Investing In The Winter Of Discontent

The Winter of Discontent

The world is in a state of confusion. COVID cases are rising. The United States election is underway. Europe is going back into lockdown. With so much uncertainty, where are the best investments? 

Raoul Pal, founder of Global Macro Investor, shares his Expert View to help you understand where you can allocate your funds in this turmoil filled period in time.  The big investment areas we will explore here are Bitcoin, gold, bonds and the U.S. Dollar.

The United States Election

The 2020 election in the United States is anticipated to be highly contentious. Raoul lays out three scenarios that could play out.  We start with the current narrative, “Blue wave, stimulus, inflation, growth.” 

The most likely scenario is a blue wave that sees Joe Biden and the Democrats take the White House and control of congress.  However, the market may be improperly pricing this scenario at this moment. Assume this scenario plays out, it will still be three to four, maybe five months before a new stimulus bill is passed. The incumbents are not inclined to do anything about the virus. When Biden does take office, the European markets are already telling us that growth will be slow. 

If Trump were to win, there will be no tactics to control the virus. Trump has stated he will pursue a herd immunity approach. The burden will shift to the states and some will move forward, business as usual, and others will shutdown again. 

If Biden were to win, but the Senate stays Republican, this is likely to be the most disastrous scenario for the markets. There will be endless fighting.

The COVID-19 Shadow

In any scenario the virus will continue to ravage the United States and another round of lockdowns and/or reduced discretionary spending will occur. Why? If another shutdown were to occur or the United States took the Swedish Model approach to the virus, it does not change the Survival Mentality among Baby Boomers and older Gen Xers. Those demographics will not risk going out and contracting the virus.  

Online buying patterns from the first shutdown may not be repeated. In addition, Raoul believes that millenials may not be so willing to invest in the market the same way they have been throughout 2020. This could be problematic for the equities markets. 

As for the herd immunity tactic – that may be impossible as antibodies have been disappearing as quickly as a few months after contraction of the virus.

The Winter of Discontent Investments

Bonds – The market is heavily short bonds at the moment. In fact they are almost one sided. He is confident that bond yields will go negative. Most of the major countries have gone to negative rates. Raoul admits he may be a little early, but he is bullish Bonds via TLT.  He has purchased calls and likes the asymmetric risk this setup currently presents. 

To understand more about negative rates, our 2019 interview with Joseph Trevisani, senior analyst at FXStreet, will explain more. 

Bitcoin & Gold – “That rolling stimulus, so the Europeans, the fed, the BOJ, the PBOC– that’s the thing that pushes Bitcoin and gold higher, Pal said.” 

Bitcoin and Gold will benefit from currency debasement.  When the final large stimulus package is enacted, it will be the catalyst for the macro move.  The move up will not be a smooth ride.  In fact, there may be a liquidation event or two. Those will be times to buy. 

A “Perfect Storm” is brewing Pal feels. 

Which leads to…

U.S. Dollar – The dollar will rise on new stimulus. This is being foreshadowed in the European markets. There are parallels to the 2000-2001 hope and despair phase that are not being recognized by the market. 

For those that think the dollar, bitcoin and gold can’t rise all at once, they fail to understand that it will be debt driving all three. 

Raoul is quick to remind that some, or none, of these trades may play out, but probability is in favor of these well-thought out scenarios.

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