In a world where a drop in US treasury rates to record lows and growing probabilities surrounding even more “unconventional” monetary gymnastics in Japan – rumored to be toying with “Helicopter money” – we find an “insatiable appetite for yield.” In this world the US dollar price trend may be on the verge of flagging, a report from Jefferies noted, citing a flattening yield curve and lowered expectations for significant rate hikes.
Is advocation of bitcoin a sign of questioning fiat currency?
In a world that has seemingly been turned upside down on several levels, the July 18 note from Jefferies takes a rather bomb-shelter like tone when, in the middle of a report on “The Risk-free Rate Rally (II),” a quote advocating Bitcoin as a solution to modern currency appears. The quote is firmly inserted just before discussion of QE rate cuts in South Korea and Taiwan and just after discussion of emerging market rate cuts in Brazli and Russia. A world awash in quantitative gymnastics brings this thought:
At its core, bitcoin is a smart currency designed by very forward-thinking engineers. It eliminates the need for banks, gets rid of credit card fees, currency exchange fees, money transfer fees, and reduces the need for lawyers in transitions… all good things, Peter Diamandis.
The fact checking on these statements is another question. But Jefferies analysts Sean Darby, Chief Global Equity Strategies, Kenneth Chan, Quantitative Strategist, and Irene Zhou, all out of the Hong Kong office, note the unusual circus that is world economics. What at one point in history might be considered economic oddities — rates in the US rise in December but the long end of the curve falls by a multiple of 4 — and sprinkle of few investment ideas, and you have Monday’s note from Jefferies.
For instance, the trio of Darby, Chan and Zhou observe the dichotomy that from the point the Fed raised rates by a scant 25 basis points in December, long duration interest rates have actually dropped by 400% more. Typically, if one were to think that rising short term rates would hold into the future and portend a rate rise across the yield curve, long rates would be expected to rise, not fall.
But for Jefferies the key investment take-way is in the correlation with Asia and the emerging markets. “While the majority of Asia and EM have improving current accounts and high real rates,” the report advised, “These markets should be overweighted.”
It doesn’t appear as significant that China could be argued to be taking real interest rates negative while Japan considers Helicopter money. What matters, according to the report, is the relative value spread between the US monetary conditions and Asia and the emerging markets.
Brazil, South Africa and Russia have faced their challenges and won
With a commodity cycle near its end point, Brazil, South Africa and Russia are faced with a dichotomy that Jefferies identifies. Staring a double recession in the face, commodity prices dropping amid domestic demand shrinking, the central banks were the black sheep and actually raised rates. This was not only done to fight inflation, the report noted, but also to also dissuade their native currencies from falling in value due to capital flight. “It would seem for now that the inflation battle has been won,” Jefferies stated in the report, bullish on all three regions.
Looking at the kaleidoscope that is the Jefferies Global Asset Allocation heat map, analysts are mostly bullish in South America, particularly Brazil, while modestly bearish in Mexico and bullish the US and Canada. Looking at European relative value plays, they are “modestly bearish” in the UK but outright Bullish Germany, the heart of the European Union, and are bullish Denmark and even Italy with a looming bank crisis. In the Eurozone, even if just barely, Jefferies also likes Greece but is only modestly bullish on France and Ireland.
Looking at countries in the general Trans Pacific Partnership trade pact region, Jefferies is bullish on Vietnam, Philippines, New Zeland, but bearish on Malaysia and modestly bearish on Japan. Separately Israel, a democratic island amid world turmoil, receives a bullish ranking.