While US equity futures have gone nowhere overnight, which is surprising considering (the incorrect) interpretation that by boosting overall liquidity through expanded collateral China has finally unleashed shadow QE (more on this later), which led to a rally for Chinese stocks if not US risk, one asset class that has been quietly levitating higher overnight is gold. Perhaps a lot of this is due to the realization that while the PBOC may not have launched QE now, it has no choice but to do so eventually.
Or perhaps the real realization is what Macquarie said over the weekend when it laid out quite correctly what the next big policy step will be after the current QE craze fizzles. This is what we said on Saturday:
To summarize what Australia's biggest investment bank just said, in a nutshell, "small and incremental is out", and will be replaced by big and "paradroppy", a step which as Macquarie succinctly puts it, will "ban capitalism and by-pass banking and capital markets altogether."
Crazy? Not at all: since the status quo will be fighting for its life, this step is all too likely if it means perpetuating a broken system, and an economic orders based on textbook after textbook of lies. In fact, we would go further and say war (of the global variety) is also inevitable, as the global "1%" loses control. It won't go quietly.
Finally, we most certainly agree that the catalyst to unleash the "endgame" cycle will be some "combination of a major accident in several asset classes and/or sharp global slowdown." But long before that even, keep an eye on gold: having provided a tremendous buying opportunity for the past 4 years because for some idiotic reason "conventional wisdom" decided that central banks are in control, have credibility and can fix a problem they created and make worse with each passing day, soon the global monetary debasement genie will be out of the bottle, and not even the entire BIS trading floor will be able to suppress the price of paper (as physical gold has not only decoupled from paper prices but long since departed on a one-way trip to China) for much longer.
Keeping an eye on gold this morning confirms just this:
Then last night, none other than BofA's Michael Hartnett who is one of the very few strategists out there who "gets it", issued a report warning investors to "anticipate a massive policy shift in 2016" which would be a DM/EM mirror image: in the US/EU/Japan from QE to fiscal stimulus and in China from fiscal stimulus to QE & FX depreciation. In other words, the last big reflation push is almost upon us.
His key thoughts:
Neither deflation nor inequality has hindered the bull market on Wall Street in recent years. On the contrary, QE policies to end deflation & spark employment have been very beneficial to asset prices. But now:
- The perception of unfair globalization, gilded elites & inauthentic politicians is leading to a rise in both populist politicians (Trump, Sanders, Corbyn) and parties (SNP, Syriza, Podemos, National Front) and…
- …calls for the Fed to raise rates to boost the elderly’s return from saving are becoming louder…
- …and the fragile improvement on Main Street is threatened by a stalled global economy in 2015.
- If the secular reality of deflation & inequality is intensified by recession & rising unemployment, investors should expect a massive policy shift in 2016. Seven years after the west went “all-in” on QE & ZIRP, the US/Japan/Europe would shift toward fiscal stimulus via government spending on infrastructure or more aggressive income redistribution. And seven years after China went “all-in” on fiscal stimulus, a shift toward QE/rates/FX to support activity would be likely in the east.
And finally, getting to the point of this post, this is how Hartnett says investors should trade this "massive policy shift":
- …buy TIPs, gold, commodities, Main Street not Wall Street, China small cap
- This new policy mix (which would be in response to recession & Quantitative Failure) would be most positive for TIPS/gold/commodities, for Main Street rather than Wall Street plays (e.g. mass retailers versus luxury), and for Chinese small cap. These are the assets bears should accumulate if markets head to new lows.
- A trough in inflation expectations (Chart 7)...positive for Gold, TIPS & real estate
- Income redistribution…buy Main Street, sell Wall Street, long KRX, short XBD
So short Wall Street, buy gold. If accurate this could be the biggest policy shift since the artificial price controls were imposed on gold by the BIS trading desk in September 2011 when the SNB unleashed its now failed currency peg, just hours after gold hit its all time nominal high just shy of $2000.
Finally, if China is indeed set to reflate at all costs, watch as a few hundred million Chinese drop their infatuation with the housing and stock bubbles, and go back to the one asset class that throughout history has been the best defense for currency devaluation and runaway inflation.