Published on: September 28th, 2020

Julian turns on the SatNav of the macro charts to help orientate us before a particularly eventful Q4 begins. Much of the positive impact of monetary and fiscal expansion has worked its way into the system. COVID could go either way. Keeping up the pace of policy response will be difficult or nigh on impossible in the divisive political world of pre-election America. But policy response there will be, for better or for worse. Once we are grounded in the present, we can feel better prepared for a dynamic end of the calendar year.


  • JF
    Joao F.
    15 October 2020 @ 20:38
    Thank you Julian! Great notes. Just curious to know what is your base case to justify "We will see CPI turn lower before moving sharply higher next year".Would you be so kind to elaborate?
    • HM
      Harry M. | Real Vision
      23 October 2020 @ 21:42
      Hi Joao. Much of JBs work has explicit statistical modelling at its core. He has developed a number of models of inflation, and these have been pointing to a temporary dip in CPI, followed by a trend towards much higher inflation. Energy prices for example point in that direction. The initial impetus of Covid dropped oil prices substantially, and oil tends to set other energy prices. Once the YoY comparison drops out, that downward pressure on the CPI indices will be gone. Energy is not the only example, but its the clearest. Worth also noting that we are seeing tiny amounts of new energy investment. This is entirely natural - but it does suggest we may see higher energy prices in a few years time.
  • JU
    John U.
    29 September 2020 @ 20:24
    Thank you Julian. Really appreciate you sharing your opinions.
    • JH
      Jonathon H.
      5 October 2020 @ 10:41
      Agree JOhn, great framework to approach the next 2 quarters, thanks Julian
  • PC
    Peter C.
    28 September 2020 @ 21:43
    I like Julian's view on how this will play out in the long run but I have serious doubts about the next 3 to 6 months. The deflationary period could last much longer and seriously impact his (and our) trades. Why? Because there is one thing I miss and that is a COVID scenario this fall and winter that is much worse than anticipated by the market. I assume that Julian believes this scenario will not materialize at all because he believes that the impact of the virus is weaker now. This is the impression I get from his twitter feed and this what he wants to illustrate with the graphs of cases and deahts on page 22. It is a common and seemingly reasonable view but I would like to explain why it is deceptive and why COVID could surprise us this winter. COVID cases in March-April would have been 10 times higher if we had the ability to test everyone at the same level as we did from June onwards. COVID was spreading weeks before the first, limited tests arrived. This means that a proper graph should show a huge peak in March-April and a small one this summer. So the summer wave is just a little bump in the road. Why didn't we see a second wave? The conditions were different compared to early spring: better weather, outdoor activities and at least some level of social distancing that reduced the transmission rate Rt to levels closer to 1 instead of 3. Some states, such as Florida and Texas are exceptions because the conditions in May and June (early opening together with beach, bar and riot gatherings) allowed COVID to spread but even those states did not see a NY scenario. Also, as a result of better testing, the case fatality ratio dropped from a CFR of 10% (NY peaked at 1000 deaths per day and 10000 cases per day) to a CFR of 1-2%, giving the impression that the virus is now much weaker. In reality, the virus today is still the virus from early this year. There are mutations, all virusses mutate although COVID is one of the slower mutating types, but there is no conclusive study that shows it is less deadly now. The actual second wave will most likely happen this winter, probably starting to accelerate somewhere late October - early November. Why? Because the conditions will start to be similar compared to March-April and get worse. Not surprisingly this is also when the common cold and other corona and influenza virusses start to annoy us and when the Spanish flu started to make its killing second wave. Some level of social distancing may still surpress Rt but the support base shrinks and the current level of social distancing may not be sufficient anyway. Many look to Sweden as THE example but the only thing this sparsely populated country did was reaching a balancing act that works this summer but not this winter. Rt can be a bit higher than 1 if you have some level of immunity but once Rt starts to rise because the conditions change, that level of immunity will not be sufficient at all. Sorry for my long post but this is exactly what many epidemiologist and specialists want to explain. They fail because politicians, investors and others who believe they can read graphs conclude something else. To get a much better view on how the future might unfold based on data gathered by experts, check out Check the US or Sweden to see the dynamics of the second wave. I hope Julian gives us at least mitigation strategies for this impactful scenario. Raoul's 75% BTC and ETH strategy is not really my cup of tea.
    • BP
      Brett P.
      29 September 2020 @ 04:30
      Also worth factoring in Social Distancing Fatigue. It is already extremely high and by the time winter rolls around people will have very little patience left for any of it.
    • HM
      Harry M. | Real Vision
      29 September 2020 @ 06:38
      All fair points Peter, and I think your assessment of JBs position is pretty close to the truth. I would make three counters. 1) Right now, JB has a tactical short in Nasdaq. Its not really making progress - yet. If one were to ask why, one possible explanation would be that the monetary and fiscal easing is still more than offsetting the deflationary effect of Covid. The tactical short's logic reflected the current absence of a CARES2 but that might change. No one has a perfect insight into politics, but Covid's deflationary effect has a built in political excuse for extremely aggressive policy. Its a natural exception to normal business. 2) We are about to run another test of quite how bad Covid is. There is no current evidence of a significant uptick in hospitalizations. Its easy to see how that might change. But ultimately what is guaranteed is that we will eventually get a cure, and we will eventually get a vaccination. We need to consider both tails of the distribution. 3) There will be solvency issues in the economy regardless of how Covid pans out. The economy will need massive support to prevent cascading defaults. That massive support will be designed to keep marginal but viable businesses alive, and in so doing will create an environment in which stronger businesses securities will be extremely valuable. In Fed terms, lower for a lot longer. In UST terms, all sorts of fiscal and direct business support. Many securities will not be money good. But how valuable will those that are be? So looking beyond the next 3-6 months, what should our positioning be?
    • PC
      Peter C.
      29 September 2020 @ 20:45
      Harry, I see your point but I doubt that the NASDAQ short is the proper hedge for a COVID winter peak. The tech stocks may yet again act as a risk off hedge or at least keep up better than the broader market. Even if a COVID drama accelerates a CARES2 act, the NASDAQ may benefit more if the economy is damaged and the PMIs dive yet again. Official approval of a vaccine may reduce the impact of the COVID peak on the market but there won't be any serious vaccination efforts prior to spring 2021 and uncertainty about its effectiveness will still be high. I can imagine that uncertainty will be high if we are in the middle of a dramatic peak with increasing fatality levels. Maybe there is no announcement of an approved vaccine during the winter peak, which would add to the turmoil. The market perception today is that we start vaccinations early 2021. In Europe the member states are asked to prepare for vaccinations in March. I agree that everything will be different in 3-6 months and because of the expected fiscal and monetary spending, Julian's thesis looks very realistic. I am just worried about that equally realistic but nasty period in-between, that's all.
    • HM
      Harry M. | Real Vision
      30 September 2020 @ 06:55
      I do not disagree Peter. Both in the argument that the QQQ/NQs might not be the best hedge for a Cv19 resurgence - I think there was/is some technical evidence of exhaustion - or that there is a risk of official neglect/paralysis in run-up to the election. For politicians, winning the election takes precedence, which means it may be expediant to block necessary action to prevent economic collapse. Its pretty much the main thing keeping me up and night. Its much easier to stop Humpty from falling off his wall, than it is to put him back together again. Its these kind of scenarios which make massive non-linear appreciation in Gold/Silver/Bitcoin a plausible end game.
  • CD
    Christopher D.
    29 September 2020 @ 08:06
    Regarding a debt jubilee: "But we are quite a few (gigantic) steps away from such an endgame, so back to the here and now." My feeling is that "gigantic" is an order of magnitude too high for the pressing debt issues. The last years have seen Austrian and Belgian century bonds. Soros is advocating a pan-EZ Consol bond, as Spain has already pushed for one. Some large real money investors have been reached out to as they'll be the natural buyers of these. Final thought: it would make sense for the century/consol bonds to hit pension/insurance balance sheets prior to YCC/yield compression coming into action. First, they'll hold for term, second with such long duration the MtM gains will help cushion some the ALM mismatches. Or am I writing nonsense?
    • HM
      Harry M. | Real Vision
      29 September 2020 @ 10:52
      No, you are making perfect sense. Addresses two problems - insolvent insurance and pensions industry, and crippling private sector debt burdens. I would argue that ultimately the bulk of private sector debt will have to be transferred to the public sector to facilitate an orderly default/jubilee. Or would these industries prefer to bleed to death with negatives rates over 30 years?
  • JM
    Jake M.
    29 September 2020 @ 03:45
    Regarding the chart showing ratio of stock yield VS 10 year yield. Looks like the ratio is going up over time. Does that imply stock is more and more attractive?
    • HM
      Harry M. | Real Vision
      29 September 2020 @ 06:40
      Yields on stocks have fallen a lot slower than yields on bonds. So in terms of current carry, stocks are more attractive than bonds. Of course, the question is will dividends be maintained.
  • HK
    Hendrik K.
    28 September 2020 @ 17:51
    Very interesting - thank you! Covid cases are getting extreme everywhere in Europe... Merkel just said she expects 20 k cases by X-mas if this continues.
    • HM
      Harry M. | Real Vision
      28 September 2020 @ 18:29
      Cases getting extreme yes. But hospitalizations are lagging relative to the previous relationship. So, JB is a little wary of getting too negative based on Covid alone. Not that there aren't many clouds to worry about!
    • PB
      PHILLIP B.
      28 September 2020 @ 19:55
      I've also toned back my personal base case from the second wave being an absolute tragic loss of life. Could still go either way. My personal base case is cases rise, but enough people figure out that wearing masks, staying away from each other, and caring for those who are close, works and can keep the economy open. A big change from the first wave is that we seem to have figured out that isolating the elderly will avoid both the loss of life and the terrible headlines that impact pyschology.
    • HK
      Hendrik K.
      29 September 2020 @ 06:10
      True - but currently its mainly young people infected. I contracted it last week in the office in one meeting, despite being very careful. Once older people get infected through clusters its a whole different story.
  • AH
    Ali H.
    28 September 2020 @ 18:33
    Super interesting! thanks you Julian. Why does QE result in higher not lower Yield?
    • HM
      Harry M. | Real Vision
      28 September 2020 @ 19:41
      Hi Ali, If its anticipated, bonds can rally in the anticipation of QE, but when implemented, in the previous iterations (QE1-QE3), implementation itself has tended to result in bonds selling off. While we never know what a market is thinking (cos markets don't think) one might argue that markets discount the central bank buying before the actual buying begins, and then they move to discount the boost to the economy caused by the supportive effect on equities, when the buying itself begins.