Llevo 31 años subido al andamio de la industria financiera, los últimos 25 gestionando patrimonios. He vivido en Nueva York y en Londres, donde he tenido la gran suerte de conocer y trabajar con algunos de los mejores inversores de nuestro tiempo. A ellos y a mis socios les estaré siempre agradecido por la formación que he recibido.
Janet Yellen is highly likely to become the first woman Secretary of the Treasury. Her appointment comes at a time when many express their bearishness on the near and long term prospects of the US dollar. In spite of many news and analysts’ reports on the impending demise of the US dollar, her job remains second to none in importance. In any case, the demise of the USD seems to be somewhat exaggerated for now. Let us not forget that both Bitcoin and gold lost value against the dollar in the market downturn of March. When investors unwind positions in a rush to raise liquidity because margin requirements are going up as their positions go down in value, many of them buy US Treasury bills and notes with the proceeds. This is typical in market corrections and crashes, and this is what happened earlier this year as well. Buying US Government securities avoids the problem of increasing counterparty risk with banks that may also suffer in a crisis. In addition, unlike the gold or Bitcoin markets, the US Treasury market is very liquid. Indeed, it meets all the requirements for breadth, depth, and resiliency much sought after by investors in a store of value and means of exchange. Finally, short dated US government securities may be posted as collateral or to settle trades in lieu of cash.
Once the unprecedented fiscal expansion response to this crisis got underway, both gold and Bitcoin resumed their ascent. Bitcoin’s rally since March is particularly remarkable. Some people believe that large fiscal deficits, coupled with Fed Funds at 0% and renewed QE are likely to bring about higher inflation. Consequently, other real assets such as housing and equities are also going up in price. Paradoxically, Treasurys are holding up quite nicely as well, even if off the lowest yields observed in March. The yield curve has shifted down by a significant 100bps since February 2019. We should keep in mind though, that these prices, like the prices of euro zone Sovereign debt, are devoid of much information content as they are the result of central bank purchases. The notion that Quantitative Easing and Modern Monetary Policy will come to an end when central banks take out the scissors and condone trillions in debt, is gaining in popularity, for some this has been the central case from the get-go.
Certainly, in the euro area, it would appear that bailing out the Italian and other periphery Treasuries by association is the sole purpose of QE, because other than that, QE has failed to achieve any of its stated goals. Just last week, a junior Italian minister proposed that the ECB condoned all the debt issued because of CoVid or alternatively roll that debt into zero coupon perpetuities. While this suggestion flies in the face of the letter of the EU’s Treaties, more and more people seem to agree this should be done. Unbound by the practical constraints of these agreements governments are encouraged to misbehave, and some are going at it with gusto.
None more so than the increasingly dangerous Sanchez administration in Spain. In order to pass its 2021 Budget, Sanchez has to make concessions left and further left. The latest concession will result in massive capital flight as residents of the community of Madrid move abroad to be closer to their money and avoid confiscatory wealth and estate taxes. Little by little, slowly but surely, Spain is descending into a familiar abyss of deep division and self-destruction that has ensured the country’s relative underperformance for centuries. Spain is at the bottom of the pecking order of former Modern Era Empires alongside Portugal, Turkey, or Russia. It would appear that the two decades following the 1986 adhesion to the EU are as much an exception in terms of economic development as was the 1956 to 1974 period. The political developments of the past few weeks will ensure that the economic recovery will be needlessly slow and painful, if we see a recovery at all.
While many praise the EU Reconstruction Fund, few in this cabinet like the conditionality that comes with these loans. Even if the second wave makes it more likely that we will see a double dip recession, we still believe that the ECB will nudge the periphery countries to take down these European loans by selectively not buying their bonds next year. A misguided academic claims this week that Italian Government Bonds’ (BTPs) spread over Germany is at an all-time low and calls this a great success of the ECB Asset Purchase Program. He should get a Bloomberg license. Since the launch of the euro in January 1999, and before the onset of the euro area Sovereign and Banking crisis, Italian 30 year bonds traded at spreads as low as 3bps over German 30 year bonds, averaging 32bps over the period. In fact, the current spread of 165bps is the same spread reached in the risk sell-off that followed Lehman Brothers’s filing for bankruptcy in 2009. We cannot agree that the ECB’s asset purchase program is a big success when all it has been able to accomplish is to keep the cost of long term funding for Italy at the same spread it was during one of the biggest financial crises in history! In any case, such a large differential in long term funding costs makes the Italian economy less and less competitive over time. We are afraid that much more drastic measures will be needed soon, and not just for Italy as Spain and Portugal will have to enter EU programmes as well. Especially because the ECB sees the EU’s reconstruction loan program as the perfect exit window to cease a very conflictive self-appointed mandate to support government debt.
As all of you know, we have been experiencing a protracted USD dollar crisis for decades since the Nixon administration decided to put an end to the convertibility of the US dollar into gold at $35 per oz. As early as 1971, John Connally, the Secretary of the Treasury, explained his decision to put an end to a cornerstone of the Bretton Woods agreement very succinctly: “The dollar is our currency, but it’s your problem.” As all of you know as well, when US Secretaries of the Treasury say that the US supports a strong dollar policy, they mean the exact opposite. As we approach a normalization point sooner than expected because of the unmitigated success of Operation Warp Speed, oil and other commodities are rallying. Other important inputs such as shipping cost are also rising. We shall soon have positively higher inflation prints for which the Fed is well prepared. The data will very likely elicit no rates action because the new policy is to look at average inflation over a longer period.
What should one do to protect one’s wealth in an environment of higher inflation and lower growth? Inflation erodes the value of money with the passage of time. While it is obvious that were central banks to succeed in their mission of reaching their stated inflation targets, the value of your fixed income portfolio in real terms would decline over time or abruptly if investors left the market. Yet, many people today are still holding onto their fixed income portfolio unwisely in our view. You should ask your financial advisors, especially if your savings are in euros, why are they still recommending fixed income exposure for your long term savings, especially in light of the fact that many banks have pared down very significantly their own exposure to government bonds. You could also purchase durable goods or commodities that you intend to consume in the future, because their prices will more likely go up than down. If you were thinking of remodelling a house, this may be a good time to do so. Remember that in high inflation or hyperinflationary environments, bags of cement prove to be a much better store of value than the currency or small bank deposits. Real estate is a popular and time-tested inflation hedge, but one must remember that the three most important characteristics for long-term appreciation are still location, location, and location.
A far more difficult question to answer is whether you should add to your equities exposure. The stocks of companies that are beneficiaries of the pandemic are certainly not a bargain anymore. Furthermore, e-commerce companies may be the subject of a barrage of new taxes and regulations. Nominally, these policies will aim to help the millions of small retailing businesses (and votes) that governments have annihilated with the lock-down provisions, in reality it is just one more and very easy way to raise revenues when most needed. Many people are looking to add to cyclical value stocks to benefit from an economic recovery. We are not quite sure where they see the value. Bank stocks, especially in Europe, are becoming quite popular. We cannot see much value there either. There seems to be no indication that either rates will go up, or that credit losses are adequately provided for, while concurrently, there is no much further room for more capital gains on their bond portfolios while the reinvestment yields are uneconomic. In addition, wealth management fees are under threat from ETFs and Fintech start-ups. There is still probably some value in companies that have been the victims of the pandemic such as airlines, airports, or hotels. Nevertheless, these investments are not for the faint of heart. Quality growth companies are valued today at a premium to their historical average multiples. The S&P500 trades at a multiple of 3.08x Enterprise Value to Revenues, the last time it traded close to that multiple was in 1999. It is hardly a good sign of a good entry point.
The most difficult of all decisions is whether to stick to fiat money in the face of all the forces that are ganging up to ensure its demise, and if the answer is no, which option constitutes a good alternative. Many people invest in gold as an inflation hedge. Bitcoin is another popular alternative. The inflation-adjusted price of gold since the Bretton Woods system of monetary management was signed in 1944 is $364.5 per oz., whereas gold closed on Friday at $1,787.79 per oz. nearly five times higher. What is gold discounting then? We only have data on the United States’ broad money supply (M2) since 1959 when it was $297 billion compared to $15.3 trillion today. This is a fiftyfold increase, which the price increase of gold has matched for that period. Should the correlation between the growth of US broad money supply and gold persist in the future, gold would more than cover inflation as measured by the GDP deflator. In other words, it is not inflation alone that which is a monetary phenomenon, rather growth in monetary aggregates drives the price of gold. Bitcoin should play a similar role and it adds a benefit of privacy, but it is very illiquid. Furthermore, the price volatility of gold and Bitcoin make them unsuitable as means of exchange. Gold’s 100 day annualized price volatility is currently 20.7%, while Bitcoin’s is 47.6%. In fact gold and Bitcoin are both more volatile than the S&P500 (100 day volatility 18%),and far less effective historically as inflation hedges. The S&P500 is up ninetyfold since 1959 and three hundred and eleven fold since 1944. In addition, the S&P500 has a positive carry of 1.65%, is far more liquid, and is an incredibly efficient investment as some ETFs instead of charging management fees, actually pay their investors a small fee derived from lending shares to short sellers. We also believe that Dr Yellen is far more likely to be on the side of US business interests than on the side of inflation hawks, “after all, the chief business of the American people is business.”