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Editor's Note:

We hope you enjoyed the equity market ride because the hangover may be about to start. In today’s Macro Briefing we feature a warning from StoneX that a severe correction is likely in the next two months that will only be compounded as passive investors are forced to dump the darlings of the post-March rally and shift out of big tech. There are also ominous signs of an impending credit crunch says MI2 Partners, who point to a tightening of US bank lending conditions. For those looking to weather the coming storm, Algebris sets out how to structure a portfolio amid falling asset prices and the onset of helicopter money, while Economic Perspectives assesses the prospects for real estate – traditionally a haven from the storm, but due to COVID-19 and the WFH phenomenon is being severely disrupted. Elsewhere, Blonde Money explains why Boris Johnson may be well-advised to stop the pretence and deliver a soft Brexit – not least to silence the awkward squad in his own party.     
  1. Global equities StoneX

    1. From a summer storm to a secular bear market

    A severe correction is likely in the next two months, which could be the start of the secular bear market of the 2020s, writes Vincent Deluard from StoneX. In this note he argues that valuations, technical indicators, and seasonality support the case for a sharp correction in the fall, where $5 trillion of public debt will mature before year end, while central banks have reduced their asset purchases. Meanwhile in the equity capital markets, the net supply of stocks has turned positive for the first time since the GFC, as buy-backs have diminished. The other key factor to note, says Deluard, it that when markets are down, the big tech stocks become a major drag on indices, rather than the safe haven they were during the pandemic. The confirmation of a bear market will come when we see the reversal of flows into passive funds, where tech stocks have heavy weightings.
  2. credit conditions US economy MI2 Partners

    2. US credit conditions still tightening

    Yesterday we reported that new CECL requirements were likely to weigh on US banks and reduce their capacity to lend and already there are ominous signs that credit conditions are starting to tighten according to Julian Brigden at MI2 Partners. He says except for those areas where the government-sponsored enterprises are major players, the picture looks bleak, with private sector banks pulling in their lending horns at a rate equivalent to the GFC. This is manifesting itself via a renewed wave of layoffs, accelerative weakness in commercial real estate, and an implosion in shale, according to Brigden. Unless the issue of bank lending is addressed, the only hope of avoiding a credit crunch, he says, is further government involvement. The good news, according to Brigden, is that he believes all this will change post the US presidential election, as government steps into the gap to deliver a ‘socialisation’ of the US economy. The bad news, he adds, is until we get through the election, we are dealing with a partisan and highly dysfunctional government, which is why credit matters.
  3. hedging portfolio construction Algebris

    3. The anti-bubble portfolio

    Alberto Gallo at Algebris says the past decades have been a boon for bond investors, with central banks buying government and corporate debt to boost confidence and asset prices – yet failing to boost inflation. He says the music is changing, however, with rising inequality and the Covid crisis calling for more broad-based policy measures to benefit the real economy, not only asset owners. Indeed, Gallo believes the upcoming US election could mark a shift in policy from asset-based QE and tax cuts to helicopter money, with more fiscal stimulus aimed at individuals and small businesses and states. This combination of bottom-up stimulus and loose monetary policy may push inflation rates higher than tax cuts and asset-based QE have done so far, he says, leaving bond investors exposes like “boiling frogs”. Bond investors will therefore have to re-think their portfolios, says Gallo, who believes a bar-belled, dynamic portfolio of cash and a combination of credit, convertible bonds and commodities offers investors superior chances of beating the market and inflation over the coming years.
  4. real assets real estate Economic Perspectives

    4. Is real estate a real asset?

    Real estate is an understandably attractive asset class in times of uncertainty, says Peter Warburton at Economic Perspectives, and real assets in general are particularly valued in times of concern over inflation. However, he says because of the wide-reaching potential implications of the coronavirus pandemic, there are additional considerations that complicate the outlook for the sector. Within the sector, Warburton favours farmland and woodland as potentially good portfolio diversifiers for those who are able to invest in them since they offer a real asset in finite and, in some cases, constrained supply, with the potential to profit from a shift away from globalisation. Residential property, he says, is likely to experience diverse fortunes, with cities, especially mega-cities, potentially seeing a net exodus, at least in terms of wealth, while houses in more spacious commuter belts, countryside and more luxurious properties in mountains, lakeside or coastal regions are likely to benefit from that exodus. He says it is hard to salvage a positive outlook for commercial property over the next couple of years, however, with the rapid shift to working from home unlikely to revert fully to as it was before and the high street continuing to be hollowed out.
  5. Brexit UK Blonde Money

    5. Brexit – Boris needs a win

    UK prime minister Boris Johnson had assumed that his comprehensive election win would ease divisions in the UK, and his large majority would allow him to stage manage a Reaganite boom that would secure his grip on power for years to come, but events have intervened says Helen Thomas at Blonde Money. Instead, she says, the coronavirus has torn a fresh wound across the British electorate, and consequently his party, with the issue of whether you are a libertarian or an authoritarian throwing up fresh division and creating a new “awkward squad” of MPs eager to rein in Johnson, and his unelected chief adviser Dominic Cummings. The best way for Johnson to get his party back in line, says Thomas, is to deliver a win of some kind, and the easiest -and most timely – way of doing that would be to deliver a Brexit deal of some kind. As she puts it: with everyone well and truly sick of the pantomime over “deal or no-deal”, and as the furlough scheme tapers off and the dark winter nights set in, and with the prospect of Christmas being cancelled – getting Brexit done really would be bang for the negotiating buck.