Falling Into Place…

Published on: August 28th, 2020

From Liquidity and Hope, Raoul argues that we are now transitioning into Insolvency. Lower activity in the face of the headwinds of the continuation of pandemic and post-pandemic business conditions will collide with the fading efficacy of monetary and fiscal stimulus. Companies temporarily propped up by debt and liquidity measures will be forced into insolvency, as flawed business models crumble under the weight of tightening credit conditions and the inevitable debt service shock. Debt deflation will be upon us. Only pristine assets will survive unscathed. Most of the framework is in place; just one or two more pennies to drop…

Comments

  • AT
    Anthony T.
    1 September 2020 @ 00:38
    The reaction to Covid is much more about fear than reality. Spain saw 900 deaths daily after the March peak in cases (one day over 10000). Over the 9 weeks of second wave to the end Aug, with daily cases having hit nearly 8000, the number of deaths has averaged only 18 daily. Your assumption that the covid era will last longer than expected seems challenged by this. If you assume that moderate politicians will find their voice as media begins to report this the re-opening can only accelerate. I realise your view is informed by long established trends, but would a rapid re-opening change it?
    • CM
      Christopher M.
      5 September 2020 @ 16:08
      Spain reported 127 deaths on August 19 and 184 deaths on September 4, so they are starting to see deaths. Spain is best viewed in light of the fact that they only have 1% of their population as cases. Even if that underestimates the total infection rate 10-fold, that would only put their infections at 10%, the bottom of the herd immunity threshold according to recent papers advocating lower thresholds for natural infections than would hold for vaccines (60-80%). So, Spain is increasing because it was never hit hard in the first place. We aren't going to see such a 2nd wave everywhere.
  • CM
    Christopher M.
    30 August 2020 @ 02:21
    Could someone recommend an introductory explanation of the basic mechanics of bond trading to help me understand his bond trade? I don't have any investment experience. I've never bought any bonds at all. I'm a bit confused by what he's saying that his bond trade has been working. His August 3 portfolio says he bought 10y bonds on March 23rd that are up 26bps + 0.28% and that he bought 2-Yr Bonds Sept 2020 110.5 Calls that are up 1 tick. Is this the interest rate or the bond price that accumulated? Do you profit by buying the bond at a low price and reselling it before it expires at a higher price with the change in interest rate being irrelevant? Or do you buy to hold to expiration with the change in interest rate being relevant and the trading price being irrelevant? On the 2-years I'm even more confused. Is he saying he bought calls on the 2-years and then closed out the options, or that he *could* close out the options now and they'd be up one tick but he's waiting for them to go up further? And what does a tick mean? I'd be grateful if someone could either answer these questions or simply direct me to a high-quality bond trading 101 explanation where I could get a grasp of this myself. Thanks! Chris
    • IB
      Ivan B.
      30 August 2020 @ 03:37
      Chris, bond is a trade here, interest rate is irrelevant you're in the trade for price appreciation. Trade is done via futures, so leveraged and even small price moves can generate good (not great at this level) returns. Bonds pricing is confusing and if understand there're two systems for pricing old and new... I trade via Schwab and they use new system priced in 32nds but Raoul often refers to 64s (if I'm not mistaken). I wish I could explain it, I did some research on CME site about bonds futures, give it a go. I'm no expert in all this, just got enough understanding on how this trade works.
    • CM
      Christopher M.
      1 September 2020 @ 05:37
      Thanks. I'm doing most of my trading in Schwab now. (I have no genuine experience, just very amateur stuff.) But my God now I need to learn futures trading too haha! I'm not touching any of this for now as it's over my head. If anyone finds a great 101 on bond and future training please let me know. Maybe I should just head to investopedia?
    • EC
      Edward C.
      4 September 2020 @ 11:59
      Hi Chris, hope you are well. Assume you are aware that bond px is inverse of change in rates. So Raoul is long the bonds => expects rates to go down/price of bond to go up. If you want to invest in bonds and you are a US citizen, you can invest directly on Treasury direct. i.e. You can hold to maturity and earn the interest. For trading in/out, if you have very little experience, just stick to the ETFs. i.e. TLT. Not in your interest to go straight to derivatives, although I suppose you could argue the px of ETFs are derived from underlying holdings :) Tick is just a price increment. Hope this helps, just shout if you need anything further.
    • CM
      Christopher M.
      5 September 2020 @ 16:05
      Thanks Edward. I don't know enough right now so would do ETFs. Thanks for explaining!
  • EC
    Edward C.
    4 September 2020 @ 10:10
    I think Raoul is on the money. Great piece....interesting time horizon on crypto..... (Bloomberg) -- Switzerland’s canton of Zug, home to hedge funds, crypto firms and commodity traders, will start allowing citizens to pay taxes in Bitcoin and Ether as the acceptance of digital currencies continues to rise.
  • BN
    Barrett N.
    4 September 2020 @ 00:06
    Thanks Raoul, brilliant as usual. Thank you. Take care. B
  • MJ
    Mike J.
    31 August 2020 @ 19:49
    Thanks Raoul, Thanks for your sharing your thinking.
  • PR
    Private R.
    31 August 2020 @ 09:02
    Considering the date of release quite a few of these charts seem old?
  • JS
    J S.
    31 August 2020 @ 02:25
    Raoul, Are you long other miners too like rare earths REMX US or general miners XME for your deflation yet Fed printing thesis? (As you are long gold miners). Thanks, Jon
  • JS
    J S.
    31 August 2020 @ 01:42
    Hi Raoul, Thank you for sharing your thoughts. After watching the Princes of the Yen. Plus recent small deregulation of banks (plus more to come) and more short term tools already available (like a guaranteed SPV by the Fed for future delinquencies). That we may be way earlier on the insolvency stage? Circa Nikkei 3Q87 correction?
  • MS
    Mark S.
    31 August 2020 @ 00:27
    Raoul what are the economic indicators that you think will push the stock market lower? You mentioned ISM. Do you mean that and others? And of the ISM below expectations by how much?
    • MS
      Mark S.
      31 August 2020 @ 00:31
      I should add I’ve been watching bonds and banks.
  • JM
    Jake M.
    30 August 2020 @ 23:53
    Does any one know why fed backstopping BBB would only help corporate bond but not their respective equity? Couldn't these companies buy back their own stocks via funding from the bond?
  • RM
    Rohin M.
    30 August 2020 @ 12:25
    Raoul - Great report, thank you. I assume you wrote this report during July? Has anything occurred since you wrote it that may cause you to change/question any of your views / outlook or timeframe? Thank you
  • TK
    Tom K.
    29 August 2020 @ 18:08
    Really appreciate these insights Raoul, thank you for sharing them the way you do.
  • AD
    Anthony D.
    29 August 2020 @ 16:33
    Raoul, There are several institutional products available or coming available for Bitcoin. (Fidelity just announced one ). Do you feel Bitcoin, like gold, should be held completely outside the financial system. I guess in your own cold storage account?
  • hb
    hilde b.
    29 August 2020 @ 13:28
    Hi Raoul, Do you really think reset here for 2022 to come ? Very fast So,what to expect ? Significant wealth taxes, social unrest, diminished lifequality in general, lower quality of goods and services, less purchasing power left, less spending,lower growth for much longer, with emerging markets coming out better for next 10 years. All of that will take 5 years no to play out ?? Seems we urgently need to decide to,enjoy our last days in the sunshine more before all will be taken away from us.
  • CM
    Christopher M.
    29 August 2020 @ 05:49
    I just joined pro and am completely stoked to have these insights. I am a PhD and former professor in Nutritional Sciences and spending most of my time reading COVID research right now. I just wrote this tonight and am releasing it tomorrow: https://chrismasterjohnphd.com/covid-19/are-we-already-reaching-herd-immunity This is on two recent papers suggesting herd immunity has already been reached in NYC and that most of the US and Europe is not far behind. The 60-80% threshold ONLY applies to randomly distributed vaccines and the threshold for natural infections is 10-20% I believe that 1) any second wave will be very moderate and nothing like the first wave, and 2) NYC will not have second wave. I believe these should be considered the base case. Therefore I do not think it should be considered the way out just for poor countries.
    • JG
      Johan G.
      29 August 2020 @ 09:11
      Thanks a lot Christopher, I have been thinking along the same lines for the last month or so. Sweden is an interesting case where they managed to avoid overshooting, and the number of infections is on a steady decline within limited restrictions imposed on the society. I suspect T-cell immunity is a big and under communicated issue. I have started planning my investments for a pretty covid free 2021. Cheers!
  • CS
    C S.
    29 August 2020 @ 04:23
    It sounds more like a spike (USD up, deflation) that Raoul is describing. Although he says 2020-22, a time range within which the price moves could take place. Earlier being more likely. And yes, they do have to wait for an action ('risk off') before reacting, as Julian has pointed out. These are the times of debasing and printing unimaginable quantities of money, which has not really been the case in history. They can also do it at ultra short notice. We saw how quickly things turned around after March. I think it is erroneous to believe deflation in nominal terms will be sustained for a period beyond a 'spike' move. Once they set their minds to rescuing debts, large and small at all costs, the ultimate end is a currency crisis and a rejig of the financial system. All other bets seem more like casino bets. I would also point out, the 1930-33 chart at the top of the report, that was just prior to the devaluation of the USD v gold in April 1933 - ie, the QE of the day. The devaluation of USD is already underway and can be ramped at any moment. So expecting a similar 30-33 decline in assets today is not an apple to apple comparison. Viva la gold +/- BTC.
  • KH
    Kavi H.
    29 August 2020 @ 02:11
    Hello Raoul, Thanks for the update! Does the very recent back up in bond yields (10y above 0.7, 30y above 1.5) do any technical damage on your charts? or could this just be a fakeout before a move lower? Cheers Kavi
  • DB
    Daniel B.
    28 August 2020 @ 21:47
    I agree with everything Raul said except for the below. "Overall equities will decline"? Perhaps, they will decline on a real basis, but I expect they will remain flat or slightly up on a nominal basis. It depends on how much money is printed and we already know the printing presses are running at full speed. "We may have a larger Covid waive in the Winter"? If you study the Spanish Flu, there as a second waive but it was smaller than the first waive. There are also some estimates that close to 20% of the population in some major cities have already had covid, which may lead to herd immunity much quicker.
  • LH
    Luis H.
    28 August 2020 @ 21:17
    Loved the Mums’ Index :)
  • ES
    Edward S.
    28 August 2020 @ 19:49
    Thank you Raoul. The selection of charts paints a vivid and worrying picture of the future. Echoing a previous comment here, how do you think a large rise in the dollar would affect gold and BTC? Could the dollar rise cause a significant dip and buying opportunity? Or could these stores of value stand firm this time round as people continue to look for safe havens?
    • EF
      Eric F.
      28 August 2020 @ 21:16
      I’d check Raoul’s twitter feed - he practically answered your question there yesterday I think.
  • JM
    Jake M.
    28 August 2020 @ 19:26
    Hi Raoul, for bitcoin and gold, if you have to name one or two factors that could cause to sell off in their journey long term big rally, what would they be? Is it sudden rise long term bond yield?
    • RP
      Raoul P. | Founder
      28 August 2020 @ 21:09
      Yeah, that might well do it for a short period as all risk gets pulled for a period.
  • JG
    Johan G.
    28 August 2020 @ 20:57
    Nice work Raoul, I might add to my USD exposure.....
  • AP
    Adam P.
    28 August 2020 @ 20:30
    63 pages... omg... I'm getting myself a NE IPA and reading this tonight. Can't f*$@ing wait.
  • Mt
    Miami t.
    28 August 2020 @ 18:59
    You just cant let go of your dollars! :-) It will be a roller coaster ride on PM and BTC if the USD the trend turns back to bullish...