What's up Dark Money, Dollar Shortages, QE, Permissioned Blockchain, and Commodities?

Dear Reader,

​The Market:

• Almost half of all American workers are stuck in low-wage jobs that often don't pay enough to support their lives.
  • There are 53 million U.S. workers — around 44% of the total workforce — who work in jobs with a median hourly wage of $10.22 and median yearly earnings of $18,000.
• Bet on REITs to outperform banks when rates are falling, and banks to beat REITs when bond yields are rising. Generally, inflation and interest rates have an inverse relationship. When interest rates are lowered, people can borrow cheaply which induces spending and inflation increases. The Feds problem now is inflation isn’t moving up.
• Dollar Squeeze: a scarcity of greenbacks in the swaps market is worsening. The dollar is appreciating while all other currencies are depreciating. A dollar shortage is when a country lacks a sufficient supply of US dollars to manage its international trade or debt obligations effectively. All countries need liquidity in the form of US dollars to meet their financial obligations and liabilities. The world is short by $12.8 trillion. 
• The US government passed a $1.4 trillion spending package to fund the government through September and avoid a shutdown (See graph below).
• January Effect: a perceived seasonal increase in stock prices during the month of January. In December, investors sell due to tax harvesting to offset capital gains which drops stock prices. In January, prices rise again due to investors buying back in (See graph below).

Questions we have going into 2020:

• Will impeachment reach the senate and pass?
• How much will US GDP growth fall?
• Will there be continued rate cuts?
• Who will win the 2020 US Presidency?
• Will the stock market keep rising?
• How much further will the Feds expand their balance sheet?
• Are there any black swans that can put our economy into recession?

Commodities: The drivers of the global economy. Commodities are basic goods that are used in commerce, often as inputs that are turned into a good or service. For most of human history, commodities have fueled trade, war, and progress. Many commodities are extremely valuable and can command a high price on the market, especially since production can be impacted by countless factors. Vanilla is not necessarily what comes to mind when you think of costly commodities, you may think of gold, silver, or oil, but none the less, in the 1990s, Madagascar was responsible for approximately 30% of the world's supply of vanilla and in 2000 when a cyclone hit, vanilla production fell and prices rose to $600 for a kilo! After the industry regained its capacity, vanilla prices fell back to $20 a kilo, but since then, Madagascar vanilla production has grown to 80% of the global supply, which means that global vanilla prices are extremely susceptible to the condition of the vanilla industry in Madagascar. Over the last few years, there have been disputes between the vanilla industry in Madagascar and some of the largest firms that purchase vanilla, leading the price to jump back to $600 a kilo in 2018. As you can see, the price of a commodity can be extremely volatile, more so when the majority of production takes place in a single country, but this is just vanilla, and vanilla has no significance outside of the kitchen. What happens with commodities that are so strategically significant that they can decide the technological superiority of an entire nation? China alone is responsible for 85% of the world’s capacity to process rare earth materials and supplied 80% of the rare earth materials imported to the U.S from 2014-2017. These rare earth materials are critical for the production of everything from DVD players and wind turbines to electric cars, jet engines, and missile defense systems. The United States only has one operating rare earth facility and even that is not capable of processing the materials and instead sends them to China to be processed where they face a 25% tariff as a result of the current trade war. Due to the technological and strategic importance of these materials, they are extremely valuable gaining them a high price and political importance. As a result, China is able to use its stores of these commodities as leverage at the negotiating table and in response, nations like the U.S and South Korea are attempting to stockpile billions of dollars’ worth to avoid a potential cutoff by China. While the nuances of vanilla production in Madagascar and the tensions between the U.S and China remain uncertain, it is clear that commodities will continue to play a vital role in the global economy.  

Permissioned blockchain + hyper ledger. Although the cryptocurrency craze seems to be nearly over, and most of the tech never left the small industry, one new sub-sect is quickly emerging. Permissioned blockchain, brought on by Hyperledger, a multi-project open source collaborative effort being brought on by the likes of the Linux Foundation, IBM, Intel, and SAP, seems to be quickly dominating the institutional space. This technology allows for a governance aspect on current blockchain systems, without the use of a coin, making it suitable for large corporations. This technology should be able to support inter-country transactions, supply chain improvements, and other non-fungible aspects. Although the technology as a whole would require too much information to efficiently explain in one section of this newsletter, it’s worth looking further into, be-it if only for the fact that billion-dollar companies, such as Cisco, IBM, Intel, BNY Mellon, JPM, Wells Fargo, and many more have already started to integrate this technology into their current ecosystems. In short, the technology allows for a completely governed and permissioned decentralized database, which admin users can effectively manage and track changes too.

Dark Money. A source of political funding that is typically anonymized and unlimited, allowing groups to influence elections without the transparency requirements of typical political fundraising and advertising. In the United States, Dark Money has been particularly influential in the funding of “Super PAC’s” or large Political Action Committees that independently fund advertising and voter mobilization efforts; effectively becoming a political campaign without a specific political figure at its head. These Super PACs have become increasingly frequent in modern American politics, with specifically targeted ads issuing calls to action over abortion, illegal immigration, and other hot-button political issues. Dark Money allows corporations, large net worth individuals, and other groups to fund initiatives anonymously, therefore not tainting their individual name while also not delegitimizing causes they support by being funded by specific corporations or billionaires.
 
Democratic Dark Money. The Republican party dominated the “dark money” market for much of the past decade, outspending liberal dark money funded organizations 4 to 1 in the 2016 presidential election. This is due to the organizational complexity and hardline supporters that conservative causes often engender, and absolutely played a key role in mobilizing supporters for Donald Trump among people who may not have agreed with him personally but saw him as a defender of their views on specific issues. However, for the first time, the 2018 midterm elections saw liberal dark money organizations outspend conservative ones by almost 2 to 1, leading to speculation that the conservative dominance of such donations and organizations is coming to an end. Additionally, several prominent conservative organizations, such as Koch Industries, have been alienated by President Trump’s divisive policies. As a result, many have signaled that they are either spending less or even considering funding of Democratic candidates in 2020. While many Democratic candidates have sworn off corporate donations to their campaigns, dark money-funded Super PAC’s will continue to operate on their behalf regardless of candidate support, drawing a sharp contrast between candidates’ rhetoric and the source of liberal campaign funding.
 
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Keep Climbing,


The Alchanati Campbell and Associates Team