Morning All, 

US Tech Majors (AMZN,AAPL, FB,GOOG,TSLA) doing a good job of distorting index returns and fuelling speculation down to the market food chain. The market appears to be trading on momentum, detaching from fundamentals.

If markets have no real fix on what the fundamentals will look like in a years time, then trading momentum in this vacuum is perhaps understandable, as there is no data set to say you are right or wrong (yet). 

For now, equities remain the only game in town. Placements/cap raises that would have been brushed aside 12 months ago, due to size and skinny terms, are still being swamped. 

I repeat my fondness for Gold in the medium term despite the run higher (interest rates at zero, hard to keep counting the trillions printed in stimulus, geopolitical unease, increasingly hard to find and dig it up). I think it is set up nicely in the medium term, despite being vulnerable to some sort of give back, like everything else, in the short term.




Gold - Medium term set-up still looks bullish

Post GFC Gold entered a 4-year bull run and then started to taper off as the outlook for rates began to normalise. Fast forward 10 yrs, and the conditions for gold continuing the bull run are still largely in place.

The 3 key factors that drive the direction of the gold price are 1) real US yields; 2) Fed rate expectations; 3) the US $. 

-   Central Bank - printing - FED balance has almost doubled in 3 months. ECB announced US$857 billion yesterday alone. 
-   Interest rates - at 0-0.25 or negative - FED said they won't "think" about lifting rates until 2022. Australia at 0.25, Europe 0 / -ve. 
-   Geopolitical tensions rising. (China-US relations are at a low, outside the usual go-to suspects in the Middle East). 

The key risk to the bull case for gold is if the US Household comes through all this relatively unscathed (savings combined with government handouts) and they spend their way out. This could see a shift in inflation expectations, and have the FED pullback on stimulus expectations, both of which would be negative for gold.

Let's start with the US Central Bank Balance sheet.

Central Bank Balance Sheet expansion needs to be referenced against the expansion in the economy. So let's compare US GDP growth and the Central Bank Balance Sheet. Since 2007 the Balance sheet in the US has grown ~670%, vs GDP growth of ~48%, and that is if we assume GDP growth is at 2019 levels. (in the chart below CB balance sheet left axis, GDP right axis)
And US interest rates
Gold's Bull run post-GFC. (Note the current bull run in gold started in 2018 this time around, so perhaps more mature than some think)
And Gold vs the SP500 post GFC

US Tech - Amazon, Apple, Microsoft, Google - larger than the Japanese Mkt 

Performance has come from chasing Growth (PE expansion) with Defensive and Cyclicals going sideways. Keeps me up at night....

On Monday in the US when the markets rallied - Amazon was up a Boeing and Tesla was up a Ford (in terms of the jump in their market caps). Hard to rationalise and it's not normal.

Mania - we love it!

Each decade there is a new mania. I remember the AUS coal mania fondly... 

Not a lot of belt-tightening going on here

- "CBA card spending data shows spending is up 11.4% on a year ago, we're in the middle of a recession and we're spending a lot more than a year ago which seems very odd. Having not been in a recession for 30 years do we not know that you'd typically tighten our belts in one?"

To be fair the data would be impacted by the lack of foot traffic for cash sales. 

Reporting in the US for the reminder of the week

Insider selling ratchets up in the US. 

Not sure if this is seen as "smart" or "dumb" money these days given the distortions in performance. What would be interesting is to see the sectors it is coming from (ie Growth vs Defensive/Cyclicals)

The South China Sea - tensions escalate

Worth understanding the politics of the South China Sea.

 - "For the second time in two weeks, the U.S. deployed two aircraft carriers to the South China Sea, as Beijing and Washington accuse each other of stoking tensions in the region." Reuters

Click on the short video below to understand the background. 

Bees & Almonds (SHV - Select Harvest)

Bees are essential to orchards (fruit) and almonds for pollination of crops (to create the fruit and nuts. No bees = no fruit and nuts). Reason for caution? We have had the bushfires, which severely set back native bee populations through the loss of gumtrees. Reports suggest there were substantial commercial hive losses during the fires as well. With natural food low following the fires, bee hives can suffer additional losses over winter unless the bees are fed adequately. COVID may also make transportation of remaining hives into Victoria more difficult. 

The bulk of the Almond crop in Victoria requires bees to be brought into the orchards. There could be a shortage of hives/native bees this season. The major almond growers will contract the hives ahead of time, however, will the cost blow-out per hive and will they turn up when needed? (Select Harverst SHV is a top ten orchard by production, and in FY21 was forecast to be 2.0% of global supply). Bee availability is a key risk if they are not able to secure the necessary hives. 

To put the demand for hives in context - see the article below (2016 but still relevant)

Key month for the Almond bloom is in August.

Thomas Schoenmaker
Head of Wealth Management

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