ASSET CLASSES IN 2020

In continuation to my article in January 2019; there was flattish to upward bias

performance of major Asset classes in 2019, I would like to restate that there will be good
returns in asset classes like precious metals, base metals and stock market in coming few
months; the performance of each asset classes will be directly linked to the money supply
by the sovereign nations. Stock markets should give handsome returns in the year 2020.
Gold shall lead the rally, followed by silver, base metals, crude oil and agricultural
commodities. US Dollar (USD) Index is rising/ appreciating since April’18 and Gold
started its upward rally since 1st June’19 where both are behaving like reserve currency or
safe haven. After a long gap since 2011, Gold gave a positive return on annual basis.
Major Stock Markets in the world gave positive returns in the year 2019. Hard and soft
commodities are strongly correlated to money supply by way of money printing/
supplying or Quantitative easing (QE) and Quantitative tightening (QT) so would be their
performance, where huge liquidity leads to increase in prices of commodities and vice
versa. During the end of 3rd quarter, major powerful nations in the world resorted to QE
or increase in money supply like EU, China and followed by US in 4th quarter. The repo
rate climbed from 1.8% to 10% over weekend as on 16th of September 2019, US Fed
increased supply of US Dollar by nearly USD 300 billion since then in the span of one
week. USD Index performed well till end of September where it touched at 99.50 and
fallen to 97 during the end of 2019. USD Index should break the level of 87 before it
could stabilize and at the same time Gold and other precious metals should start an
upward rally to reach historic high in coming years.

The repo market is a system used by banks to get very short term financing at the rate
fixed by US Fed Reserve. They sell securities they hold in repurchase agreements (repo).
For example, they pledge US Treasury bonds in repo overnight, to serve as collateral for
the loan they are making and they buy them back on the following day or in few days. In
exchange for these securities, they get cash at a rate of interest close or equal to the policy
interest rate fixed by US Fed. But in the month of September these repo rates shot up to
10% or 5 five times the rate fixed by US Fed Reserve. That is how US Fed started
intervening the repo markets by injecting billions of USD. Initially the period of offering
the funds started with 1 day then increased the period to 14 days, until last information
shows that the period is gone up to 42 days, maturing in January 2020. It means the QE4
program is set to arrive soon but not admitted by US Fed Reserve because the period of
offering funds would eventually increase to more than a year and may be more to
officially call it a QE program. In the month of January 2020, USD 500 billion is ready to
be injected into financial system as per the repo operation schedule. This shows the
repetition of money injecting into financial system of shorter cycle and the time will
come when it has to end to start longer cycle, which can be called as QE4. US Fed
indicated last year that Quantitative tightening of money supply is on auto pilot mode
which means there was no firm direction on the decision and it had also started increasing
the interest rates gradually to 2.25 – 2.50% per annum but turned its hawkish stance by
softening interest rates from the meeting of 31st July 2019. There are three occasions
when US Fed had cut the interest rates since July 2019 to 1.50 – 1.75%. The tone of US
Fed is dovish where they will not increase the interest rates in the year 2020, in other
words the rates will not change, but there is always a possibility of interest rates may go
down.

While the US Fed provides huge injection of liquidity to the banks by buying the bonds
from them which the banks bought from the US Treasury or private companies. Banks
use this liquidity to buy bonds to cash on arbitrage opportunity in interest rate differential
or other structured products of various kinds and shares, whereas in reality banks are
diverting from the prime business of lending money. Small percentage of this liquidity is
going to economic productivity. Corporations are buying back their own stocks by
borrowing cheap money and valuations of loss-making technology or ecommerce stocks
are getting overvalued because of easy money. In short, the money is rotating around in a
vicious circle. This will result into speculative bubble in the bond market and in the stock
market. USA, Europe and Japan are involved in the same type of activity also known as
Modern Monetary Theory “MMT”, increase money supply to solve money crunch. India
and China are the new entrants since a decade, also involving in same type of activity.
USA is forced to follow Europe and Japan as higher interest rates make US Dollar strong
which is not good for its trade imbalance and also being international reserve currency.
China is creditor nation in terms of USD and most of the debt is in its domestic currency
known as Yuan or Renminbi (RMB), which is manageable to an extent. China’s national
Debt/ GDP is 50% (approximately) and is 300% (according to the Institute of
International Finance) adding household, corporate and national debt. China is a trader
who lends money (by buying US Treasury) to USA to sell its own products where
China’s trade surplus is again invested in US Treasury, which is a win-win situation.
President of USA, Donald Trump who is also a businessman realized the foolishness of
US policies in case of China, eventually started a trade war. Such a long term policy
shouldn’t have been reversed in such a short period with Trade War but structurally
change it by inflation in USA through a gradual weakness in US Dollar currency over a
period of time. USA being the great nation which taught the world, the real meaning of
Capitalism with freer economy. Socialism is a threat to Capitalism if the problem persists
for longer period of time, so it is important to have a short term pain to declare financial
emergency and to solve the debt problem at the earliest. Capitalism will have a short term
jolt which augurs well for the time to come.

USA waging a Trade War against China and other countries, is itself an example that the
top politicians and bureaucrats realize the real problem is within USA of debt servicing
and trade deficit. Immediate solution is required to service debt, so Trade War is one of
the ways to do it, which shall also have a collateral damage effect on the world economy
because it is the fight of the titans. Double whammy of fiscal and trade deficit would lead
to depreciation of USD. Currently, USD is appreciating because of higher interest rates
and performing stock markets. It shall be short lived. China was holding US Treasury
worth USD 1.25 trillion till last year which has come down to USD 1.12 trillion. What if
China decides like Russia to completely exit US Treasury holdings? Then the only option
would be to create more money in US Dollar. It would lead to hyperinflation. China owns
more U.S. government debt than any other foreign country and reducing those holdings
would be only in the case of worsening trade negotiations. It is a financial nuclear bomb
in the hands of China.
There is inherit weakness in the US economy by the way of increasing debt level at
approximately USD 22 trillion and its fiscal deficit of USD 1.25 trillion per annum which
is on its way. As predicted in the last article that there is possibility of Quantitative
Easing during the year 2019 and dovish stance by US Fed Reserve where it may stop
increasing interest rates, already happened that interest rates are reduced and without
naming QE, money supply was increased during mid of September onwards. Repo rate
shot up to 10% as on 16th/ 17th September due to cash crunch in the overnight borrowing
market. Every month dose of USD 120 billion is required to stabilize financial markets in
USA where it could not be ascertained that the money would flow whether inside USA or
to other nations. European Union (EU) banks are most likely to benefit from QE program
as Swiss, German or French banks are present in USA with big exposure as well as in
Europe. USA, Japan or EU are in the same basket of huge debt piled up and very low to
negative interest rates. EU started its QE program from 1st November as announced on
12th September ECB meeting to buy bonds worth Euro 20 billion per month. How the
money will flow to find a stable point is difficult to ascertain which depends on the level
of exposure by the banks in USA and EU? US Dollar will suffer only when interest rates
would be close to EU level of negative interest rates or even 0.75 to 1% p.a. because this
is the time when money will flow out of USA and find its way to EU and Asian
countries. Definitely positive news for precious metals and commodities. China
periodically is interfering in its financial market to induce money for stabilizing the
economy and India reduced Corporate Tax along with open market operations to
maintain the growth in domestic economy. All are making same mistakes which is a
proven track record by Japan in the past 3 decades that is negative to zero interest rate
with huge liquidity will not yield any positive long term results. It produced no results for
Japan, so will not for the other nations.

Problem still persists and it is not yet addressed that how the governments of developed
nations would reduce the huge debt, so the turmoil in future is obvious, hence rally in
precious metals and commodities. Inflation is the only way out where inflating prices of
commodities in the economy shall increase the revenue for the nation to service debt and
reduce current account deficit in some cases. Huge debt is piled up since 1998 to spur
growth artificially. Increasing money supply and keeping interest rates artificially low,
created the problem over 2 decades by following the Modern Monetary Theory (MMT).
Some nations will have a problem of hyperinflation as it was witnessed in 2007 as they
are dependent nations, depending on nations mining natural resources like crude oil, iron
ore, bauxite etc. Global debt level is highest ever and it could be anywhere above USD
250 trillion while the same funds are available at cheapest interest rates. Stock markets in
USA, Brazil and India are hitting new highs as well as other major stock markets in
Europe and else-where in the world are near their record highs with annual return of more
than 20%. Actual economic data is not good around the globe and all sorts of media are
projecting gloomy scenario, while the stock markets are performing well. What does it
mean? Markets know some kind of information which is not available in public domain.
Once John Templeton said that “Bull markets are born on pessimism, grow on
skepticism, mature on optimism and die on euphoria”. Many high networth investors are
sitting on cash including Warren Buffet. Markets are not waiting for the outcome of US-
China Trade war as the momentum for stock markets are boosted by QE program which
is on its way in USA. Momentum is going to increase in near future after witnessing the
velocity of money has already been slowed down, and eventual big bull market would
drag the pessimists into the market. Volatility in stock markets would drag small
investors at the fag end of rally. Only truth is that stock markets are hitting all time high
in anticipation to huge monetary injection into financial system by US Fed. The other
obvious thing is weaker hands should be holding stocks in their portfolio before the bull
run comes to an end.

Higher commodity prices and inflation in the economy generally augur well for fewer
countries like India, China and Brazil because government gets increased revenue by way
of indirect taxes. The other part of the economy is not matured enough to offset the lower
or falling commodity prices so the economy is affected badly when commodity prices go
down. India produces and mines almost every commodity except small amount of crude
oil which had been always a problem for the country. The performance of Indian stock
markets had always been good when the prices of commodities go up. The increased
revenue is spent on capital expenditure by the government, which in turn increase money
supply in the economy. It also brings disparity in rich and poor. It is acceptable
phenomenon in the emerging economies with injustice to poor citizens. BRICS (Brazil,
Russia, India, China and South Africa) nations are going to outperform the western stock
markets in coming years due to inflationary environment and better sovereign debt
management by some nations. India’s GDP crashed from 8% to 4.5% in span of 5
quarters where velocity of money is slow with stock market hitting all time historical
high.

The dominance of USD is under threat as BRICS nations are looking for international
alternative reserve currency may be backed by their respective currencies and Gold. It
may be in the form of crypto currency where China and Russia are already working
towards it and trials have started. Iran is also one country which is suffering from US
sanctions, want to be part of currency arrangement with India, Russia and China, backed
by Gold. A statement by President of German Bundesbank that gold should be used for
stability of international monetary system and further added by Dutch central bank that
gold provides a sense of security. Poland added and repatriated (from UK) gold in its
vault which increased the reserve to 228 tons from less than 100 tons about 2 years ago.
There shall be trend in Europe that central banks of respective countries would start
buying gold as negative interest rates shall destroy wealth. Repatriation of gold by many
countries also started in a significant way that shows nations have no trust on nations
holding gold in their vault for them like USA, UK and Switzerland. In September 2019,
German central bank gold holdings have risen for the first time in this century. 2 years
bank, German central bank repatriated 53 tons of gold from USA. India is also under the
process of making Gold policy for the nation which also indicates the urgency of
increasing gold reserve by Government of India.

United Nations (UN) is an organization which is working good for powerful nations but
does not have power to implement rules which is fair and equitable for weaker nations.
There is no system to provide fair trial and justice to less powerful nations. Total
overhauling of United Nations shall happen or may be new institution shall be formed
against UN where world order could be divided into 2 groups changing the dynamics of
whole world. Society for Worldwide Interbank Financial Telecommunications (SWIFT)
system is a vast messaging network used by banks and other financial institutions to
quickly, accurately, and securely send and receive information, such as money transfer
instructions. SWIFT has retained its dominant position in the global processing of
transactional messages other than primitive TELEX. It operates from USA and is offering
reports and data for business intelligence. Since the dollar serves as the world reserve
currency, SWIFT facilitates the international dollar system. SWIFT and dollar dominance
give the U.S. a great deal of leverage over other countries. It becomes an effective tool to
impose sanction on any nation without consulting other nations with veto power in UN.
In the mid-term period, SWIFT seems poised to continue dominating the market because
Europe and BRICS are readying with their own international payment system with the
help of blockchain technology on which crypto currencies are working. Russia has SPFS
and China has CIPS for international payment system to bypass USD. The launch of
Instrument in Support of Trade Exchanges (INSTEX) by France, Germany and UK will
allow all non US Dollar trade with Iran. It shows that world is in the financial war and
looking for non-dependence on one country.

On 26th March 2018, the Chinese government issued the first long term oil trading
contracts denominated in Petroyuan. It is an attempt to compete with the American
Petrodollar as a main currency in crude oil transactions, whose dominance, has led the
market since the dollar standard was first established in 1971, replacing the gold standard
and giving USA the power to manage most of the world's currency supply. There is
support from Russia and Iran to settle trade in Yuan for Crude Oil. It was a first step by
China to attempt a change in world order. Threat to USD currency shall be an edge to
Gold as global reserve currency for a short while in coming years, before the expected
turmoil in financial system shall be resolved by introduction of new global currency. The
blockchain technology may be used for creating cryptocurrency backed by powerful
nations’ currencies indirectly backed by Gold. A global reset is expected in financial
system to solve huge debt problem and removing the dominance of one country.

The financial year 2020, shall be flushed with money and limited opportunities to invest,
which would result into inflating commodity prices, eventually leading to hyper-inflation
in most of the economies of the world. Situation will be vulnerable where adverse news
shall keep on flowing during the year as well as bull-run in commodities. Coming decade
would bring more political crisis, geo-political problems would arise, change to high
interest rates, collapse of treasury bonds, nation debt crisis, may be war and any other
new crisis in a new form shall emerge. In scenario like this once again safe haven would
be Gold, silver and other physical hard assets. The mixed performances were seen in
emerging stock markets in the last one year with upward bias and gave a foundation of
stronger rally ahead. From 1st quarter of the year 2016 to January 2018, the performance
of most of the emerging stock markets remained upwards with least volatility, but
volatility may increase going forward. After a long up move with periodic corrections for
12 to 18 months, majority of stock markets remained sideways with upward bias since
beginning of 2018. Market breadth was very bad for the full year 2019 except heavy
weight stocks which kept the indices of major stock markets in upward trajectory. Gold
looks like it finally completed its time correction and broke its resistance at USD 1360
per ounce and ending the year with positive returns. It is ready for strongest historical
rally which shall be justified to back the currencies in the world especially Russia, China,
Euro zone and USA. The worth of currency shall be backed by strong Gold value, and all
the investors and hedge funds would have no choice but to invest in gold. There is not
even 5% allocation of funds done to Gold by any major banking institutions in the world
barring few exceptions. Correction in Gold price from historical peak of USD 1940 in
2011, after 9 years bull rally from the level of 280; has completed its price and time
correction. It should hit all time high during the year 2020. Base metals shall move
upward gradually in comparison to precious metals so would be emerging stock markets.
Decreasing interest rates and change in stance from QT to QE by US Fed Reserve will
lead to demand for stocks, precious metals and base metals during year with increasing
volatility.

Commodities like base metals and precious metals bottomed out from October to
December 2016, up move throughout 2017 and correction in the year 2018. The
performance of base metals was not good during the year 2019 contrary to precious
metals like Gold and Silver. Technically, there should be robust up move for all kind of
hard and soft commodities with stock markets in the year 2020. High probability of QE4
and high inflation are the obvious outcomes for the year 2020. Precious metals like Gold,
Silver, Platinum etc., commodities like Steel, Copper, Zinc, Crude Oil etc. and stock
markets in the world could go up hyperbolic as they are directly proportionate to huge
liquidity injection into the financial system. We may witness mother of all bull runs
because such expected high level of liquidity was never injected in the system as there
are several nations involved in the same activity. Globalization is evolving and we may
face a jolt in coming years, which shall be a lesson to learn.

Value of precious metal like Gold has to go up at some point as many governments are
ramping up gold reserves, there is currency war, there is trade war and attempt to
dethrone US dollar, so the opportunity is to look at an alternative fiat currency. BITCOIN
(Crypto Currency) is one such example where the money poured into big time and
historical bubble was created in the recent past. There shall be domino effect of bubble
burst in US Treasury Bonds and Crypto Currency, simultaneously weakening USD then
the money will flow into hard assets like Crude Oil, Gold, Silver, Copper, and such other
hard commodities. Gold and silver are such precious metals where historically at the
times when there is no confidence in the economy or systemic financial collapse, they are
the saviors of wealth. Once everybody starts realizing the importance of precious metals
to protect the wealth from depletion due to imminent rising inflation, that will be the time
Gold and Silver will explode while we shall experience the gigantic global debt collapse
may be in the near future.
Technically speaking:

S&P 500 (USA)

Current Level 3240 (approximately as on 27-12-2019)
S&P 500 gave good returns for the year 2019 which was around 2500 levels at the
beginning of the year. There is skepticism about bull run. 50 Days Moving Average
crossed over 200 Days Moving Average during the end of March and it remained above
it since then which is a bullish pattern. On weekly charts, S&P 500 has broken out of
consolidation zone (range bound movement between 2500 and 2950) which is
meaningful crossover of 3000 levels to enter into new bull zone. The view remains the
same that the bull market is still intact with volatility to increase in coming months. It
could be the last wave of long bull market which is usually euphoria. Last year’s
prediction proved to be correct that S&P 500 shall cross 2900 and remain below 3300 for
the year 2019.
Commodities based equities shall outperform the other sectors of the market which was
not good in the year 2019.
Buy is recommended for short term investment and buy at dip with a speculative intent
for the full year (2020) volatile range between from 3300 to 3800. S&P 500 will hit new
highs but with a caution above 3800 level.

BSE Sensex (BSE - India)

Current Level 41575 (as on 27-12-2019)
BSE is moving up with many intermediate corrections after forming a bottom at 16000 as
on May 2012. At the level of 23000 (February 2016), BSE after completing the deep
correction; is right now on upward move. BSE Sensex gave 15% return for the year 2019
in Indian Rupee terms. 50 Days Moving Average crossed over 200 Days Moving
Average during March 2019 and second time it touched 200 Days Moving Average in
October continuing its upward journey. It remains in long term Bull pattern.
Buy is recommended at current level for the target of 49000 in the year 2020.

By Ankur Sharda

Published on 28/12/2019
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