Summary

You kept your portfolio pretty much delta neutral, and you proved that this squelched all the risk, and all the return too.

Gradually, as it became apparent that investors perceive recent changes as signalling that the pandemic is coming to an end, you took off the risk-off hedges. You are long MXEA via calls. You have got some exposure to commodities via tankers etc. You’ve missed out on some spectacular breakouts (e.g. HYG, Chesapeake), but you’ve avoided losing money. Definitely getting more bullish about Latin America, as a beaten-down region and as an inflation hedge.

Over the weekend you listened to Louis-Vincent Gave extolling the virtues of RMB bonds, and the RMB as a new currency zone, plus Kuppy talking about guns and bitcoins. You listened to Max Kieser talking about bitcoins and gold to Chris Irons, but this was almost entirely for the entertainment value. Kieser has a point, though, talking about why we always bail out the creditors and never the debtors.

It seems weird to see markets rallying as city centres descend into chaos because of Black Lives Matters demos following the death of George Floyd (not the most attractive of martyrs).

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The following is a random capture of what was happening.

From Calculated Risk

May employment report — 2.5M jobs added. Against a much larger drop in April. Unemp. now 13.3%.

8.9% of all mortgages in Covid forbearance. 7.1% of all GSE-backed loans in forbearance.

Friday: • At 8:30 AM ET, 8:30 AM: Employment Report for May. The consensus is for 8,250,000 jobs lost, and for the unemployment rate to increase to 19.7%.

GS estimates that unemployment rose to 21.5%.

Lumber futures up, year over year (!)

House prices up. Housing market surprisingly strong. Mortgage applications up. Purchase apps. up 9% yoy. Case Shiller points to 3.5% yoy increase. About 10% of renters not paying rent.

Vehicle sales down… a lot.

TSA is showing a massive drop in travel — approx. 87%.

OpenTable shows a big percentage increase in bookings, unsurprisingly.

Massive drop in spending: 13.6 (BEA).

NY Fed forecasts a 40% decline in GDP on a seasonally-adjusted annual rate.

CharlieBilello

2020 stockmarket so far: internet, internet commerce (incl payment services), biotech, health, all did well. Energy, travel, reits, airlines (some) did badly.

with unprecedented speed.

may have something to do with it.

Credit Bubble Bulletin

I didn’t write this wrap last week. The market was behaving much the same, as last week’s bulletin makes clear.

Massive short squeeze in the most exposed stocks.

Huge relief rally in Brazil Real, all emerging markets currencies and stockmarkets.

Given the pullback, the dollar has drifted down 1.4%, and treasuries are weak. The problem is that this may either be the typical risk off behaviour as investors move cash into risky assets like stocks & EM currencies or it may be that the market is getting a faint whiff of inflation on the horizon.

Hong Kong currency and stockmarket have not participated in the rally, but have not crashed since China has decided to increasingly impose its will on the former colony. I see a potential for the Hang Seng to sag dramatically, but it’s too early to take action.

Civil unrest, following the George Floyd murder, seems good for stocks. Maybe the police could arrange something similar on a weekly basis.

Commercial real estate in the US is not in a good place:

June 1 – Financial Times (Joe Rennison): “The percentage of commercial property loans left unpaid by borrowers in the US more than trebled last month, in a sign of a deepening crisis in the $1.3tn market for bonds backed by the mortgages. The delinquency rate on loans underpinning commercial mortgage-backed securities rose from 2.3% in April to 7.4% in May, according to the data service Trepp. Borrowers are considered delinquent when they fail to make a payment within 30 days. A further 8.6% of mortgages were in that 30-day grace period after missing a payment.”

Emerging Market economies (as opposed to their currencies and stockmarkets) are in a worse one:

June 1 – New York Times (Mary Williams Walsh and Matt Phillips): “From Angola to Jamaica to Ecuador to Zambia, the world’s poor countries have had their finances shredded by the global pandemic. The president of Tanzania has called on ‘our rich brothers’ to cancel his country’s debt. Belarus veered toward a default when a promised $600 million loan from Russia fell through. Russia couldn’t spare the money because the ruble had taken a nose-dive… Lebanon, troubled even before the pandemic, has embarked on its first debt restructuring. And Argentina has defaulted again — for the ninth time in its history. The low interest rates of the past decade led to an unlikely alliance between poor countries and international investors. Governments, state-owned companies and other businesses were able to raise money relatively cheaply to finance their growth, while investors searching for better returns than they were getting at home gobbled up that debt. As a result, developing countries owe record amounts of money to investors, governments and others outside their borders: $2.1 trillion for countries ranked as ‘low income’ and ‘lower-middle income’ by the World Bank…”