What’s been happening?
Global economic data continued to maintain its dismal streak, thus helping capital markets stay higher despite a few wobbles. The worse the data is, the better it is for risk markets in the short-term. Chinese data was again a key standout in a world of disappointments. For July:
- China Industrial Production: 4.8% vs 6% expected
- The big drop is from SOE: 3.7% vs 6.2% previous
In Germany, the ZEW survey showed investor confidence below EuroZone crisis levels. Economic surveys continue to show severe deterioration almost everywhere.
With more hopes of QE and further negative rates, European banks are making lows once again. This is not a sign of a healthy economy: indeed, these are now at Lehman Brothers and EuroZone crisis levels.
In the bond world, negative rates are still creating huge moves everywhere. This is the 100 year Austrian Bond courtesy of @Schuldensuehner on Twitter:
For a Western European, wealthy and developed country these moves are beyond reason. Buying the bond at this price and holding it to maturity for slightly less than a century would mean losing over half your initial investment. And this is nothing to say about erosion of purchasing power by currency moves or inflation. Nor any default or draw down risk.
In the topsy-turvy world of bonds, which drive the world economy, the US share of global Investment grade (IG) yield has reached a staggering 94% (BAML). Very little else has a positive yield in the IG world.
In just under one year, total negative rate bonds have gone from $6.1 trillion to $6.4 trillion. Seven years ago, Portuguese and Spanish 10 year debt was yielding 15% and 5% respectively. Now, they both yield zero.
Despite these shocking stats the US President has called for, once again, a huge drop in the Federal Reserve interest rate to bring it into line with other nations. At the ECB, Olli Rehn hinted at huge stimulus from the ECB in September:
As volatility hit markets throughout mid-August Trump buckled and started to try to create positive headlines regarding a Chinese trade deal (despite the Hong Kong issue getting worse, not better). Furthermore, with the data in the economy looking soggy expect new policy declarations like this:
Why do they bother pretending anymore? Especially leading up toward the election cycle the US President will stop at nothing to juice the economy in his favour. His fate rests solely on the ability of the stock market to move higher. Therefore, expect more criticisms of the Federal Reserve (today’s: Trump says the Fed is the ‘only problem’ with the economy, calls Powell ‘a golfer who can’t putt’), more unexpected tax cuts, more borrowing, more infrastructure spending. And expect this everywhere demand is falling and the economy is in trouble.
Very few nation-states are moving away from interventionism in their economies towards a more laissez-faire approach. In fact, the inverse is occurring. Around the globe, governments and central banks are becoming far more involved in the economy. Prices are affected, rules are changed, rules are broken and norms are violated.
Politically, the Chinese government refused to bow to international pressure to calm the situation down in Hong Kong, and say it is an internal matter. Trump postponed a meeting with the leadership of Denmark after they ruled out selling the territory to the United States. Brexit draws a little closer with no sign of a deal whatsoever. Similarly, there is little sign of a trade-deal between the US and China, despite the drip, drip, drip of positive headlines when the market goes down.
Why Gold doesn’t matter – until it does
The Argentine Peso crashed its way into infamy and history earlier this month. This was due to incumbent Macri losing the first round of the primary far more heavily than anticipated.
For many years, Argentina was one of the richest countries in the world. It had huge amounts of human potential and natural resources. But once the idea that the government can break basic norms of economic competence takes hold, then it is a long road back to respectability. If the current crop of Western policymakers think they can trash their currencies and deficits with MMT, UBI and negative rates and not have consequences then they are in for a rude awakening.
As long as governments think they can defy the laws of mathematics, there will always be a demand for gold.
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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.