Monetary policy beats most other factors most of the time

Today’s edition of 20/20 Visions comes from our tech and trading expert Eoin Treacy.

It’s an extraordinary mix of the good, the bad and the ugly. And Eoin also takes some time to answer a few reader questions, which you sent in for him.

The overall theme appears to be a boom in Britain and a selection of tech breakthroughs that investors can’t afford to miss out on. But always keep one eye on monetary policy – it beats most other factors, most of the time.

Eoin is by far our most prolific editor. You can find out more about how to receive his work here.

Best wishes, 

Nick Hubble
Editor, Southbank Investment Research

20/20 Vision
with Eoin Treacy

Eoin, what would be your headline to sum up 2019?

2019: the year the Wall of Worry felt real

There was plenty to worry about in 2019. But what were you focused on?

The most common question I received from subscribers this year is, how do we cater to the random volatility of President Donald Trump’s tweet storm? It was an emotional year for many investors. There was the constant promise of a favourable resolution to the trade war, which was punctuated by disappointment after disappointment. Even though the market didn’t really go much of anywhere, it felt like there was a lot going on.

The Brexit debate went into overdrive over the summer. Boris Johnson’s strategy of brinksmanship and calling the bluff of the EU was the correct one in my view, but it faced incredible opposition from all sides, include from within his own family.

The country badly needed an election and democracy prevailed. The new government has a clear mandate to get the job done. It’s a wonderful topic to close the year on.

You have 100 words to prepare investors for 2020 – what are they?

Bet on the UK.

Self-determination and independence are not idle attributes of every democracy. They have to be constantly fought for and defended. The threat of uncertainty resulted in UK valuations trading down to a significant discount relative to other developed markets. That discount is now likely to close.

It’s not all that often that foreign institutional investors get the currency, market and yield on their side. When those conditions fall into line, they pile in. I don’t think there has been a better set-up for UK stocks in years.

What was your most successful prediction of 2019?

Beyond Meat was a short sharp profit of 113.82%. I found that issue of Frontier Tech Investor easy to write. The stars were aligning for the meat alternative sector.

The ferocity with which investors raced to buy the share rapidly priced in the growth that, for a normal company, might take years. We were in and out in a little over six weeks, which is a short holding period for an investment advisory that typically envisages holding periods stretching into years.

However, I sold because it reached my expected return very quickly and had sown the seeds of its own demise. The success of alternative meat startups is rapidly encouraging competition so I suspect the market will soon be flooded with products.

What surprised you most in 2019?

I suggested buying Alkane Resources back in 2016 because it had the security of income from a gold mine to supplement its efforts to build a world-class heavy rare earth metals mine.

I wasn’t planning on it finding new gold but that is exactly what it did and the share popped on the upside. Obviously, I’m happy for the result, but the bonus of new gold will also help to get to rare earth metal production faster. That’s an urgent goal because China is increasingly using more of its own supply even without the threat of curtailed exports. 

What is the biggest opportunity of 2020?I really think we can keep it simple. Stay local with stocks and buy gold.

The UK is full of attractive undervalued high-yielding shares that are attractive for any investor. Boris Johnson clearly sees the future of the UK as a leader in the technology sphere. We expect plenty of investment in the sector over the life of the government. 5G will be just the start.

The recent strength of the pound has acted as a headwind for gold investors in the UK. The de-risking of the Brexit question coupled with the relief rally in the currency has seen the price of gold fall from £1,300 to £1,100 at the time of writing.

The pound will not rally indefinitely, not least because the government will start to lean on it before long. That suggests we are being set up for the next attractive entry opportunity.

What is the biggest threat of 2020?

The US election will be in November 2020 and if President Trump fails to win re-election, the stockmarket is likely to take a hit.

The biggest threat as far as I can see, however, is if inflation surprises on the upside. Major economies are performing with little available slack, unemployment is close to record lows in the US and UK, commodity prices are recovering, central banks are stimulating and governments are increasingly engaged in deficit spending. When you combine all of those factors, what we are looking at is an inflation scare in 2020.Stockmarkets are reasonably valued only when they are compared to the historically low bond yields. The higher bond yields move, the less convincing the argument the corporate profits can continue to advance. Inflation usually surprises on the upside towards the end of an economic cycle so it is well worth monitoring.

Name a trend from 2019 that will continue into 2020.

That’s an easy one. I strongly believe the trend of the US Federal Reserve contracting its balance sheet is over. It has added in more than $300 billion of liquidity back in since October and that figure could hit $500 billion by the end of the year.

The impact of large government deficits and increasing regulation squeezing banks out of the repo market resulted in a surge in money market rates this year and that means we are looking at combined global monetary and fiscal stimulus for 2020. That’s the kind of action that has the potential to massively inflate valuations.

Name a trend from 2019 that will reverse in 2020.

The dollar has been steady for the last couple of years because of the Fed’s balance sheet contraction and the fact it was raising rates. Both those trends are now over.

The hiatus in the trade war and potential for a benign conclusion to the Brexit saga remove the need for protection and that in turn should see the end of the dollar’s rally. That’s positive news for investors all over the world but especially in the UK because the pound is still cheap and the stockmarket is undervalued compared to global peers.

What were the key moments of 2019 in shaping 2020?

I know the easy answer is the breakthrough in the Brexit negotiations, the storming result of the Conservatives in the UK election and the potential for an end to the trade war. However, it is important to remember that monetary policy beats most other factors most of the time. The repo market illiquidity that kicked off in September is the most important thing that happened in 2019.

The global bank sector depends on the repo market to earning interest on overnight deposits. It’s an integral part of the global financial system and it seized up in October. That is not something the world’s central banks can allow to happen and they will do whatever is necessary to avoid a repeat. That means the market is going to be flooded with liquidity.

These actions are equivalent to QE4, regardless of what it is being called in official circles. That’s far more important than politics because it directly affects the flow of money around the world.

How do you think 2019 will be remembered?

2019 will be remembered as the storm in a teacup year. Many investors spent the whole year worrying about the rise of populist movements all over the world, Brexit, impeachment and the trade war and yet the market marched higher anyway.

The lesson from all of this is to pay attention to what people are doing with their money rather than what the media are saying. The second lesson is that following 2019, where everyone worried about everything, they are less likely to worry next year and are less likely to pay attention to late-cycle phenomena, if they appear.  

How will the 2010s be remembered?

The rise of populism is what I will remember the teens for. Back in 2010 I don’t think anyone was predicting the political status quo, which has been dominant for half a century, would be all but blown away by the rise of populist movements. The lack of a ready path for less well-educated people to achieve a middle-class lifestyle is a problem everyone is aware of now because of the rise of populism. That’s a good thing. Now we need a solution.

Chinese expansionism and the evolution of the One Belt One Road programme of global domination is meeting with sharp resistance around the world for the same reason people are rebelling against the status quo. Xi Jinping becoming ruler for life, imprisoning millions of his own people in internment camps, democracy protests in Hong Kong and extraterritorial censorship all suggest the lustre is quickly coming off of China. That is particularly interesting since many analysts thought this would be China’s century.

What will the 2020s be remembered for?

Generation wars. The young are going to outnumber the old by the end of the decade in many countries. That is going to sharply change the electoral maths for many countries and it is then that the really big discussions about pensions and how they should be funded are going to start. Wealth and pension privileges are concentrated in the older generations, but young people have numbers on their side.

On the technology front, we have 5G, quantum computing, electric vehicles and cures for chronic conditions to look forward to. If we are ever to get a handle on the mess the pension system is in, we are going to have to see massive productivity growth delivered from these sectors. I strongly believe that is more likely than not and that the future will be better than the past.

Which financial indicator will you keep an eye on this holiday season (and why)?

My favourite holiday indicator is the Santa Claus trade. Last year was very disappointing, but it would be exceedingly unusual to see a negative year repeated.

This is the most favourable time of year for trading. We are also in the third year of the four-year presidential cycle. The second half of the third year is usually positive and this year has certainly followed through to form.

What do you think the financial impact of the new government will be?

Positive! The end of austerity means more money in everyone’s pockets. The pound and the stockmarket are both likely to perform in 2020.

What would you buy Jeremy Corbyn and Boris Johnson for Christmas?

For Boris, some throat lozenges. He is heading into 2020 with a lot of talking to do, particularly with the EU.

For Jeremy, a gold watch because he is heading for retirement.

What was the best book you read in 2019?

The Three Body Problem trilogy by Cixin Liu. It’s a novel about the first encounter of humans with a much more advanced alien civilisation. The discussion of the hunter in a dark forest is particularly interesting.

An alien can never be certain of another civilisation’s true intentions because the difference in species, distance and civilisation is so vast. Therefore, war is inevitable is the basis for the book.

That is particularly worth considering today where increasing commentary on the Tacitus Trap is gaining ground. It has become a particular topic of conversation in China, where they view the risk that, no matter what the government does or says, it will be interpreted as a lie, to be one of the greatest threats to the country.

Which book will you read over the holidays?

I have a shelf full of books I want to read, but I am hoping to use this quiet time to get back into working on my next book focusing on populism and global interrelationships.

Do you have any film recommendations for your readers?

The film Mrs. Treacy and I watch every Christmas is My Cousin Vinny. It’s something we find fun every time we watch it and it also helps to remind me that my better half is more precious than everything else in my life.

Which investment strategy will work best in 2020?

As far as strategies go, I think buying breakouts is going to work nicely in 2020 because the stockmarket has been ranging for nearly two years. Expectations for future potential have declined, but that only suggests there is even more potential for a surprise on the upside.

The one kind of report we don’t have at Southbank Investment Research is something that focuses on emerging markets. That’s because most investors have an implicit home bias and aren’t interested in emerging markets even though they have more growth, better demographics and lower valuations. If the dollar is really peaking then emerging markets are primed to do well.

What are you most worried about?

The perilous state of pensions is something we all should pay attention to. Open-ended funds are running into difficulties at an alarming rate and that is something which is going to have wide ranging effects for pensions.

Most people have no conception of the risk pensions have taken on, on their behalf. This is something that will be thrown into sharp relief if bond yield move higher.

[And now for some questions which subscribers sent in for Eoin…]

How long do you think it will be before the battery metals start to gain in price due to lack of supply … Please note, do not forget about graphite!!

The investment cycle for battery metals began in 2013/14. Cars are being sold now, but not enough to put a dent in supply. We need to see more electric cars being sold to change the fundamentals. In order of preference at the moment that is copper, nickel, cobalt, lithium and graphite.

Will it be the decade of restraint and rebuilding via infrastructure, will infrastructure be the investment of the decade, or will it be the precious metals decade?

I think the one thing politicians have recognised is populism cannot be contained with restraint. They are going to print and print and print to pay off restless populations. That means lot of new infrastructure paid for with debased currency. That is good for the builders and for gold.

If you were investing money for a newborn grandchild, knowing full well that you’d be long gone and buried before your grandchild would want to use that investment (say for a deposit on a house) – what would you invest in today?

The only way to ensure the money you put away today with a 25-year outlook is going to hold its value is to buy either gold, growth or dividend growth.

I’d look at technology with dividend growth, with that kind of time horizon. Visa is a good example. The yield is small because the share keeps rising but they have been growing the dividend at over 20% a year since the initial public offering (IPO).

Category: Energy

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