A Lehman Survivor Is Prepping for the Next Credit Downturn
Gomez-Bravo had front-row seat to the crisis on Lehman buyside
MFS Investment manager pares risk as the debt party is ‘over’
Pilar Gomez-Bravo knows a thing or two about financial crises. She’d been a credit insider in one guise or another at Lehman Brothers for about a decade when the last one hit.
Today she’s a portfolio manager at MFS Investment Management, and sees eerie similarities between the current frenzy for risk and the speculative mania that made her cautious on the eve of the last bubble.
She’s selling junk bonds in a contrarian bet that the debt rally is on its last legs -- with the potential to trap funds with billions staked in levered and often illiquid assets.
“There’s an art to knowing when to leave the party,” said the director of fixed income for Europe in an interview. “In fact it’s over -- people are desperate and they’re hunting down the after-party. We probably only have a few hours left.”
Rallying corporate debt is defying growth fears sounded by government bonds and warnings that risky assets are priced for perfection.
Gomez-Bravo, who oversees $4.5 billion in fixed-income assets, is on the way out. She’s cut high-yield exposure to 10% from as high as 30% in 2016, in one of her unconstrained funds with 160 million euros ($179 million), which is up almost 10% over the past year.
Her cue to leave the party came a few weeks ago when average U.S. high-yield bond spreads fell below 375 basis points, a level that in the past has signified negative excess returns in a year’s time. It’s the same threshold that turned famed credit bull Bob Michele of JPMorgan Asset Management into a bear last month.
From her vantage point managing a slew of global credit funds, she sees the long-bemoaned opacity and leverage of junk issuers now at a tipping point.
Over a third of private high-yield companies in Europe, for example, restrict access to financial data in some way, according to Bloomberg analysis earlier this year. Buyers should receive extra compensation for firms that curb access to earnings with password-protected sites, according to Gomez-Bravo.
Borrowers still have the upper hand in the U.S. and Europe. Thank cheap-money policies and low defaults. Speculation the European Central Bank is preparing for another round of quantitative easing is spurring the rally -- and masking fragile balance sheets.
Yet leaving the party too early risks leaving profits on the table. Gomez-Bravo is selling into into a rising market and taking more political risk by adding to investments in peripheral governments like Greece and Italy.
“There’s more risk than reward right now,” she said. “There are real end-of-cycle fears about what performs.”
When Lehman went bust, the mother of four was a portfolio manager at its investment arm. Prior to that, she was a senior credit analyst on Lehman’s sellside but moved in 2006 citing, she says, frustration with unchecked animal spirits.
Like even outspoken naysayers at the time, she didn’t anticipate the violence of the downturn. Still in May 2007, Gomez-Bravo became cautious on U.S. risk and issued warnings on corporate health -- which bear echoes with the intense hunt for yield today.
“Everything was bid indiscriminately,” she recalls. “I knew things were heating up; there were telltale signs. It’s always difficult to leave money on the table, but as a result we avoided the blow-ups.”
Why Gold Became The Strongest Currency Globally In 2019
Taki Tsaklanos Investing Haven
Gold holds the top spot of the strongest global currency in 2019 (in the first six months of 2019). Why did gold become the strongest global currency of 2019? The answer is pretty straightforward, and has everything to do with both intermarket trends as per our investing method combined with monetary policies of central bankers around the world. What matters is this: gold confirmed its breakout and is set to continue to rise to our forecasted gold price of 1550 USD. All the rest is essentially irrelevant for investors, and may be ‘good to know’ at best.
The one and only thing that matters in financial markets, and is the most important thing for investors, is how intermarket trends work.
As said in our 100 investing tips overview:
Markets move in relation to each other, they do not move in a vacuum. Capital flows from one market to another market, considering that cash is also a market (any currency). This flow of capital can be identified by thoroughly analyzing chart patterns and trends in a handful of leading assets. They are primarily treasuries, currencies, leading stock market indices, gold, crude oil.
Essentially, what we are saying is that gold is performing so well because it is a great investment from a relative perspective. Compared to other assets, and especially comparing to other currencies, gold is a much more attractive investment.
To illustrate this point we refer to an article we wrote earlier today which says that the Euro, one of the leading indicators of the gold price (indeed, the Euro, more so than the U.S. Dollar) is flat for 12 months. This is an event that has not occurred before. That’s why we said that the Currency Market Writes History: Why The Euro Is Flat For 12 Months.
Moreover, fundamentally, monetary policies from central bankers around the world are designed to to support economic growth. However, this comes at the expense of their own currencies. If all central bankers concurrently do the same, they all devalue at the same time. The only way to recognize this phenomenon is by applying a baseline which is what gold stands for. Gold is the baseline for currencies.
The first chart shows the relative price performance of gold in red in the first 6 months of 2019, and compares it with the performance of the other leading global currencies (in this order: Canadian Dollar, Japanese Yen, US Dollar, Swiss Franc, Aussie Dollar, British Pound, Euro).
The second chart shows the price performance of gold in terms of another currency. So the baseline is set at 0% which is the price performance of gold, while the other currencies (same as above) have a significant negative performance against gold’s price.
Mark Mobius: “I love gold”
MoneyWeek July 15, 2019
Mark Mobius, founder, Mobius Capital Partners
“I love gold.” Mark Mobius, perhaps the best-known emerging markets investor in the world, reckons that the precious metal should form at least 10% of any investor’s portfolio (in the form of bullion). However, now looks like a particularly promising time to invest – and it’s all down to central bankers, he tells Bloomberg in an interview in Singapore.
For one thing, “interest rates are going so low, particularly now in Europe”. So, as Mobius says, “what’s the sense in holding euro when you get a negative rate? You might as well put it into gold, because gold is a much better currency”. Expectations of even looser monetary policy from central banks across the globe, including the Federal Reserve in the US, have seen gold hit a six-year high this year already (in US dollar terms at least), of close to $1,440 an ounce.
Cutting interest rates isn’t the only factor – central banks, particularly in Russia and China, have also been ramping up their own purchases of gold to add to their reserves. And while Mobius is not a buyer of cryptocurrencies at the moment (“I don’t know what the real value is”), a resurgence of interest in the likes of bitcoin has also drawn attention back to alternatives to fiat currencies such as gold. In all, Mobius reckons the price could go further from here, to top $1,500 by the end of the year.
In terms of wider markets, Mobius favours stocks over bonds, and he is also still a big believer in emerging markets, which are set to benefit from ongoing, business-friendly reforms.
Ray Dalio Says It's Time to Buy Gold
Bridgewater’s boss thinks the metal is a good way to diversify in these troubled times
July 15, 2019 John Engle for Gurufocus
As the founder and CEO of Bridgewater, the world’s largest hedge fund company by assets under management, Ray Dalio (Trades, Portfolio) knows a thing or two about capital markets. And, as a macro strategist, he is well versed in the ebbs and flows of broader economic action. Thus, it usually pays to listen when Dalio speaks.
Lately, Dalio has been ratcheting up his warnings about broadening market and economic risks. Indeed, as we discussed in February, he apparently fears that a recession could be on the horizon. Dalio’s gloomy forecast has continued to the present. Apparently, the risk of economic turmoil has actually become sufficiently high as to make the hedge fund billionaire a gold bug.
In a recent discussion with Goldman Sachs (NYSE:GS) Managing Director Allison Nathan, Dalio discussed the current economic outlook and the problems facing investors. Specifically, he sees investors’ current risk exposure as a major red flag:
“I think investors today are mostly leveraged long, meaning they own risky assets and have substantially leveraged those assets through company buybacks, private equity, and so on. In order to diversify against this—i.e. reduce exposure to leveraged long portfolios—investors should look to other stores of wealth and areas that have intrinsic diversification.”
There is a lot of truth to this insight. Investors clearly are still leveraged heavily to the long side, while companies have been engaging in behavior that is effectively doing the same. As a consequence, investors have been exposed to highly levered position. That is a very risky place to be when the world seems to be spinning out of control.
But, if stocks are not the answer, where should investors be putting their capital to protect their assets?
Cash is not king
Many investors turn to cash as a hedge when things go south in capital markets. Dalio does not think this is a good idea, as he told Goldman’s Nathan:
“People seem to think that going to cash reduces risk. But that's only the case from a standard deviation perspective. When interest rates are negligible—below the inflation rate/nominal GDP growth—and you pay taxes on that, you're not getting any return. Cash over the long run is the worst performing asset class and therefore the riskiest asset class.”
This is a point Dalio has made many times in the past. Cash is, generally speaking, a poor hedge compared to other stores of value insofar as cash is not free of market forces, and is susceptible to the long-term predation of inflation. Inflation risk may even accelerate in a downturn if monetary policy is deployed with gusto, as has been the case in recent years.
Gold is golden
With cash out of the equation, Dalio suggests turning to a classic alternative: gold. That may sound a bit odd coming from a sophisticated macro strategist, a point Dalio freely admits in fact, but he makes a solid case:
“I know gold sounds like a kooky investment. But gold is just an alternative currency to fiat paper currencies. If your portfolio is likely to perform poorly in the adverse environment I’ve been describing—less effective monetary policy, the need to run larger fiscal deficits and monetize them, and challenging politics—the behavior of gold as alternative cash has some diversifying merit.”
Dalio is no full-blown gold lover by any stretch of the imagination, and rightly so. But, if the economic turmoil he foresees in the relative near-term does come to pass, the idea of having exposure to a physical currency alternative with decent long-term value storage is probably a solid idea.
Gold is an odd asset. Many people turn to it in bad times, which is why it is not terribly surprising that Dalio would be talking about its merits. However, it is certainly no panacea. On the surface, gold’s record during market downturns appears strong; it was up in eight of the 10 worst months for stocks in the past 30 years. But its average return during these periods was not terribly impressive.
During the two most recent downturns, however, gold did very well, as we discussed in a previous research note:
“Gold’s record during the past two bear markets was quite impressive, however. In the bear market of 2000 to 2003, gold rose 27.6% while stocks fell 42.5%. That looks like a real hedge after all. During the bear market following the 2008 financial crisis, stocks fell 51% while gold rose 18.6%.”
Clearly, gold has merit as a means of reducing portfolio risk and, if the past two bear markets are anything to go by, it should hold up very well in any forthcoming market shock. Investors worried about market turmoil in the near-term might do well to consider adding a bit of gold to their portfolios.
Trade war to drag on as Trump says long way to go and China strikes hard-line tone
PUBLISHED TUE, JUL 16 2019 9:36 AM EDT UPDATED TUE, JUL 16 2019 1:12 PM EDT By Yun Li
China suddenly added a new member to its negotiating team — the country’s commerce minister, Zhong Shan, who is seen as a hard-liner by many officials in Washington.
“The U.S. side has provoked economic and trade frictions against us and violated the principles of the WTO. It is typical of unilateralism and protectionism. ... We have to uphold our warrior spirit in firmly defending national and people’s interests in defending the multilateral trading system,” Zhong told the People’s Daily, the official newspaper of the Communist Party in China.
“Trade progress has been in reverse,” says Donald Straszheim, head of Evercore ISI’s China research team.
The U.S. and China have restarted their trade talks, but signs are showing a comprehensive deal could be a long way off, if it happens at all.
President Donald Trump said Tuesday that there’s still a long way to go to reach a deal with China, threatening to slap tariffs on another $325 billion of Chinese goods.
Meanwhile, China had suddenly added a new member to its negotiating team — the country’s commerce minister, Zhong Shan, who was present at last month’s G-20 summit and took part in a telephone conversation with U.S. representatives last week. Zhong is seen by many officials in Washington as a hard-liner, a sign Chinese leader Xi Jinping is standing firm, The Washington Post reported.
His recent remarks in the Chinese press indicated his tough stance in the trade war.
“The U.S. side has provoked economic and trade frictions against us and violated the principles of the WTO. It is typical of unilateralism and protectionism,” Zhong told the People’s Daily on Monday, according to a Google translation. “We have to uphold our warrior spirit in firmly defending national and people’s interests in defending the multilateral trading system.” The People’s Daily is the official newspaper of the Communist Party in China.
The new development dampened analysts and investors’ hope for a resolution as some see the progress “in reverse.”
“No face-to-face meetings have even been scheduled,” Donald Straszheim, head of Evercore ISI’s China research team, said in a note. “Trade progress has been in reverse. The two sides are further apart now than in Nov-Dec 2018.”
“A combination of substantial steps, partial actions and empty words which will be a relief but far from a final resolution of what has morphed from trade war to a ‘stop the China rise’ cold war,” Straszheim said.
The prolonged trade battle seems to be taking a toll on the Chinese economy. Data on Monday showed its economic growth slowed to 6.2% in the second quarter — the weakest rate in at least 27 years.
Trump claimed the slower growth is evidence that China is losing the trade war, saying in a Twitter post Monday that the U.S. tariffs were having “a major effect” and it’s why China wants a deal.
China’s side was quick to rebut Trump’s comment. Chinese Foreign Ministry spokesman Geng Shuang said China’s first-half pace was a “not bad performance” and was in line with expectations.
“As for United States’ so-called because China’s economy is slowing so China urgently hopes to reach an agreement with the U.S. side, this is totally misleading,” Geng told a daily news briefing Tuesday.
Gold Jumps After IMF Says Dollar Overvalued
Investing.com July 17, 2019 By Barani Krishnan
Investing.com – More than Jay Powell, the IMF seems to have the word of gold now on rate cuts.
Spot gold, reflective of trades in bullion, traded at $1,424.45 per ounce by 2:43 PM ET (18:43 GMT), up $13.25, or 0.9%, on the day.
Gold futures for August delivery, traded on the Comex division of the New York Mercantile Exchange, settled up $12.10, or 0.9%, at $1,423.30.
The IMF said the U.S. currency is overvalued by 6% to 12% based on near-term economic fundamentals. The dollar index, benchmarked against a basket of six currencies, fell 0.2% on that, boosting both bullion and gold futures, which are contrarian trades to the dollar.
A strong employment report released at the beginning of the month had appeared to rule out a 50-basis-point cut at the July 30-31 meeting.
But remarks last week by Powell have seen some hopes of quick and decisive action from the Fed return.
Even so, gold’s biggest decline this week occurred on Tuesday as a stronger-than-expected reading of U.S. retail sales suggested that the Fed may not hurry to ease cut interest rates.
While markets are currently pricing the odds of a quarter-point interest rate cut at 100% for the end of the month, San Francisco Fed President Mary Daly indicated late Tuesday that she still was still uncertain over whether it was the time to do so.
"At this point I'm not leaning one direction or another, but I am very much oriented toward looking at the data, watching the pieces come out, looking at the preponderance of evidence on mood and behavior and momentum and headwinds," she said in an interview with Reuters.
Daly’s colleague Charles Evans, chief of the Chicago Fed, however, argued that a half-point reduction could be warranted in order for the central bank to reach its inflation target.
“There is an argument that if I think it takes 50 basis points before the end of the year to get inflation up, then something right away would make that happen sooner,” he said.
Dallas Fed President Robert Kaplan, who had opposed a cut, recently shifted his stance, saying that he now thinks a "tactical" reduction of a quarter-point could address the risks seen by bond investors, who have pushed some long-term yields below shorter-term ones.
Fed funds futures now price in a 34.9% chance for a 50 basis point cut at the next meeting.
Expect a ‘10% correction in the next three months’, warns Morgan Stanley’s chief investment officer
MarketWatch July 19, 2019 By Barbara Kollmeyer
Too darned hot?
As much of the U.S. gets ready to face a heatwave, the appetite is just as sizzling for stocks after Fed Vice Chairman Richard Clarida and New York Fed President John Williams revved up market expectations about rate cuts. Despite some backpedaling on those comments, there’s still plenty of enthusiasm out there for equities.
Hold your horses, says our call of the day, from Mike Wilson, chief investment officer of Morgan Stanley, who tells MarketWatch in an interview that investors should wait for better times to jump into this stock market. And they are coming.
“We’re not looking for the bottom to fallout like last year, but I do expect a 10% correction in the next three months,” said Wilson, whose end-year S&P target is 2,750.
One reason is that earnings estimates are still 5% to 10% too high, a factor which will weigh on stocks in the next 6 months, he says. Once those estimates come down, stocks will look a lot more attractive.
There are other obstacles for equities, such as tough technical resistance at 3,000 for the S&P 500 and the hype surrounding an expected Fed cut that may turn it into a “sell the news” type of event.
“We think there’s still some unfinished business and it’s not going to be scary, but it will be a better opportunity to buy stocks over the next three to six months, and maybe 18 months. We tell people don’t chase break outs when everyone is getting excited,” said Wilson.
As for what they will buy when that moment comes, he’s looking around.
“There are a lot of stock markets out there that have not done that well in the last 18 months. We’re looking to buy some of those markets that have really underperformed, small-caps or the cyclicals, banks or energy or value, even Europe and Japan. That’s what we will be looking to buy more aggressively than the S&P 500,” he says.
One U.S. area he’s less keen on right now are growth stocks, which he sees as too crowded, along with defensive companies such as utilities and staples. Wilson expects a “rotation away from the high-growth stocks. If the economy improves next year as we expect, you won’t have to pay such a premium for growth.”