We have slipped into Q4 2020. Covid-19 is around and still spreading. There are more countries and regions locking down and the global economy is suffering. Unemployment is rising just about everywhere; governments’ budget deficits are rising, many businesses are failing. Frankly, it isn’t looking good. You are welcome to believe President Trump that a vaccine is ready and will be available by election time. We choose to remain sceptical and sense that it more likely that we will have to learn and adapt to this new world that is infected.

And we awoke to the news that both POTUS and FLOTUS tested positive for the virus. Whilst we wish them both an easy and speedy recovery, the markets are likely to be erratic until the situation clarifies. The VIX, the infamous “Fear Index” has risen to 29, up 8.30% overnight.

With this in mind, we stick to our mantra of reading the markets and predicting the news. The former is showing us rising stock markets around the globe, some wavering in the bond markets which seem to have found a floor on interest rates, are even edging up ever so slightly. Hardly a sensible reading considering the pandemic. Or is it rational? We think it is, as two powerful drivers are evolving from the economic chaos. Firstly, fiscal stimulus WILL happen sooner rather than later. This means that fresh capital will flow into the system and is likely to trickle into markets. We all know that when the tide comes in, all boats rise... The second driver, possibly even more powerful, is the people themselves as their expenditures have dramatically fallen. We note rising savings’ rates everywhere; Americans, notorious for low savings’ rates, have increased their savings substantially, a combination of fear of the future and significant slowing of spending are adding cash to their savings. This money must be invested. Maggy Thatcher’s old acronym “TINA”, There Is No Alternative, is directing these savings towards the stock markets. Cash, Time Deposits, Bonds and other Fixed Income products generate no returns. We all have a dread of inflation coming back and shy away from fixed income holdings at these zero or thereabouts levels. We are not alone here as last week, the Pension plan of Canada announced that it will redirect its portfolios away from bonds towards equities... We agree. In our previous musings we had postulated that the equities are not expensive. We often used semantics to demonstrate this thought: Expensive isn’t a level, but a relative term; a stock market with a P/E of say 25 may appear high, but cannot be considered expensive unless compared to something else. Well, traditionally the “something else” is the bond market and the benchmark 10 year US Treasury Note yielding say 0.65% has a P/E ratio of about 154... That is a whopping 6.20 X the S&P P/E! At school we learnt to sell what is dear and buy that which is cheap. The World may well have changed but Truths remain as they were. Sell bonds, buy stocks!

We do not fear inflation coming anytime soon. With unemployment high and rising, wage pressures are nil. Capacity utilisation is at its lowest in decades. Commodities are sinking from lack of demand. The pandemic is accelerating the “Amazon Effect”, i.e. price discovery and disintermediation on everything, and we really do mean EVERYTHING. Prices are falling everywhere; There are no drivers in place to change this trend. Those who have read history may point to the Weimar Republic and more recent pockets such as Zimbabwe and Venezuela. All three having thrown currency at an economic disaster and getting in return hyperinflation. Not here and now, as we find that the liquidity is forcing up asset prices, not consumption products. This most likely will change one day, but not anytime soon... In The Fed We Trust...

Oh yes, let’s not forget that we are but days away from the US Presidential Elections. We all saw the chaotic first debate between Biden and Trump. Truly pathetic and anything but inspiring or confidence building. However, we believe that no matter the outcome in November, stimulus will be passed and found in our portfolios. Yes, if Biden were to win, we could expect a change in the tax code which more likely than not will trim some upside. If Trump were to be the winner, well, we will certainly have other problems to consider and fear.

Do stay long equities but do fasten your seatbelts. In spite of UBS recommending it, the best hedge into the next quarter is not gold. We stay with the Green Back as it is and will remain for some time yet the world’s currency (with a positive carry to all the other majors!). Remember that when one buys gold it is a sale of Dollars...