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Get ready for this year’s rollercoaster

Get Ready For This Year’s Roller Coaster


We know you missed us and we missed you too. We were happy to enjoy the holidays and some solitude from writing to dive deeper into a pile of research we had organized for this year. The world hasn’t got any less crazy since our last communique so let’s look at the things that are going to drive 2020 forward, or as we believe among our team, 2020 will likely drive many things backward. If you thought 2019 was full of surprises brace yourself for 2020!

Geopolitics are red hot right now. Unless you don’t read the news at all, you are well aware that the U.S. has assassinated Iran’s supervillain Qasem Soleimani. To say this was a bold move by the U.S. is an understatement.

What surprises us the most about this move by the U.S. is that the U.S. has boldly claimed responsibility. Normally it’s much more strategic to kill bad guys quietly and enjoy some level of plausible deniability to limit the risks of retaliation. Even the Italian mafia and Colombian cartels have learned that killing your adversaries and making front-page news is bad for business. We expect way more turmoil in the Middle East this year and an Arab Spring 2.0 as inflation is passed through to USD pegged currencies in the Middle East.

Global debt-to-GDP hit a new record in 2019 surging to 322%.

2020 estimates are that total debt will exceed $257 trillion. That’s literally debt of galactic proportions. Ordinarily so much debt issuance would cause bond yields to rise but instead, we also saw in 2019 a record $17 trillion in negative-yielding government debt. We talked about negative-yielding debt a lot last year. While the outstanding amount of negative-yielding debt has backed off a bit it is still defying financial gravity.

If we had one theme for 2020 it would be stagflation. We believe that commodities are going to perform well and that by the second half of the year equities will meet the reality of higher input prices and higher yields.
We’ve always been a fan of the soft commodities such as sugar, cocoa, and coffee and think that these commodities are positioned to outperform this year. Over the last twelve months, these three commodities are up over 10% each (see chart). That may sound boring compared to U.S. equities but we think the commodity train is just getting going.

We would like to add that there is one interesting technology development that runs counter to our thesis on higher coffee prices. Tech start-up Atomo claims to have hacked the coffee bean and they’ve figured out a way to make molecular coffee that tastes like coffee but no longer is made from coffee beans. Basically fake coffee.

If you’re interested in learning how they do it you can visit their website here For us, we still prefer the real thing.

We strongly believe that U.S. core CPI is going to continue to surprise to the upside. It’s consistently starting to print above the Federal Reserve’s magic 2.0% line.

One of the big questions on the minds of our clients in Latin America is how will their currencies fair this year. If there’s a rise in global commodity prices that’s ordinarily a great thing for commodity currencies like the Colombian peso and Brazilian real. Unfortunately, we feel that Latin America will be much more nuanced this year.

The amount of borrowing in U.S. dollars by Latam governments and corporations is at record highs. The attraction of lower borrowing costs in U.S. dollars comes only by taking on the exchange rate risk of the dollar vis-a-vis the domestic currency.

This leads us to position 2020 as a good year to run a long/short book in emerging markets, in other words, to long some Latam countries and short others. Top of our list would be to long Brazil and short Mexico. This could be expressed through equity positions or through currency positions.
By the way for perspective here’s what holding on to investments in Latin America looks like for the last ten years.

Clearly, Brazil (EWZ) is the only standout. If you held Mexico (EWW), Chile (ECH), or Colombia (ICOL) you’re still licking your wounds. We had some high hopes for Colombia when Duque took office but based on tax reforms that still remain unattractive to local business and international businesses plus the recent departure of Uber we don’t see Colombia as a stand out economy for 2020 despite a strong last year.

Chile could be interesting with a possible move higher in copper prices and Mexico is by far our favorite short. The risk building under the surface with the recent tax reform from AMLO in Mexico is turning up the heat on capital flight in a way that is reminiscent of Venezuela when smart money started to leave in the early days of Chavez’s presidency. Do not ignore Mexico, it has a ton of embedded risk and we think it will take some time before markets recognize that because of the recently signed USMCA.

This is a taste of what’s on our radars for 2020. If you’d like some more specifics please don’t hesitate to reach out to us and learn how our investment expertise in global macro is perfectly designed to profit in these market environments.