Investment Bank Outlook 06-08-2021

Danske BankToday's highlight will be the US jobs report, which will give insights into whether businesses had more success hiring workers in July. The FOMC has clearly stated that job growth is a key determinant for the monetary policy outlook. Consensus is looking for an increase in non-farm payrolls by 870k, but the private sector ADP employment report earlier this week missed expectations with only 330k new jobs created during July. Labour shortages might hence still limit jobs growth despite half of US states having already phased out extraordinary unemployment benefits. In Sweden, the NDO publishes borrowing numbers for July where the reference is a projected SEK6.3bn deficit. The cumulated outcome since the last government borrowing report in May is almost bang in line with the NDO forecast.BOE Review: The Bank of England maintained its monetary policy unchanged in the August meeting, but struck a moderately hawkish tone by clearly signalling some monetary tightening if the economy continues recovering in line with expectations. Inflation was seen accelerating to 4% by the end of this year before stabilizing towards the 2% target next year. We expect BoE to end its quantitative easing program by the end of this year, and begin lifting rates by a first 15bp hike in H2 2022. BoE also noted that it plans to begin unwinding the QE purchases once the benchmark rate reaches 0.5%, which is currently being priced in by 2023.CitiUSD was better bid through Asia hours ahead of today’s NFP print. Our estimate sits on the higher end of the street at +1.15m, while light USD positioning suggests risks to the currency are skewed to the topside.Elsewhere today, AUD continues to lead high beta FX lower as Sydney’s daily cases hit a record high. The moves come despite the RBA Aug SoMP showing baseline forecasts consistent with the 'strong rebound' rhetoric as both growth and inflation seen peaking at Dec-22. Asia currencies also trended lower on frustratingly consistent virus narratives as well as generally guarded bias into the print.

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Hosting the Olympic Games - Hot or Not for Your Currency?

We’ve heard thousands of drums played simultaneously, Olympic cauldrons lit by flaming arrows, political boycotts and even Bjork. So, what is it about the Olympic games that has countries battling ferociously to become a host?Aside from the obvious prestige of hosting the games, it’s a common belief that the host gets huge financial benefits for the host city… But, is that true? In this article we’re going to investigate the economic impact of hosting the games on the Olympic host cities.Tokyo 2020/2021Delayed by a year due to the pandemic, the current Olympic games come as a much-needed respite following 2 years of lockdowns, pandemia and controversy. The theme: United by Emotion. And we really really are.As an example of symbolism at its finest, the opening ceremony began with Arisa Tsubata running alone. This powerful woman (also a qualified nurse that treated COVID-19 patients) signified how, like all of us, our world champions have spent countless hours training alone. Training without companionship or any of the other emotional necessities that Olympians are usually afforded. Yet, united in the fact that, although these incredible men and women differ from us in their speed, agility, or other forms of physical prowess, we’re united in our experience of isolation. It’s a hugely powerful symbol.Now though, we’re not only seeing the isolation faced while training, but we’re also watching the first Olympic Games in history to be conducted without spectators! So, with the Japan 2021 Olympics differing hugely from its predecessors, how could being an Olympic host right now affect the Japanese economy?Economic Benefits of HostingOur first port of call is to look at the economic benefits usually afforded to the hosts of the Olympic games. Several income generators for the city can come from ticket sales, licensing, increased employment, broadcast revenue, sponsorship, and increased tourism.Now, one of the biggest earners for the host city undoubtedly comes from broadcasting revenue or sponsorship, eclipsing revenue from ticketing and licensing considerably. Our graph below gives you an idea of where the sources of revenue lie when a country becomes a host, and how these revenue streams have changed over the last few years. Its important to note that revenue from Television and Ticket sales have increased significantly over the last 2 decades. Logically this follows the assumption that they’re increasing thanks to larger investments into facilities to cater to more guests and viewers on TV.Although host cities usually aim to benefit from the impact of tourism, despite it being notoriously difficult to quantify, we’re not able to calculate how each individual tourist will be spending their money in a host city. However, after initially selling 4.48 million tickets with an expected windfall of $815 million from tourism alone, a state of emergency was declared until August 22nd. This has ensured that the games are going on without domestic or foreign spectators – essentially nullifying any income from ticket sales or tourism in general!Even though revenue from ticketing pales in comparison to that from broadcasting revenue and sponsorship, an honorary professor at the Kansai University, Katsuhiro Miyamoto, estimated that no spectators would amount to an economic loss of up to $22 billion (¥2.4 trillion). Overall, by keeping the games as closed events, there would be a total loss of $3.5 billion (¥381.3 billion) combining tickets and other spending related directly to the games. This is a huge 90% loss of the original amount projected to come in for the games.After such huge reductions due to a changing spectator dynamic, lets focus on the income from broadcast revenue and sponsorship.So, over 60 Japanese companies have spent more than $3.3 billion in sponsorship for the games, with an additional $200 million to extend contracts following the postponement! This record sum doesn’t even include partnerships with firms like Toyota, Bridgestone, Panasonic and Samsung that have separate sponsorship programs with the IOC, worth hundreds of millions of dollars.NBCUniversal also garnered a record $1.25 billion in U.S. national advertising spending for the Games before the pandemic pushed the postponement. It now has plans to show more than 7,000 hours of content from the Tokyo Olympics across its networks and streaming platforms. However, over the last year, the company attempt to get support from sponsors for a second time. Their parent company, Comcast, also agreed to pay an additional $4.38 billion for U.S. media rights to the Olympics running from 2014 to 2020!With an additional $1.4 billion from Discovery Communications (parent of Eurosport) to screen the Olympics from 2018 to 2024 across Europe, the Tokyo Olympics have fast become one of the most heavily invested events to date.It’s also important to note that the enthusiasm for the events have faced a great deal of controversy with Japanese citizens protesting the games being held at all. People are experiencing waning enthusiasm for the sporting events which has led to stimulus effects on household consumption expenditure halving to 2.5 billion (¥280.8 billion) while also dampening corporate marketing activity.Overall, the economic benefits from promotional sport and cultural events look as though they’ll be reduced by half to $7.763 billion (¥851.4 billion).Costs of HostingCalculating the costs of being an Olympic host begin far before the city starts to prepare for the games. It starts during the bidding process, a whole 7 years before the games begin!First the hosts create a National Organizing Committee (NOC) who will be responsible for submitting a bit to the International Olympic Committee (IOC). Now, it’s important to mention there’s more than one round in the bidding process and each has its own additional costs. The first round is $100,000 per city, with a total of 8 cities vying for the honour.Then we move to round 2 – with the 4 successful teams moved forward then having to pay an additional $500,000 each! New York City officials estimated that their bidding process would come to around $13 million!Once a city has been chosen by the IOC spending begins on building the infrastructure needed for the Olympic Villages and new venues. Additional costs arise from improvements needed for already existing infrastructure like roads, bridges, sewer systems, cleanup. Overall, the final cost is impacted significantly by the existing infrastructure that the host city has, investment made by private investors into facilities and the government’s inclination towards investment into the Olympics.In Japan’s case, a bank-bursting $1.4 billion was spent on construction of the National Stadium, where the opening and closing ceremonies will be held, while $542 million was spent on new 15,000-seater Olympic Aquatics Centre!Now, aside from investments in infrastructure, spending in Japan has grown exponentially since postponement last year. Initially organizers stated that the cost of hosting the games in its entirety would come to around $15.6 billion, which includes the $3 billion racked up from postponing last year.However, officials now state that the amount has ballooned to over $26 billion, 3 times more than stated in its original bid. Earning it the title of the most expensive Olympics in history and leaving Japan in an approximate deficit of $18.2 billion! So, now we’ve had a brief look into some of the benefits and costs, let’s examine the actual impact on Japan considering these very different Olympics and the unprecedented costs that its facing.Overall Impact on the EconomyWhen the bid was originally submitted for the 2020 Olympics the pandemic wouldn’t have even been a factor to consider. However, following our discussions, its become the deciding factor upon which we’ll work out how the Olympics have affected the Japanese economy.Originally expected to be a huge income generator from tourism, the ban of foreign spectators dashed hopes that the games would assist in an early recovery of inbound tourism. Before the start of the pandemic, Japan generated 31.9 million foreign visitors which amassed $44 billion (4.81 trillion yen) for the economy. However, this fell a whopping 87% in 2020 to a mere 4.1 million – a 22-year low for Japan.Nomura Research Institute’s Takahide Kiuchi stated that although Japan was forced to declare another state of emergency, the fallout from hosting a super-spreader event and the impact on the economy, would far outweigh the costs incurred by having the games sans-spectators!However, the continually ballooning costs are the burden of the Japanese taxpayers – who are funding around 55% of the cost! With an initial projected revenue of $6.7 billion from the Tokyo games, the mounting costs at this point far outweigh benefits from hosting the games; especially when considering the lack of income from tourism and ticket sales!At the point that Tokyo was initially awarded the games in 2013, there was a forecasted income of around $2 billion from tourism in the form of tickets, hotels, food, beverages, and merchandise. Economists also expected additional ‘legacy benefits’ to the tune of $10 billion over the following decade. However, in the current climate, this income won’t materialize; making Japan seriously overshoot their budget. With that in mind, we think it’s important to illustrate those other Olympic games hosts have also seriously overshot their originally stated budget. The image below gives a few examples of other hosts who have overestimated their income and underestimated their spending.Overall, the purported benefit of hosting the Olympics appears to be virtually nonexistent for many previous hosts, which is especially the case for the Japanese economy. As we’ve examined the costs of hosting the Olympics in the midst of a pandemic, it’s pretty clear that a postponement and mounting outgoings expenditure without the expected incoming revenue will be leaving the Japanese economy in a huge deficit.A multitude of other sources have also found that the likelihood of a positive economic impact from hosting the Olympics is unlikely. Boston’s National Bureau of Economic Research found little evidence of a positive impact while economists Stephen Billings (University of North Carolina) and Scott Holladay (University of Tennessee-Knoxville) found that a country’s GDP isn’t impacted by being a host!With such monstrous expenditure coupled with negligible benefits, we must ask if the future bidding and hosting process will become a thing of the past.Impact on Japanese YenIt’s been widely expected that the Games may lead to a rise in infection rates, hence banning spectators from the events. However, this isn’t the exact way that the current rise in infection rates came about. At the start of the 4-day weekend as the games began, new cases had already started climbing, forming what is expected to be the start of the fifth wave. It’s size rapidly approaching that of the third and fourth waves and widely expected to be the highest yet; likely to cause the Suga government to extend the current state of emergency to the 31st of August.The Suga government is reportedly also considering the formation of an economic package to the tune of $275 billion (30 trillion yen) or 6% of GDP. Although this amount sounds huge, a large supplementary budget may not be needed as the government’s FY20 budget is unused due to COVID; thus, being rolled over into 2021. With that in mind, long-term impacts on the JPY will be limited.A variety of domestic and foreign factors have contributed to a 6% slide in the Yen against the USD this year. Its vaccination program has only seen 19.1% of the population receiving their first dose and only 8.7% having both. In combination with the slow rollout, there’s been a significant delay in the return to normality which, coupled with no tourism, is shrinking the economy and putting the JPY under immense pressure.Searching for more insight about trading the USDJPY and other majors? Check out our eBook by clicking here. Now, we’re the type of company that’s always looking to start a conversation… Do you have different views about the Olympics? Pop in a comment below and join the conversation!

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Daily Market Outlook, August 6th, 2021

Daily Market Outlook, August 6th, 2021 Overnight Headlines Japan Household Spending Falls Before Latest Virus Surge China Sees Highest Daily Coronavirus Cases In Current Outbreak US Sen Manchin: Fed Should Reverse Easy-Money Policies Fed's Kashkari: Delta May Throw Wrinkle Into Taper Plan Schumer Sets Up Saturday Vote On Infrastructure Bill US Business Groups Call On Biden To Restart Trade Talks With China CBO Sees Infrastructure Bill Widening Budget Gap By $256 Billion FDA Covid-19 Vaccine Booster Plan Could Be Ready Within Weeks Novavax Again Delays Seeking U.S. Approval For COVID-19 Vaccine Dollar Drifts Higher As Markets Await Jobs Data For Fed Clues Oil Heads For Biggest Weekly Loss This Year On Delta Concerns Asian Shares Fall As Delta Variant Casts Shadow Over Growth South Korea’s Kakao Bank Shares In Soar In Market Debut Bayer Starts Latest Roundup Trial With Leg Up After Three Losses AIG Profit Beats Estimates On General Insurance, Retirement Gains The Day Ahead The monthly US employment report will, as usual, command a lot of attention from markets. In his press conference last week, Fed Chair Powell noted that a further fall in unemployment would be pivotal in helping determine when they would start to phase out their asset purchases. He also noted the present unusual combination of a high level of job vacancies, which suggests strong demand for workers, alongside continued elevated unemployment. That makes the numbers particularly difficult to interpret right now. Expect the July report to show a monthly jobs rise of 950k which would be the largest since last August, and we also expect the unemployment rate to fall to 5.6% from 5.9%. Both moves would highlight the buoyancy of the labour market. The wage data will be watched for any evidence they are being boosted by recruitment difficulties. We look for a 0.4% monthly increase. Earlier this week saw rather mixed signals for the US labour market. Monthly private sector jobs growth for July in the ADP report was disappointing at 330k, but the ISM survey pointed to strong rebounds in employment for both manufacturing and services. Initial jobless claims have also fallen in the past two weeks.G10 FX Options Expiries for 10AM New York Cut(Hedging effect can often draw spot toward strikes pre expiry if nearby) EUR/USD: 1.1800 (1.1BLN), 1.1825 (645M), 1.1865-75 (561M) 1.1895-1.1900 (554M) EUR/GBP: 0.8400 (1BLN), 0.8475 (415M), 0.8500 (550M), 0.8515 (400M) GBP/USD: 1.3900 (202M), 1.4000 (250M) AUD/USD: 0.7390-0.7400 (1BLN), 0.7460 (297M), 0.7480-90 (510M) USD/CAD: 1.2450-60 (1.7BLN), 1.2500 (440M), 1.2525 (1.1BLN), 1.2600 (1BLN) USD/JPY: 109.50-60 (480M), 110.00 (500M). EUR/JPY: 130.55 (464M) AUD/JPY: 79.00 (300M), 80.50 (530M), 82.00 (395M)Technical & Trade ViewsEURUSD Bias: Bearish below 1.1950 Bullish above EUR heavy across board in Asia, central bank expectations playing part EUR/USD 1.1834 to 1.1819 EBS despite EUR/JPY buoyancy, cross 129.87-94 More hawkish Fed talk, bouncing US yields, maybe strong US jobs data weigh German-US 10-year interest rate differential widening again, @172 bps Support good at 1.1800 however, E1.1 bln in option expiries there today Other nearby option expiries - 1.1825 E645 mln, 1.1865-1.1900 E1.1 bln EUR/GBP heavy too, Asia indicated 0.8492-97, EUR/CHF doesn't trade, @1.0722GBPUSD Bias: Bearish below 1.40 Bullish above. 0.05% with the USD a shade firmer in a low key 1.3915-1.3932 range Record UK starting salaries as jobs squeeze tightens - REC... Decision for the BoE - is this the start of a sustained wages rise? Charts; 5, 10 & 21 daily moving averages climb - momentum studies base-rise Positive signals - bias remains higher while 1.3838 21 DMA holds 1.3991 61.8% June-July fall and 1.4015 upper 21 day Bolli pivotal resistance Break would bring 1.4090 76.4% retracement of June-July fall into play 1.3899 NY low and 10 DMA and 1.3932 Asian top first support resistanceUSDJPY Bias: Bullish above 109 Bearish below USD/JPY up another small leg in Asia, 109.75 to 109.88 EBS Upside going facing more resistance, especially pre-US jobs report Dealers suggest likely range between 109.62 100-DMA, 110.04 55-DMA USD/JPY already back in ascending Ichi cloud, 109.57-110.68 today Specs long from lower levels, Japanese exporters to help cap upside Some bids eyed from @109.75, option expiries to help contain action Today 109.50-80 $976 mln, 110.00 $500 mln, to 110.25 $423 mln more Continuing bounce in US yields supportive, Treasury 10s to 1.238% Risk more off in Asia despite Wall St rise, Nikkei near par @27,744 JPY crosses buoyant but quiet, EUR/JPY 129.87-94, GBP/JPY 152.80-97 AUD/JPY, NZD/JPY in favour on CB expectations, 81.05-30, 77.30-47AUDUSD Bias: Bearish below .75 Bullish above -0.25% towards the base of a 0.7380-0.7406 range with consistent interest Delta sweeps Sydney as Australia widens COVID-19 restrictions... RBA - fiscal stimulus 'more appropriate' tool to curb virus hit... RBA Governor Lowe generally upbeat - "return to strong growth next year" Charts; 5, 10 & 21 DMAs conflict, momentum studies climb - neutral setup 0.7395 21 DMA a magnet - 0.7306-0.7484 21 day Bolli bands define broad range Thursday's 0.7377 low and earlier 0.7406 high initial support and resistance

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Eight of the best houses for sale with separate accommodation

Brooke House, Thorne, Yeovil, Somerset.

Brooke House, Thorne, Yeovil, Somerset. A Grade II-listed, 17th-century house with a separate home office and a detached, two-bedroom annexe with a vaulted ceiling and its own private garden. The house has exposed beams and open fireplaces. 5 beds, 2 baths, dressing room, 2 receps, study, garden, 1.4 acres. £1.25m GTH 01935-415300.

Quarry Lodge, Quarry Wood, Marlow, Buckinghamshire.

Quarry Lodge, Quarry Wood, Marlow, Buckinghamshire. A restored period property with riverside gardens that include a boathouse and a studio with a bathroom and kitchenette. The main house has a turret with a weather vane, open fireplaces and a contemporary kitchen. 3 beds, 2 baths, 3 receps. £3m Hamptons 01628-260324.

Hope Farm, The Haven, Billinghurst, West Sussex.

Hope Farm, The Haven, Billinghurst, West Sussex. An estate with a Grade II-listed house set in landscaped gardens that include a separate Grade II-listed, five-bedroom farmhouse, a two-bedroom cottage and an American barn that includes a riding school and stables. The house has vaulted beamed ceiling and a loggia leading onto a converted barn. 4 beds, 4 baths, 3 receps, breakfast kitchen, 220 acres. £8.5m Knight Frank 01428-770562.

Brackendene House, Low Fell, County Durham.

Brackendene House, Low Fell, County Durham. A Grade II-listed, mid-1850s property in an elevated position in a village overlooking the Team Valley. It comes with a separate, refurbished one-bedroom coach house and a tennis court, and has solid oak doors, wood panelling and open fireplaces. 5 beds, 4 baths, 2 dressing rooms, 2 receps, study, breakfast kitchen, garden, 1.5 acres. £1.75m Sanderson Young 0191-223 3500.

Glenhurst, Pleasant Harbour, Bewdley, Severn Valley.

Glenhurst, Pleasant Harbour, Bewdley, Severn Valley. A three-storey, Grade II-listed, early 18th-century house with a classic Georgian frontage in an elevated position in south-west facing landscaped walled gardens with a courtyard to the rear that includes a detached, two-bedroom coach house. The house has oak floors, period fireplaces, a large panelled dining room and a breakfast kitchen with an Aga. 5 beds, 3 baths, 3 receps. £1.5m Strutt & Parker 01584-873711.

The Old Court House, The Green, Richmond, London TW9.

The Old Court House, The Green, Richmond, London TW9. A Grade II-listed, Queen Anne house built between 1705 and 1708 with a separate one-bedroom cottage. It has Adam-style doors and fireplaces and oak floors. 8 beds, 4 baths, 4 receps, kitchen, walled gardens. Six-year lease with option to extend. £2m Knight Frank 020-8939 2800.

Appletree, Eden Valley, Penrith, Cumbria.

Appletree, Eden Valley, Penrith, Cumbria. A period property in the Eden Valley with a one-bedroom cottage and a barn converted into a one-bedroom and a three-bedroom apartment that are currently used as holiday lets. The house has a conservatory overlooking the gardens and a formal dining room with a beamed ceiling and an inglenook fireplace. 4 beds, 2 baths, 2 receps, breakfast kitchen. £895,000 Fine & Country 01768-869007.

The Dower House, Market Bosworth, Nuneaton, Warwickshire.

The Dower House, Market Bosworth, Nuneaton, Warwickshire. A renovated, Grade II-listed Georgian townhouse with landscaped gardens that include an office suite with a kitchen, which could be converted into a separate house, and a pool complex. The house has sash windows with shutters and window seats, panelled walls and a bespoke kitchen with an Aga. 6 beds, 4 baths, 3 receps, courtyard, garage and barn, gardens, grounds, 0.7 acres. £2.95m Savills 0115-934 8020.

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Hotels with stylish swimming pools

A “swim-up suite” in St Lucia

At the Sandals Halcyon Beach Resort in St. Lucia, guests booking into the Crystal Lagoon Club Level or the Crystal Lagoon Butler Level can book a stay in a “swim-up suite”, says Stacey Leasca for Travel + Leisure. A private pool awaits right outside the door of the suites –and it’s one of the longest in the Caribbean. The 600-foot-long pool also has a bar for “the fruity cocktail and tiny umbrella of your choice”. For those after something more private, the Beachfront Honeymoon Butler Rooms come with a “sparkling private plunge pool lined with shimmering mosaic tile and accented by a soothing cascade water feature”. From £2,119 for seven nights all-inclusive, including flights, sandals.co.uk.

Icy kicks in Knightsbridge

The pool at the Bulgari Hotel

The Bulgari Hotel in Knightsbridge has probably London’s best hotel pool, says Rebecca Rose in the Financial Times. “At 25 metres long and seven metres wide, and tiled with bluish-green and gold-flecked mosaics, it is certainly the most opulent.” It may not be on a beach in Turkey, but with its private cabanas and a buzzer for service, “you could kid yourself for a moment”. Bottled water and fruit are provided poolside. After a swim, plop into the adjacent vitality pool. “The floor-to-ceiling mosaics are made from gold-leaf glass, so the walls shimmer and the bubbling water sparkles like Champagne.” With a touch of a button, you can opt for an “aqua massage”, which gives “a gentle pummelling on an underwater lounger or a shoulder massage from a waterfall”. A sauna and slushy ice fountain can be found upstairs for a “proper Scandi frisson”, or try the cryotherapy facial for more “icy kicks”. From around £700 a night in September, bulgarihotels.com.

Beachside lounging in Sardinia

Baglioni Resort in Sardinia

On the northeast coast of Sardinia, “sleepy San Teodoro has expanded to become a popular holiday resort, with a reputation for splendid beaches and late-night parties”, says Sarah Marshall in The Times. Just to the north, the new Baglioni Resort Sardinia opened in June, “filled with pieces crafted by local artisans. Cushions and tapestries feature patterns that could be Mayan in origin”, made by the “population that thrived here hundreds of years before the Romans”. On the walls in the bedroom, photographs capture the pink flamingos that migrate to the lagoons next door in October. “Out at sea the steep wedge of Tavolara island soars like the bow of an ocean liner.” The resort has 600 metres of beachfront, or guests can lounge on one of the daybeds beside the pool. From around €800 in September, baglionihotels.com.

A pool of one’s own in Greece

It may have been seven years in the making, but the opening of the Rooster, on the Greek island of Antiparos, within the Cyclades group of islands, “chimes perfectly with the new, more meaningful type of travel we are all looking for in 2021, with its emphasis on privacy, health and family time”, says Mary Lussiana in The Daily Telegraph. There is no communal pool. Instead, each “house”, built from the “local, mellow stone”, and containing one or two bedrooms and “spacious” bathrooms, comes with its own individual pool. It also has a tiny private patio featuring an outside shower, in addition to an al-fresco dining area – “gravelled underfoot, green tendrils wrapping around the wooden struts that form the roof overhead”. The hotel also has a gym and holistic spa. From around £700 a night in September, theroosterantiparos.com.

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Land Rover Defender: last chance to savour that V8 burble

“When it comes to horsepower, too much is often just about right,” says Mike Duff on Car and Driver. The new Land Rover Defender V8 proves the rule – that a car can only get better “with more cylinders under its hood”. The new Land Rover has a slightly chunkier body than its predecessors and treats you to the “deep burble” characteristic of V8 engines at startup. That gives “by far the strongest clue that this isn’t a regular Defender”. The chassis handles the engine’s full power impressively and the acceleration is “heady”. The steering also gives better feel than with “lesser Defenders”, with more weight and “meaningful communication” with the driver. The brakes too are reassuring, boasting good stopping power “with a pleasingly solid pedal feel”. And as you would expect from a Land Rover, it performs excellently off-road: around Land Rover’s Eastnor Castle test site, “it conquered pretty much every type of terrain without breaking a sweat”. 

This Land Rover is actually quite a few “characters” rolled into one, says Matt Prior in AutoCar. At low speeds on slippery bits, “it mooches with generous wheel movement, easy, long throttle travel and a great-sounding steady rumble”. When pushed further, it becomes more responsive, doing a “passable impression of a rally-raid car” on grassy fields. On the road, it’s “smooth, refined and still very, very fast”. This new supercharged variant boasts 518bhp and a 0-60mph speed of just 5.2 seconds. True, it will set you back at least £98,575, so it might not be the most sensible choice. “But it is a pretty lovely one.” 

It’s far more than just a “full-bore performance version of the brand’s off-roader” though, says James Brodie on Auto Express. “It’s an option for those demanding a bit more presence and a small sense of luxury from their Defender.” The near-six-figure price tag takes the Defender into “proper luxury vehicle territory”, but it’s no limited-edition toy, “just the top end of the regular line-up”. 

Just starting the car “is enough to prompt a wry smile”, says Jake Groves in Car magazine. There are “no thunderclap theatrics… you simply hear the engine briefly harrumph to life before settling down”. Land Rover has tried to “choke the engine as best it can to maintain the very latest emissions standards”, allowing the engine to continue in service until 2027 – but it won’t be long before you can no longer buy one of these new on the market. Cars are changing fast as governments put plans in place to make them ever greener. So make the most of it now, says Greg Potts on Top Gear – “if you can park the feeling that everyone else on the road thinks you’re a bit of a pillock”.

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Market Update – August 6 – USD Firmer on Jobs Day

Market News Today – USD (USDIndex 92.35) & Yields (10yr 1.237%) both higher today ahead of NFP. Weekly claims were in-line (385K). Equities rallied into close (USA500 +0.46% 4429).  Asian markets weaker again on virus worries. BOE  implied that rates hikes may come sooner than expected, avoided direct talk on taper and raised inflation expectations to 4%. Overnight – Significantly weaker JPY and German data. USOil rallied from $67.13 (12-day low) to  $69.00 handle now. Gold spiked down to $1798 and struggles to hold the key $1800 now. The US Senate could agreed $1 trillion infra. plan on Saturday.

European Open –  The September 10-year Bund future is slightly lower, Treasury futures are underperforming and in cash markets the U.S. 10-year rate is up 1.1 bp at 1.24%. Tapering speculation is creeping back in and markets will be cautious ahead of today’s all important US payroll report. DAX and FTSE 100 futures are currently flat, up 0.019% and down -0.057%, respectively, while US futures are fractionally lower. Eurozone markets extended higher with Wall Street yesterday, but caution is likely to prevail ahead of the payroll report today.

Today – US & Canadian Labour Market Reports, BoE’s Bailey – Earnings: Allianz, ING, Hikma Pharmaceutical, LSE, Dominion Energy.

Biggest Mover @ (06:30 GMT) Copper (+0.85%) Rallied from 12 day fall to 4.3000 yesterday to test 20-day MA at 4.3930 today. Faster MA’s aligned higher, MACD signal line & histogram over 0 significantly and moving higher, RS 76, OB but still rising. H1 ATR 0.0103, Daily ATR 0.1014.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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What to watch on Monday: Barrick Gold

Barrick Gold Corporation (#BarrickGold) is scheduled to announce its Q2 2021 results on 9th August, before the market open. Founded in 1983, the Canada-based company has engaged in the production and sales of gold and copper, exploration activities and mine development.

Figure 1: Commodity Exposure: Gold Equivalent Oz Sold (attributable basis). 

To date, Barrick Gold has 16 operating sites in 13 countries. It operates 5 of the 10 largest gold mines in the world. This year, as stated by the company in March, the commodity exposure ratio of Gold:Copper equals to 78%:22%, as compared to previous year’s 84%:16%. It is expected for copper exposure to remain above 20% for the coming few years.

Figure 2: First-Half Demand by Sector, Tonnes.

As reported by the World Gold Council in late July, global demand towards gold in the second quarter remains flat, and down 10% (y/y) throughout the first half (H1) of 2021. Demand towards jewelry is the highest compared to other gold assets, near 880 tonnes, yet remained 17% below the 2015-19 average; Bar and coin investment throughout the first six months this year has recorded the most robust growth since 2013, at 594 tonnes; Central bank gold purchases were 39% and 29% higher than the five-year and ten-year H1 average, respectively. On the other hand, gold ETF inflow saw its first net outflows since 2014, due to Q2 inflows not being able to fully offset the heavy outflows seen in Q1.

For copper, fundamentals that could support the strength of the precious metal in the near term include demand from infrastructure spending, supply-side constraints, its role in global decarbonization and global economic recovery (especially in advanced countries) that continues to advance.

Figure 3: Reported Sales and EPS versus Analyst Forecast for Barrick Gold.

Back to the Barrick Gold Corporation. In Q1 it reported sales revenue near $3.0B, down 9.85% (q/q) but up 8.64% (y/y); Adjusted EPS last stood at $0.29, over 17% below the quarter before, but over 80% higher than the same period last year. Free cash flow remains solid, at $0.763B, with net cash improved by $0.5B (q/q) after tax payment. Dividend payout to investors was $0.09/share, same as those in Q4/2020.

For the upcoming announcement, consensus estimate for sales stands at $2.9B, down 3.33% (q/q) from the previous quarter and down 6.45% (y/y) from the same period last year. For EPS, it is expected to hit $0.26, down 10.35% (q/q) but up 13.04% (y/y).

According to the company’s Q2 preliminary report in mid-July, reported sales of gold and copper stood at 1.07 million ounces and 96 million pounds, respectively. On the other hand, gold production was lower than in Q1 following planned maintenance shutdowns, while copper production was slightly higher than in Q1. Nonetheless, Barrick predicts both gold and copper production to be stronger than the first half of the year. The management of the company remains optimistic towards its outlook in the near term, stating “we remain on track to achieve 2021 guidance”.

Technical Analysis:

Sentiment of 14 analysts remains positive, with a buy rating kept unchanged and median price target set at $29.00, which is still over 35% above the latest close price, and 14.35% above the highest point of this year seen in May, $25.36.

The Daily chart shows that the #BarrickGold share price has experienced a strong uptrend since early March, with lows of the month at $18.80. The gains were massive until all prior losses seen in Jan-Feb/2021 had fully recovered; shortly thereafter, price momentum shifted from bullish to bearish, which led the share price to tumble and resulted in two session lows being formed, at $20.32 (29th June, -24.80%) and $20.26 (19th July, -25.17%). These two lows, together with $20.00 (FR 78.6%, also a psychological level) formed a solid support.

After forming a rounded bottom pattern with the two lows, the company’s share price extended higher and broke above $21.20 (or 61.8% Fib. level), however bullish momentum waned last Wednesday (4th August) and it has failed to break the critical confluence zone, which comprised of trend line Resistance, 100-SMA and 50.0% Fib. level Resistance, or $22.00. The bearish momentum continued yesterday, and the price is currently testing $21.20, the 61.8% Fib. level or the low estimate as offered by the analysts. For momentum indicators, RSI remains neutral near 50, while the Stochastics fast line breaks below 50.

Click here to access our Economic Calendar

Larince Zhang

Regional Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

 

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Inflation: compound interest’s evil twin

MoneyWeek will turn 21 in early November. It has been a busy couple of decades. We’ve been through the dotcom bubble, two commodities supercycles, the housing bubble, a once-in-a-century financial crisis, and a once-in-a-century pandemic. 

We have, in short, been round the block more than a London traffic warden. But one thing we have yet to experience: a nasty bout of inflation. I wonder if we now will. 

Not so transitory inflation

John explains in detail why we’re worried in this week's magazine, but the (rapidly rising) bottom line is that all the signs are there. Massive money-printing, which this time is going straight into the system rather than plugging balance-sheet holes in banks as in 2008-2009. Supply bottlenecks, skill shortages and rising raw-materials prices – a combination that points to a wage-price spiral. And, last but not least, central banks and a majority of economists insisting that inflation at multi-year highs is transitory. These would be the same central banks and majority of economists that failed to see the financial crisis coming. 

It may not be long now before we start to notice the price of items we buy regularly tick up. We all have our own everyday inflation gauges. Mine is the Peppermint Aero. I remember that a bar cost me 22p in 1988. Now it sells for 60p. The Bank of England’s inflation calculator, by far the most interesting thing on the website, suggests that this is right: £22 in 1988 was £60 in 2020. Prices have almost tripled. 

The annual average rate since 1988 has been 3.2%, which doesn’t sound too bad. But apply that for 33 years and look what happens. Nudge it up to 5%, and money depreciates much faster. At that rate, £100 shrinks to £36 in 20 years. Inflation is compound interest’s evil twin. 

So keep an eye on your favourite cereal, chocolate bar or wine brand. Watch out for “shrinkflation” too. Sometimes the price stays the same but the package gets smaller. I seem to recall that the 1988 Aero bar was a tad longer. I couldn’t swear to it, but I do know for sure that only a few years ago, Cadbury’s used to sell six Creme Eggs in a package; now there are five. 

Where does this all lead (beyond Creme Eggs in packs of four)? It’s becoming ever clearer that central banks have no intention of squeezing inflation out of the system. They have subtly raised the bar on what they say they need to see or anticipate from inflation before they stop printing money via quantitative easing or raise interest rates. We hear repeatedly that inflation should be temporary, and they will look through it. They suggest they will tolerate above-target inflation for longer than they have in the past. This spring the US Federal Reserve changed its official inflation target from 2% to an average of 2% “over time”. Two weeks ago the European Central Bank shifted its inflation target upwards too. It now aims to achieve inflation of 2% over the medium term, whereas before it tried to keep inflation below but close to 2%. 

Interest rates can’t rise

The direction of travel is clear. The aim is to inflate away the world’s huge debt load – much of it caused by central banks keeping interest rates too low for too long, of course. A big jump in interest rates would cripple the global system. 

Bond yields remain historically low, as investors apparently assume that the disinflationary environment of the past 40 years will endure indefinitely. And central banks have bought up a huge chunk of the bond market with printed money, which also keeps yields low. The upshot? We are in for years of yields staying below inflation, which is excellent news for gold. If rates do eventually rise in an environment of out-of-control inflation, it will benefit too. I will be topping up my gold today – just as soon as I finish my 60p Aero. 

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Dollar Up, Investors Brace for Latest U.S. Jobs Report

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Pound Gains Against Dollar as BoE Reins in Bond Tapering Threshold

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Jeremy Grantham, we're in one of the greatest bubbles in financial history

Merryn Somerset Webb: Hello, and welcome to the MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine, and with me today I have a special treat. I know I always say that, and I’m constantly being accused of saying everyone is special, but do you know what? This week, it really is special. 

We have Jeremy Grantham, who is cofounder and chief investment strategist of GMO. I think he needs very little more introduction, as you will all know him already. Thank you so much for joining us today, Jeremy. We really appreciate it. 

Jeremy Grantham: Hi. It’s a pleasure to be with you. 

Merryn: Now, I want to start just by reading a fairly lengthy quote from you, from your website, from the GMO website. It’s GMO.com, by the way. Anybody who doesn’t regularly look at the website, you should. 

There is loads of interesting research on it available, unless I have some special entry on my computer, available, I think, to all. 

So, here’s the quote: “Today, it is clear to me that this is the most dangerous package of overpriced assets we have ever seen in the US”. 

Jim Grant would say that we have the most overpriced fixed-income market in the history of man. That, combined with an equity market that can easily lose $5 or $10 trillion, depending on the magnitude of the break, and is a contender for the highest-priced market in American history. 

Then, you talk about the housing market also racing up. So, you’ve got housing, equity, bonds. If they go together, they will carry a write-down in perceived wealth that would have no precedent. I love that phrase perceived wealth, by the way, as opposed to wealth. 

So, what you think is that we are now in the middle of one of the greatest, possibly the greatest, bubbles in American financial history. And I just wondered if we could talk a little bit, or rather you could talk a little bit, about what makes it such a great bubble, and then we can move on to what might make it end. 

Jeremy: First of all, it’s been the longest economic upswing. Covid is an exceptional little blip. I liken it to the 87 portfolio insurance crash, quickly down, quickly back, but the long, slow build-up had gone on for 12 years, so it’s about the longest upswing we’ve had.

And at the end of a long upswing, you’re likely to have very substantial profit margins, and if history repeats itself, investors are likely to consider that the high profit margins will last forever. And what it takes to make a bubble, traditionally, is very strong economics extrapolated into the indefinite future, and that will do it. 

And to get there, you normally need accommodating money supply, an accommodating Fed in general. And in most of the bubbles that we’ve had, in all of them actually, those conditions have been met. And so, here we are again with the economy very strong, above the level of 2019, which is in itself remarkable, with the most accommodating Fed perhaps in history, certainly the lowest rates in history, the biggest increase in money supply, by far, that we have ever had in history, up to 25% year-over-year in America. 

And let me point out that the US is far more stimulative than Europe and the rest of the world. Europe and the rest of the world did a pretty good job this time around, of stimulating, a better job than in the Great Financial Crash. However, they are merely at the top end of their historical range. The US, however, has broken way out of its historical range, both for government stimulus and for Federal Reserve stimulus. 

So, you have this double whammy, and not only working together, which is not always the case, but having broken way out of the historical range on the upside, in the US. 

Merryn: OK, it’s a mixture of all these things, but let’s talk briefly about how we got to the point where these profit margins have become so high in the first place, and how we’ve got to the point where we extrapolate this rise forever. It seems to be a combination of big global trends. 

So, we have globalisation itself, we have the entry to the global labour market, of China and Eastern Europe, etc, so we have this wave of low-priced labour. Then we have very low interest rates and the continuation of that, and we have a very friendly tax environment for big companies in the US. So, all those things, which have kept going longer than I expected. I remember first writing articles about how all these things were going to turn at some point, and the share going to capital would shift, and the share going to labour. 

All these things that weren’t expected to happen for the last four, five, six, seven years, they do now seem to be beginning to happen. We’re beginning to see the end of these, I suppose, deflationary pulses coming across the world, so we slightly feel like we’re in a turning point at the moment, that might shift that constant rise in profit margins. 

Jeremy: Yes, and it’s fair to say that asset class prices have risen, or real estate housing. Housing was in a bubble everywhere, whether it’s London or Vancouver, Sydney, Paris, or San Francisco. And commodities are pretty high, and bonds of course are very high everywhere, and rates are low. The equity market is a little different, in that in the rest of the world they’re merely normally high prices, and one or two countries are barely that, they’re adequate, but the US is a candidate for the highest-price market in its history. 

And this is unusual, and we might ask, why is that the case? And the reason it’s unusual, that is profit margins in the US have gone so high. I think capitalism, particularly in the US, is a little fat and happy. It’s extremely monopolistic. The Justice Department has gone to sleep profoundly for a long number of years. 

So, every industry is more monopolistic, more concentrated than it used to be, and they’re also less aggressive. They don’t go for market share like they would in the 60s through the 90s, they go for profit margins, so they use their cash flow, they use the reduction in corporate profits to buy their stock back. And buying stock back interacts beautifully with the stock options, it’s very manageable, it’s very low in career risk for the players, and so they love it. And that’s been a big input. 

And if you look at the difference between the US and the rest of the world, you can see that it’s concentrated between 2010 and today, and in that window, the rest of the world’s profit margins have stayed reasonably high, and the US has crashed up to record highs. 

We have opened up a fairly astonishing 80% gain over the rest of the world in profits, so the stock market doesn’t have to have a massively higher PE, it is mainly being driven by higher profit margins. 

When you break the profit margins down, you find that a couple of handfuls of FANGs account for something like 85% of the total, so it’s quite a remarkably unusual setup. The balance of the broad US economy has done just fine, it’s outperformed the rest of the world by 15% or so, which over 11 years is not bad, but it’s in the range of pretty good, and that’s what usually passes for good performance. 

But the performance of the FANG has been extraordinary, there’s been literally nothing like it in history, anywhere. The classic example, let us say, would be Apple. Apple, biggest market cap in the world. The last quarter’s sales announcements, sales over a 12-month window were up 50%. Give me a break, this is the largest company in the world. 

The largest company in the world, traditionally, has a brilliant year up to six and a half. There is no precedent for the largest market cap in the world being up 50% year-over-year, so one has to admit these are exceptional companies, and they all have elements of monopoly about them, through the Amazons and the Facebooks and so on.  

And now the question is, is that going to mean revert? Profit margins, historically, have been the most mean-reverting series. If high profits do not draw in competition, then something about capitalism is wounded or even dead. And it certainly acts as if it’s a little bit wounded here, and these high profit margins have not attracted the normal competition. And let me just say that since 2000, the profit margins in America have averaged 60% higher share of GDP than they did in the 100 years before that, in the era in which I grew up managing money. 

This is a major breakout. It hasn’t occurred anywhere else. But it’s still strange that it wasn’t the 2000 to 2010 period where the US was different. It was like a base-building period. The companies were growing and growing, and suddenly in the 2010-until-today period, their profits shot into the stratosphere. 

You have to ask the question, why is it that the US has such a dominant share of these great new interesting firms, with China tagging along with the other important two or three? 

And my thought on this is, is the venture capital industry. The venture capital industry has, like a lot of great American exceptionalism, has not been doing that well in those indicators that matter, whether it’s in the sense of life expectancy, where life expectancy has fallen way to the bottom of the list, health has fallen to the bottom of the list, number of people in prison and so on, bottom of the list. 

But when it comes to venture capital, it is the last great American exceptionalism, and it ties in to the great research universities, of which America has two-thirds or so of the entire world’s supply, and Britain has a decent percentage of the remainder, incidentally. 

And venture capital really feeds off that. And better than that, the US society has tailored its risk-taking to be compatible to venture capital. Now, the one thing you have to admit about Americans is they can take risk. 

They forgive failure, they go back and try again, and they throw money at new ideas, and they’ll do 20 new deals, where the careful Germans will do one. And so, they have many more failures, but when the smoke clears out of the wreckage of the internet, the Amazons, and for a while the AOLs, tend to be American, and they own these great new enterprises. 

So, I look at the FANGs and I say, where did they come from? And the answer is, they all jumped out of the venture capital industry in the last few decades. When GMO was getting going, we hired away, employing potential employee 23 from Microsoft. Now, Microsoft and Apple are the two oldest, and the others are positively teenagers compared to them. 

But that isn’t very old. GMO isn’t very old. And these are, in that sense, brand-new enterprises. The FANG types, that make all the difference to American profits and the American market cap, are all pretty recent companies. These are not the products of the IBMs, and the Coca Colas, and the Procter and Gambles, and the General Electrics, the great companies that have been around since 1929 and long before that. No, these are all brand-new enterprises. 

Anyway, now the question is, will the world turn against them? We see signs of that certainly in China, which has been bashing its new, special, powerful monopolistic entries. We see signs of it in Europe. We see signs of it in the new administration in America. These companies are incredibly powerful, they have at least very strong whiffs of monopoly, and they are disturbing people by the power and influence that they have, particularly some of the Facebook-type, social app enterprises. 

Merryn: But it rather suggests, from what you’ve just been saying about the venture capital industry and the huge vitality of start-ups in the US, that you would expect potentially capitalism to keep working, and competition to appear for these big companies. 

You look at something like Facebook today, and you think, how could something compete with that? But actually, from what you’re saying, it sounds like you think that it’s perfectly possible for capitalism to continue to work in the way that it should. So, it looks like we’re about to see various types of government intervention, but maybe it’s not necessary?

Jeremy: Ironically, I think that capitalism is not designed to be left on its own. Otherwise, as Adam Smith would have said, pretty soon you have monopolies and oligopolies. It needs a Justice Department, it needs an administration, it needs a fatherly eye kept on it, and it has not had that. 

So, what has happened, driven by the US, but all over the world, there’s an enormous increase in inequality. 

The globalisation has been met by a shift in tax in favour in capital, so you had all the basic underlying forces moving in favour of capital, and extreme labour competition weakening the unions and lowering the wages. 

And you had the tax structure come in on top of that and decrease the taxes on capital and dividends, capital gains, and also decrease the tax on the very rich, and leaving social security payments the same, basically increasing the ratio of tax on the less well off. And we have a situation in the US that you will not be aware of necessarily, and that is, since 1975, for an hour worked by the guy in the middle, the median worker, is not up as much as 15% since 1975, adjusted for inflation. 

In the UK, who has not been the leader of the pack, they’re up about 70%, and in France, over 150% increase in the real return for an hour of work. And what this has done, eventually, is it’s taken the US economy to a situation where Henry Ford would say, how are they going to buy my cars if I don’t pay them a decent wage? They’re not having a decent wage. Their consumption has moved up to the upper-class items, and the economy is beginning to hollow out. 

After 40, 50 years of the pendulum swinging against labour and towards capital, we are dangerously lopsided, and I think particularly in the US, but also in Europe to some extent, we’re weakening the strength of the economy by weakening labour, and decreasing. 

We have increased the share going to corporate profits by about four points, 4% of GDP, and most of that has come out of the share going to the workers. I think the governments are beginning to worry. I think they’re beginning to express interest in having the pendulum begin to shift back. 

And I think it’s absolutely a good idea from an economic point of view that it happens, and that it begins to happen pretty soon. 

Merryn: So, it does seem inevitable, at this point, that the pendulum will start to swing back that way. Might the discussion around that be one of the things that possibly prompts the end of this great bubble? 

We’ve talked about this. We’ve talked about how very high valuations are in the extent of this bubble. Whether it’s one of the greatest in history or not, we’ll find out when there’s fallout. But what brings it to an end? I know I did see you in the early spring saying that you expect it to be over very soon, but what does very soon mean, and what might be the thing that sparks a change? 

Jeremy: The history books are pretty clear, there doesn’t have to be a pin. No one can tell you what the pin was in 1929. We’re not even certain in 2000. It’s more like air leaking out of a balloon. You get to a point of maximum confidence, of maximum leverage, maximum debt, and then the air begins to leak. 

And I like to say, the bubble doesn’t reach its maximum and then get frightened to death, what happens is the air starts to leak out slowly because tomorrow is a little less optimistic than yesterday. And gradually, people begin to pull back. And the process is very interesting, in that before the end of the great bubbles, and there’s only been a handful, so we can get carried away with over-analysis. 

But before the great bubbles ended in 1929, 1972, and in 2000 in the US, the three great events of the 20th century, there was a very strange period in which, on the upside, the super-risk, super-speculative stocks started to underperform. They never do that in between, ever. And then suddenly, it starts. So, you go back to 1928, the JACI Index, the low-price index, and the S&P were up 80% in 1928, and then the S&P was up, say, 40%. That’s what it’s meant to do. 

And then in 1929, the S&P went up another 40% before crashing. The low-price index started early in the year to go down. It couldn’t even get the sign right. It had a beta of about two, and started to go down, and the day before the crash it was down over 30%. Nothing like that happens again until 1972. And let me point out that 73/74 is still the biggest decline, adjusted for inflation, since the Great Depression. It was 62% in real terms. 

And in 1972, the last up year, the S&P outperformed the average Big Board stock by 35%, approximately plus and minus 17 points. The average stock was going down steadily all year, and the S&P was going up. Nothing like that happens again until 2000. In 2000, in March, the great TMT bubble starts to peak, and Pet.coms get taken out and shut. 

And then in April and May, the junior growth. May/June, the middle growth. June, July, August, the Ciscos. Cisco was the biggest company in the world for eight minutes, I like to say. And the whole TMT block, that was 30% of the market cap, was down about 50% by September. 

The S&P was unchanged. Unchanged. Which meant that the remaining 70% was up 17%. That is an amazing deviation. So, bang, bang, bang. It’s only happened three times. It happened leading into the great air leaking out. And finally in September, the confidence termites, as I like to think of them, reached the broad market, and the entire 70% rolled over like a giant iceberg, and down it went, 50% over two years. 

And so, where are we today? Those three deviations, by the way, 1929 was eight months, 1972 was 11 months, and 2000 was six or seven months. And on February 9th, the Russell 2000, which had had a crushingly good year, wiped out way ahead of the S&P from March of 2000 until February 9th, way ahead of the NASDAQ. And the S&P has continued on its merry way, having a nice bull market. 

Even after yesterday’s great rally, the Russell 2000 was decently down since February 9th, the NASDAQ is five points ahead of it, and the S&P is ten points ahead. This is getting to be a pretty good down payment. It’s February, March, April, May, June, July. It’s five months. I would say this is tracking quite nicely. 

And the confidence termites started, once again, exactly where you would expect, they started with my favourite biggest holding, personal holding, QuantumScape. QuantumScape, a solid-state lithium-ion battery company I bought into eight years ago, as a green venture capital. They came as a SPAC, came at ten, went to 130.

At 130, it was 52 times my investment, which is pretty nice. It was also $55 billion, bigger than GM, bigger than Panasonic, if you want to think batteries. There’s nothing like that to compare to in 1929, by the way. The scale of that. They’re a brilliant research outfit, and I’m happy to still hold a quarter of my… But they don’t have a product for four years, and they have no trouble telling you that. 

So, here is a research lab that will have no profits, no revenue for almost four years, selling more than GM. $55 billion, give me a break. Anyway, that started down. It’s now down 80%. The SPAC Index is down 30%. The SPACs have started to dry up. Bitcoin, 62,000 to today’s, after a nice rally, 31,000, half price. Tesla, 900. Down to 650. 

This is the classic pattern of start with the most speculative, the most heroic, and work your way down carefully until finally you’ve reached the market. I would say it’s lasted longer than I thought. Why? Two reasons. One, the vaccine was simply bigger and better than anyone expected, and we produced it quicker, it was more effective, particularly Moderna, Pfizer, than anyone had ever hoped possible, really for any vaccine of that kind. 

And the other reason was the speed and size of President Biden’s stimulus package. He came in with such a roar, and bang, you’re suddenly talking trillions of dollars of stimulus. Those two things, of course, were bound to increase confidence, bound to increase the money in the hands of individuals. Individuals, because of Trump’s stimulus and because of Biden’s stimulus, have been dripping in resources, and they have bought into every setback. 

And they’re buying all the crazy stuff, the meme stocks that are just jokes, where they’re whipped up into a frenzy, and they’re buying them just for fun, it seems, ten times more than any underlying value. 

And, by the way, every indicator of that craziness, this is a record, this is more impressive even than 2000, and that was more impressive than anything that had preceded it. But the craziness that we have seen in the meme stock, companies being bought on no earnings potential, on no underlying reality, is just amazing. 

Merryn: But it’s interesting, isn’t it, the extent of participation in this bubble? Certainly in 2000, the entire population wasn’t participating in the bubble, it was still a marginal activity, but when you look at it now and you look at the numbers in the US, the percentage of household wealth held in financial assets is at its highest ever. Almost everybody seems to be participating, as opposed to a small group. And that means that the fallout, when it comes, it’s going to be much worse. 

Jeremy: Absolutely. But, by the way, 2000 was a pretty broad participation. My favourite story, which is completely accurate, was that the local Greasy Spoon for lunch in the Financial District of Boston, the television sets, of which there are always about eight in every one of them, all but one of them would be showing talking heads from MSNBC and CNN and so on, and one of them would be showing replays of the Patriots football team. 

And a year earlier, it was eight out of eight were showing the Red Sox. It was quite amazing, and it drove the headline in 2000 from the financial page to the frontpage. And really, one was reading on a daily basis. And that went away for 20 years, and is now back, and now everyone keys on whether the market’s at a new high, and what Bitcoin is doing, and how’s Tesla getting on, and what were its sales. 

And the individuals in particular, you’re right, the individual participation as a percentage of trading has tripled in the last 18 months, so this is the real McCoy. This has more spectacular numbers than any market ever in American history, and some of them buy a lot. 

The number of options that are traded by individuals, the shares traded, the penny stocks that are traded, have exploded by a factor of ten over two or three years. It is a really splendid speculation, and of course it will end badly. One of the points the listener should take is, in the end, it doesn’t really matter how high these things go in the following sense, that the market has, let us say, a theoretical value, a value on its stream of earnings and dividends, and my guess is it’s about 24 on the S&P. 

And whether it goes to 4,500 or 5,500 doesn’t really matter. If it goes to 5,550, or like Japan, 6,500, like Japan in 89, it just means it goes down longer and harder. Japan had the highest stock market in the developed world, by far. It went to 65 times earnings in 1989. 65 times earnings. It had never been above 25 before in its history. And simultaneously, it took the land and real estate even higher. The land under the emperor’s palace really was worth more than the State of California. 

The land bubble in Japan in 89 was more impressive than the South Sea Bubble, or Tulips, in my opinion. And what was the price they paid? Today, the stock market is not back yet to 1989 high. The land is not back yet to 1989 high. That is getting to be a long time, 33 years of pain and suffering. 

Rule number one, do not bubble two great asset classes together, particularly housing is more dangerous than stocks. And Japan did it, and they paid the price. The higher they went in the stock market, the longer and more painful the crash. 

Merryn: But that’s what’s happening now, everything is bubbling together, and that’s what I think makes it very difficult for our readers at the moment, because they look around and they say, where do I hide? Where can I go? 

Back in 2000, when MoneyWeek, our magazine, was quite new and we were writing about the Dot-com Bubble, etc, there were also lots of other places we could tell people to go. Some small caps were cheap, lower-value stocks were cheap, houses weren’t that expensive, the bond market wasn’t completely bonkers. There were lots of places we could tell people to put their money, if they weren’t putting it in the Dot-com Bubble. 

But when we look around now, we can’t see where we should tell people to put their money, if they’re going to try and get it out of the bubble and safe from the bubble. Is there anywhere that you can see that our readers can hide?

Jeremy: Let me just start by agreeing with you in 2000. REITs, the real estate trusts, they were buying properties below the cost of building them, and the REITs themselves were selling below the cost of the properties that they owned. They yielded 9.1%, 9.1% yield at the very top of the market, when the S&P had a 1.6% yield, the lowest in its history. And so it went on. TIPS yielded 4.3% real, guaranteed by the US government, guaranteed against inflation. The regular bonds. 

Merryn: Can you imagine that now? Wouldn’t that be amazing?

Jeremy: Can you imagine? So, bonds were cheap, real estate was desperately cheap, value stocks were not bad. Small cap value did not decline when the S&P was down 50%, at the bottom. The small cap value was plus 2% or 3%. REITs were plus 30% at the very bottom. Plus 30%. 

Anyway. So, fast forward. We are breaking the cardinal rule, we are bubbling bonds, stocks, land, and real estate, and if you want to throw in commodities. The ex-energy Goldman Sachs Index, which is metals and food, which are not inconsequential, are almost back to their 2011 high, when everyone says we were in some cosmic, super commodity cycle. So, that’s a lot. And even energy, which is half of the market, has more than doubled from the low. That’s also quite a bit of pain for consumers to absorb. 

One day, if we become pessimistic, we have the ability to mark down these enthusiastic prices, more than we have ever had to do. If we stay optimistic, it’s not so bad, but if we become, or when we become pessimistic, we have an awful lot of marking down to do. 

The housing in most of the world, and certainly in America, as a multiple of family income, has recently overtaken the Great Housing Bubble of 2006, 2007, which in itself is quite amazing. When that deflated it took away $8 trillion of perceived wealth. 

And let me go back to your expression, perceived wealth. I use the word perceived wealth, because everyone knows the house they live in did not change. It doubled in price. It was the same house, kept the rain off just as well as it did, but no better, and then it halved again in many cases, in the extreme bubble markets, and it was still the same house. The shift was perceived wealth, and you can see it very clearly in housing. 

In stocks, you indulge more in fantasy. The price of Tesla goes up five times in a single year, and somehow you kid yourself that it’s justified. And of course, either a year earlier it was crazy, or today it’s crazy, take your pick. It is not efficient. 

The sales increase was a very splendiferous 35%, and the stock price increase was 500%. That is a shift in perceived wealth. 

You see it easily in your house. You see it with great difficulty in your stock. But overwhelmingly, the portfolio of stocks is not changing its intrinsic value very much. 

Its intrinsic value depends on the US or global portfolio of dividend power and earning power, and that changes historically at a couple of percent, real, per year. And so, when the market goes up by 100%, you better believe that is mainly air around a modest increase in long-term fundamentals. In fact, the long-term fundamentals have not accelerated since Greenspan’s day. 

Greenspan introduced this aggressively pro-asset formula of moral hazard and keeping money supply generous, keeping interest rates down, but what has happened since that day? The growth of the US GDP has actually slowed down. So, lower interest rates introduced an enormous increase in debt, but the increase in debt, which is meant to induce an increase in growth, did not. And the reason is, people didn’t take that increased debt and increase their CapEx. CapEx actually weakened since Greenspan, and stayed pretty weak through Bernanke up until today. 

The growth rate of the system has slowed down, but the increase in debt continued up. And what happened to it? It was used for other purposes. It was used for assets. So, asset prices have gone through the roof, whilst the GDP has slowed down a little. And that’s the world we live in. And now the question is, interest rates have come down from 16% long bond, in 1982, until basically 0%. Where do we go from here? Is there still the ability to stimulate? Money supply has gone through the roof. Does that introduce inflation? All of these issues are now buzzing around. 

And what are the things that could cause a shock? Obviously, a prolonged uptick in inflation would shock the market. 

Obviously, I think we’re vulnerable to another wave of Covid, particularly in the US, which the US market has not realised. It began to realise a little bit last week, but very slow on the uptake. If you study the UK, which I do, you can see how dramatic delta has been, the delta variant. There were 2,000 cases a day in England. There’re now 50,000 cases, multiplied by 25 times. Thank heavens all the old people are vaccinated, so not too many people are dying. But a 25-fold increase. 

And the US has only just started to double and redouble, from a very small base. The US has fewer people infected, which is a sixth of the size, so we have a lot to go, and we are not vaccinated here in the US the same way that you are. 

Merryn: That’s the problem, the vaccination, isn’t it? Because in a way, you can look at what’s happening in the UK as being absolutely tremendous news, in that we’re seeing this massive uplift in cases, and of course we’re testing an awful lot to get those cases, but we’re not seeing it follow through into deaths. So, the rest of the world could look at the UK and say, this is fantastic, all we need to do is just get everybody vaccinated and this is over. It’s good news, not bad news. 

Jeremy: Of course, it’s absolutely fabulous news for the long term, and we’ve known that. If you paid attention to the data, you’ve known that for over six months, that this was an incredible vaccine, and all you had to do was vaccinate people. There’s nothing new, if I may say so, in that. 

But in the short term, what is shocking is how little the US, who are really predisposed to wishful thinking, by the way, at the drop of a hat, seem to think they’re going to skate through this thing that has increased so many cases in the UK. They do not have the vaccination thoroughness, by any means, that we have. It’s completely regional. 

Massachusetts is like the UK, thank heavens. But Tennessee is not. There are big districts of the Midwest and the South, where 20%, 30% of the people are vaccinated. And a lot of the older people are not vaccinated, and you have factories with 40-, 50-year-olds, as well as 20- and 30-year-olds, where handfuls are vaccinated. They just don’t think it’s cool. They don’t do it. And some of those guys in their 40s and 50s will die, and some of those factories will get closed. 

My guess is that this will turn out, in the next two or three months, to be a final real shocker before the good news that you talk about. And we are not counting on that. We’re counting on all systems go now. In case you hadn’t noticed, the market is at an all-time high, and everything in the garden is rosy, and Covid is not as rosy as it seems. 

But the third reason that could shock, is what I call everything else that you forgot to anticipate, and there’re always a lot of those things. The disgusting subprime in 2008, much worse than you ever dreamt of. Things come out. The bezel increases, the size of the bezel, as some famous writer wrote about the Great Crash of 1929. And things go wrong, and we have more debt, we have more possibilities of bad debt, of defaults, lurking around in the system. 

So, that’s the one that worries me most, and that is all other unanticipated bumps in the night. Inflation and Covid also worry me. 

Merryn: Jeremy, what’s worrying me here is that the answer to the question, where can we hide, appears to be nowhere. 

Jeremy: My recommendation, fairly standard. For some reason, the equity market is not as overdone as bonds and real estate, and therefore if you stay out of the US, you can own some real estate. Pick it carefully, emphasise emerging markets, and you will make a respectable return. Not as much as you would like, but a respectable return. Log it up for ten years, 20 years, you will make respectable money. And I would do that, precisely that. 

And the other thing that is about as cheap as it gets, compared to the other half of the market, is value or cheap stocks versus growth stocks. They have had an ultimately dismal 11 years, they’ve had a few little rallies since then, but the range is very positive for them. If you can combine those two ideas, emerging is about as cheap as it gets, relative to the S&P, and value is about as cheap as it gets, relative to growth. 

If you could buy the cheaper low-growth stocks in emerging, and carefully selected other developed countries, and avoid the US. And then, in addition, if you could carry a decent chunk of cash to take advantage of the bargains that will come down the pipeline, in the not-too-distant future. 

I used to think we’d be lucky to reach June, July, when finally I would get to sell my QuantumScape, because I was a controlled insider. And of course, it didn’t happen, and QuantumScape and the SPACs began to be weak long before July 1st. And so, by the time I got to sell it, it was down 80%, which was a bit of a curse. 

Merryn: It’s a shame. 

Jeremy: But now, because of stimulus, because of the success of the vaccine on a global basis, I think the cycle has been pushed a little further. But I would be surprised if the termites, that are eating away at the SPACs, do not reach the rest of the market before the end of the year. 

Merryn: And what about the UK market? If you look at that on a cyclically adjusted PE basis, it really looks pretty low down the global scale. 

Jeremy: Yes, not nearly as bad as the US. And of course, you’ll come down in sympathy. That’s always the shocker, isn’t it? That when the US tanks spectacularly, witness the Great Financial Crash, it tends to suck in a lot of players. Yes, the UK’s not too bad. It’s overpriced, in my opinion, in our opinion. 

Merryn: But not hugely. 

Jeremy: Not hugely, no. Compared to your real estate market, now there’s humdinger. One day, there is going to be hell to pay in your real estate market, because you guys have floating rates, like Canada, Australia, and New Zealand.

We have fixed rates. So, yes, our market will crash and it will be painful, but not nearly as painful as it will be in Britain. 

Merryn: Although, interestingly, you’re beginning to see much longer, very cheap fixed-rate deals than you have in the past. This week, there was an announcement from Nationwide about a five-year deal on under 1%, and this is new here. 

Jeremy: Dear listener, go and get the longest one you can. Pay up a little bit if you can get the ten-years. 

Merryn: I did that ten years ago, and boy did I feel stupid. The rates just kept going down and down, and I never paid. 

Jeremy: That’s right. Everybody feels stupid at the top of the bull market, basically. No one has taken enough risk, no one has leveraged enough, etc, and the message they draw from that is, they never will again. Just in time to get wiped out. It works very well. The market, in its own way, must have a lot of fun. 

Merryn: Every time. Now, all bubbles leave us not just a lousy legacy, but a good legacy too. My favourite bubble that I write about quite a lot is the Diving Bubble at the back end of the 1600s, when everyone was busily inventing new kinds of diving apparatus, so that they could go and dive, salvage ships, and get out the gold, etc. And there was this huge explosion of technological innovation, to try and create a machine that would let someone stay underwater for the longest time. 

And of course, it totally burst, everyone lost all their money, but nonetheless it left people with lots of quite interesting new technologies. And of course, the Railway Bubble left us railways, and the Dot-com Bubble left us all sorts of wonderful things. And even the Housing Bubble left us lots of extra houses, which we then went on to use, both in the UK and the US. 

Jeremy: Actually, you never built any houses in the UK. 

Merryn: That’s true, we didn’t build any. You got lots of new houses, we didn’t. Ireland got lots of new houses. 

Jeremy: Ireland and the US did. 

Merryn: And Spain. Spain got lots of houses. 

Jeremy: And Spain did. And those three markets cracked. And the ones that didn’t, Australia, Canada, the UK, didn’t really crack. 

Merryn: They never really crashed, it’s true. 

Jeremy: They came down 10% or 15%, and went to new highs. But Amazon is a lovely example in the 2000 mess, where Amazon was the superhero of that cycle, and 100 by Christmas, 200 by Christmas would be making reputations of Henry Blodget and so on. And then it went down 92%, before making everyone an ineffable fortune. And, indeed, if you held it at 2000 and rode it down 92%, you still did very well. 

Merryn: So, what do we hold? When this bubble goes, what do we buy and hold? What’s going to be the great legacy of this bubble?

Jeremy: The Grantham Foundation for the Protection of the Environment has moved its assets, contrary to everything I am telling you now, I’m sad to say, for your sake, to 70% venture capital. Now, when you’re in venture capital, you cannot move in and out, you make long-term commitments, it takes years to invest in a programme, it takes years after that to get paid back. 

So, whether you like it or not, you’re stuck, and we have been stuck. And we have moved early-stage VC, and we’re aiming half of that to be in a grouping that’s preceded it. There is a wall of global money coming behind decarbonising the global economy. It will take trillions of dollars. It will take carbon taxes, which are coming everywhere, including China last week. It will take rules and regulations, and subsidies and extra research. 

And what will happen, in my opinion, is that the early-stage green companies will be a bottleneck. There will be more money trying to get into the new ideas, and there are many new ideas, by the way, and they will really prosper. And the established green companies will also be beneficiaries. GMO has a climate change fund for the last several years. It’s doing extremely well. And it will get hurt in the burst, but it’s a global fund. It will go down less. It will come back quicker. It will run further. 

So, right behind that other portfolio, I would consider that as a separate idea. And if you can buy venture capital. Venture capital in the US, it’s far and away the most virile part of American capitalism. It has all the ideas. All the best and brightest now come into venture capital, all starting their new firms, as they should. 

Merryn: Interesting. Jeremy, let me ask you one more thing then, partly on this subject. One of the most interesting articles of yours I’ve ever read, I can’t remember when it was, many years ago, it was about soil health, and it was the first piece I’d read on the importance of soil health, both for agriculture and for carbon capture, etc. Do you think that there is a case, even now, for buying land with carbon capture in mind? 

I was talking to someone the other day who was telling me that pretty much every estate that changes hands in Scotland now, changes hands with the new owners looking at it with a view to capturing carbon capture subsidies, or selling the capture under the peat, etc. Is there a case for this? For, say, UK residents buying land in the UK for its carbon capabilities?

Jeremy: Scotland is a very special case, because it’s very low-grade agricultural land, but very peaty and very interesting for carbon capture. The trouble with arable land is that the systematic programme of lower rates has driven up the price. And if you back up ten, 20 years, the yields on farms and forests would be 6%, and today it’s 3%, so you’re compounding your money at half the rate. That’s a poor place to start that otherwise very interesting idea from, which is a shame.

However, we are going to have a very devil of a time producing enough food for nine billion people one day, in a world of climate change, where big chunks of Africa and perhaps India, because of weather and governance, are having a hard time growing enough food. And so, I think there is a good long-term future in stable, resilient food growing. It’s just a shame, a real shame that we have to start by buying it at twice the price. 

Merryn: We have to start from here. OK, I won’t go and buy a farm then. For now, anyway. Jeremy, I think we’d better leave it there. You’ve been incredibly generous with your time. Thank you very much for joining us. And everybody, if you’d like to hear more from Jeremy, it’s just GMO.com, isn’t it? 

Jeremy: Yes. 

Merryn: You’re not on Twitter, I’m guessing. 

Jeremy: No. GMO.com. 

Merryn: Brilliant. Thank you so much. That was fascinating. 

Jeremy: No, you’re extremely welcome. Bye bye. 

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Live Analysis on BOE Day

The Bank Of England left bank rate unchanged at 0.10% as expected, the key phrase in a largely uneventful MPC document was “Some modest tightening of monetary policy is likely to be necessary to be consistent with meeting inflation target in medium-term”.

Click here to access our Economic Calendar

Andria Pichidi 

Market Analyst

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Lira Bears Awaken as Erdogan Renews Calls for Turkish Rate Cut

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