We are in danger of charts overkill in today’s blog, but I can’t help but pull up some observations and charts which I think are compelling. The first gaggle come from the latest edition of the SG Practical Quant Investor last week. Looking to the short to medium term, the report looks at research in the healthcare industry about the pandemic revealing that “two-thirds of the respondents of these 184 C-level health care executives expect the pandemic to continue into the second half of 2021 or beyond.” The first chart below maps out these views. I have seen similar charts from a range of experts including successful super forecasters as well as hospital doctors. All seem to carry the same message. We possibly/probably have at least another 12 more months of viral mayhem ahead of us.
The next chart from SG tries to place the pandemic and the extreme economic damage that results from it within a wider historical context, comparing stock market outcomes with recent wars. The overall message is that the bounce back seems most pronounced at the roughly 24 months stage, But the chart also reminds us that markets can then drift lower again. And here on e example stands out – the ‘forgotten’ depression of 1920-21. The SG analysts report that the “ post-pandemic 1920-21 depression was as severe a calamity to the American economy as the Great Depression of the 1930s, with a deeper recession in a shorter timespan. It was a massive deflationary descent with unemployment skyrocketing to an estimated 8.7% to 11.7% percent and real GDP contracting by 7%. It recorded the largest one-year decline in price levels (-18%), while destroying about a quarter of the nation’s output in nominal terms.” Stock markets swooned in the wake of this economic reversal. Be warned. The next wave of economic disruption could be even worse than what we’ve seen so far.
The dollar weakens
Moving back to a short time frame, we’ve finally seen what many of us have been expecting for some time – dollar weakening. John Authers has a nice piece about this in his column this morning, reminding us that most of the weakening has been in a few currencies, principally the Euro. You can read the excellent column here – https://www.bloomberg.com/opinion/articles/2020-08-03/dollar-weakness-ending-raises-risk-of-emerging-market-crisis?sref=YsjYbPpy
Charles Ekins, of Ekins Guinness picks up on this analysis. Charles spends a fair bit of his time working out smart asset allocation strategies built around an analysis which combines technical and fundamental analysis. He’s currently still bullish on Euro strengthening, arguing that most of the key technical measures are still flashing buy for the Euro Dollar trade.
He also observes that “ the appreciation in the EUR (depreciation of the USD) has not yet moved into overbought territory. The 20 day Relative Strength Indicator is elevated at 71.4 but is not yet flashing warning signs.”
Also the deviation from trend measure of 0.35 is far below warning levels.
One way this weakening in the dollar has expressed itself is in a stronger gold price, as a weak USD will typically raise the USD price of Gold. Gold prices have risen sharply since the start of 2019 and according to Ekins, his models have been, and are still, long, even though he concedes that gold is somewhat extended.
Finishing with gold I also pulled out these useful observations from the most recent report by the World Gold Council last week.
Clearly gold and gold equities have been a roll – the US dollar gold price gained 17% in H1, following a 10% increase during Q2 – but there are also some increasingly obvious warning signs emerging. Top of the list has to be physical gold markets: bar and coin investment declined sharply in Q2 driven by Asian weakness and leading to a 17% decline to 397t in H1. With global markets in lockdown and consumers deterred by high gold prices and a squeeze on disposable income, the World Gold Council reported that jewellery demand fell by 46% to 572t and gold used in technology dropped 13% to 140t in H1.
Investment in gold coins and small bars also slowed sharply in H1 2020, down by 17% to 397t – the lowest since H1 2009. H1 jewellery demand halved to 572t while Central banks bought 233t of gold during H1, 39% below 2019’s record level. Buying has become more concentrated, with fewer banks adding to reserves so far in 2020.That said some of these bearish signals coming from the physical markets were offset by the that Gold supply was impacted by the pandemic: total H1 supply declined 6% to 2,192t as both mine production and recycling were affected by lockdown restrictions.