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Alchanati Campbell & Associates

What's up Bear Market Rally?

4/10/2020

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Dear Reader,

​
The Market:
  • Typical production chain for Gold: Gold mine or other warehouses- logistics company- refinery- logistics company- mint- logistics company- bullion dealer- individual
    • Gold is the perfect piggy bank- it’s the anchor of trust for the financial system. If the system collapses, the gold stock can serve as a basis to build it up again. Gold bolsters confidence in the stability of the central bank’s balance sheet and creates a sense of security.
    • The reason for Gold’s price decline in March is because Institutional Investors selling Gold to meet liquidity needs, reduce leverage or take profits.
  • The Everything Bubble
    • QE Infinity
    • Fed Balance sheet at $6.3 trillion
  • Low oil prices are “going to hurt a lot of jobs”
    • Global oil demand has dropped by up to a third
    • OPEC is discussing supply decreases of 10 million barrels per month
    • Oil prices are determined by supply and demand. A cut in supply increases the price per barrel as well as an increase in demand. With the virus causing a global economic slowdown, demand is estimated to be reduced by 12%. Lower demand and higher supply mean lower prices. Oil prices in the twenties are disastrous for domestic energy companies because most breakeven when prices are in the forties. Oil and Natural Gas contributes close to 8% of US GDP.
  • Deflation is likely to take hold over the next few months as businesses slash prices in response to much lower demand from the coronavirus outbreak and associated restrictions on movement.
    • While stimulus is required to mitigate the coronavirus’s negative impact on global economies, it could lead to inflationary pressures down the road. Increasing government deficits and debt could act as a drag on economic growth, support lower interest rates and eventually weaken the U.S. dollar.
  • Silver:
    • Although demand for silver as an industrial metal has slowed, the supply has also stalled. Increased demand may arise from the wide price differential between the two most common hard currency options. This increased demand could narrow the gap between gold and silver by putting upward pressure on silver prices. Looking forward, shorter-term demand may rise as a result of gold prices. Longer-term it could rise as a result of infrastructure stimulus.
    •  In our view, a combination of fiscal and monetary stimulus, rising U.S. government deficits, debt, and lower-for-longer interest rates are supportive of gold prices. While silver is increasingly viewed as an industrial metal, we think its wide discount to gold as a monetary metal will narrow.​


There’s no such thing as fundamental analysis in this market. It’s either: stay out of the market, cost-average at predetermined times, or stare at your phone for every second when the market is open (with stop losses and the flexibility to play the ups and downs). The market is being pumped up by printed money inflating the Fed’s Balance Sheet and open Fed operations in the MUNIs, high yield debt (junk) markets, and high yield debt (junk) ETFs. The market is unpredictable, but this week we saw stocks rise (positive news from the flattening of the virus death rates + more promised stimulus), Gold and other precious metals rise, high yield bonds rise (due to Fed stimulus), and the USD drop in value.  
 
Trump and the Feds will be doing everything possible to keep the market from falling. When countries finance their way around a problem, they open the door to inflation. The increase in currency circulating means there is a much larger supply. When the supply of something goes up, unless it’s met with an equal demand, it’s value goes down. In this case, the demand for what we purchase with cash is not expected to rise. This could lead to a devaluing of currencies, which buys fewer goods and services. Any day now we can expect a treatment or a cure for the virus which will bump up the market. But Wall Street sees something we don’t see. Economic indicators like consumer confidence and initial claims have been worst than worse; with numbers looking more like The Great Depression. The last three weeks of jobless claims totaled 16.5 million unemployed. With the total US workforce being around 157 million, this comes out to an unemployment rate of ~10%. With this, we see a disconnect of the economy and the stock market; with the economy pointing towards a recession and the stock market indicating a new expansion. But there will be consequences in education, society, and debt bubbles. And even if the economy reopens, how long will it take for everything to be back to normal?


Dollar Illiquidity
, or a dollar-denominated shortage, comes from a mismatch between supply and demand, with the later overpowering the former. When we are mentioning the USD, we are talking about all dollar-denominated safe assets, which are considered like-money. This idea of dollar liquidity can get very complicated, relatively fast, so we will leave it at this definition.
 A dollar illiquidity crisis, in its simplest sense, means a dry-up of liquidity. This results in a general decrease in loans across the board. The second derivative consequence leads to a rapid appreciation of the USD, leading to strain on international trade and net imports outside of the US. We recently saw a sign of this dollar illiquidity through our repo market, whose rate blew up to over 10% in late 2019.
 Now that we have what it means down, we can get into how this has come about. The major underlying cause of this stems from directly after world war 2 when the USD replaced the British Pound as the new global reserve currency. The global reserve currency is a central currency that is held by a majority of central banks and other monetary authorities for the means of international trade, cross-country investments, and most aspects of the global economy. The global reserve currency cements that nation as the most fundamental aspect of the global system. This creates a large demand for our US greenback, increasing our dollar prices. Realistically, this in part, leads to the US being viewed as a safe haven during times of global doubt. This is net positive for the US, while being negative for the rest of the world. Hypothetically, this should allow the US to not only weight out a global recession but should lead to increased risk-free and risky asset prices and further dollar appreciation.
 

 
Keep Climbing,


The Alchanati Campbell and Associates Team
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     WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now. 

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