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29 April 2021
Video commentary for April 28th 2021
Eoin Treacy's view
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: Dollar top formation,Bitcoin pauses at 50-day MA, stocks continue to pause, industrial metals remain firm but agriculture pauses from overbought conditions.
India Stocks Advance as Nation Ramps Up Virus Control Steps
This article from Bloomberg may be of interest to subscribers. Here is a section:
“We expect markets to look beyond the short term on cases peaking, vaccine approvals and expansion,” Amish Shah, an analyst at Bank of America Securities India said in a note on Tuesday. The stabilization of new cases in Maharashtra state, location of the financial capital Mumbai, could be a “precursor” to the virus curve flattening over one to two months, Shah said.
The U.S. this week said it will help India by sending items needed to manufacture vaccines as part of an aid package. European countries are also pledging support after the South Asian country saw record numbers of new cases. India today began registering people from 18 years of age to get inoculations from May 1.
Eoin Treacy's view
The headlines regarding India and feedback from domestic sources all point towards dire conditions. The reality is the Indian authorities were probably a bit too sanguine about their success in avoiding the worst effects of the pandemic and are now paying for that laxity. The bigger question for investors is if this spike is the result of superspreading religious events or a new variant.
Hoisington Quarterly Review and Outlook
Thanks to a subscriber for report from Lacey Hunt which reiterates his long-term view that yields will continue to compress. Here is a section:
Before the pandemic, economic growth was decelerating as confirmed by a decline in world trade in 2019, one of the few yearly declines in the history of this series. While the huge debt financed programs were a response to the pandemic, the end result is that global nonfinancial debt increased to a record 282% of GDP in 2020. The 37% surge of debt relative to GDP was also a record. While this debt may be politically popular and socially necessary, it will weaken growth and inflation after a transitory spurt, which will lead to even more disappointing business conditions than existed prior to the pandemic.
The actual global debt situation may be worse than these numbers indicate because they include China, the world’s second largest economy. Scholarly forensic research indicates that Chinese GDP is overstated by at least 18%. Thus, the official Chinese debt to GDP ratio is suppressing the global numbers. A comparative analysis of money velocity confirms the suspicion about the Chinese figures. Money velocity in China in 2020 was 0.44 versus 1.19 in the U.S. Admittedly money and debt are not identical, but they are opposite sides of the balance sheet and the glaring gap is too much to be ignored.
Eoin Treacy's view
A link to the full report is posted in the Subscriber's Area.
Something that has been troubling me for a while is why has China chosen now as the time to clamp down on Alibaba and Ant Financial’s massive money market fund. The rationale that it was politically motivated and that the firm has become too big and powerful for the comfort of the Communist Party is tempting and probably holds some truth. However, the bigger question is whether the financial system needs to reabsorb the flows and be refortified because the debt overhang is much larger than investors are willing to give credence to?
What 175 years of data tell us about house price affordability in the UK
Thanks to a subscriber for this detailed article from Schroders which may be of interest. Here is a section:
Houses have rarely been more expensive relative to earnings than they are today in more than 120 years. Prices are stretched everywhere but London and the south of England stand out. Things look even less affordable for women.
The last time there was a sustained decline in the house price-earnings multiple was the second half of the 19th century. Average house prices fell for more than 50 years thanks to substantial building of houses, many of which were smaller than existed before. At the same time earnings rose.
How likely or even desirable would that be today? The UK’s heavily mortgaged consumers would struggle to cope with 50 years of falling house prices. It would also be political suicide for whoever was deemed responsible. A shift towards the building of smaller houses would also seem unlikely – research has found that houses are smaller today than at any point since at least the 1930s[1]. Hobbit homes cannot be ruled out entirely but I’m not sure how positive an outcome that would be.
Which leaves us with earnings. Earnings growth has been weak since the financial crisis but has recently picked up strongly – average earnings in the final quarter of 2020 were 4.7% higher than the same period of 2019. A period of stronger pay growth may represent the best hope of improving affordability (with the caveat that stronger earnings may result from a stronger economy which could result in a stronger housing market).
The elephant in the room here is interest rates. A Bank of England working paper[2] concluded that nearly all of the rise in average house prices relative to incomes between 1985 and 2018 can be seen as a result of “a sustained, dramatic, and consistently unexpected, decline in real interest rates as measured by the yield on medium-term index-linked gilts”[3]. The Bank doesn’t rule out other factors, but concludes that they have had more of a short-term impact. It furthermore concludes that: “An unexpected and persistent increase in the medium-term real interest rate of 1 percentage point from its level as at end 2018 could ultimately generate a fall in real house prices (over a period of many years) of just under 20%.”
However, depending on whether you are a current home owner or a prospective buyer, you are likely to be encouraged and discouraged in equal measure by the Bank of England’s scepticism that this is likely to materialise. Just because house prices are expensive relative to earnings does not mean there is a good reason to expect them to cheapen materially.
Eoin Treacy's view
The view that property is a better investment than stocks has grown considerably in the UK because the FTSE-100 peaked in 2000 and has spent the last twenty years ranging in a volatile manner. Against that background investing in property has been the right decision regardless of the costs of maintenance and taxes. The big question for investors is whether that will continue to be the case.
Eoin's personal portfolio: breakeven stop triggered
Eoin Treacy's view
One of the most commonly asked questions by subscribers is how to find details of my open traders. To make it easier I will simply repost the latest summary daily until there is a change.
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