Searching for Value in Tangible Assets

Published on: April 17th, 2020

Markets have squeezed violently as monetary and fiscal authorities have thrown kitchen sinks at the COVID-19 lockdown problem. We are not out of the woods, but Julian wants to explore some possible beneficiaries of QE Infinity, Financial Repression and a weaker USD.

Comments

  • JM
    James M.
    6 May 2020 @ 11:17
    As a UK national I'm finding it impossible to buy EWW, XME & DBA as they do not have KIDs, even IB won't let me trade them. Can anyone suggest other reasonable approximates of these etfs?
  • AP
    ANTHONY P.
    29 April 2020 @ 14:05
    Nice pop in both EWW and XME so far this week. It's nice to see some green for a change!
  • AY
    Adam Y.
    22 April 2020 @ 21:33
    Interesting comments from the CEO of the China Beige Book (private data service re the Chinese economy) - thinks China could be forced into infrastructure stimulus similar to 2008. https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334?i=1000471304596 Minutes 32-36 Does anyone think this is in the price for XME or AUD.USD?
    • JS
      Jim S.
      25 April 2020 @ 10:54
      Would say no on XME, but maybe on the AUDUSD... but that could just be because of the swap lines.
  • BH
    Bin H.
    20 April 2020 @ 07:39
    I am a little bit surprised by the trade recommendation. With the model predicting CPI down, long AUDUSD recommendation looks extremely dangerous. I have more than 20 reasons to take the short side, could any one point out the reason to long AUDUSD with target 0.8?
    • RM
      Robert M.
      20 April 2020 @ 12:52
      I would have thought the AUD was going to hit new lows, not new highs.
    • CS
      C S.
      22 April 2020 @ 03:27
      I think it comes down to believing the reflation-theme, at least near-medium term. USD assault/control would be reflected primarily in the majors (AUD being one of them), not so much EM currencies. Perhaps timeline/degree makes a difference too.
  • BT
    Barry T.
    21 April 2020 @ 23:41
    Harry (and Julian, of course), thanks so much for your thoughtful, clear and concise responses. Raoul and Julian get most of the spotlight, and rightfully so, but I really appreciate you taking your time to get us more answers to more questions. It really helps complete the education for each video. Well done.
  • NL
    Nick L.
    17 April 2020 @ 15:46
    Thanks Julian! For anyone looking through the individual stocks on the list Julian included, make sure you factor in the company's debt load. All of those metrics in the table - P/B, P/E, P/S, etc. - are only valuations based on the equity market cap and doesn't include the debt load. And the debt is where companies get in trouble. I suggest looking at valuations based on Enterprise Value instead to factor it in.
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 20:09
      Price to book should be book net of debt. But otherwise I totally take your point.
    • BT
      Barry T.
      21 April 2020 @ 22:51
      I understand your point but P/S is the only metric that can't be 'massaged' by creative CFO's. I look at several metrics and only when all the stars align do they go on my watchlist. YMMV
  • BS
    Benjamin S.
    19 April 2020 @ 05:44
    Julian or Harry, do you have any thoughts on how YCC would effect Risk Parity? Wondering if Risk Parity strategies could still maintain a highly leveraged equity position in a YCC environment. I would imagine that the firms running these strategies will do everything they can to maintain clients so if the bonds are no longer working, what might they use to offset their equity positions?
    • HM
      Harry M. | Real Vision
      21 April 2020 @ 00:06
      Would pin bond yields undermining the whole strategy. They will have to come up with a new strategy. That said, there will be commodities to use, and corporate bonds. So not impossible. But one less significant diversify-er
  • JS
    Jim S.
    20 April 2020 @ 22:03
    Any thoughts on HCC and MSB to play the XME market - I hate buying the index right now because I don't want to pick up some bad companies with good ones. Trying to stay in companies with little debt and high operating margins?
  • SN
    Sean N.
    17 April 2020 @ 17:09
    Thanks Julian... I fully agree with your thesis. Question as always is how / time frame it plays out. Trying to find out more info about who is getting access to the dollar swap lines, specifically the sovereign wealth funds you mentioned..?
    • JB
      Julian B. | Contributor
      17 April 2020 @ 21:49
      First off all the lines are to Central Banks only. Although, SWF could access then via their respective CB. Second, swap lines are just to our friends ie not the PBoC https://www.federalreserve.gov/newsevents/pressreleases/swap-lines-faqs.htm While the repo lines are available to ALL central banks, which is new. The IMF is also talking of lending $s. Finally, while not directly linked to the FX market the Fed's CP programme should help to reduce the cost of uncollateralised $ funding. As for time frame, its working now in developed markets just look at the bounce in GBPUSD as funding normalised. I think it should start to percolate into USDMXN hence my short there. Maybe I'm wrong but I'm nibbling now.
    • SN
      Sean N.
      20 April 2020 @ 14:53
      Thanks Julian. It's a bit mind boggling to try and wrap your head around how many dollars have been loaned out...
  • JW
    J W.
    18 April 2020 @ 07:50
    I found this a fascinating read, so thank you Julian. I took small positions in EWW and XME to see how this might play out. Also wanted to compliment everyone in that the Q&A below was really interesting to read - some great comments all round. I also have some doubts about timing, but really nobody knows, so stepping in small with tight stops seems the right approach. The timing question is also due to what it is Mexico exports most and hence how quickly the economic activity picks up, or not. As vehicles and machinery are the main categories (60%) once could argue for a further delay in the recovery. (2019 figures, http://www.worldstopexports.com/mexicos-top-exports/): Vehicles: US$121.3 billion (25.7% of total exports) Electrical machinery, equipment: $81 billion (17.1%) Machinery including computers: $80.7 billion (17.1%) Mineral fuels including oil: $26.6 billion (5.6%) Optical, technical, medical apparatus: $19.9 billion (4.2%) Plastics, plastic articles: $10.8 billion (2.3%) Furniture, bedding, lighting, signs, prefabricated buildings: $10.3 billion (2.2%) Vegetables: $7.8 billion (1.7%) Beverages, spirits, vinegar: $7.5 billion (1.6%) Fruits, nuts: $7.4 billion (1.6%)
    • JW
      Joel W.
      19 April 2020 @ 22:30
      Yep, great piece and comments both. I’m positioned for near term usd strength so I really appreciate Julian taking the other side. I’ll be lightening up my positions until I can see more clearly.
  • MG
    Miguel G.
    19 April 2020 @ 11:19
    Julian, with the 2T expansion in balance sheet since March, do you think that this 2T in liquidity injection from the fed should be analyzed differently than the repo injection of Sept of last yr? When the repo problem popped up last Sept we were at full employment and still at 2%ish gdp, so on the margin that liquidity was more stimulative than today where we now have 10% unemployment and contraction GDP. Am I thinking about this correctly where liquidity in Sept was more stimulative compared to today’s liquidity of 2T being looked as patch work to fill the lost growth from the virus?
  • SN
    SAT N.
    18 April 2020 @ 13:38
    " if (still a big if) we go into a phase of a managed devaluation of USD along with a grab for resources, EM will begin to recover" I guess this is the key assumption. The argument on the dollar bull side has been that there is huge offshore euro$ debt, a large part of which is held by the private corporations. It would be very helpful if Julian can provide a direct counter-argument to that view by addressing these questions in this context: Can the swap lines and international repo operations allow money to flow to $ indebted offshore corporations? How? Is there enough political capital that would allow Fed to indirectly bail-out sovereigns and corporations in EM? The other problem that I struggle with dollar bear case is, every other country is also debasing their currencies. In fact, even EMs with seemingly tighter monetary policy are seeing >10% depreciation in their currency value w.r.t $, like India: https://think.ing.com/articles/reserve-bank-of-indias-whatever-it-takes/ India's 10 year bond is >6%. It has not been cutting rates aggressively (see above link). Yet, its currency depreciated at lot over the last year.
    • HM
      Harry M. | Real Vision
      18 April 2020 @ 17:25
      "Can the swap lines and international repo operations allow money to flow to $ indebted offshore corporations? How? Is there enough political capital that would allow Fed to indirectly bail-out sovereigns and corporations in EM?" Well I would guess the Fed would hope that its peer central bank would lend to larger banks against good local collateral, and they would in turn lend to the larger local corporations. However there are clear problems with this in a time of pandemic. Underlying credit risks might be considered particularly high, and its not so clear that dollars will trickle down to everywhere that needs them. Which is why smaller companies are under performing larger companies.
  • MC
    Mike C.
    18 April 2020 @ 07:53
    Thanks Julian. What a polarising topic atm. Longer term you make perfect sense but over the next few months how do you consider inherent reflexivity in your thesis? The world doesn't want a super strong USD but conversely trashing it would be just as damaging and would provoke angry responses from other leaders and their central banks trying to rebalance their own economies. CB's want the stable middle and neither extreme. Trashing the USD gives back competitive mercantile advantage to China and its currency peg...G20 ex-China want to claw back competitive advantage not reward them for giving us a virus. AUD at 70c would deflate a highly imbalanced Australian economy (80c would be tragic) since China is clearly not launching massive fiscal stimulus like it did in '09 and '16. The RBA has explicitly targeted a lower AUD to compensate for lost demand from a burst housing bubble (AUD seems more a reflection of the domestic economy that lacks the terms of trade boost required to attract foreign capital, while commodity prices signal deflation). And the Fed using the words "unlimited" really change anything? When was their action ever not unlimited? Everytime they felt the need to inject liquidity they have done so, and so has every other central bank in the world. Indeed Draghi already dropped this bomb when he said "Whatever it takes" in 2012. They always do whatever it takes. So I suppose I see a world where if you are right (and the Fed is the only CB to do whatever it takes on this seesaw ride) it is just another ugly extreme. So some middle ground where the USD is "not to hot " and "not to cold" to me is what every central banker really wants (maybe not what they get) where they take turns handing the devaluation batton around in a circle like the good old days. Now that markets are responding to monetary and fiscal aid I really wonder whether we have seen enough sustained deflation to bring about either USD extreme scenario yet. After all this crisis is only a baby at 2 months old.
    • HM
      Harry M. | Real Vision
      18 April 2020 @ 17:18
      So a number of excellent points. I cant imagine any country is particularly interested in a strong currency right now, which is a recipe for competitive devaluation. The US at least would like to continue the dollar system "exorbitant privilege". I think we are likely to trade the range for a few more months, but right now it do seem to be towards the top of the range and we relatively optimistic news flow (at least the main narrative is positive and improving). But I definitely take the point the crisis is only two months old.
  • GK
    GRIGORIOS K.
    18 April 2020 @ 06:41
    guys for silver our vehicle is SLV right?
    • JW
      J W.
      18 April 2020 @ 07:52
      That and miners I would say (AG, MAG, SIL, SVM, PAAS, ... )
    • HM
      Harry M. | Real Vision
      18 April 2020 @ 16:59
      SLV is definitely one perfectly sensible way to play it.
  • RH
    Rob H.
    17 April 2020 @ 21:36
    Hi Harry, One more question. Since you like infrastructure spending, I'm thinking they will spend a lot more on connectivity let's face it if it wasn't for the current connectivity structure we had in place we would have been way worse off. What ETF or stocks do you like in the 5G space telecommunication space in the USA? I read a lot of the USDA reports and there is already a big push to get more pipes out to rural America that is not being served now.
    • JB
      Julian B. | Contributor
      17 April 2020 @ 23:44
      Rob sorry a bit outside my macro comfort zone. One observation. I agree we need 5G across a wider swathe of the US. Not just for communications but a smart grid etc. My assumptions is that the government will just throw the contract/subsidy to one of the existing big players i.e. Verizon, ATT etc. The trick is working out who has the best lobbyists.
    • JW
      J W.
      18 April 2020 @ 07:36
      A while ago (early last year), I looked into FIVG because I liked the composition of the portfolio, very focussed and international (see https://www.etf.com/FIVG#overview). I did not buy, which turned out to be a good decision, but I still like the holdings and perhaps later in the year it might be worth revisiting. Certainly interesting to keep an eye on imo.
    • HM
      Harry M. | Real Vision
      18 April 2020 @ 16:58
      I very much like your underlying thesis, but I dont know enough about the micro to recommend a stock. I will look around a bit but I am definitely not an expert.
  • JM
    Jake M.
    17 April 2020 @ 21:26
    Julian, do you consider bitcoin to be paper or tangible asset?
    • JB
      Julian B. | Contributor
      17 April 2020 @ 22:13
      Jake I guess its tangible of sorts. But the real problem I have with Bitcoin as a store of wealth is that if it ever becomes big enough to become a thing (to use current parlance) and starts to threaten FIAT money I'm afraid central banks will just ban it. So given those dynamics I'd rather trade other assets.
    • JW
      J W.
      18 April 2020 @ 11:28
      Useful podcast on the topic of the potential threat to Bitcoin by government action in one form or the other;; interview w/Caitlin Long: https://www.youtube.com/watch?v=KSNe7l7JELI
  • AP
    Adam P.
    17 April 2020 @ 21:06
    Excellent stuff, Julian. Thank you. We're probably a bit early on the EM trade, but ultimately I agree that is where we will want to be. Demos favor that as well.
    • JB
      Julian B. | Contributor
      17 April 2020 @ 22:02
      Re Timing I'm nibbling. As I said below I'll press stuff if I see the $ start to weaken further especially vs EM
    • AP
      Adam P.
      18 April 2020 @ 05:38
      I also thought that this whole process of the Fed bailing out IG/HY and YCC would take place over the next year or two... it happened in a month. There’s absolutely nothing wrong with creating a blueprint early, Julian. Apparently, we may need it sooner than we think!
  • RH
    Rob H.
    17 April 2020 @ 21:05
    I'm seeing in percentage terms XME and SPX are both up around 30% from the lows. You see short term risk in the SPX at the 61.8 Fib level. Since the XME and SPX have a positive correlation I would think we would have about the same risk in XME as the SPX. Yet I do see the XME is barely over the 23.6% fib level so is this the reason you see less risk in the XME trade at this level? I'm just trying to understand how your process works? I agree with your trades and like the risk-reward, thus plan to scale in as I see them starting to work or let me stops work if they don't. Thanks Harry!
    • JB
      Julian B. | Contributor
      17 April 2020 @ 21:34
      Hi Rob just to build on Harry's point. Big picture I want to own tangible assets like XME vs paper like the S&P. But at 2850/2900 the equity market has run a long way. So to neutralise the equity beta in XME I can hold off buying it or hedge it with a short at bit of the SPX. Ultimately, when I will press XME is when I see the $ start to weaken. That's when I'd expect real outperformance.
    • RH
      Rob H.
      18 April 2020 @ 00:04
      Thanks, Julian, that helps my understanding. The dollar is the key to everything right now.
  • JM
    Jake M.
    17 April 2020 @ 21:25
    Hi Julian, is it possible that you are half-right? That is, we do see rise in value both in tangible assets and dollar? One theory I heard is that given the general impression of Fed's strong will, foreigners might flock to USD and US assets as being relatively much safer than their own domestic currencies and assets.
    • JB
      Julian B. | Contributor
      17 April 2020 @ 22:10
      Unfortunately, outside precious metals its hard to see USD strength and broad commodity/tangible asset strength. PS Re $ assets, the biggest class by far is fixed income. That's raises the question. As a foreign investor what value do you put on a 10yr Treasury yielding 75bps because the Fed is pegging it their via de facto YCC? In a country where debt to GDP is exploding faster than overseas, because we have a more flexible labour market and as result unemployment has just exploded. While at the same time the Fed is backstopping everything that moves via QE and debt monetisation? Personally, I'd want a pretty big concession in the exchange rate before I was willing to take that risk.
  • ST
    Sophie T.
    17 April 2020 @ 16:50
    I think he is wrong on the timing, we are nowhere near the time to take any of the trades he is recommending, except the ones on gold and silver. I'd wait at least July, even October to take the trades he is recommending on EMs and against the dollar
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 20:02
      Totally understand your perspective Sophie. I think JB thinks we will have a big enough rally in certain types of risk over the summer to make it worthwhile trading from the long side. I don't think he would argue that we are out of the woods and that there is no risk of a further sell off.
    • JB
      Julian B. | Contributor
      17 April 2020 @ 21:59
      That's what makes a market
  • JM
    Julien M.
    17 April 2020 @ 16:55
    Raoul and Julian now hold opposite views on the dollar. No longer just a timing difference?
    • JM
      John M.
      17 April 2020 @ 17:16
      Yeah, given that "At the centre of this battle is the dollar" it seems that the entire strategy right now hinges on where the dollar goes. Right now this just seems like a coin toss.
    • JB
      Julian B. | Contributor
      17 April 2020 @ 21:52
      Events have moved very rapidly. Hence, my change in view. Are they enough to reverse the $? Perhaps but perhaps we need more intervention. However, I'm not willing to fight central banks. They want a weaker $.
  • SS
    S S.
    17 April 2020 @ 17:30
    Hi Julian, Re: EWW, XME, GDX, SLV, what is your time scale for hitting the targets roughly as I want to buy some calls and currently deciding how far out I should go. Perhaps June 30th?
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 19:06
      Let me come back to you. I would like to ask JB specifically
    • SS
      S S.
      17 April 2020 @ 19:43
      Thanks Harry. it would be great to know timescale as JB previously said he saw these as short term trades.
    • JB
      Julian B. | Contributor
      17 April 2020 @ 21:40
      I Steve always a tough call but I see a window into September.
  • LP
    Laurence P.
    17 April 2020 @ 17:37
    So thoughtfully, clearly and succinctly laid out. Brilliant. Great job, Julian!
    • JB
      Julian B. | Contributor
      17 April 2020 @ 21:35
      Many thanks Laurence.
  • NR
    Nathan R.
    17 April 2020 @ 15:31
    Thanks Julian. Timeframe caveat: any concern on further liquidation of real assets if Volquake hits again, a la Feb? Bonds seem to be pinned so that cascade moves more heavily to GLD/SLV or, frankly anything green to sell first?
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 20:10
      Yup! Would expect FX to take the vol strain going forward. Big current account deficits seem like a bad risk should something similar happen again.
    • NR
      Nathan R.
      17 April 2020 @ 20:31
      Time to have Druckenmiller on again for a very long-form discussion.
  • PC
    Peter C.
    17 April 2020 @ 19:15
    While we might not revisit the market lows soon, both the technicals (fib retracements) and the recent, wrong perception in the market about 'opening the economy soon' and the impact of remdesivir makes it difficult for me to put any of the new trades on. We may face a next leg down soon if perception catches up with reality, especially if they do open in different states and have to close again. At that point, the effectiveness of the fed backstop will be tested again to see how deep the market falls. Wouldn't it be better to see how this plays out and wait at least a month before moving in to those new trades? I assume that in the mean time the impact of a sudden, significant drop in the DXY is rather muted, so keeping cash bears less risk in comparison?
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 20:14
      I know. We are pressing up against some of those critical fib levels. They have been incredibly reliable in the move, so its very difficult to ignore them (and why would you anyway?). I would suggest inverting your logic. While I cant see why it should (underlying bearish view), if the market were to break the key fibs to the upside, I might be tempted to put on long risk on a break above those levels. But my first instinct is to assume they hold. Which means if I am adding long risk, I will be doing it on dips.
  • JM
    John M.
    17 April 2020 @ 16:33
    Julian, did you get glasses? Take it easy looking at those charts! Speaking of real assets and dark places, any thoughts on Oil? I am reading Iraq is deteriorating from a health/political perspective, which seems to run the risk of drawing Iran in and then the US etc. Maybe this is a tail risk but from what I am reading this is becoming not unlikely.
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 20:08
      The US is already in, but I know exactly what you mean. A policy of maximum pressure implies some risk of a military confrontation between Iran and the US. But I'm not sure that will use of block enough fuel when the world is consuming so little. Right now we are just as worried about Cushing storage filling up. If that happened, spot oil could drop to $10. And we have head informed analysts suggesting that Cushing may fill by June, if nothing gets in the way. All that said, its hard to escape the conclusion that oil will inevitably be higher in 3 years simply cos we will see next to no non-essential investment for the next 3 years. So as a longer term investment we like it.
  • DV
    David V.
    17 April 2020 @ 17:30
    Why the Russel / Silver ratio? There's obvious trends there, however don't quite follow the linkage. Reflation?
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 19:10
      So consider the pairs trade silver-gold. Or the pairs trade Russell-Gold. Both ratios are stretched. However the relationship between Russell- Silver is particularly extreme because both the above ratios are quite stretched. There is an economic rationale for both silver gold being correlated or Russell-Gold.
  • SS
    S S.
    17 April 2020 @ 17:36
    @Julian. We have finally broken through the $19-$20 WTI level that someone was defending. Do we have your blessing to buy some Tanker stocks?
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 19:05
      Answering for JB, I think the answer is yes. Naturally the value of your investment can go down as well as up. Always play with stops, etc. If that's no longer true JB will hopefully correct me.
  • JD
    John D.
    17 April 2020 @ 18:05
    Judging by the charts, this report must have been written at least 2 weeks ago?
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 19:04
      It would be disappointing if the charts were not updated. My understanding is the piece was written within the last 3 days and the charts were updated as of yesterday. Is there a specific one that looks off to you?
  • MS
    Moritz S.
    17 April 2020 @ 18:34
    Julien, what makes you prefer an outright long position in silver and XME over the pair trades Russel/Silver and SPX/XME?
    • HM
      Harry M. | Real Vision
      17 April 2020 @ 19:00
      Answering on JB's behalf, it will depend on where Russell and SPX are at the time of entering the trades. Right now we are trading towards to the top end of recent ranges in equities. That would favor the RV XME-SPX or Silver over Russell. If we were trading at the lower end of the range for equity indices, my understanding is he would prefer taking the "Market Beta". At these levels I suspect he doesnt want it. But that final decision depends a bit on where your own portfolio is. If you owned Beta (market risk) would you want more right now?
  • ST
    Simon T.
    17 April 2020 @ 16:52
    Hi Julian, thanks for this note. With regards Silver, should we wait for it to come back to us a little more or jump right in with a tighter stop for our higher entry? Thanks.
  • AS
    Amit S.
    17 April 2020 @ 14:27
    Agree with everything except long AUDUSD. Those interested may revisit Gerard Minack's interview on RV in Apr 2019.