ROADSHOWS: L/S Industrials and Materials Ideas - Jay Van Sciver /Hedgeye   •   London   09 - 11 Jul 25      

Liquidity Pocket Followed By Global Growth Rocket

Wed 22 Jul 2020 - 15:00

Summary

Teddy Vallee provided us with a fascinating insight in to Pervalle’s fundamental process, proprietary long and short term leading indicators, liquidity models, and deep understanding of when technicals are relevant, which have proved very successful at predicting asset class moves. Teddy discussed how the markets have been very liquidity driven and as this stimulus fades away we will see a truer accurate depiction of growth profiles. Teddy sees US growth being depressed over the next several months as permanent SME impairments, lost income, and lost growth outweigh the current policy response measures. Pervalle have calculated that of the USD 3.2 trillion stimulus only USD 800 billion will actually benefit economic growth; 55% of the money will be saved or used to pay down debt so will significantly decrease the velocity of money in the system. Due to the upcoming small business’ bankruptcies Teddy doesn’t predict inflation from here, particularly with banks not lending. The enormous budget deficit will pull markets down over next 6 to 12 months. With breakevens likely to move lower, expect real rates to rise until year end; a view reinforced by Demark indicators. This environment is negative for equities, particularly Technology stocks whose multiples have been supported by low rates. The long end of the curve will likely flatten further leaving the Fed out of conventional policy tools so expect yield control followed by more creative measures. Expect the dollar to hit a multi-year high by year end and will then fall for multiple years creating opportunities around the world. With liquidity picking up in 2021 as China embark on QE on an enormous scale growth should pick up across many parts of the world in the next 12 to 18 months. China, with 43% of GDP growth since 2010 globally, will be the driver of the next economic cycle, with the US lagging significantly. Pervalle believe that global equities, skewed massively by the US, will not see positive returns over the next decade and one should expect negative real rates of return for corporate and sovereign bonds too. This should prove a prosperous environment for skilled active investors and for assets that offer stores of value. Expect a shift from growth to value and from passive to active. This represents a positive outlook for gold, although with high real rates looming Teddy favours cryptocurrencies. Central bank balance sheets have shown very positive correlation with the bitcoin price, so with balance sheets expanding expect to see bitcoin flying!

Topics

We are entering a period of very weak liquidity through year-end, followed by a sharp rebound in 2021

This will adversely affect risk assets, primarily US equities

The bottom in global growth in Q4 20/Q1 21 will emanate from China, benefitting EM Asia along with parts of Europe

Multi-year high for the USD as we enter 2021

Global equities will provide a net negative real rate of return per year for the next 10 years, global bond market will also provide a tax loss, significantly benefitting gold and bitcoin.