VIRAL LIQUIDITY BOOST

Published on: February 13th, 2020

That the policy response to the deflationary threat of the Coronavirus would be liquidity injection, stands to reason. Can China’s shutdown simply postpone demand to later in the year? A bold assumption the markets are embracing. I update my trades and analytical structure below.

Comments

  • JL
    J L.
    17 February 2020 @ 09:27
    Any opinion on using long Dow short Nasdaq as a substitute to the value/growth ETFs for those of us who cannot trade them? Many thanks
    • HM
      Harry M. | Real Vision
      24 February 2020 @ 19:19
      It is a rough proxy but its not obvious why you wouldn't just do the ETFs. Dow is bank heavy and also has Boeing. Value tends to have a lot of bank risk in it too, but not Boeing. So its got at least one very stock specific risk in it.
    • JL
      J L.
      26 February 2020 @ 10:06
      thanks harry, reason is european retail cannot trade US ETFs, only the options on them which are not liquid enough in this case
  • MW
    Marco W.
    16 February 2020 @ 11:00
    On a positive note, 8 of 9 patients in UK discharged. Five of 10 in Macau discharged and the rest 5 in mild conditions. Omitting inductive reasoning, it won't infect 1/4 or 2/3 of the population like influenza because in most situations it can't transmit silently. Hospital intervention is needed otherwise it progresses into pneumonia. One cannot take a medicine at home to defeat the virus and leave it to spread for another day.
    • HM
      Harry M. | Real Vision
      24 February 2020 @ 19:25
      Im reminded of the Donald Rumsfeld comment about known, knowns, known, unknowns, and unknown, unknowns. Im not sure what information I can rely on so it is very difficult to make an informed assessment of risks. The most important observation I can make is that the marginal company might well be pushed over the edge into insolvency by a period with a substantial reduction in turnover and overheads remaining constant. This is important in China where bad debts were already on the rise. Will it matter in Italy or Germany? Don't know. But you make a valid point, and certainly in China, the growth of the infection appears to have been checked. Emphasis on "appears".
  • CB
    Charles B.
    17 February 2020 @ 14:49
    Could the Value over Growth trade work even if we do not get a resurgence in profits? Hedgeye has Value winning only in a profit growth environment.
    • HM
      Harry M. | Real Vision
      24 February 2020 @ 19:15
      Yes it could work in either situation. If anything we suspect it will work better in a down market so we are about to test the hypothesis. Value is not crowded. Growth is.
  • JA
    Joseph A.
    14 February 2020 @ 08:54
    Just some local observations for you all as I am based in Hong Kong and also have close connections with people from the airlines as a former pilot for the flag carrier here myself. Toilet paper panic buying ongoing with limited restocking of shelves. Today 730am as soon as a big supermarket opened people were rushing in only to buy toilet and other dry paper that had just come in. All sold within an hour to not that many people because they are buying trolleys full at a time. On the other hand, airlines grounding planes by the dozens and announced 30% capacity cut is more like 50-60% based on flights cancelled for Feb and March and crews not only asked to take 3 weeks unpaid leave, now they have had their March rosters being delayed to be published by at least a week as the airline I suppose can't figure out how much business they will have for March. Hong Kong rugby 7s a huge tourism and local event and big weekend in April postponed until October. Schools still closed originally until mid Feb, then beginning of March but extended again until 16th March. Out in the city at night socially it's very quiet when it should be busy with people going to bars and restaurants. Gambling shops that take millions in bets typically every day have been closed for weeks. No doubt the Hong Kong economy continues to suffer significantly especially as this virus issue kicked in during Chinese New Year which was relatively early this year and many tours were cancelled with residents staying in Hong Kong but that didn't create much in the way of activity because people just stayed at home. Office workers have been ordered to work from home but some are intermittently back in their offices but for sure business travel has been massively curtailed. I am trying to get information on the state of the cargo market alongside the passenger downturn. A friend just across the border in the mainland city of Shenzen two days ago revealed that local residents there are only allowed out of their homes once every 2 days. Given how close Shenzen is to Hong Kong I wonder if that order will be applied here. Not yet. I wouldn't say there is an overall air of panic here however. Just much quieter city than I have ever seen it in 15 years and talking to folks who were here during SARS in 2003 they are saying it feels similar in terms of how few people are around at the moment.
    • RM
      Richard M.
      14 February 2020 @ 16:07
      Thanks for the on-the-ground update Joseph! Very informative and interesting to see how this plays out.
    • CS
      C S.
      14 February 2020 @ 23:57
      I'm also here in HK, Joseph. Planning to leave this Tuesday though (2 small kids). I met another chap, subscriber to MI, still resident in HK. He knows 1-2 others. If interested in a group with similar interests, and perhaps, mutual support during these times (whatever they turn out to be), we can get in touch. All the best. Cheers.
    • YO
      Yoshitaka O.
      15 February 2020 @ 01:08
      Things are pretty bad in Singapore and Vietnam as well. Prime Minister in Singapore just said on the record that "impact to economy is already worse than SARS" and "recession is a possibility". Two weddings that I was supposed to attend in Singapore / Vietnam has already been cancelled. On the ground in Singapore, many tranmission clusters are already forming. 13 infected cases in a local church last week, one of them a relative.
    • JA
      Joseph A.
      15 February 2020 @ 15:23
      CS thanks and yeah sure let's connect. Harry can you please connect us via email if CS agrees? I am also on social media. Twitter: @joeair17 LinkedIn: josephanthonyphotographerpilot Instagram: @joeair17 FB: @contactjoeanthony or @truetolifephotography
    • HM
      Harry M. | Real Vision
      15 February 2020 @ 17:38
      Yes, thanks Joseph. Priceless stuff.
    • CS
      C S.
      17 February 2020 @ 04:17
      Hi Joseph, my email is wumpski@gmail.com My friends name is Dmitry. I will pass the info on to him. Send me an email and I can pass you his contact/email (he is always interested to meet others with common interest). Cheers.
  • J
    Jim .
    13 February 2020 @ 18:02
    Julian, that was great so thank you. Do you have a view on US credit, both IG and HY at these rich valuations? Thanks again.
    • HM
      Harry M. | Real Vision
      13 February 2020 @ 21:40
      I spoke to JB and he is definitely concerned about valuations. Valuations are definitely rich, particularly in the very poor quality credits but also in BBB, where it wont take much to downgrade them out of IG. But none of this will matter unless the "virtuous" cycle gets broken. In the same way that most global equity funds are probably underweight US equities and have been since Q4 2018, most credit funds are a little below their target risk levels in IG and very under target risk in HY. The rally caught a lot of institutional accounts offside and they have been been trying to buy to reduce the underweight. We definitely dont think the Fed is interested in the cycle ending here and now. So the deterioration in the underlying economy has to be pretty bad to see a significant uptick in high grade defaults. The wild card is Corona virus. There is some serious weakness in credit in China. Default, like CV is contagious. And weak businesses do not do well when they carry overhead without revenue. We are more than a little concerned about how badly global earnings will be impacted when the full accounting is done. But there is no evidence that this potential bomb is about to go off right now. Well not much.
    • J
      Jim .
      14 February 2020 @ 17:36
      Thanks Harry and a quick follow up if I may: are those credit funds you refer to hedge funds or long institutional fixed income managers. From what I can tell the long only institutional fixed income managers are chasing anything with yield and are certainly overweight IG corporates and seem to have HY/ EMD exposure as well. Any color is much appreciated. Thanks again
    • HM
      Harry M. | Real Vision
      15 February 2020 @ 17:52
      Well both but more true of institutional money. They are not overweight, which is why they are chasing now. Its hard to find yield and the whole institutional investment business in fixed income is built around corporate debt. Its sort of the original alpha for Institutional fixed income money. Yields are low but they still have cash and they are (as a generalization) under their index bogie, not over it. Its true that the underweight is concentrated in HY or lower quality credit, because they were expecting a recession. Hence the squeezy rally in junky credits in late Q4 and early Q1.
  • RD
    Rawleigh D.
    13 February 2020 @ 21:42
    Julian, great piece. Also, I was wondering if you or harry could give some insight into your view for platinum in 2020?
    • HM
      Harry M. | Real Vision
      15 February 2020 @ 17:44
      Hi, Still bullish, but needs to break above 1040, to confirm bull trend/break out of long term bear trend. In fact its sitting only a little above that long term down trend line now, so we hope it doesn't break back below it. . All this talk of CorVir is not helping to confirm the bull. Plat is mixed jewelry and industrial use.
  • OT
    Omar T.
    13 February 2020 @ 17:17
    Thanks Julian, you didn't give an updated on your view on TLT, do you think the 10 year really breaks lower to new lows or do you think we need something else to happen as a catalyst?
    • HM
      Harry M. | Real Vision
      13 February 2020 @ 21:45
      JB is still bullish rates/bonds but he definitely prefers the very short end (EDs) still. EDs give you defined risk against Fed policy. The Fed's revealed preference is pretty clear at this point. They want to keep the party going. So its hard to see hikes and plausible to expect cuts if the data continues to deteriorate. That said, one needs to be aware that rates (even at the short end) have moved. This trade has worked. So a little caution is in order regarding entry levels. Particularly given the prominence of CV. We just had news which suggested the Chinese authorities had been under reporting CV incidence. CV is definitely affecting the price of global fixed income. If it disappeared tomorrow one would expect bonds to sell off.
  • JA
    Joseph A.
    13 February 2020 @ 16:20
    Thanks Julian well written and clear on decision making processes and where all the trades currently stand. I have been trying to figure out what causes the price action trends during out of hours trading in recent times which as far as I recall I had not seen in years gone by and I had noticed it without being able to explain it so was glad to see some mention in this piece as to what might be the cause. FYI Harry I received the email notification at 1545 GMT just for reference that they are coming out as expected.
    • HM
      Harry M. | Real Vision
      13 February 2020 @ 17:07
      Excellent Joseph. Good to hear.

Mark Yusko

Morgan Creek Capital Management, Co- Founder, CEO, & CIO

Mark Yuskois the Founder, CEO and Chief Investment Officer of Morgan Creek Capital Management. He is also the Managing Partner of Morgan Creek Digital Assets. Morgan Creek Capital Management was founded in 2004 and currently manages close to $2 billion in discretionary and non-discretionary assets. Prior to founding Morgan Creek, Mr. Yusko was CIO and Founder of UNC Management Company (UNCMC), the Endowment investment office for the University of North Carolina at Chapel Hill. Before that, he was Senior Investment Director for the University of Notre Dame Investment Office.Mr. Yusko has been at the forefront of institutional investing throughout his career. An early investor in alternative asset classes at Notre Dame, he brought the Endowment Model of investing to UNC, which contributed to significant performance gains for the Endowment. The Endowment Model is the cornerstone philosophy of Morgan Creek, as is the mandate to Invest in Innovation. Mr. Yusko is again at the forefront of investing through Morgan Creek Digital Assets, which was formed in 2018. Morgan Creek Digital is an early stage investor in blockchain technology, digital currency and digital assets through the firm’s Venture Capital and Digital Asset Index Fund.Mr. Yusko received a BA with Honors from the University of Notre Dame and an MBA in Accounting and Finance from the University of Chicago.

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SkyBridge Capital, Founder & Co-Managing Partner

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Avanti Financial Group, Founder & CEO

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Bitwise Asset Management, CEO

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