Daily Briefing – May 20, 2020

Published on
May 20th, 2020
Duration
31 minutes


Daily Briefing – May 20, 2020

Daily Briefing ·
Featuring Nick Correa, Ash Bennington, and Roger Hirst

Published on: May 20th, 2020 • Duration: 31 minutes

Real Vision's senior editor Ash Bennington and managing editor Roger Hirst analyze the latest developments in markets. Bennington and Hirst discuss the implications of fiscal burden-sharing in the European Union within the framework of French President Macron and German Chancellor Merkel’s recent joint proposal for a €500 billion aid fund. The pair also unpack the technical and supply and demand dynamics driving oil markets, the concentration risk in the largest stocks of the S&P 500, and key technical levels in US equity markets. During the intro, Real Vision's Nick Correa discusses the reopening of Spain, and the unique hurdles the Spanish will face as they begin their journey to economic recovery.

Comments

Transcript

  • SB
    Stewart B.
    21 May 2020 @ 09:17
    Gentlemen. Great update. One thing to add is that I think there may be a misunderstanding as to why QE makes stock markets go up. There is some front running, but it is mostly about passing the hot potato. Here are the mechanics: WHY QE MAKES THE EQUITY MARKETS GO UP When a central bank conducts OMO to buy assets, they exchange the asset for a cash deposit. For example they may buy a treasuries from a broker dealer. In this case the broker deal no longer has the treasuries and they now have a cash deposit. However sitting on cash deposits is not the business of broker dealers, so they will try and replace their inventory. Let's assume they use this cash deposit to buy treasuries from a hedge fund. The hedge fund now has the cash deposit. However the hedge fund looks at treasuries, and considers them a bit rich, so uses the cash deposit to buy say munis, or IG credit from say a family office. That family office now has the cash deposit. However, just like the participants before, they don't want to sit on cash deposits. So, the family office now eyes the munis and IG and thinks they look a bit rich, so uses the money to buy Tesla and Beyond Meat equities. And that, is why QE makes stocks go up. One thing to add is that OMO injection in one country usually flow to the equity markets and credit markets with the highest relative strength. In doing so they weaken the domestic currency and strengthen the target currency. We see this all the time. QE weakens your currency, unless your own market is the leaders. A useful analogy is this: Imagine your wife gives you $50 to go out and buy steaks for the BBQ. When you get to the supermarket, you learn that Jay Powell has already been there and bought all the steaks with counterfeit money. He is at home with Ben and Janet enjoying a lush BBQ with ingredients that cost him nothing (as bought with freshly printed money). However you are left with a quandary. You have $50 and there are no steaks left. So you step out the risk curve (with your wife) and buy pork sausages and burgers (not your first preference). Your wife is a bit unhappy. But, the next person who arrives was going to buy pork sausages and burgers, but now there are none left. They have to settle for crappy veggie burgers. If we assume that the laws of microeconomics hold for this supermarket, then (1) no one got what they wanted, except the central bankers who dined for free, and (2) everyone had to pay more for their BBQ food.
    • RH
      Robert H.
      21 May 2020 @ 12:30
      I don’t jave the knowledge to confirm that this analysis is correct, but it makes a lot of sense. Can you tell us something about your background and credentials as an aid to the reader’s confidence?
    • SB
      Stewart B.
      21 May 2020 @ 15:27
      Sure - I'm a full time trader, hold a certificate in quantitative finance and have worked for four investment banks. Of course, that doesn't mean I'm always right. But I'd welcome anyone to challenge my assumptions on this :)
    • KR
      Kartik R.
      21 May 2020 @ 21:55
      Very well put. I think fintwit stalwarts who say that QE is immoral and miss out on the liquidity-driven rally (e.g. FAANGs that have over-performed all equity classes) must follow the adage "Don't be right and, instead, make money).
    • AT
      ALAN T.
      22 May 2020 @ 18:17
      Thanks for walking through this scenario. John Hussman elucidates this idea very similarly using the hot potato analogy as well. I find the repeating of concepts from different sources with variations very helpful.
  • DM
    Daniel M.
    21 May 2020 @ 13:04
    To compare a bank's market capitalization with potential equity losses from bad loans is incorrect. For example Commerzbank in Germany has a book equity of 24 Euro per share, but is trading at 3.xx, so even if it loses 12 billion of its equity it could still triple from the current stock price.
  • DS
    David S.
    21 May 2020 @ 00:02
    It is significant that this is an EU and not Euro initiative. European countries want to help each other. They do not want to take on everyone's debts. Even Italy, Greece, Spain, etc. do not want to bail out other countries at the expense of their own citizens. To me this is a very positive move. There is a recognition that the EU is a better confederation than Euroland. DLS
    • RS
      Roger S.
      21 May 2020 @ 02:21
      If the strong countries don't bail out the weak ones the EU will collapse.
    • DS
      David S.
      21 May 2020 @ 07:11
      Roger S. - The strong countries in the EU – European Union – do need to show support for the EU countries most in need. This should be in the form of a grant. All Hell is going to break loose as the Euro is shown to be ineffective, especially during the COVID-19 crisis The Euro countries in trouble will stay as long as possible to get any help they can before the Euro folds. After that the EU is the real game in town as it should have been from the beginning. DLS
    • JC
      John C.
      21 May 2020 @ 10:37
      Initiative doomed to fail as all EU countries need to vote right? Why would non Euro countries like Sweden & Denmark vote to pay for this? UK used to be the country that took the lead against the Franco-German bloc but obviously that is not happening anymore. Andreas Steno Larsen did a good summary of this situation https://twitter.com/AndreasSteno/status/1263022355326144513?s=19
  • DT
    David T.
    21 May 2020 @ 00:59
    Spain's assessment was inaccurate. Most of Spain is in phase 0, not in phase 1. Most important story in Spain is not economy, it's political turmoil that is coming. There are daily antigovernment protests that are growing all over Spain. People are protesting Venezuelisation of Spain by Chavista government.
    • JC
      John C.
      21 May 2020 @ 10:28
      Spanish government also kept the country open very late in the game and took awhile to clamp down, allowing the virus to spread. At this point hard to know what the right move will end up being. Virus likely was way more wideapread early on that we thought
  • FB
    Frank B.
    21 May 2020 @ 09:48
    Love Roger's clear cut explanations and Ash asking the right questions. Roger speaks fast and there is a lot to unpack but it's worth the time. How Fed liquidity actually makes it into the equity market, I wondered the same thing, and here it comes up in the briefing.
  • JS
    James S.
    21 May 2020 @ 09:31
    Roger, what’s your favourite pudding to bake?
  • AP
    Amar P.
    21 May 2020 @ 08:54
    Always Always Always Tune in when Sir Roger Hirst speaks!
  • AS
    Ash S.
    21 May 2020 @ 02:00
    Great daily briefing! Great to hear the explanation on how liquidity is getting into the stock market, in addition to all the other thoughts and observations.
    • PC
      Paul C.
      21 May 2020 @ 06:44
      Druckenmiller confirmed that very point, commenting that when they sell say, $100m to the Fed of their Treasuries, do they use that money to simply replace what they've sold? No. A percentage of that capital finds its way into other asset classes.
  • AS
    Ash S.
    21 May 2020 @ 03:07
    And thanks for the breakdown of the S&P excluding the top 5, super interesting!
  • MC
    Michael C.
    21 May 2020 @ 01:26
    Go the boy from Manchester...... You need to through that (light hearted but very British) Manchester grenade back into Raoul's court Roger!
    • MC
      Michael C.
      21 May 2020 @ 02:52
      throw .... doh !
  • MD
    Mike D.
    21 May 2020 @ 02:46
    Echo praise for the explanations! You cannot explain enough. You cannot explain enough. You cannot... (you get me).
  • RK
    Rumen K.
    21 May 2020 @ 02:40
    The 5 stock concentration in the SPX is a bearish sign.
  • CM
    Chris M.
    21 May 2020 @ 01:19
    Agree with the comment that we will have a "V" recovery when you consider that the 2nd quarter could be down +30%. So the 3rd quarter will be a blowout number up some big percentage. You would think the market does expect this, but when 3rd quarter estimates are announced, sure you will see a big rally as if it is "new" news. The key point that Roger made is to what level does the economy jump back. With projections for slowing real growth below 2% before the virus, now with a significant percentage of people and businesses materially impacted financially from the stoppage and balance sheets weakened, and with some reduced/changed spending going forward, one would have to think it would be hard for GDP to bounce back to previous 2020 projections as debt and lower cash flows weigh on consumer/business/local and state governments ability to spend.
  • TS
    Tom S.
    20 May 2020 @ 21:30
    Will the Hugh Hendry and Richard Werner interview be up today?
    • JF
      Jack F. | Real Vision
      20 May 2020 @ 23:29
      Hi Tom, the interview with Hugh Hendry and Richard Werner, which comes in at an hour and forty minutes, will air on Friday. You won't be disappointed. Tomorrow is Brent Johnson with Bernd Ondruch of Astellon Capital Partners, which is also a fantastic conversation. We're ending the week strong!
    • TS
      Tom S.
      21 May 2020 @ 00:14
      Amazing! Thanks for the update, Jack!
    • JF
      Jack F. | Real Vision
      21 May 2020 @ 00:59
      Anytime!
  • MT
    Mark T.
    20 May 2020 @ 22:36
    I love the Roger segments. There was a RV interview a few months ago with Schiller I believe, or I saw an interview with Schiller regarding his book about narratives and how narratives shape our outlook. It feels that when it comes to the stock market, there is a narrative that 1) we're in a new bull market because look at the rebound and conversely 2) the stock market and the real economy are disconnected. Ash and Roger discussed it here, and it's been discussed before how the FAANG plus Microsoft stocks are really distorting reality. The S&P 500 is supposed to be a more reliable indicator of the underlying economy, but when 5 stocks have such disproportionate weighting how useful is it? It seems that these 5 stocks should be excluded/reported in their own index. This would correct the misperceptions of both #1 and #2 above and bring them more in alignment. Just a thought.
    • PB
      PHILLIP B.
      21 May 2020 @ 00:47
      Agreed. If not excluded, then maybe more emphasis on equally weighted. RSP is SP equally weighted.
  • NR
    Noah R.
    21 May 2020 @ 00:21
    Brent: 1, everyone else: 0.... restaurants, travel, and most of everything that goes on in a city, is truly, and perhaps tragically, non-essential. A country just needs food, factories, vehicles, and logistics. If 30% of the population dropped dead along with all the restaurants and travel, and the cities are left uninhabited, just slap some QE on it, "no problem", or do nothing, and make yourself understand the the purpose of a government is to "secure liberty"; something America has done the least worst.
  • ZF
    Zach F.
    21 May 2020 @ 00:10
    Great show!
  • DR
    Derrick R.
    20 May 2020 @ 23:34
    Thanks for the shout out, Ash!
    • AB
      Ash B. | Real Vision
      21 May 2020 @ 00:06
      Thanks for the comment, Derrick!
  • RS
    Robin S.
    20 May 2020 @ 23:55
    Still keen to hear possible vehicles by which you can play the EM stocks and currencies in the UK? Pls
  • RS
    Robin S.
    20 May 2020 @ 23:55
    Still keen to hear possible vehicles by which you can play the EM stocks and currencies in the UK? Pls
  • RC
    Ron C.
    20 May 2020 @ 22:40
    I’m sure I speak for many, these daily updates have become part of my daily routine, and on that day they cease I will be filled with the same melancholy as when one finishes a great work of fiction.
    • AB
      Ash B. | Real Vision
      20 May 2020 @ 22:51
      Thanks, Ron. That’s high praise! I hope we can continue brining them to you for a long time to come!
    • DR
      Derrick R.
      20 May 2020 @ 23:34
      Couldn’t have said it better myself!
  • LA
    Lawrence A.
    20 May 2020 @ 23:30
    English accents and financial news....like peanut butter and jelly.
  • SB
    Simon B.
    20 May 2020 @ 23:30
    What the hell is going on with these markets!! Unemployment rate soaring and markets right back to all time highs! I give up ! Loving these market reviews each morning (Australian time)!
  • SG
    Sebastian G.
    20 May 2020 @ 23:05
    Couple of points: 1. Given the concentration of money flowing into the FAANG stocks, would it be correct to suggest that Roger et al think it is a mini tech bubble and if so, is there a view it will burst? 2. Don't think we haven't noticed the repositioning of Roger's camera to hide the wine (or lack thereof). Great way to start the morning in Australia with the daily briefing. Cheers.
  • JR
    Josh R.
    20 May 2020 @ 22:35
    Have we seen the low in stocks?
    • MT
      Mark T.
      20 May 2020 @ 22:37
      Dave Rosenburg said it best, 'leave the bottom picking to the proctologists'