May 14, 2020 Where does the US go from here and what does it mean for Hong Kong.


03 Dec

Where does the US go from here. Dow and S&P are facing resistance levels, forthcoming data unlikely to be a driver and the risk is rising from second wave covid-19 cases. I think we are likely to see consolidation as earnings season closes.

Investors are now more focused on new covid-19 as America and other countries ease lock-down restrictions. Dr Fauci warning about re-opening too quickly and the WHO yesterday warning that covid-19 is going to be around for years until science can really say its under control, even with a vaccine; has made investors realise that a V shaped recovery is increasingly unlikely. That means that more stimulus is likely and yesterday Fed Chairman Powell acknowledge the likelihood and the debt implications but overall thought the risk worth it. Slowly investors are going to focus on paying for the stimulus.

For the US and most countries borrowing in their own currency its not a real problem, they are able to print money they have the advantage of never actually having to pay it back.

Its a simple process; the Treasury Department issues the bonds. The Central bank creates the money and buys the bonds from the Treasury. The Treasury then gives the money to the Government, who disperses the funds into the real economy.

The problem only comes later when that newly injected money creates inflation. This will be another new factor for a lot of fund managers; rising inflation. Something they have not seen before and probably only gave a passing thought to at collage. For most of them they have only known falling inflation, after all its been the case for the past 40 years.

It’s notable that US Treasury Sec Mnuchin said on Monday “he sees no need for the US to buy back debt” and that he plans to borrow money long-term to lock in low interest rates, as the covid-19 pandemic hits the economy. He’s comfortable because interest rates are very low at the moment. He is effectively saying that existing short term debt is at a higher rate and so using the lower rates now will make financing the deficit cheaper. That implies there is no current plan of how to paying off the debt, just issue more government bonds at ultra low rates.

The big BUT is what happens when inflation re-appears? I don't think it's an if but a when. For Mr Mnuchin that’s a problem for a future Treasury Secretary. Just as paying for the GFC was kicked down the road so will paying for Covid-19.

BUT if this time we get inflation and it's hard to imagine we will not considering the amount of fiscal stimulus, then servicing that debt will become an issue. All of which makes me very positive on the outlook for Gold; whether you buy an ETF, which has been the popular route recently or physical or the miners; you should make sure you have some, somewhere in the portfolio.

Investors should take note of the US treasury plans to borrow US$3tn in the Apr-Jun quarter to fund covid-19 rescue programme and cover the drop in revenues. The government is also delaying tax payment dates; all of which indicates that the data it is seeing on the economy is not as strong as they want or would have us believe.

The treasury launched new 20yr bonds to extend maturities. Those who bought them are likely facilitating the next bear market for bonds; which may have started back in March. The treasury got them away this time the question is will they next time? Which is likely to be soon from Powell's comments.

To put the issue into perspective; the issue was about 50% of the entire national debt that President Clinton inherited in 1994. It was only US$1tn short of what George Bush inherited in 2000. It had taken the USA 100 years to get to those levels. Yet now just 20 years later, just one issue has added the same amount again.

We may not see hyperinflation but I think inflation is very much more likely than not. That is likely to be good for precious metals, commodities, collectibles and property to outperform on fundamentals.
Tech will continue to do well as business models change. Tech will play a more important part; be it in monitoring supply chains, automation or more flexible working. Although I still think home working is limited for many industries, not only for security reasons (hacking home systems is already on the increase but also access to bandwidth) but also because as people most of us like human interaction.

So looking at Gold plays; there are a large number of ETFs. Also consider the miners; the Australian ones have seen upticks recently. The Chinese ones have recovered partially from the March lows already.

On Tech; Tencent reported good numbers yesterday and whilst much of that may be priced in I still think accumulate on weakness, along with Alibaba and Meituan.

For Hong Kong I still like Property for the long term so the HK developers are a buy and it is notable that Li Ka Shing has been buying his stock-back. Whilst their sales were not great and hurt by the recent protests and covid-19 they continue to sell properties at a profit. The developers have advantage of landbanks accumulated at historic prices; so look to accumulate on weakness rather than chasing as I still think the markets will see consolidation.

With property go some of the white goods makers and I think Aircon makers (Daikon) and air purifiers (LG) will see good interest as people become more virus aware.

I still like Apple and its supply chain names along with Nintendo and Sony as home entertainment is going to be with us for a while longer. In that theme I still like Techtronics; people aren’t moving home in the US or UK and from the number of clips coming up on social media about home projects during lock-down I think sales will remain good. Watch for the results from Home Depot etc.

Auto’s in China are seeing a slight improvement as people shun public transport but it will be a matter of Chinese consumer confidence and the China unemployment and retail sales data due Friday should give us insight on that.

Watch for more Chinese stimulus which seems more likely after the comments from the PBOC and the New Yuan loans data we saw earlier this week. I suspect big stimulus measures will be announced at the NPC and CPPCC in the meantime I think a lot of Chinese investors will be keeping their ‘powder dry’.

Obviously stay away from travel names from Airlines to the suitcase makers those market are not going to recover anytime soon.

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