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September 25, 2020 - 7:48 AM HKT

Golden times ahead?

It feels like a bit of a deja-vu, doesn’t it? Investors have been selling kind of everything, from stocks to high yield bonds to commodities and even gold. Haven’t we seen this movie before? Yes, we have, and I mean the crash in March when everyone and their uncle was dashing for the doors to make dollar cash, no matter whether the asset held was defensive or an alpha- or beta play. Cash was king then, and it seems to be king now. Thankfully, the extent of the move is tame in comparison so far.

The only market that hasn’t moved in sync is US Treasuries. While in March 10-year yields crashed by over one point, they appear to be as flatlined now as they have been since. But even in a corrective move as we seem to be having one again there are limits to where yields can fall to. Unless the Fed is ready to introduce negative Fed Fund rates, the long end might trend down further from 60-70bp range but not collapse like in March.

Also, it isn’t very likely for Powell & Co to embark on the red territory. It doesn’t seem to be in the American DNA to experiment with negative rates, and the example of the ECB applying them hasn’t been very promising in any case. After all, Powell in his last testimony was quite clear that he didn’t want to become the rescuer-in-chief holding the bag. He in so many words insisted that the Fed has done what it should and could and that it was fiscal policy’s turn to catch the hot potato.

While this sounds sensible, Congress appears to be in no position to come to a compromise currently. Naturally, the proximity to the November poll date prohibits any and every willingness to compromise on either side of the aisle. In other words, we are left in limbo, and there may not even be a deadline for it as Donald Trump seems to be taking pleasure in refusing to say whether he will accept an election result against him. Finally, Mitch McConnell and Lindsey Graham have put an end to this charlatanism overnight.

So, what are we left with? Assuming fiscally there is no action to be expected in coming weeks, and Powell acting coyly on the rates front as a matter of principle, the only way to bridge and carry will be some form of QE to continue and potentially expand from here. To be sure, the Fed already added 3 trillion dollars to its balance sheet in the past 5 months, lifting it to a total of over 7 trillion. But again, what else is there unless policymakers want to accept irreversible damage to the economy.

I say let’s go with what we have known for a decade now, namely that the Fed will eventually provide the put the system is relying on. A further accommodating monetary policy, probably in the form of more asset purchases, will confine the asset correction as well as the recent surge in the dollar. It means that equities should not fall out of bed, high yield bonds quickly find a bottom once the shakeout dissipates, and the gold price presents us with a great entry point even at this lofty altitude.

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Golden times ahead?

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