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Views on the Gobal Economy, Gold, Corn, Negative Rates, and Easy Money

Views on the Gobal Economy, Gold, Corn, Negative Rates, and Easy Money

28 November 2019

Better Days Ahead?

Global Economics Analyst by Goldman Sachs Research.

We expect the global growth slowdown that began in early 2018 to end soon, in response to easier financial conditions and an end to the trade-war escalation.

The risk of a global recession remains more limited than suggested by the flat yield curve, which partly reflects a structural decline in the term premium, and the low unemployment rate, whose predictive value for inflation and aggressive monetary tightening has fallen. We also take comfort from the absence of significant private-sector financial deficits in all but a few advanced economies.

Our confidence that growth will improve sequentially is highest in the U.S., where demand is most responsive to financial conditions, and the United Kingdom, where we expect the Brexit drag to reverse and fiscal policy to ease. We look for a more gradual pickup in Europe, where the fiscal boost is likely to remain (too) limited, and Japan, where we are watching carefully for a negative impact from the October consumption-tax hike. We expect growth in China to slow modestly from just above 6% to just below.

Slightly better growth, limited recession risk, and friendly monetary policy should provide a decent background for financial markets in the early part of 2020. However, concerns about the impact of higher corporate taxes on profits could rise in the run-up to the U.S. presidential election. Even aside from politics, rising wage growth looks set to reduce profit margins over the next several years.

–Jan Hatzius, Daan Stryven, and Ronnie Walker

Ready to Shine Again

Gold & Silver Stock Report by Clif Droke.

After weeks of underperforming the highflying stock market, gold and silver have lately shown signs of life as investors increasingly turn their attention to the U.S. impeachment hearings.

In a sign that the “fear factor” may be reviving in gold’s favor, U.S. Treasury bond prices have bottomed on an immediate-term basis and have rallied in recent days. Treasury bonds have shared much the same fate as gold since last month, when it was widely believed that the U.S.-China trade war was well on its way to being resolved.

A continued rally in T-bonds would increase gold’s attractiveness to yield-conscious investors. Higher bond prices would mean lower Treasury yields, and lower bond yields have benefited gold in recent years.

In view of the growing nervousness of investors right now, participants should be closely monitoring the gold market.

The impetus behind a breakout move above gold’s widely watched $1,500 level would almost certainly be based on growing political concerns here in the U.S., perhaps involving both the impeachment hearings as well as the trade dispute with China, and would revive safe-haven demand for the yellow metal.

When the [ (ticker: IAU)] exchange-traded fund closes above its 15-day moving average for two consecutive days], we’ll have our next confirmed short-term trading signal. For now, I continue to recommend a cash position until the market has confirmed a bottom.

–Clif Droke

Why Corn Might Pop

Fall 2019 Market Letter by Third Street AG Investments.

It is our opinion that the corn market is in the process of putting in a bottom.

For the past year, the U.S. has had great difficulty competing in the export corn market. Excellent crops in Brazil, Argentina, and Ukraine put the U.S. in the role of residual supplier. Fortunately, we are seeing signs that this is changing.

The domestic market in Brazil is firming, and that is pushing its export prices higher. Argentina and Ukraine are following, and the U.S. price disadvantage has dropped from $15 per metric ton to roughly $4 per metric ton.

Not surprisingly, U.S. export sales are slowly starting to pick up.

Another important factor for the corn balance sheet is poor quality. Farmers are starting to harvest corn that they planted in June, and a number of areas are reporting low test weight. North Dakota is particularly hard hit, with some test weights coming in 10% to 15% below normal.

While we believe that corn is carving out its harvest lows, we still see two significant risk factors that could weigh on both corn and soybeans in the long term.

The first is Asian swine flu; it has decimated Chinese demand, and it has now been found in wild boars near Poland. If the disease spreads to Europe, its feed demand will suffer.

The second factor is currencies. Both the peso and the real are near all-time lows, and South American farmers are getting a strong signal to plant from fence row to fence row. Also, the new administration in Brazil is very supportive of bringing more land into agricultural production.

–Chad Burlet

In the Danger Zone

Out of the Box by B. Riley FBR,

We are now back to $15 trillion of global negative-yielding bonds. Forty percent of Europe’s investment-grade corporate debt yields less than zero. With no yield to be found, money is pushing its way into the equity markets in America, and now, for the first time, the valuation of U.S. equities is 1.5 times our gross domestic product. At the same time, Corporate America has increased its debt load by about 60% in the past 10 years, which now totals about $16 trillion, an all-time high. This is as corporate equity buybacks are projected to exceed $1 trillion this year.

I often wonder: Can the central banks print “pixie dust” money forever, or is there a point, some point, where there is a price to pay for its continuing creation? We have never been here before, so it’s hard to predict an outcome with any accuracy. I do find our current economic environment extremely troubling, and I worry about where we might be heading. At some point, there will be a price to be paid.

–Mark J. Grant


28 November 2019
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