January 21, 2020 • 16 mins
2020 is off to an eventful start for financial markets. What are the major trends that investors should be paying attention to? This episode gives a general overview of what's been going on in January and what to expect during the first quarter of the year.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
This is Breaking the Dollar.
(00:04):
The podcast that dismantles is some of the biggest misconceptions about money.
Presented by Gainesville Coins.
Hello and welcome back to Breaking the Dollar.
(00:26):
I'm your host, Everett Millman, and we will be doing another one of our brief market commentaries
for this week's episode.
We're already about a month into the new year, and so it's good timing to look at some of
the trends that are going on across the markets.
I'll begin with the stock markets because that is obviously the sector of the global financial
(00:50):
system and the economy that gets the most attention.
And so far this year, equities have done very well.
You could say that it has carried over a lot of the positive momentum from last year, and
there is kind of a sense in markets right now of a fear of missing out, otherwise known
as FOMO.
When it just seems like the stock market keeps going up and up, it's understandable that
(01:14):
investors and investment firms wouldn't want to miss out on those gains.
Now there's a few interesting things about the rise of the equity markets that I think
people should be paying a little bit more attention to.
One is the idea that valuations for the stock market or for individual stocks at that are
(01:35):
a little bit stretched right now.
What I mean by that is by historical averages, the prices of stocks are relatively high compared
to some of the underlying fundamentals.
Two main things that I've been looking at lately is price to earnings, P/E ratios.
Those are a popular metric to look at.
(01:56):
It certainly doesn't tell you everything, but it is interesting that stock prices are
so high and have continued to climb, even though the outlook for earnings is not rising.
They're not keeping pace with one another.
In fact, in the second and third quarter of 2019, earnings were in a slight contraction.
(02:20):
Some people have described this as an earnings recession.
And although we're supposed to get a rebound in the fourth quarter earnings that are about
to be reported, it really hasn't been an explosion of growth that would imply the need for stock
prices to be higher or to justify that.
And as I point some of these things out, keep in mind that this doesn't mean that the stock
(02:44):
market can't keep going up.
It certainly could.
It's all based off of people's confidence and perception.
But these are just some good points to keep in the back of your mind.
Another sign that equity valuations might be a bit overstretched is when you compare
them to the underlying economy.
(03:05):
But right now, the combined market capitalization or market cap for all stocks in the US is at
an all-time high in comparison to GDP.
Of course, GDP is not a perfect measurement for how the economy is doing, but it is one
of the most popular ones.
Tells you basically how much the economy is growing.
(03:27):
And so again, by this metric, stock prices are pretty high relative to how much the actual
economy is growing.
One final thing that is interesting to point out is that consumers and the average person
on Main Street is very confident in the US economy right now.
(03:48):
Sentiment is at or near its all-time highs, at least over the past 15 years.
However, the sentiment of executives, of CEOs and CFOs and other executives in corporate
America, is actually starting to follow a bit of a downtrend.
So we are seeing this widening gap or spread between what the average person on the street
(04:12):
expects from the economy and what the executives who run companies expect.
So yet again, that is not a determining factor that means the stock market is going to go
down, but it is kind of a worrisome sign.
Having prefaced with all that, looking around the broader markets, basically everything has
(04:34):
been going up.
We've seen volatility has been very low.
The VIX briefly dropped below 12, which is a very low reading for volatility.
And the biggest winners and gainers in the stock market have generally been tech stocks.
A lot of the hottest companies are what they call the mega cap stocks, the biggest of the
(04:55):
big. Recently Alphabet, which is actually the parent company of Google, but it's listed
as Alphabet, recently joined Apple and Microsoft as the only trillion dollar companies.
They have a market cap of over a trillion dollars.
But it is not just stocks; pretty much everywhere you look.
The US dollar has rebounded.
(05:18):
The bond market has seen a lot of demand and the cryptocurrency market has seen quite a
nice rebound to start the year.
The same has generally been true for the precious metals, gold, platinum, palladium, were all
up significantly year-to-date.
But following the reopening of US markets after the Martin Luther King holiday, there
(05:43):
has been a bit of a pullback from some of the highs.
But that is really the first time we've seen that so far in 2020.
As I said, volatility has been very, very low.
There has been some controversy in the financial news media about how some are only attributing
the gains for broader markets to the Federal Reserve stepping in with what is essentially
(06:09):
quantitative easing.
This is broadly speaking the use of stimulus measures and liquidity injections to keep
markets running smoothly.
But of course, the Fed says that it is not QE.
And although there's a lot of disagreement about whether or not it's the same thing,
because essentially the Fed has not been buying long-term bonds like it did with its actual
(06:35):
QE program.
It has been buying short-term Treasury bills.
So there is a distinction perhaps without a difference, but nonetheless, it's caused
a lot of disagreement.
What I find interesting is that it almost doesn't matter if it is actual QE.
That narrative is very strong right now, and markets seem to believe that.
(06:58):
So again, perception is really reality.
As long as it seems like the Fed is doing QE, and that's what market participants believe
to be going on, it has restored some confidence.
Two developments that I think are related to that that we need to pay attention to in
markets is that the United States Treasury has announced it is considering issuing 20-year
(07:22):
Treasuries for the first time.
This is in addition to 10-year and 30-year Treasuries.
Those are the two longest-dated bonds that the government currently offers.
So adding the 20-year option to the table does give some indication that the government is
seeking more sources of funding, more ways that it can be lent to.
(07:46):
The other bit of news in central bank land is that the Fed is also considering directly
lending money to hedge funds.
In terms of the debate about is the Fed doing QE or not doing QE, this is another example
that I think kind of makes that argument irrelevant in some sense.
(08:09):
No matter what's going on elsewhere in the economy, if the Fed is having to essentially
bail out big institutions like hedge funds by directly lending to them, which is an unusual
action, that is probably not a great sign.
That means that maybe something or some mechanism isn't going exactly right.
(08:31):
Personally, I would be concerned about that going forward.
But in the short term, again, it is just basically restoring confidence in markets.
Other than that, one of the big developments in global markets right now is the meeting
of the World Economic Forum in Davos, Switzerland.
(08:52):
This is essentially the annual gathering where all of the wealthiest interests in the world
meet to discuss the future of financial policy.
Something that's interestingly coming up at Davos has been whether or not central banks
should issue their own digital currencies.
Essentially, there are proposals for actual government entities to do something to rival
(09:18):
Bitcoin.
And what I find intriguing is that it is not just one player or participant that is beating
the drum about this.
The Bank of England has perhaps been the most vocal about it, but you also have the European
Central Bank, the Bank of Japan, and certainly the People's Bank of China are all interested
(09:39):
in talking about this topic.
So far, that's really the only conclusion that can be drawn is that there is more interest
in the idea of cryptocurrencies.
And I do think some government this year in 2020 will attempt to issue its own digital
currency.
The problem is that this would not be a decentralized solution.
(10:04):
It would be something very different than existing cryptocurrencies.
And it wouldn't come with many of the same benefits about being decentralized, peer-to-peer,
and censorship-resistant.
Instead, it would be basically the same as every fiat currency would be controlled by
some central national government.
(10:27):
In my view, that means it will unlikely be successful at these attempts.
But it is interesting that the big central banks and institutions are at least talking about
it.
It's also a bit fascinating that this topic is gaining steam at the same time as central
banks seem to be reaching for more stimulus, lower interest rates.
(10:49):
Even though the financials, the banking sector, has reported some of the highest earnings
on record in the past quarter.
I believe JP Morgan had the most profitable year that a bank has ever had last year.
That just fascinates me endlessly.
Not to say if there's anything wrong with them making record profits.
(11:11):
I guess that is bullish.
But it seems to contradict a lot of these other developments that are going on.
In some international economic news that we'll just wrap up with here, of course, we had
last week the signing or finalization of phase one of the trade deal between the US and China.
This definitely improved market sentiment.
(11:33):
But on paper, it just moves us back to square one.
It really is just a ceasefire in the trade war that didn't change anything other than
rolling back some of the escalation we saw in 2019.
It certainly doesn't mean the trade war is over and there is a reason they are breaking
(11:55):
this up in two phases because they do not have a comprehensive deal on the table yet.
Interestingly enough, in other trade news, the USMCA, which is the replacement for NAFTA,
the trade agreement between Canada, the United States and Mexico, has quickly moved through
(12:16):
Congress and is expected to be approved.
To me, that is somewhat ironic, given all of the dysfunction and political infighting
in Washington right now, that they could agree on something.
They got one thing done.
And of course, it is the one policy that has to do with globalization and free trade.
It is expected to be very good for the corporate sector and multinationals, perhaps less so
(12:43):
for the actual industrial and manufacturing sector of the United States.
So we will have to see how that plays out.
That does it for this week's overview on what has been going on in markets.
Now is a good time to look at our question from the listeners.
This week's question comes from an anonymous listener and they ask, what do you expect
(13:09):
for the gold price in the first quarter?
It's a good kind of timely question.
In a somewhat similar manner to the stock markets, you could make the argument that the
gold price is rather high right now.
There have been some really big gains from the end of last year and we did see gold
(13:32):
poke above $1,600 an ounce very briefly in January.
So that is definitely near its highest in seven years.
But the main factor that I think is going to cause a pullback for the gold price, at
least in the near term for maybe the next month or so, are some possible disruptions
(13:53):
to gold demand in China.
We are right around and approaching the Chinese Lunar New Year.
This is always one of the hottest times to buy gold throughout the year in China.
That's what you would call a strong seasonal event for the gold price.
Virtually every year this drives gold higher.
(14:16):
However, one thing that may hold back Chinese gold demand this year for the Lunar New Year
is the spread of this unexpected coronavirus that has been all over the news.
Because this virus is spreading quickly, it may have a depressing effect on how much consumers
want to go out and shop, and that includes shopping for gold.
(14:40):
As I often bring up on this show, psychology and the confidence of people in the markets
has such a big effect on what actually goes on with the economy.
So I think for at least a few weeks, maybe even more than a month until this virus situation
is somewhat cleared up.
But that is going to have a real effect on people's behavior and what drives the gold
(15:05):
market.
I want to of course thank everybody out there for listening.
We appreciate all the questions from listeners.
Really excellent stuff.
We hope you're enjoying the show.
Be sure to check out next week's episode where I'll be giving my own overview of what
is going on with the platinum group medals lately.
(15:26):
Some really crazy price action with those, so be sure to check that out.
This is Breaking the Dollar.
(00:04):
The podcast that dismantles is some of the biggest misconceptions about money.
Presented by Gainesville Coins.
Hello and welcome back to Breaking the Dollar.
(00:26):
I'm your host, Everett Millman, and we will be doing another one of our brief market commentaries
for this week's episode.
We're already about a month into the new year, and so it's good timing to look at some of
the trends that are going on across the markets.
I'll begin with the stock markets because that is obviously the sector of the global financial
(00:50):
system and the economy that gets the most attention.
And so far this year, equities have done very well.
You could say that it has carried over a lot of the positive momentum from last year, and
there is kind of a sense in markets right now of a fear of missing out, otherwise known
as FOMO.
When it just seems like the stock market keeps going up and up, it's understandable that
(01:14):
investors and investment firms wouldn't want to miss out on those gains.
Now there's a few interesting things about the rise of the equity markets that I think
people should be paying a little bit more attention to.
One is the idea that valuations for the stock market or for individual stocks at that are
(01:35):
a little bit stretched right now.
What I mean by that is by historical averages, the prices of stocks are relatively high compared
to some of the underlying fundamentals.
Two main things that I've been looking at lately is price to earnings, P/E ratios.
Those are a popular metric to look at.
(01:56):
It certainly doesn't tell you everything, but it is interesting that stock prices are
so high and have continued to climb, even though the outlook for earnings is not rising.
They're not keeping pace with one another.
In fact, in the second and third quarter of 2019, earnings were in a slight contraction.
(02:20):
Some people have described this as an earnings recession.
And although we're supposed to get a rebound in the fourth quarter earnings that are about
to be reported, it really hasn't been an explosion of growth that would imply the need for stock
prices to be higher or to justify that.
And as I point some of these things out, keep in mind that this doesn't mean that the stock
(02:44):
market can't keep going up.
It certainly could.
It's all based off of people's confidence and perception.
But these are just some good points to keep in the back of your mind.
Another sign that equity valuations might be a bit overstretched is when you compare
them to the underlying economy.
(03:05):
But right now, the combined market capitalization or market cap for all stocks in the US is at
an all-time high in comparison to GDP.
Of course, GDP is not a perfect measurement for how the economy is doing, but it is one
of the most popular ones.
Tells you basically how much the economy is growing.
(03:27):
And so again, by this metric, stock prices are pretty high relative to how much the actual
economy is growing.
One final thing that is interesting to point out is that consumers and the average person
on Main Street is very confident in the US economy right now.
(03:48):
Sentiment is at or near its all-time highs, at least over the past 15 years.
However, the sentiment of executives, of CEOs and CFOs and other executives in corporate
America, is actually starting to follow a bit of a downtrend.
So we are seeing this widening gap or spread between what the average person on the street
(04:12):
expects from the economy and what the executives who run companies expect.
So yet again, that is not a determining factor that means the stock market is going to go
down, but it is kind of a worrisome sign.
Having prefaced with all that, looking around the broader markets, basically everything has
(04:34):
been going up.
We've seen volatility has been very low.
The VIX briefly dropped below 12, which is a very low reading for volatility.
And the biggest winners and gainers in the stock market have generally been tech stocks.
A lot of the hottest companies are what they call the mega cap stocks, the biggest of the
(04:55):
big. Recently Alphabet, which is actually the parent company of Google, but it's listed
as Alphabet, recently joined Apple and Microsoft as the only trillion dollar companies.
They have a market cap of over a trillion dollars.
But it is not just stocks; pretty much everywhere you look.
The US dollar has rebounded.
(05:18):
The bond market has seen a lot of demand and the cryptocurrency market has seen quite a
nice rebound to start the year.
The same has generally been true for the precious metals, gold, platinum, palladium, were all
up significantly year-to-date.
But following the reopening of US markets after the Martin Luther King holiday, there
(05:43):
has been a bit of a pullback from some of the highs.
But that is really the first time we've seen that so far in 2020.
As I said, volatility has been very, very low.
There has been some controversy in the financial news media about how some are only attributing
the gains for broader markets to the Federal Reserve stepping in with what is essentially
(06:09):
quantitative easing.
This is broadly speaking the use of stimulus measures and liquidity injections to keep
markets running smoothly.
But of course, the Fed says that it is not QE.
And although there's a lot of disagreement about whether or not it's the same thing,
because essentially the Fed has not been buying long-term bonds like it did with its actual
(06:35):
QE program.
It has been buying short-term Treasury bills.
So there is a distinction perhaps without a difference, but nonetheless, it's caused
a lot of disagreement.
What I find interesting is that it almost doesn't matter if it is actual QE.
That narrative is very strong right now, and markets seem to believe that.
(06:58):
So again, perception is really reality.
As long as it seems like the Fed is doing QE, and that's what market participants believe
to be going on, it has restored some confidence.
Two developments that I think are related to that that we need to pay attention to in
markets is that the United States Treasury has announced it is considering issuing 20-year
(07:22):
Treasuries for the first time.
This is in addition to 10-year and 30-year Treasuries.
Those are the two longest-dated bonds that the government currently offers.
So adding the 20-year option to the table does give some indication that the government is
seeking more sources of funding, more ways that it can be lent to.
(07:46):
The other bit of news in central bank land is that the Fed is also considering directly
lending money to hedge funds.
In terms of the debate about is the Fed doing QE or not doing QE, this is another example
that I think kind of makes that argument irrelevant in some sense.
(08:09):
No matter what's going on elsewhere in the economy, if the Fed is having to essentially
bail out big institutions like hedge funds by directly lending to them, which is an unusual
action, that is probably not a great sign.
That means that maybe something or some mechanism isn't going exactly right.
(08:31):
Personally, I would be concerned about that going forward.
But in the short term, again, it is just basically restoring confidence in markets.
Other than that, one of the big developments in global markets right now is the meeting
of the World Economic Forum in Davos, Switzerland.
(08:52):
This is essentially the annual gathering where all of the wealthiest interests in the world
meet to discuss the future of financial policy.
Something that's interestingly coming up at Davos has been whether or not central banks
should issue their own digital currencies.
Essentially, there are proposals for actual government entities to do something to rival
(09:18):
Bitcoin.
And what I find intriguing is that it is not just one player or participant that is beating
the drum about this.
The Bank of England has perhaps been the most vocal about it, but you also have the European
Central Bank, the Bank of Japan, and certainly the People's Bank of China are all interested
(09:39):
in talking about this topic.
So far, that's really the only conclusion that can be drawn is that there is more interest
in the idea of cryptocurrencies.
And I do think some government this year in 2020 will attempt to issue its own digital
currency.
The problem is that this would not be a decentralized solution.
(10:04):
It would be something very different than existing cryptocurrencies.
And it wouldn't come with many of the same benefits about being decentralized, peer-to-peer,
and censorship-resistant.
Instead, it would be basically the same as every fiat currency would be controlled by
some central national government.
(10:27):
In my view, that means it will unlikely be successful at these attempts.
But it is interesting that the big central banks and institutions are at least talking about
it.
It's also a bit fascinating that this topic is gaining steam at the same time as central
banks seem to be reaching for more stimulus, lower interest rates.
(10:49):
Even though the financials, the banking sector, has reported some of the highest earnings
on record in the past quarter.
I believe JP Morgan had the most profitable year that a bank has ever had last year.
That just fascinates me endlessly.
Not to say if there's anything wrong with them making record profits.
(11:11):
I guess that is bullish.
But it seems to contradict a lot of these other developments that are going on.
In some international economic news that we'll just wrap up with here, of course, we had
last week the signing or finalization of phase one of the trade deal between the US and China.
This definitely improved market sentiment.
(11:33):
But on paper, it just moves us back to square one.
It really is just a ceasefire in the trade war that didn't change anything other than
rolling back some of the escalation we saw in 2019.
It certainly doesn't mean the trade war is over and there is a reason they are breaking
(11:55):
this up in two phases because they do not have a comprehensive deal on the table yet.
Interestingly enough, in other trade news, the USMCA, which is the replacement for NAFTA,
the trade agreement between Canada, the United States and Mexico, has quickly moved through
(12:16):
Congress and is expected to be approved.
To me, that is somewhat ironic, given all of the dysfunction and political infighting
in Washington right now, that they could agree on something.
They got one thing done.
And of course, it is the one policy that has to do with globalization and free trade.
It is expected to be very good for the corporate sector and multinationals, perhaps less so
(12:43):
for the actual industrial and manufacturing sector of the United States.
So we will have to see how that plays out.
That does it for this week's overview on what has been going on in markets.
Now is a good time to look at our question from the listeners.
This week's question comes from an anonymous listener and they ask, what do you expect
(13:09):
for the gold price in the first quarter?
It's a good kind of timely question.
In a somewhat similar manner to the stock markets, you could make the argument that the
gold price is rather high right now.
There have been some really big gains from the end of last year and we did see gold
(13:32):
poke above $1,600 an ounce very briefly in January.
So that is definitely near its highest in seven years.
But the main factor that I think is going to cause a pullback for the gold price, at
least in the near term for maybe the next month or so, are some possible disruptions
(13:53):
to gold demand in China.
We are right around and approaching the Chinese Lunar New Year.
This is always one of the hottest times to buy gold throughout the year in China.
That's what you would call a strong seasonal event for the gold price.
Virtually every year this drives gold higher.
(14:16):
However, one thing that may hold back Chinese gold demand this year for the Lunar New Year
is the spread of this unexpected coronavirus that has been all over the news.
Because this virus is spreading quickly, it may have a depressing effect on how much consumers
want to go out and shop, and that includes shopping for gold.
(14:40):
As I often bring up on this show, psychology and the confidence of people in the markets
has such a big effect on what actually goes on with the economy.
So I think for at least a few weeks, maybe even more than a month until this virus situation
is somewhat cleared up.
But that is going to have a real effect on people's behavior and what drives the gold
(15:05):
market.
I want to of course thank everybody out there for listening.
We appreciate all the questions from listeners.
Really excellent stuff.
We hope you're enjoying the show.
Be sure to check out next week's episode where I'll be giving my own overview of what
is going on with the platinum group medals lately.
(15:26):
Some really crazy price action with those, so be sure to check that out.
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