low inflation vol is complacent. BAML clients can read the full note on BAML Mercury