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In lieu of next week’s report, I will be presenting the quarterly Counterpoint webcast titled ‘Where Is The Groupthink Wrong? And How To Profit From It.’ I do hope you can join. We will then take a summer break, so our next report will come out on August 5. Highlights The quantum theory of finance describes the strange quantum effects of ultra-low inflation, of ultra-low interest rates, and of ultra-low probabilities. The key finding of the quantum theory of finance is that when inflation and interest rates get ultra-low, inflation becomes completely insensitive to monetary policy, while risk-asset valuations become hyper-sensitive to monetary policy. The hyper-sensitivity of $500 trillion of global risk-assets to bond yields means that the ultimate low in the US T-bond yield is still to come. Given the hyper-sensitivity of equity valuations to bond yields and the demand for US assets during bond market rallies, it also means that the structural bull market in equities and the structural bull market in the US dollar are both still intact. Feature Feature ChartNear The Lower Bound In Bond Yields, Potential Losses Are Greater Than Potential Gains When things get ultra-small, the laws of physics undergo a radical shift. Classical physics breaks down, and we must to turn to an alternative theory to explain and predict the physical world. That theory is the quantum theory of physics. In this updated Special Report we propose that, just as there is the quantum theory of physics, there is The Quantum Theory Of Finance. When inflation and interest rates get ultra-low, the laws of economics and finance undergo a radical shift. And we must turn to the alternative theory to explain and predict the economic and financial world. In the physical world, the allowable values of a physical system appear to be continuous, with all values permitted. In fact, the permitted values occur in discrete ‘quanta’. At ultra-small scales, these quantum effects become the dominant driver of physical systems and form the foundation of the quantum theory of physics. Likewise, in the economic and financial world of ultra-low inflation and interest rates, quantum effects become the dominant drivers of the system. These quantum effects take three forms: The quantum effects of ultra-low inflation. The quantum effects of ultra-low interest rates. The quantum effects of ultra-low probabilities. The Quantum Effects Of Ultra-Low Inflation Even though inflation is continuous mathematically, we do not perceive it as such psychologically. Instead we perceive inflation as ‘quantum states’ of either price stability or price instability. A recent IFO paper points out that households’ inflation perceptions are “more in line with the imperfect information view prevailing in social psychology than with the rational actor view assumed in mainstream economics.”1 And in Real-Feel Inflation: Quantitative Estimation of Inflation Perceptions, Michael Ashton confirms that “it would be challenging for a consumer to distinguish 1 percent inflation from 2 percent inflation – that fine of a gradation in perception would be extremely unusual to find.”2 There are several reasons why we perceive inflation imprecisely: We do not recognise quality change and substitution adjustments. We tend to feel inflation asymmetrically, noticing goods whose prices are rising, but noticing less goods whose prices are falling. This is the classic attribution bias: higher prices are inflation, lower prices are “good shopping.” Items whose prices are volatile tend to draw more attention, and give more opportunities for these asymmetries to compound. We notice the price changes of small, frequently purchased items more than the price changes of large infrequently purchased items. We perceive the cost of homeownership as the monthly mortgage payment, and not the imputed cost of owners’ equivalent rent (OER). Yet OER is the largest single item in the US core CPI basket, weighted at 30 percent. The result of these biases is that we perceive inflation intuitively, as a quantum state rather than as a precise number within a continuum. The quantum effects of ultra-low inflation mean that policymakers can take an economy from the state of price instability to the state of price stability, and vice-versa, but they cannot sustainably hit an arbitrary inflation target within the quantum state, such as 2 percent (Chart I-2). Chart I-2Mission Impossible: 2 Percent Inflation The Quantum Effects Of Ultra-Low Interest Rates Policymakers accept that there exists an interest rate, at around -1 percent, below which there would be an exodus of bank deposits. Hence, this marks the lower bound of policy interest rates. When policy interest rates are at, or near, this lower bound, central banks can turn to a second strategy: they can promise to keep the policy rate ultra-low for an extended period. Thereby they can pull down the long bond yield towards the lower bound too. To do this, they must convince the market that their promise is genuine. Enter quantitative easing (QE) which, in the words of the ECB’s former Chief Economist Peter Praet, is nothing more than “a signalling channel which reinforces the credibility of forward guidance on (ultra-low) policy rates.” Once forward guidance plus QE has taken bond yields close to their lower bound, we start to see the quantum effects of ultra-low interest rates. Specifically, the bond investor is left with a highly asymmetric payoff – the bond price can fall much more than it can rise. Witness the performance of Swiss bonds through the past three years. The worst drawdowns have far exceeded the best gains (Feature Chart, Chart I-3 and Chart I-4). Chart I-3Swiss Bonds Offer Small Potential Gains... Chart I-4...But Big Potential Losses This asymmetric payoff is technically known as negative skew and it starts to take effect when bond yields decline to around 2 percent above their lower bound. So, if the lower bound for the 10-year T-bond yield is -0.5 percent, the negative skew in its payoffs would start to take effect at around 1.5 percent. One important implication of the quantum effect of ultra-low interest rates is that the asymmetry of bond payoffs becomes very similar to the asymmetry of equity and other risk-asset payoffs (Chart I-5). This is important because, as we describe in the next section, it is the skew of an asset’s payoff that establishes its absolute and relative riskiness. Chart I-5Equities Can Suffer Bigger Short-Term Losses Than Short-Term Gains (Negative Skew) The Quantum Effects Of Ultra-Low Probabilities We are very bad at comprehending low probabilities. For example, we cannot distinguish a 1 in a 1000 risk from a 1 in a 100 risk, even though the second risk is ten times greater than the first. This is what Daniel Kahneman’s and Amos Tversky’s Nobel prize winning Prospect Theory called the ‘quantal effect’ of ultra-low probabilities. Kahneman and Tversky discovered that our fears and hopes come in quanta rather than in a continuum, with the result that we overweight the tail-events in a payoff distribution. “Because people are limited in their ability to comprehend and evaluate extreme probabilities, highly unlikely events are either ignored or over-weighted.” If the payoff distribution is symmetric, then our overweighting of the positive and negative tails cancels out, meaning there is no impact on the value of the payoff (Figure I-1). However, if the payoff distribution is skewed, then the longer tail dominates our perceived value of the payoff. Figure I-1In A Symmetric Payoff, We Overestimate The Big Gain And the Big Loss Equally, So It Cancels Out A lottery payoff has an extreme positive skew. There exists a miniscule chance of winning a fortune. As we overweight this highly unlikely event, we overvalue the lottery ticket relative to its expected payoff (Figure I-2). And this explains the existence of the multi-billion dollar lottery industry. Figure I-2In A Positively-Skewed Payoff (Lottery), We Overestimate The Big Gain, So We Overpay Conversely, the payoff from equities has a negative skew. As we overweight the tail-event of losing a lot of money, we undervalue this negatively skewed payoff (Figure I-3). In other words, we demand a higher return from a negatively skewed payoff relative to a symmetrical payoff, such as the payoff from bonds when yields are not ultra-low. And this explains the existence of the so-called ‘equity risk premium.’ Figure I-3In A Negatively-Skewed Payoff (Risk-Assets), We Overestimate The Big Loss, So We Demand A ‘Risk Premium’ Crucially though, at ultra-low bond yields – when both equity and bond payoffs carry the same negative skew – we no longer demand a higher return from equities versus bonds. As the equity risk premium compresses, the return demanded from equities and other risk-assets collapses to the ultra-low bond yield. Put another way, the valuation of risk-assets soars. The Quantum Theory Of Finance, The Past And The Future The key finding of the quantum theory of finance is this. When inflation and interest rates get ultra-low, inflation becomes completely insensitive to monetary policy, while risk-asset valuations become hyper-sensitive to monetary policy. This is the story of the past decade, and most likely the story of the coming years. For over a decade now, central banks have fixated on hitting their 2 percent inflation targets when the quantum effects of ultra-low inflation make such a target unachievable. In their misguided fixation, the unleashing of trillions of dollars of QE has taken bond yields to unprecedented lows which has driven risk-asset valuations to unprecedented highs, and made them hyper-sensitive to the slightest move in bond yields (Chart I-6 and Chart I-7). Chart I-6Real Estate Prices Have Massively Outperformed Rents Chart I-7Equity Prices Have Massively Outperformed Profits Yet to be clear, though policymakers cannot consistently hit the 2 percent inflation target, they could certainly take the economy back to price instability – if they pursued ultra-loose monetary policy combined with ultra-loose fiscal policy aggressively enough for long enough. But if a major economy were to take this road – intentionally or accidentally – the $500 trillion valuation of global risk-assets that is premised on ultra-low inflation and ultra-low interest rates would collapse. As we have previously written, this means that The Road To Inflation Ends At Deflation and the ultimate low in the T-bond yield is still to come. Alternatively, another deflationary shock could take us to this ultimate low in the T-bond yield more directly. Given the hyper-sensitivity of equity valuations to bond yields and the massive portfolio inflows into US assets during shocks, this also means that the structural bull markets in equities and the structural bull market in the US dollar are both still intact. Dhaval Joshi Chief Strategist dhaval@bcaresearch.com Footnotes 1 Please see Households’ Inflation Perceptions and Expectations: Survey Evidence from New Zealand, IFO Working Paper, February 2018 available at https://www.ifo.de/DocDL/wp-2018-255-hayo-neumeier-inflation-perceptions-expectations.pdf 2 Please see Real-Feel Inflation: Quantitative Estimation of Inflation Perceptions by Michael Ashton, National Association for Business Economics available at https://link.springer.com/content/pdf/10.1057/be.2011.35.pdf Fractal Trade Update We are pleased to report that long USD/CAD achieved its 3.7 percent profit target, and short building materials (PKB) versus healthcare (XLV) achieved its 15 percent profit target. Combined with other successes, this lifts the 6-month win ratio to an all-time high of 76 percent, comprising 12.3 winners versus just 3.9 losers. This week, we present two new candidates for countertrend reversal. First, the strong recent rally in Australian 30-year bonds has reached fragility on its 65-day fractal structure. The recommended trade is to short Australian versus Canadian 30-year bonds, setting the profit-target and symmetrical stop-loss at 3.9 percent. Second, the strong recent rally in lead versus platinum has also reached fragility on its 65-day fractal structure. The recommended trade is to short lead versus platinum, setting the profit-target and symmetrical stop-loss at 6.4 percent. Chart I-8Short Australian Vs, Canadian 30-Year Bonds Chart I-9Short Lead Vs. Platinum Fractal Trading System Fractal Trades 6-Month Recommendations Structural Recommendations Closed Fractal Trades Closed Trades Asset Performance Equity Market Performance   Indicators To Watch - Bond Yields Chart II-1Indicators To Watch - Bond Yields - Euro Area Chart II-2Indicators To Watch - Bond Yields - Europe Ex Euro Area   Chart II-3Indicators To Watch - Bond Yields - Asia Chart II-4Indicators To Watch - Bond Yields - Other Developed   Indicators To Watch - Interest Rate Expectations Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations   Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations    

Highlights Three distinct forces are likely to make South Asia’s geopolitical risks increasingly relevant to global investors. First, India’s tensions with China stem from China’s growing foreign policy assertiveness and India’s shift away from traditional neutrality toward aligning with the US and its allies. This creates a security dilemma in South Asia, just as in East Asia. Second, India’s economy is sputtering in the wake of the COVID-19 pandemic, adding fuel to nationalism and populism in advance of a series of important elections. India will stimulate the economy but it could also become more reactive on the international scene. Third, the US is withdrawing from Afghanistan and negotiating a deal with Iran in an effort to reduce the US military presence in the Middle East and South Asia. This will create a scramble for influence across both regions and a power vacuum in Afghanistan that is highly likely to yield negative surprises for India and its neighbors. Traditionally geopolitical risks in South Asia have a limited impact on markets. India’s growth slowdown and forthcoming fiscal stimulus are more relevant for investors. However, a sharp rise in geopolitical risk would undermine India’s structural advantages as the West diversifies away from China. Stay short Indian banks. Feature Geopolitical risks in South Asia are slowly but surely rising. India-Pakistan and China-India are well-known “conflict-dyads” or pairings. Historically, these two sets have been fighting each other over their fuzzy Himalayan border with limited global financial market consequences. But now fundamental changes are afoot that are altering the geopolitical setting in the region. Specifically, the coming together of three distinct forces could trigger a significant geopolitical event in South Asia. The three forces are as follow: Force #1: Sino-Indian Tensions Get Real About a year ago, Indian and Chinese troops clashed in Ladakh, a disputed territory in the Kashmir region. Following these clashes China reduced its military presence in the Pangong Tso area but its presence in some neighboring areas remains meaningful. Besides the troop build-up along India’s eastern border, China is building more air combat infrastructure in its India-facing western theatre. China’s major air bases have historically been concentrated in China’s eastern region, away from the Indian border (Map 1). Consequently, India has historically enjoyed an advantage in airpower. But China appears to be working to mitigate this disadvantage. Map 1Most Of China’s Major Aviation Units Are Located Away From India Owing to China’s increased military focus along the Sino-India border, India’s threat perception of China has undergone a fundamental change in recent years. Notably, India has diverted some of its key army units away from its western Indo-Pak border towards its eastern border with China. India could now have nearly 200,000 troops deployed along its border with China, which would mark a 40% increase from last year.1 Turning attention to the Indo-Pak border, India’s problems with Pakistan appear under control for now. This is owing to the ceasefire agreement that was renewed by the two countries in February 2021. However, this peace cannot possibly be expected to last. This is mainly because core problems between the two countries (like Pakistan’s support of militant proxies and India’s control over Kashmir) remain unaddressed. History too suggests that bouts of peace between the two warring neighbors rarely last long. These bouts usually end abruptly when a terrorist attack takes place in India. With both political turbulence and economic distress in Pakistan rising, the fragile ceasefire between India and Pakistan could be upended over the next six months. In fact, two events over the last week point to the fragility of the ceasefire: Two drones carrying explosives entered an Indian air force station located in Jammu and Kashmir (i.e. a northern territory that India recently reorganized, to Pakistan’s chagrin). Even as no casualties were reported, this attack marks a turning point for terrorist activity in India as this was the first-time terrorists used drones to enter an Indian military base. Hours later, another drone attack struck an Indian base at the Ratnuchak-Kaluchak army station, the site of a major terrorist attack in 2002. Chart 1China, Pakistan And India Cumulatively Added 41 Nuclear Warheads Over 2020 Given that the ceasefire was agreed recently, any further increase in terrorist activity in India over the next six months would suggest that a more substantial breakdown in relations is nigh. Distinct from these recent tensions, China’s troop deployment along India’s eastern arm and Pakistan’s presence along India’s western arm creates a strategic “pincer” that increasingly threatens India. India is naturally concerned. China and Pakistan are allies who have been working closely on projects including the strategic China-Pakistan Economic Corridor (CPEC). The CPEC is a collection of infrastructure projects in Pakistan that includes the development of a port in Gwadar where a future presence of the People's Liberation Army Navy (PLAN) is envisaged. Gwadar has the potential of providing China land-based access to the Indian Ocean. Trust in the South Asian region is clearly running low. Distinct from troop build-ups and drone-attacks, China, Pakistan, and India cumulatively added more than 40 nuclear warheads over the last year (Chart 1). China is reputed to be engaged in an even larger increase in its nuclear arsenal than the data show.2 From a structural perspective, too, geopolitical risks in the South Asian peninsula are bound to keep rising. When it comes to the conflicting Indo-Pak dyad, India’s geopolitical power has been rising relative to that of Pakistan in the 2000s. However, the geopolitical muscle of the Sino-Pak alliance is much greater than that of India on a standalone basis (Chart 2). Chart 2India Has Aligned With The QUAD To Counter The Sino-Pak Alliance China’s active involvement in South Asia is responsible for driving India’s increasing desire to abandon its historical foreign policy stance of non-alignment. India’s membership in the Quadrilateral Security Dialogue (also known as the QUAD, whose other members include the US, Japan, and Australia) bears testimony to India’s active effort to develop closer relations with the US and its allies (Chart 2). India’s alignment with the US is deepening China’s and Pakistan’s distrust of India. Conventional and nuclear military deterrence should prevent full-scale war. But the regional balance is increasingly fluid which means geopolitical risks will slowly but surely rise in South Asia over the coming year and years. Force #2: A Growth Slowdown Alongside India’s Loaded Election Calendar The pandemic has hit the economies of South Asia particularly hard. South Asia historically maintained higher real GDP growth rates relative to Emerging Markets (EMs). But in 2021, this region’s growth rate is set to be lower than that of EM peers (Chart 3). History is replete with examples of a rise in economic distress triggering geopolitical events. South Asia is characterized by unusually low per capita incomes (Chart 4) and the latest slowdown could exacerbate the risk of both social unrest and geopolitical incidents materialising. Chart 3South Asian Economies Have Been Hit Hard By The Pandemic Chart 4South Asia Is Characterized By Very Low Per Capita Incomes To complicate matters a busy state elections calendar is coming up in India. Elections will be due in seven Indian states in 2022. These states account for about 25% of India’s population. State elections due in 2022 will amount to a high-stakes political battle. During state elections in 2021, the ruling Bharatiya Janata Party (BJP) was the incumbent in only one of the five states. In 2022, the BJP is the incumbent party in most of the states that are due for elections, which means it has the advantage but also has a lot to lose, especially in a post-pandemic environment. Elections kick off in the crucial state of Uttar Pradesh next February. Last time this state faced elections Prime Minister Narendra Modi was willing to go to great lengths to boost his popularity ahead of time. Specifically, he upset the nation with a large-scale and unprecedented de-monetization program. Given the busy state election calendar in 2022, we expect the BJP-led central government to focus on policy actions that can improve its support among Indian voters. Two policies in particular are likely to come through: Fiscal Stimulus Measures To Provide Economic Relief: India has refrained from administering a large post-pandemic stimulus thus far. As per budget estimates, the Indian central government’s total expenditure in FY22 is set to increase only by 1% on a year-on-year basis. But the expenditure-side restraint shown by India’s central government could change. With elections and a pandemic (which has now claimed over 400,000 lives in India), the central government could consider a meaningful increase in spending closer to February 2022. Map 2Northern India Views Pakistan Even More Unfavorably Than Rest Of India India’s Finance Minister already announced a fiscal stimulus package of $85 billion (amounting to 2.8% of GDP) earlier this week. Whilst this stimulus entails limited fresh spending (amounting to about 0.6% of India’s GDP), we would not be surprised if the government follows it up with more spending closer to February 2022. Assertive Foreign Policy To Ward-Off Unfriendly Neighbors: India’s northern states are known to harbor unfavorable views of Pakistan (Map 2). The roots of this phenomenon can be traced to geography and the bloody civil strife of 1947 that was triggered by the partition of British-ruled India into the two independent dominions of India and Pakistan. Given the north’s unfavorable views of Pakistan and given looming elections, Indian policy makers may be forced to adopt a far more aggressive foreign policy response, to any terrorist strikes from Pakistan or territorial incursions by China. This kind of response was observed most recently ahead of the Indian General Elections in April-May 2019. An Indian military convoy was attacked by a suicide-bomber in early February 2019 and a Pakistan-based terrorist group claimed responsibility. A fortnight later the Indian air force launched unexpected airstrikes across the Line of Control which were then followed by the Pakistan air force conducting air strikes in Jammu and Kashmir. While the next round of Pakistani and Indian general elections is not due until 2023 and 2024, respectively, it is worth noting that of the seven state elections due in India in 2022, four are in the north (Uttar Pradesh, Punjab, Uttarakhand, and Himachal Pradesh). Force #3: Power Vacuum In Afghanistan The final reason to be wary of the South Asian geopolitical dynamic is the change in US policy: both the Iran nuclear deal expected in August and the impending withdrawal from Afghanistan in September. The US public has now elected three presidents on the demand that foreign wars be reduced. In the wake of Trump and populism the political establishment is now responding. Therefore Biden will ultimately implement both the Iran deal and the Afghan withdrawal regardless of delays or hang-ups. But then he will have to do damage control. In the case of Iran, a last-minute flare-up of conflict in the region is likely this summer, as the US, Israel, Saudi Arabia, and Iran underscore their red lines before the US and Iran settle down to a deal. Indeed it is already happening, with recent US attacks against Iran-backed Shia militias in Syria and Iraq. A major incident would push up oil prices, which is negative for India. But the endgame, an Iranian economic opening, is positive for India, since it imports oil and has had close relations with Iran historically. In the case of Afghanistan, the US exit will activate latent terrorist forces. It will also create a scramble for influence over this landlocked country that could lead to negative surprises across the region. The first principle of the peace agreement between the US and Afghanistan states that the latter will make all efforts to ensure that Afghan soil is not used to further terrorist activity. However, the enforceability of such a guarantee is next to impossible. Notably, the US withdrawal from Afghanistan will revive the Taliban’s influence in the region. This poses major risks for India, which has a long history of being targeted by Afghani terrorist groups. The Taliban played a critical role in the release of terrorists into Pakistan following the hijacking of an Indian Airlines flight in 1999. Furthermore, the Haqqani network, which has pledged allegiance to the Taliban, has attacked Indian assets in the past. Any attack on India deriving from the power vacuum in Afghanistan would upset the precarious regional balance. Whilst there are no immediate triggers for Afghani groups to launch a terrorist attack in India, the US withdrawal will trigger a tectonic shift in the region. Negative surprises emanating from Afghanistan should be expected. Investment Conclusions Chart 5Indian Banks Appear To Have Factored In All Positives We reiterate the need to pare exposure to Indian assets on a tactical basis. India’s growth engine is likely to misfire over the second half of the Indian financial year. Macroeconomic headwinds pose the chief risk for investors, but major geopolitical changes could act as a negative catalyst in the current context. So we urge clients to stay short Indian Banks (Chart 5). Financials account for the lion’s share of India’s benchmark index (26% weight). India could opt for an unexpected expansion in its fiscal deficit soon. Whilst we continue to watch fiscal dynamics closely, we expect the fiscal expansion to materialize closer to February 2022 when India’s most populous state (i.e. Uttar Pradesh) will undergo elections. Over the long run, India’s sense of insecurity will escalate in the context of a more assertive China, stronger Sino-Pakistani ties, and a power vacuum in Afghanistan. For that reason, New Delhi will continue to shed its neutrality and improve relations with the US-led coalition of democratic countries, with an aim to balance China. This process will feed China’s insecurity of being surrounded and contained by a hegemonic American system. This security dilemma is a source of South Asian geopolitical risk that will become more globally relevant over time. China’s conflict with the US and western world should create incentives for India to attract trade and investment. However, its ability to do so will be contingent upon domestic political factors and regional geopolitical factors.   Ritika Mankar, CFA Editor/Strategist ritika.mankar@bcaresearch.com Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com   Footnotes 1 Sudhi Ranjan Sen, ‘India Shifts 50,000 Troops to China Border in Historic Move’, Bloomberg, June 28, 2021, bloomberg.com. 2 Joby Warrick, “China is building more than 100 missile silos in its western desert, analysts say,” Washington Post, June 30, 2021, washingtonpost.com.

Dear Client, Last week, I had the pleasure of participating in a debate with my colleague, Dhaval Joshi, on the future of cryptocurrencies. You can access a replay of the event here. Best regards, Peter Berezin Highlights The meme stock mania is unlikely to die down anytime soon. Fueled by zero-commission trading and an anti-establishment mindset, social media has given millions of retail traders the ability to coordinate attacks on individual companies. An examination of the most popular meme stocks reveals that returns were highest when both the closing price and volume during the prior day’s session were above their moving averages. For GameStop and AMC, in particular, returns averaged 11.0% and 13.9%, respectively, when both the prior day’s closing price and volume were above their 5-day moving averages, compared with -4.0% and -1.3%, respectively, when the price and volume were below their 5-day moving averages. Nearly 80% of the returns on meme stocks were earned overnight (i.e., between the close of trading and the following day’s open). The ups and downs of meme stocks have generally had little impact on the overall direction of the stock market. Nevertheless, growing interest in meme stocks is positive for equities over a medium-term horizon of about 12 months. This is because the meme stock phenomenon is drawing funds into the stock market, boosting prices and liquidity in the process. #HedgiesGetWedgies Chart 1Word Du Jour: Meme This January, the term “meme stock” entered the popular lexicon (Chart 1). That was the month that GameStop and a handful of other once-left-for-dead stocks soared to dizzying heights. Armed with stimulus checks, millions of amateur investors flocked to one of the few sources of entertainment still available to them: online trading. Tales of instant riches spread like wildfire, motivating yet more new investors to enter the fray. Whether it was stocks or cryptos, the allure of easy money was irresistible. The decision by most American brokerages to eliminate trading commissions in the fall of 2019 added fuel to the fire. Meanwhile, the proliferation of social media provided a ready-made mechanism for retail traders to coordinate attacks on individual stocks. And attack they did. Most of the companies targeted had high short interest, making them ripe for a short squeeze. The implosion of Melvin Capital demonstrated to the Reddit crowd that they, too, could beat hedge funds at their own game. “We can remain stupid longer than you can stay solvent” became their rallying cry. In a game of chicken, being perceived by your opponent as irrational boosts your odds of winning. Trading Meme Stocks For Fun And Profit If one were so inclined, how should one trade meme stocks? It helps to begin with some data. Table 1 displays average daily returns from the start of 2021 for six popular meme stocks: GameStop (GME), AMC Entertainment (AMC), Blackberry (BB), Nokia (NOK), Bed Bath & Beyond (BBBY) and Koss Corp (KOSS). A few observations stand out: There is strong price momentum. Looking across all six stocks, the average daily return was 5.9% when the prior day’s closing price was above its 5-day moving average, compared to 0.3% when the prior day’s close was below its 5-day moving average. The average daily return for stocks in our sample was 3.3%. Volatility predicts higher returns. Meme stocks gained 4.3%, on average, when the prior day’s return was positive compared to 2.4% when it was negative. Looking only at the subset of cases where the prior day’s return was either above 10% or below -10%, we find that meme stocks gained 11.3% when the price rose more than 10% during the prior day and gained a still-robust 7.5% when the price dropped more than 10% during the prior day. Strong volume predicts higher returns. Consistent with the volatility observation, meme stocks gained an average of 6.1% when the volume in the prior day’s trading session was above its 5-day moving average, compared to just 1.3% when the volume was below its 5-day moving average. Meme stocks do best after the close of trading. Nearly 80% of returns on meme stocks were earned overnight (i.e., between the close of trading and the following day’s open). We attribute this phenomenon to the tendency of many traders to exit positions before the closing bell and reopen them at the start of trading the following day. Such a pattern of selling and repurchasing tends to boost overnight returns. Historically, a similar pattern has held for most other US stocks (Chart 2). Table 1Meme Stock: Returns And Patterns Chart 2Bear By Day, Bull By Night In summary, meme stocks perform best when they are trading above their 5-day moving average. Both volatility and strong volume predict positive returns. Holding (hodling?)1 meme stocks overnight can significantly enhance returns. Be An Ape Chart 3The BUZZ ETF Is Off To A Lackluster Start Fans of AMC often refer to themselves as “apes.” The moniker is fitting, if not ironic, given the tendency of meme investors to ape one another in their trading decisions. The VanEck Vectors Social Sentiment ETF (BUZZ) tries to get in front of the apes and other meme investors by buying stocks that are garnering increasing attention from social media, news articles, blog posts, and other sources. While it is too early to assess the value of this approach, it should be noted that the fund has lagged the S&P 500 for most of the time since its inception in March (Chart 3). A potentially more fruitful approach, and one that I myself have adopted, is to seek out meme stocks before they become meme stocks. For example, Cinemark (CNK) is the second biggest publicly-listed movie theater chain in the US. The share of its float sold short is almost identical to AMC’s. Yet, the Reddit crowd has largely ignored it. Could that change? Only time will tell. Don’t Get A Wedgie: How To Short Meme Stocks Safely While meme stocks can benefit from positive price momentum in the short term, it is at the expense of lower returns down the road. By any reasonable measure, the leading meme stocks are grossly overvalued. Knowing when a meme stock will fall back to earth is no easy task, however. The discussion in this report provides one avenue for short-term traders to mitigate risk: Short meme stocks only when price and volume are trending lower. The average daily return for GME and AMC was 11.0% and 13.9%, respectively, when both the prior day’s closing price and volume were above their 5-day moving averages, compared with -4.0% and -1.3%, respectively, when the price and volume were below their 5-day moving averages. With that in mind, we are opening a new tactical trade going short an equally-weighted basket of AMC and GME. The trade will only be active when the prior day’s closing price and volume are below their 5-day moving averages.2  Longer-term investors looking to short meme stocks without having to frequently open and close positions should consider using the “exponential” shorting technique discussed in a recent report. The technique flips the usual risk-reward trade-off from going short on its head. Rather than facing unlimited losses and a maximum gain of only 100% of the initial position, our shorting strategy caps the loss at 100% but allows for unlimited gains. Broad Market Implications As Chart 4 illustrates, the ups and downs of meme stocks have generally had little impact on the overall direction of the stock market. Nevertheless, growing interest in meme stocks is positive for equities over a medium-term horizon of about 12 months. This is because the meme stock phenomenon is drawing funds into the stock market, boosting prices and liquidity in the process. Chart 4Meme Stock Roller-Coaster: Little Impact On The Broader Market Chart 5Global Equity Risk Premium Remains Quite High   While the “stimmy” checks have already been deposited into brokerage accounts, their impact on the stock market will linger on. As we explained in Savings Gluts, Asset Shortages, And The 60/40 Split, retail investors who bid up the price of stocks will generally force institutional investors to sell their holdings.3 This will leave institutions with excess cash on hand – cash that they can deploy in other parts of the stock market. The resulting game of “hot potato” will only end when the value of the stock market rises by enough to ensure that all investors are happy with how much stock they own in relation to how much cash they hold. Given that the equity risk premium remains quite high, this dynamic likely has further to run (Chart 5). Disclosure: At the time of writing, I am personally long CNK and short AMC and GME. I previously held a short position in KOSS. Peter Berezin Chief Global Strategist pberezin@bcaresearch.com   Footnotes 1 HODL stands for “Hold On for Dear Life”. The term is widely used by traders on Wallstreetbets and other online forums. 2 The equal-weighted trade should be initiated if the conditions are met for either stock (GME, AMC) in the basket. The conditions are as follows: Both the price and volume should be below their 5-day moving average. The price and volume at the end of the day determine whether one enters the trade the next day or not. 3 An exception is when retail investors buy stock from the company itself, as has happened several times with meme stocks. Global Investment Strategy View Matrix Special Trade Recommendations Current MacroQuant Model Scores  

Highlights China's high-profile jawboning draws attention to tightness in metals markets, and raises the odds the State Reserve Board (SRB) will release some of its massive copper and aluminum stockpiles in the near future. Over the medium- to long-term, the lack of major new greenfield capex raises red flags for the IEA's ambitious low-carbon pathway released last week, which foresees the need for a dramatic increase in renewable energy output and a halt in future oil and gas investment to achieve net-zero emissions by 2050. Copper demand is expected to exceed mined supply by 2028, according to an analysis by S&P, which, in line with our view, also sees refined-copper consumption exceeding production this year (Chart of the Week). A constitution re-write in Chile and elections in Peru threaten to usher in higher taxes and royalties on mining in these metals producers, placing future capex at risk. Chile's state-owned Codelco, the largest copper producer in the world, fears a bill to limit mining near glaciers could put as much as 40% of its copper production at risk. We remain bullish copper and look to get long on politically induced sell-offs as the USD weakens. Feature Politicians are inserting themselves in the metals markets' supply-demand evolutions to a greater degree than in the past, which is complicating the short- and medium-term analysis of prices. This adds to an already-difficult process of assessing markets, given the opacity of metals fundamentals – particularly inventories, which are notoriously difficult to assess. Chinese Communist Party (CCP) jawboning of market participants in iron ore, steel, copper and aluminum markets over the past two weeks has weakened prices, but, with the exception of steel rebar futures in Shanghai – down ~ 17% from recent highs, and now trading at ~ 4911 RMB/MT –  the other markets remain close to records.  Benchmark 62% Fe iron ore at the port of Tianjin was trading ~ 4% lower at $211/MT, while copper and aluminum were trading ~ 5.5% and 6.5% off their recent records at $4.535/lb and $2,350/MT, respectively. In addition to copper, aluminum markets are particularly tight (Chart 2). Jawboning aside, if fundamentals continue to keep prices elevated – or if we see a new leg up – China's high-profile jawboning could presage a release by the State Reserve Board (SRB) of some of its massive copper and aluminum stockpiles in the near term. In the case of copper, market guesses on the size of this stockpile are ~ 2mm to 2.7mm MT. On the aluminum side, Bloomberg reported CCP officials were considering the release of 500k MT to quell the market's demand for the metal. Chart of the WeekContinue Tightening In Copper Expected Chart 2Aluminum Remains Tight Brownfield Development Not Sufficient Our balances assessments continue to indicate key base metals markets are tight and will remain so over the short term (2-3 years). Economies ex-China are entering their post-COVID-19 recovery phase. This will be followed by higher demand from renewable generation and grid build-outs that will put them in direct competition with China for scarce metals supplies for decades to come. Markets will continue to tighten. In the bellwether copper market, we expect this tightness to remain a persistent feature of the market over the medium term – 3 to 5 years out – given the dearth of new supply coming to market. Copper prices are highly correlated with the other base metals (Chart 3) – the coefficient of correlation with the other base metals making up the LME's metals index is ~ 0.86 post-GFC – and provide a useful indicator of systematic trends in these markets. Chart 3Copper Correlation With LME Index Ex-Copper Copper ore quality has been falling for years, as miners focused on brownfield development to extend the life of mines (Chart 4). In Chart 5, we show the ratio of capex (in billion USD) to ore quality increases when capex growth is expanding faster than ore quality, and decreases when capex weakens and/or ore quality degradation is increasing. Chart 4Copper Capex, Ore Quality Declines Chart 5Capex-to-Ore-Quality Decline Set Market Up For Higher Prices Falling prices over the 2012-19 interval coincide with copper ore quality remaining on a downward trend, likely the result of previous higher prices that set off the capex boom pre-GFC. The lower prices favored brownfield over greenfield development. Goehring and Rozencwajg found in their analysis of 24 mines, about 80% of gross new reserves booked between 2001-2014 were due not to new mine discoveries but to companies reclassifying what was once considered to be waste-rock into minable reserves, lowering the cut-off grade for development.1 This is consistent with the most recent datapoints in Chart 5, due to falling ore grade values, as companies inject less capex into their operations and use it to expand on brownfield projects. Higher prices will be needed to incentivize more greenfield projects. A new report from S&P Global Market Intelligence shows copper reserves in the ground are falling along with new discoveries.2 According to the S&P analysts, copper demand is expected to exceed mined supply by 2028, which, in line with our view, sees refined-copper consumption exceeding production this year. Renewables Push At Risk Just last week, the IEA produced an ambitious and narrow path for governments to collectively reach a net-zero emissions (NZE) goal by 2050.3 Among its many recommendations, the IEA singled out the overhaul of the global electric grid, which will be required to accommodate the massive renewable-generation buildout the agency forecasts will be needed to achieve its NZE goals. The IEA forecasts annual investment in transmission and distribution grids will need to increase from $260 billion to $820 billion p.a. by 2030. This is easier said than done. Consider the build-out of China's grid, which is the largest grid in the world. To become carbon neutral by 2060, per its stated goals, investment in China’s grid and associated infrastructure is expected to approach ~ $900 billion, maybe more, over the next 5 years.4 The world’s largest fossil-fuel importer is looking to pivot away from coal and plans to more than double solar and wind power capacity to 1200 GW by 2030. Weening China off coal and rebuilding its grid to achieve these goals will be a herculean lift. It comes as no surprise that IEA member states have pushed back on the agency's NZE-by-2050 plan. This primarily is because of its requirement to completely halt fossil-fuel exploration and spending on new projects. Japan and Australia have pushed back against this plan, citing energy security concerns. Officials from both countries have stated that they will continue developing fossil fuel projects, as a back-up to renewables. Japan has been falling behind on renewable electricity generation (Chart 6). Expensive renewables and the unpopularity of nuclear fuel could make it harder for the world’s fifth largest fossil fuels consumer to move away from fossil fuels. Around the same time the IEA released its report, Australia committed $464 million to build a new gas-fired power station as a backup to renewables. Chart 6Japan Will Continue Building Fossil-Fuel Back-Up Generation Just days after the IEA report was published, the G7 nations agreed to stop overseas coal financing. This could have devastating effects for emerging and developing nations‘ electricity grids which are highly dependent on coal. In 2020 70% and 60% of India and China’s electricity respectively were produced by coal (Chart 7).5 Chart 7EM Economies Remain Reliant On Coal-Fired Generation Near-Term Copper Supply Risks Rise Even though inventories appear to be rebuilding, mounting political risks keep us bullish copper (Chart 8). Lawmakers in Chile and Peru are in the process of re-writing their constitutions to, among other things, raise royalties and taxes on mining activities in their respective countries. This could usher in higher taxes and royalties on mining for these metals producers, placing future capex at risk. In addition, Chile's state-owned Codelco, the largest copper producer in the world, fears a bill to limit mining near glaciers could put as much as 40% of its copper production at risk.6 None of these events is certain to occur. Peruvian elections, for one thing, are too close to call at this point, and Chile has a history of pro-business government. However, these are non-trivial odds – i.e., greater than Russian roulette odds of 1:6 – and if any or all of these outcomes are realized, higher costs in copper and lithium prices would result, and miners would have to pass those costs on to buyers. Bottom Line: We remain bullish base metals, especially copper. Another leg up in copper would pull base metals higher with it. We would look to get long on politically induced sell-offs, particularly with the USD weakening, as expected Chart 8Global Copper Inventories Rebuilding But Still Down Y/Y   Robert P. Ryan Chief Commodity & Energy Strategist rryan@bcaresearch.com Ashwin Shyam Research Associate Commodity & Energy Strategy ashwin.shyam@bcaresearch.com     Commodities Round-Up Energy: Bullish Next Tuesday's OPEC 2.0 meeting appears to be a fairly staid affair, with little of the drama attending previous gatherings. Russian minister Novak observed the coalition would be jointly "calculating the balances" when it meets, taking into account the likely official return of Iran as an exporter, according to reuters.com. We expect a mid-year deal on allowing Iran to return to resume exports under the nuclear deal abrogated by the Trump administration in 2019, and reckon Iran has ~ 1.5mm b/d of production it can bring back on line, which likely would return its crude oil production to something above 3.8mm b/d by year-end. We are maintaining our forecast for Brent to average $64.45/bbl in 2H21; $75 and $78/bbl, in 2022 and 2023, respectively. By end 2023, prices trade to $80/bbl. Our forecast is premised on a wider global recovery going into 2H21, and continued production discipline from OPEC 2.0 (Chart 9). Base Metals: Bullish Our stop-losses was elected on our long Dec21 copper position on May 21, which means we closed the position with 48.2% return. The stop loss on our long 2022 vs short 2023 COMEX copper futures backwardation recommendation also was elected on May 20, leaving us with a return of 305%. We will be looking for an opportunity to re-establish these positions. Precious Metals: Bullish We expect the collapse in bitcoin prices, the US Fed’s decision to not raise interest rates, and a weakening US dollar to keep gold prices well bid (Chart 10). China’s ban on cryptocurrency services and Musk’s acknowledgment of the energy intensity of Bitcoin mining sent Bitcoin prices crashing. The Fed’s decision to keep interest rates constant, despite rising inflation and inflation expectations will reduce the opportunity cost of holding gold. According to our colleagues at USBS, the Fed will make its first interest rate hike only after the US economy has reached "maximum employment". The Job Openings and Labor Turnover Survey reported that job openings rose nearly 8% in March to 8.1 million jobs, however, overall hiring was little changed, rising by less than 4% to 6 million. As prices in the US rise and the dollar depreciates, gold will be favored as a store of value. On the back of these factors, we expect gold to hit $2,000/oz. Ags/Softs: Neutral Corn futures were trading close to 20% below recent highs earlier in the week at ~ $6.27/bu, on the back of much faster-than-expected plantings. Chart 9 Chart 10     Footnotes 1     Please refer to Goehring & Rozencwajg’s Q1 2021 market commentary. 2     Please see Copper cupboard remains bare as discoveries dwindle — S&P study published by mining.com 20 May 2021. 3    Please see Net Zero by 2050 – A Roadmap for the Global Energy Sector, published by the IEA. 4    Please see China’s climate goal: Overhauling its electricity grid, published by Aljazeera.  5    We discuss this in detail in Surging Metals Prices And The Case For Carbon-Capture published 13 May 2021, and Renewables ESG Risks Grow With Demand, which was published 29 April 2021.  Both are available at ces.bcaresearch.com. 6    Please see A game of chicken is clouding tax debate in top copper nation, Fujimori looks to speed up projects to tap copper riches in Peru and Codelco says 40% of its copper output at risk if glacier bill passes published by mining.com 24, 23 and 20 May 2021, respectively.    Investment Views and Themes Strategic Recommendations Tactical Trades Commodity Prices and Plays Reference Table Trades Closed in 2021 Summary of Closed Trades

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Highlights The selloff in crypto-currencies on May 19 may be overblown but the risk of government intervention is a rising headwind for this asset class. While environmental concerns are a threat to Bitcoin, the entire crypto-currency complex faces a looming confrontation over governance. Digital currencies are a natural evolution of money following coinage and paper. Moreover a sizable body of consumers is skeptical of governments and traditional banking. Loose monetary conditions are fueling a speculative mania. However, governments fought for centuries to gain a monopoly over money. As crypto-currencies become more popular, governments will step in to regulate and restrict them. Central bank digital currencies (CBDCs) threaten to remove the speed and transactional advantage of crypto-currencies, leaving privacy/anonymity as their main use-case. Feature The prefix “crypto” derives from the Greek kruptos or “hidden.” This etymology highlights one of the biggest problems confronting the crypto-currency craze in financial markets today. Speed and anonymity are the greatest assets of the digital tokens. But the former advantage is being eroded by competitors while the latter is becoming a political liability. In the 2020s, governments are growing stronger and more interventionist, not weaker and more laissez faire. Chart 1Loose Money Fuels Crypto Mania Bitcoin and rival crypto-currency Ethereum fell by 29.5% and 43.2% in intra-day trading on May 19, only to finish the day down by 13.8% and 27.2%, respectively. The market panicked on news that China’s central bank had banned firms from handling transactions in crypto-currencies. What really happened was that China’s National Internet Finance Association, China Banking Association, and Payment and Clearing Association issued a statement merely reiterating a 2013 and 2017 policy that already banned firms from handling transactions in crypto-currencies. These three institutions also warned about financial speculation regarding crypto-currencies.1 The crypto market suffered a spike in volatility because it is in the midst of a speculative mania. In the last five years, total market capitalization of crypto-currencies has risen from around $7 billion to $2.3 trillion,2 recording a 34,000% gain. Some crypto-currencies have even recorded returns in excess of that number over a shorter horizon. Price gains have been driven by retail buyers who may or may not know much about this new asset class (Chart 1). Prior to the May 19 selloff, prices had grown overextended and recent concerns over the environment, sustainability, and governance (ESG) had shaken confidence in Bitcoin and its peers. Chinese authorities have already banned financial firms from providing crypto services in a bid to deter ownership of crypto-currencies. And China is not alone. The latest market jitters are a warning sign that government interference in the crypto-currency market is a real threat. Regulation and sovereign-issued digital currencies are starting to enter the fray. While ultra-dovish central bank policies are not changing soon, and therefore crypto-currency price bubbles can continue to grow, crypto-currencies will remain subject to extreme volatility and precipitous crashes. In this report we argue that the fundamental problem with crypto-currencies is that they threaten the economic sovereignty of nation-states. Environmental degradation, financial instability, and black market crime, and other concerns about cryptos have varying degrees of merit. But they provide governments with ample motivation to pursue a much deeper interest in regulating a technological innovation that has the power to undermine state influence over the economy and society. Government scrutiny is a legitimate reason for crypto buyers to turn sellers. Does The World Need Crypto-Currencies? Broadly speaking, there are two primary justifications for crypto-currencies, centered on a transactional basis: speed and privacy/anonymity. The crux of crypto-currency creation rests on these two use cases.3 The speed of crypto-currencies comes from their ability to increase efficiency in local and global payment systems by facilitating financial transactions without the need of a third party (e.g. a financial institution). Cross-border settlement of traditional (fiat) currency transactions processed through the standard SWIFT communications system takes up to two business days. Most transactions involving crypto-currencies over a blockchain network are realized in less than an hour, cross-border or not.4 The fees involved with third-party payments are often more expensive than transacting with crypto-currencies. Simply put, excluding the “middleman” can save money. This is a selling point in a global market that expects to see retail cross-border transactions reach $3.5 trillion by the end of 2021, of which up to 5% are associated with transaction-based fees.5 But this breakthrough in payment system technology can be overstated and is not the main reason for using crypto-currency. Speculation drives current use, especially given that there is speculative behavior even among those who believe that cryptos are safe-haven assets or promising long-term investments (Chart 2). Chart 2Crypto-Currency Use Driven By Speculation Chart 3Consumers Growing Skeptical Of Banking Regulation If a person wants to buy an item from a company in a distant country, that person could use a crypto-currency just as he or she could use a credit card. Both parties would have a secure medium of exchange but, unlike with a credit card, both would avoid using fiat currencies. Neither party could conduct the same transaction using gold or silver. The crucial premise is the existence of an online community of individuals and firms who for one reason or another want to avoid fiat currencies. From a descriptive point of view, the crypto-currency phenomenon implies a lack of trust in modern governments, or at least their monetary systems, and an assertion of individual property rights. The list of crypto-currencies continues to grow. To date, there are approximately 9,800 of them. Some are trying to prove their economic value or use, while others have been created with no intended purpose or problem to solve. Even so, there has yet to be a crypto-currency that overwhelms the use of slower fiat money. In a recent Special Report, BCA Research’s Foreign Exchange Strategist Chester Ntonifor showed that crypto-currencies still have a long way to go to have a chance at replacing fiat monies. While crypto-currencies are showing signs of significant improvement as mediums of exchange, they still fall short as stores of value and units of account. The other primary case for crypto-currencies is privacy or anonymity. The bypassing of intermediaries implies a greater control of funds by the two parties of a transaction. Crypto-currencies are said to be more “private” compared to fiat money. Fiat money is controlled by governments and banks while crypto-currencies have only “owners.” Crypto-currencies are anonymous because they are stored in digital wallets with alphanumeric sequences – there is a limited personal data trail that follows crypto-currency compared to those of electronic fiat currency transactions. In a post-9/11, post-GFC, post-COVID world where a sizable body of consumers is growing more skeptical of government surveillance and regulation and banking industry practices (Chart 3), crypto-currencies give users more than just a means to transact with. However, privacy is not the same as security. Hacking and fraud can affect cryptos as well as other forms of money and attacks will increase with the value of the currencies. Bitcoin At The Helm Of Crypto-Currency Market Chart 4Bitcoin Slows Bitcoin has cemented its status as the number one currency in the crypto-verse.6 It is considered to be the first crypto-currency created, it is the most widely accepted, it is touted as a store of value or “digital gold,” and it is the most featured in quoting alternative crypto-currency pairs across crypto exchanges. As it stands, Bitcoin accounts for around 42% of total crypto-currency market capitalization.7 This share has declined from around 65% at the start of 2021 on the back of the frenzied rise of several alternative coins.8 But rising risks to Bitcoin’s standing will cause the entire crypto-market to retreat. In a Special Report penned in February, BCA Research’s Chief Global Strategist Peter Berezin argued that Bitcoin is more of a trend than a solution and that its usefulness is diminishing. Bitcoin’s transaction speed is slowing and its transaction cost is rising (Chart 4). Slowing speed and rising cost on the Bitcoin network are linked to a scalability problem. The crypto-currency’s network has a limited rate at which it can process transactions related to the fact that records (or “blocks”) in the Bitcoin blockchain are limited in size and frequency. This means that one of its fundamental justifications, transactional speed, will become less attractive over time, should the network not address these issues. Bitcoin also consumes a significant amount of energy, a controversy that is gaining traction in the crypto-currency market after Elon Musk, the “techno-king” of Tesla, cited environmental concerns in reversing his decision to accept Bitcoin payment for his company’s electric vehicles. Energy consumption rises as more coins are mined, since mining each new Bitcoin becomes more computer-power intensive. The need for computing power and energy will continue to increase until all 21 million Bitcoins (total supply) are mined, which is currently estimated to occur by the year 2140. Strikingly, the energy needed to mine Bitcoin over a year are comparable to a small country’s annual power consumption, such as Sweden or Argentina (Chart 5). Chart 5Bitcoin Consumes More Energy Than A Small Country … Bitcoin also generates significant quantities of electronic waste (Chart 6). Chart 6… And Generates A Lot Of Electronic Waste Bitcoin mining is heavily domiciled in China, which accounts for 65% of global mining activity (Figure 1). China’s energy mix is dominated by coal power, which makes up approximately 65% of the country’s total energy mix even after a decade of aggressive state-led efforts to reduce coal reliance. Of this, coal powered energy makes up approximately 60% of Bitcoin’s energy mix in China.9 With several countries aiming to minimize carbon emissions, and with approximately 60% of Bitcoin mining powered by coal-fired energy globally,10 Bitcoin imposes a major negative environmental impact. Figure 1Bitcoin Mining Well Anchored In Asia Bitcoin does not shape up well when compared to gold’s energy intensity either. Bitcoin mining now consumes more energy than gold mining over a single year. While the energy difference is not large, the economic value is. Gold’s energy consumption to economic value trade-off is lower than that of Bitcoin. The production value of gold in 2020 was close to $200 billion, while Bitcoin was measured at less than $25 billion (Chart 7A). On a one-to-one basis, gold even has a lower carbon footprint than Bitcoin (Chart 7B). Chart 7AGold Outshines Bitcoin On Production Value And Carbon Footprint Chart 7BGold Outshines Bitcoin On Production Value And Carbon Footprint Crypto-currency energy consumption and carbon footprint will attract the attention of government regulators. Of course, not all crypto-currencies are heavy polluters. But if the supply of cryptos is constrained by mining difficulties then they will require a lot of energy. If the supply is not constrained then the price will be low. Government Regulation Is Coming Environmental concerns point to the single greatest threat to crypto-currencies – the Leviathan, i.e. the state. In this sense the crypto market’s wild fluctuations on May 19, at the mere whiff of tougher Chinese regulation, are a sign of what is to come. Governments around the world have so far left crypto-currencies largely unregulated but this laissez-faire attitude is already changing. Environmental regulation has already been mentioned. Governments will also be eager to expand their regulatory powers to “protect” consumers, businesses, and banks from extreme volatility in crypto markets. But investors will underrate the regulatory threat if they focus on these issues. At the most basic level, governments around the world will not sit idly by and lose what could become significant control of their monetary systems. The ability to establish and control legal tender is a critical part of economic sovereignty. Governments won control of the printing press over centuries and will not cede that control lightly. If crypto-currencies are adopted widely, then finance ministries and central banks will lose their ability to manipulate the money supply and the general level of prices effectively. Politicians will lose the ability to stimulate the economy or keep inflation in check. Most importantly, while one may view such threats as overblown, it is governments, not other organizations, that will make the critical judgment on whether crypto-currencies threaten their sovereignty. Throughout the world, most crypto-currency exchanges are regulated to prevent money laundering. Crypto-currencies are not legal tender and, aside from Bitcoin, their use is mostly banned in China (Table 1). However, more specialized regulation that targets energy and economic use has yet to be brought into law across the world. Table 1World Governments Will Not Relinquish Hard-Fought Monopolies Over Money Supply In China, initial coin offerings (ICOs – the equivalent of an initial public offering on the stock market) and trading platforms are banned from engaging in exchanges between the yuan and crypto-currencies or tokens. In fact, China recognizes crypto-currencies only as virtual commodities or virtual property. India is another country where exchanges and ICOs are banned. While crypto-currencies are not banned, they are not legal tender. Indian policymakers have recently proposed banning crypto-currencies, however. The proposed legislation is one of the world’s strictest policies against crypto-currencies. It would criminalize possession, issuance, mining, trading, and transferring crypto-assets. If the ban becomes law, India would be the first major economy to make holding crypto-currency illegal. Even China, which has banned mining and trading, does not penalize possession. In the US, Secretary of the Treasury Janet Yellen has already expressed concerns regarding the illicit use of cryptos for supposed criminal gain.11 She is in alignment with European Central Bank President Christine Lagarde. Because of the anonymity of crypto-currencies, identifying users behind illicit transactions is difficult. This means regulators face headwinds in identifying transactions that are made for criminal gain, as compared to fiat transactions. Governments have long dealt with the anonymity of cash but they have ways of monitoring bank accounts and paper bills. Crypto-currencies are beyond their immediate sight of control and therefore will attract growing scrutiny and legislative action in this regard. The Colonial Pipeline ransomware attack on May 7, which temporarily shuttered about 45% of the fuel supply line for the eastern United States, illustrates the point. The DarkSide group of hackers who orchestrated the attack demanded a ransom payment of $4.4 million worth of Bitcoin, which Colonial Pipeline paid them on May 7. Shortly thereafter, unspecified “law enforcement agencies” clawed back the $4.4 million from the hackers’ account (transferring it to an unknown address) and DarkSide lost access to its payment server, DOS servers, and blog. This episode should not be underrated. It was a successful, large-scale cyber-attack on critical infrastructure in the world’s most powerful country. It highlighted the illicit uses to which crypto-currencies can be put. True, criminals demand ransoms in fiat money as well – and many crypto-currency operators will distance themselves from the criminal underworld. Nevertheless governments will give little slack to an emerging technology that presents big new law enforcement challenges and is not widely used by the general public. Ultimately governments will pursue their sovereign interests in controlling money, the economy, and trade, listening to their banking lobby, expanding their remit to “protect” consumers, and cracking down on illicit activity. Governments are not capable of abolishing crypto-currencies altogether, or the underlying technology of blockchain. But they will play a large and growing role in regulating them. Central Banks Advancing On Digital Currencies Central bank digital currencies (CBDCs) will leave crypto-currencies in the realm of speculative assets. CBDCs are a form of digital money denominated in a country’s national unit of account and represent a liability on a central bank’s balance sheet. This is different from current e-money that represents a claim on a private financial institution’s balance sheet. It is also different from crypto-currencies, because there is a central authority behind a CBDC, unlike with crypto-currencies due to their decentralized nature. In China, the People’s Bank of China (PBoC) has suggested its rollout of a digital yuan is “ready” despite no release to date. Beta testing is ongoing in several provinces. The PBoC’s justification for a digital yuan comes from China’s growing cashless economy. The transition away from cash is largely thanks to mobile payment platforms like Alibaba’s Alipay and Tencent’s WeChat Pay, which, between the two of them, control almost the entire mobile payments market of some 850 million users. There is a significant amount of systemic risk in this system – one reason why Chinese authorities have recently subjected these companies to new scrutiny and regulation. Should Alibaba or Tencent go bankrupt, the local payment system will crash. The PBoC’s efforts will increase competition in the local payments space and reduce this systemic risk. Policymakers are also concerned that as Chinese citizens choose to hold their money in digital wallets provided by Alibaba and Tencent instead of bank accounts, liquidity is being drained from the traditional banking system, putting deposit levels at banks under strain, and posing risks to liability matching. The digital yuan will still involve a third party, unlike crypto-currencies which do not. Doing away with commercial banks is not a reality – indeed the Chinese Communist Party seeks to buttress the state-owned commercial banks in order to maintain control of the economy. What the digital yuan does, and other CBDCs will do too, is utilize blockchain technology, which is faster and more secure than traditional payment networks. In the US, the Fed has been studying the viability of a CBDC US dollar. The Fed has stated that it is carefully exploring whether a CBDC will lead to “safer, less expensive, faster, or otherwise more efficient payments.” While the Fed has yet to find a single standout case for a CBDC US Dollar, Fed Chair Jerome Powell said last year that the US has a “competitive payments market” with “fast and cheap services, particularly in comparison to other nations exploring a CBDC.” To date, the Fed’s observation is that many of the challenges that CBDCs hope to address do not apply to the US, including disuse of physical cash, narrow reach or high concentration of banking, and weak infrastructure for payment systems. Rather, the Fed is more focused on developing the FedNow real-time payment system for private banks. This is much the same as in Europe, where physical cash still plays a major role in day-to-day economic activity and where local payment systems are fast and secure. But central banks around the world continue to engage in work centered around CBDCs (Charts 8A and 8B) – and China’s progress will encourage others to move faster. Advanced economies are mostly interested in creating a safer and more efficient payment system, while emerging and developed economies have interest across several areas such as financial stability, monetary policy setting, and inclusiveness of banking, as well as efficiency and safety (Chart 9). CBDCs are especially attractive to emerging market policy makers at targeting those who lack access to traditional banking. Chart 8ACentral Banks Advancing On CBDC Work Chart 8BCentral Banks Advancing On CBDC Work Chart 9Central Banks CBDC Interest Areas In remote areas, access to banking is scarce and expensive. CBDCs can help solve this problem. Individuals would have CBDC accounts directly on a central bank ledger. They could then access their money and transact through a digital wallet application that is linked to the CBDC account. Giving people access to digital currency would allow them to transact quickly, in remote settings, without the need of hard currency. Monetary policy transmission is also better in advanced economies. In emerging markets, there are bottlenecks in local financial markets. Looser central monetary policy does not always translate into cheaper financing across the economy. In remote and poverty stricken areas, monetary policy transmission is sticky, meaning high costs of borrowing can persist even through accommodative policy cycles. This is a smaller issue in advanced economies. Payment systems in advanced economies are due an overhaul in security and efficiency, and CBDCs and blockchain technology will provide this. CBDCs will prove to be just as efficient to transact with as any crypto-currencies available today. CBDCs will also be legal tender and accepted by all vendors. The anonymity factor will be lost but this will not be a problem for most users (whereas legal issues will become a problem for crypto-currencies). The probability of central banks issuing CBDCs in both the short and medium term, both in the retail and wholesale space, is rising. If advanced economies like those of the G7 issue CBDCs soon, policy makers will undoubtedly ensure the use of it over the currently circulating and partially accepted crypto-currencies. The endgame will leave crypto-currencies in the highly speculative asset class, perhaps even in the black market where anonymity is valued for transactions that wish not to be tracked. Investment Takeaways Prices of crypto-currencies may continue to rise given sky-high fiat money creation amid the COVID pandemic and ultra-low interest rates. Digitalization is the natural next step in the evolution of money from precious metals to paper banknotes to electronic coin. But the market leader, Bitcoin, is encountering more headwinds. The primary case for the use of Bitcoin is challenged due to slowing transaction speeds and rising transaction costs. The virtual currency is primarily mined using coal-powered energy, resulting in growing scrutiny from governments and consumers. Government regulation is entering the ring and policymakers will take an increasingly heavy-handed role in trying to ensure that cryptos do not undermine economic sovereignty, financial stability, and law and order. When central banks begin to rollout digital currencies, especially those domiciled in advanced economies, crypto-currencies as medium of exchange will lose much of their allure. Crypto-currencies will remain as anti-fiat currencies and speculative assets. Risks To The View Given the controversy surrounding crypto-currencies, it is only fair to state outright the risks to our view. We would also recommend clients read our colleague Dhaval Joshi’s latest bullish take on Bitcoin. First, scaling up Bitcoin’s network and processing transactions in batches instead of single transactions will resolve transaction time and cost risks, restoring efficiency. This is a clear solution to efficiency concerns. However, scaling and batching transactions are not on the immediate horizon of Bitcoin developers. Bitcoin’s network will still need to undergo another “halving” in order for this risk to subside and for the network to scale. A halving of the network will only occur again in 2024.12 Second, on the environment: Bitcoin mining is not solely dependent on fossil fuel energy that gives it a “dirty” footprint. Renewables already make up some 25% of Bitcoin mining. Increasing the use of renewables in Bitcoin’s energy mix will help lower its environmental impact. However, this is easier said than done. Global renewable energy has yet to scale up to a point where it can consistently out-supply existing fossil-fuel energy. Mining hardware also has its associated carbon footprint that would need to be addressed. And location matters too. Crypto-currency mining farms are large-scale projects. Simply uprooting operations to a country that could lower the carbon footprint of a mining farm or two is not viable due to the costs involved. Hence crypto-currency mining will probably continue to be a “dirty” operation but a rapid shift to renewables would challenge our thesis. Bitcoin’s network is also based off a “proof of work” protocol. Miners must prove that a certain amount of computational effort has been expended for confirming blocks on the network, allowing transactions to be processed. Proof of work is energy intensive. Other crypto-currencies, like Ethereum, will adopt a “proof of stake” protocol. Simply put, transactions are confirmed by users and their stake in the associated crypto-currency. Proof of stake is less energy intensive compared to proof of work. Third, as to government regulation, the longer policymakers take to enact legislation targeting crypto-currencies, the larger their market will grow. Regulation in China and India may set a benchmark for major economies but not all will follow in the Asian giants’ footsteps. Some governments have been slow to study crypto-currencies, meaning legislation aimed at governing or regulating them may still be long in coming. Innovation is a good thing and free economies will not wish to restrain crypto-currencies or blockchain technology unduly, for fear of missing out. Fourth, on CBDCs, some central banks may only adopt them based on their respective economic needs. However, rising crypto-currency populism drives associated economic risks which can force the hands of central banks to adopt CBDCs in lieu of said needs. Each country faces unique challenges. Some central banks may not want to be left behind even if they believe their policy framework is facilitating economic activity efficiently. While the Fed has stated that it will not adopt a CBDC for the primary reason of ensuring payment security since it believes it already has a safe system in place, this view will change. The Fed could justify a move to a CBDC US dollar on the single basis of transitioning to a more sophisticated technology for the future. The Fed will not want to be caught behind the curve considering the PBoC is priming its digital yuan for release soon. Technological leadership is a strategic imperative of the United States and that imperative applies to financial technology as well as other areas.   Guy Russell Research Analyst GuyR@bcaresearch.com Matt Gertken Vice President Geopolitical Strategy mattg@bcaresearch.com Footnotes 1 Muyao Shen, “China Reiterates Crypto Bans From 2013 and 2017”, coindesk, May 18, 2021, coindesk.com. 2 As of May 11, 2021. 3 There are several other reasons or “problems” that crypto-currencies are created for or to solve, but speed and privacy form the basis of crypto-currencies first coming into existence. 4 Not all crypto-currencies transact in less than an hour. But there are many that transact in several minutes and in some cases, mere seconds. As the leading crypto-currency, Bitcoin takes approximately one hour for a transaction to be fully verified over its network. 5 “McKinsey’s Global Banking Annual Review”, McKinsey, Dec. 9, 2020, mckinsey.com. 6 We use Bitcoin as an example to understand the risk and impact of forthcoming government regulation and competition. Because of Bitcoin’s status, any significant risks that threaten the crypto-currency’s standing as the number one currency will threaten the entire market. 7 As of May 20, 2021. Figure varies daily. See www.coinmarketcap.com for more information. 8 Alternative currencies such as Ethereum, Ripple, Binance Coin, Dogecoin, and Cardano have chipped away at Bitcoin’s crypto-market dominance through 2021. 9 According to The Center For Alternative Finance, The University Of Cambridge. 10 According to The Center For Alternative Finance, The University Of Cambridge. 11 Data on the use of crypto-currencies for illicit activitiessays otherwise. Of all crypto-currency transactions, it is estimated that only 2.1% are used for illicit activities. See “2021 Crypto Crime Report”, Chainalysis, chainalysis.com. 12 A Bitcoin halving is when the reward for mining Bitcoin transactions is cut in half. This event also cuts Bitcoin's inflation rate and the rate at which new Bitcoins enter circulation, in half. Bitcoin last halved on May 11, 2020.

Highlights The reason to own stocks is not profit growth. The combination of unspectacular sales growth and down-trending profit margins means that global profit growth will be lacklustre, at best. The reason to own stocks is that the ultimate low in the T-bond yield is yet to come. This ultimate low in the T-bond yield will define the ultimate high in the global stock market’s valuation and the end of the structural bull market in stocks. Until that ultimate low in bond yields, long-term investors should own stocks… …and tilt towards long-duration growth sectors and growth-heavy stock markets such as the S&P500 that will benefit most from the final collapse in yields. The correction in DRAM, corn, and lumber prices suggests that the recent mania in inflation expectations is about to end. Fractal trade shortlist: copper and tin are fragile, go long T-bonds versus TIPS. Feature Chart of the WeekGlobal Profits Surged During The Credit Boom, But Have Gone Nowhere Since The main reason to own stocks is not what you think. The usual long-term argument to own stocks is based on profit growth – specifically, that an uptrend in profits drives up stock prices. Except that since 2008, this is not true (Chart of the Week and Chart I-2). Profits have barely grown, yet the global stock market has doubled.1 Chart I-2Since The Credit Boom Ended, Global Profits Have Barely Grown As profits have barely grown since 2008, the main reason that the global stock market has doubled is that the valuation paid for those profits has surged. Looking ahead, we expect this to remain the main reason to own stocks. The Reason To Own Stocks Is Not Profit Growth Profits are the product of sales and the profit margin on those sales. During the credit boom of the nineties and noughties, the strong tailwind of credit creation supercharged sales growth. At the same time, the profit margin on those sales trended higher (Chart I-3). Chart I-3Since The Credit Boom Ended, Sales Growth Has Slowed And Profit Margins Have Trended Lower Hence, in the decade leading up to 2008, global stock market profits surged, outstripping both sales and world GDP. Then the credit boom ended, and profits languished, because: Absent the tailwind from the credit boom, sales growth moderated. The profit margin trended lower. In the post-pandemic years, we expect both trends to persist. The credit boom is not coming back. Furthermore, as the pandemic recession was not protracted, sales are not at a depressed level from which they can play a sharp catch-up, as they did after the 2008 recession and the 2015 emerging markets recession. The structural downtrend in the profit margin will continue. Meanwhile, the structural downtrend in the profit margin will continue. Governments are desperate to mitigate – or at least, contain – the ballooning deficits that have paid for their pandemic stimuluses. Raising corporate taxes from structurally depressed levels is an easy and politically expedient response, as we have already seen from both the Biden administration in the US, and the Johnson administration in the UK. Higher corporate taxes will weigh on structural profit margins (Chart I-4). Chart I-4Corporate Taxes Will Rise From Structurally Depressed Levels The combination of unspectacular sales growth and down-trending profit margins means that global profit growth will continue to be lacklustre, at best. The Reason To Own Stocks Is That The Ultimate High In Valuations Is Yet To Come To repeat, the main reason that the global stock market has doubled since 2008 is that its valuation has surged (Chart I-5). Chart I-5The Main Driver Of The Stock Market Has Been Valuation Expansion In turn, the stock market’s valuation has surged because bond yields have plummeted. Empirically, the valuation of the global stock market is tightly connected with the simple average of the (inverted) yields on the safest sovereign bond, the US T-bond, and the riskier sovereign bond, the Italian BTP. The main reason that the global stock market has doubled since 2008 is that its valuation has surged. Through 2012-13, the decline in the Italian BTP yield, by signifying the fading of euro break-up risk, boosted stock valuations. In more recent years though, it has been the US T-bond yield that has been more influential in driving the global stock market’s valuation (Chart I-6). Chart I-6The Stock Market's Valuation Expansion Is Due To Lower Bond Yields But the crucial point to grasp is that the relationship between the declining bond yield and stock market valuation becomes exponential. This is because as bond yields approach their lower bound, bond prices have less additional upside but considerably more downside. This extra riskiness of bonds means that investors demand a diminishing risk premium on equities versus bonds. So, as bond yields decline, the required return on equities – which equals the bond yield plus the risk premium – collapses. And as valuation is just the inverse of required return, valuations soar. Chart I-7 and Chart I-8 demonstrate this exponential relationship in practice. Note that the bond yield is on the logarithmic left scale while the stock market’s valuation is on the linear right scale. The logarithmic versus linear scale visually demonstrates that at a lower bond yield, a given change in the bond yield has a much greater impact on the stock market’s valuation. Chart I-7The Relationship Between Lower Bond Yields And Stock Market Valuation Expansion Is Exponential Chart I-8When Bond Yields Reach Their Ultimate Low, Stock Market Valuations Will Surge Specifically, if the 30-year yield in the US reached the recent low achieved in the UK, it would boost the stock market’s valuation by nearly 50 percent. We fully expect this to happen at some point in the coming years because of The Shock Theory Of Bond Yields which we introduced in last week’s report. In a nutshell, the shock theory of bond yields states that each successive deflationary shock takes the bond yield to a lower structural level, until it can go no lower. Although it is impossible to predict the timing and nature of individual shocks such as the pandemic, it is easy to predict the statistical distribution of shocks. On this basis, the likelihood of a net deflationary shock is 50 percent within the next three years, and 81 percent within the next five years. Whatever that deflationary shock is, and whenever it arrives, it will mark the ultimate low in the 30-year T-bond yield – at a level close to the recent low in the UK. This ultimate low in the T-bond yield will also define the ultimate high in the global stock market’s valuation and the end of the structural bull market in stocks. Until that ultimate low in bond yields, long-term investors should own stocks. And tilt towards long-duration growth sectors that will benefit most from the final collapse in yields. Growth sectors and growth-heavy stock markets such as the S&P500 will continue to outperform, as they have done consistently since 2008. The Inflation Bubble Is Bursting   The last couple of months has seen a mania in inflation expectations. As industries reconfigured for the end of lockdowns, supply bottlenecks in some commodities led to understandable spikes in their prices. These commodity price increases then unleashed fears about inflation. As investors sought inflation hedges, it drove up commodity prices more broadly … which added to the inflation fears…which added further fuel to the mania in inflation expectations. And so, the indiscriminate rally in commodities continued. The inflation bubble is bursting. But now it seems that the indiscriminate rally is over. DRAM prices have rolled over, belying the thesis that there is widespread shortage in semiconductors (Chart I-9). More spectacularly in the past week, the corn price has tumbled by 12 percent while the lumber price has slumped by 25 percent (Chart I-10). Chart I-9DRAM Prices Have ##br##Rolled Over Chart I-10Lumber Prices Are Correcting, Will Other Commodities Follow? Given that the commodity rally was indiscriminate, there is a danger that any correction will spread into other commodities like the industrial metals, copper and tin – especially as their fractal structures are at a level of fragility that has identified previous turning points in 2008, 2011, 2015, 2017 and 2020 (Chart I-11 and Chart I-12). Chart I-11Copper's Fractal Structure Is Fragile Chart I-12Tin's Fractal Structure Is Fragile In any case, the mania in inflation expectations is about to end. An excellent way to play this is to expect compression in the market implied inflation rate in T-bond yields versus TIPS yields (Chart I-13). Chart I-13The Mania In Inflation Expectations Is About To End Hence, this week’s recommended trade is to go long the 10-year T-bond versus the 10-year TIPS, setting a profit target and symmetrical stop-loss at 3.6 percent.   Dhaval Joshi Chief Strategist dhaval@bcaresearch.com   Footnotes 1  To clarify, Chart 2 shows world stock market earnings per share, both 12-month forward and 12-month trailing. Whereas Charts 1 and 3 show sales and net profits (not per share). Fractal Trading System Fractal Trades 6-Month Recommendations Structural Recommendations Closed Fractal Trades Closed Trades Asset Performance Equity Market Performance   Indicators To Watch - Bond Yields Chart II-1Indicators To Watch - Bond Yields - Euro Area Chart II-2Indicators To Watch - Bond Yields - Europe Ex Euro Area Chart II-3Indicators To Watch - Bond Yields - Asia Chart II-4Indicators To Watch - Bond Yields - Other Developed   Indicators To Watch - Interest Rate Expectations Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations  

Highlights Non-US stocks have greatly underperformed US equities over the last decade, but a leadership change might be underway. As such, equity flows could be an important factor in dictating currency trends over a cyclical horizon. The narrative in favor of non-US stocks includes a recovery in profits, cheap valuations, and a secular theme that will favor capital spending in traditionally “heavy” industries. Non-US growth should also overtake the US beyond 2021, when most of the global population is vaccinated. Cyclical currencies have historically tracked the relative performance of their respective bourses. This implies a lower dollar. Higher bond yields also present a formidable headwind for the outperformance of US stocks, relative to other markets. An outperformance of non-US bourses will be particularly favorable for the AUD, NOK, SEK, and GBP. The yen will likely play catchup towards the middle of the cycle. Feature Currencies respond to broad inflows, including into bonds, equities or foreign direct investment. For most of 2020, the dominant currency flows were from fixed income investors. As most short rates are now anchored near zero, the story is morphing towards the potential winners from a recovery, especially in the equity market sphere. Non-US stocks tend to outperform the US when the dollar is falling. That said, the causality-effect link is not so clear-cut, as we penned in our Special Report last year.1 Admittedly, a lower dollar boosts the common-currency returns for US-based investors, leading to more capital deployment in offshore markets. Meanwhile, commodities tend to do well when the dollar declines, benefiting emerging market and commodity-producing countries. Financing costs for non-US corporations borrowing in dollars are also eased. Historically, profit growth has been the ultimate driver of stock prices and profitability is more contingent on productivity gains than translation effects. This suggests the starting point for gauging relative equity flows, and the potential impact on currencies, is to evaluate which countries/economies could be primed for outperformance. Relative Growth As A Starting Point One of the key drivers of relative earnings growth between two countries is relative economic performance. Chart I-1 shows that earnings-per-share in the G10 relative to the US tended to improve when growth was shifting in favor of the rest of the world. This, in turn, has been a key driver of relative equity performance. Chart I-1Relative Profits And Relative Growth What is remarkable is that this relationship has been pretty consistent across countries, including those that have huge exposures to the global economy such as Sweden, Norway, or even the United Kingdom. In general, relative economic performance has driven relative EPS growth (Chart I-2A & 2B). The reason is that these bourses still have a sizeable dependence on the domestic economy. Chart I-3 shows that for even the most export-driven economies, exposure to domestic sales is still at least 20%. Australia, a commodity country has almost 60% of sales from domestic sources. Our bias is that non-US growth will start to outperform towards the backend of this year. This will pressure the dollar lower (Chart I-4). This conviction rests on three critical pillars: Chart I-2AA Cross Country Look At Relative Profits Growth Chart I-2BA Cross Country Look At Relative Profits Growth   Chart I-3Domestic Sales Matter A Lot For Global Equity Bourses Chart I-4The Dollar Trends With ##br##Relative Growth   The rest of the world will catch up in vaccination campaigns relative to the US. This is almost a fait accompli. Canada is well behind in terms of vaccination progress compared to the US or the UK (Chart I-5). But in Quebec, where BCA is headquartered, Premier François Legault has suggested that everyone who wants a vaccine will be able to get their first dose by June 24. Relative employment growth in Canada is already picking up, and the central bank has already begun tapering asset purchases ahead of the Fed. The broader message is that the service sector has been held hostage by relatively closed economies outside the US. This will change as economies open up.   Producer prices (PPI) are picking up globally and the US is leading the pack. This will also rotate in favor of other economies. Producer prices first took off in the US as the sectors that benefited from the pandemic were those related to technology and healthcare. Norway also gained from the rebound in oil prices. Other countries should begin to catch up, as demand for goods and services broadens beyond the pandemic-related scope (Chart I-6). From a longer-term perspective, PPI usually peaks and troughs in the US ahead of other economies. Again, as we exit a recession, consumption tends to broaden from defensive goods towards more discretionary spending. Given that other economies are bigger producers of these discretionary items, this should start to shift relative pricing power towards these countries (Chart I-7). Non-US growth has been held hostage to cascading crises since the US housing market bust. In 2010, we had the euro area debt crisis. In 2011, the Fukushima disaster knocked down Japanese growth. In 2015, tight monetary policy in China led to a global manufacturing recession. In short, rest-of-world growth has not been able to catch breath for a decade. Chart I-5Many Countries Will Replicate The US and UK Vaccination Success Chart I-6Global PPIs Are ##br##Picking Up   Chart I-7US PPI Usually Leads Other Countries The silver lining is that the COVID-19 crisis has ushered in coordinated global monetary and fiscal stimulus. For the first time in a long while, non-US growth can start to outperform, according to IMF estimates (Chart I-8). Chart I-8The IMF Expects Non-US Growth To Outperform Flows tend to gravitate to capital markets with the highest expected returns, and this is certainly the case when US versus non-US stocks are concerned. If we accept the premise that relative growth matters for equity allocations, then it also makes sense that relative equity performance will coincide with currency performance, due to portfolio flows. Across the G10 economies, getting the equity call right has usually been synonymous with having the appropriate currency strategy (Chart I-9). This is especially the case since equity flows have been supportive of the dollar (Chart I-10). Chart I-9ACurrencies And Equities Move Together Chart I-9BCurrencies And Equities Move Together Chart I-10Equity Flows Have Been Supportive Of The Dollar A More Quantitative Approach While relative growth is important, it is not the sole factor in determining which countries or sectors will outperform. Most investors have at least two other powerful tools that have stood the test of time in making equity allocations. These include the valuation starting point, and the historical return on capital. Valuation is the easiest place to start. Over time, non-US bourses have tended to outperform the US when the relative valuation starting point was attractive. This has been especially true around recessions, when leadership changes tend to occur. Chart I-11A, 11B, 11C, and 11D show that countries such as Japan, Mexico, and Germany should sport more attractive returns over the next decade compared to the US. The list is not comprehensive, but our previous work suggests this valuation tool works across many countries and various geographies. Chart I-11AValuation Matters For Long-Term Returns Chart I-11BValuation Matters For Long-Term Returns Chart I-11CValuation Matters For Long-Term Returns Chart I-11DValuation Matters For Long-Term Returns   Not surprisingly, the currencies that are the most undervalued in our models also have cheap equity markets. These include the Scandinavian currencies, commodity plays, the Japanese yen, and the pound. A rerating of these markets will be synonymous with a rerating in their currencies (Chart I-12). The rise in global bond yields will also prove to be a formidable headwind for US stocks. Technology constitutes 28% of the US equity market, the largest allocation within the G10. Together with defensive sectors such as health care and consumer staples, this ratio rises to 60%. As a result, the relative performance of the US equity market has been inversely correlated to bond yields (Chart I-13). Should bond yields continue to gravitate higher over the next few years, this will lead to a powerful rotation towards more cyclical bourses. The rise in yields will be particularly favorable for deep value sectors like banks (due to rising net interest margins) and commodities (due to inflation protection). Chart I-12The Dollar Remains ##br##Expensive Chart I-13US Outperformance Has Dovetailed With Lower Bond Yields Going forward, expected return on capital will be more difficult to gauge, but countries that have a history of providing superior shareholder returns are a good place to start. For example, we know that the winners of the last decade have had the largest returns on equity, as was the case for the winners during the prior decade. Given the mammoth task of performing this exercise on a cross-country basis, and across factors, we enlisted the help of our colleagues who run BCA’s Equity Analyzer platform. The EA platform provides a BCA score of 0 to 100 for all developed market stocks, according to their ranking on 30 carefully selected and curated factors. Crunching the numbers revealed a few interesting results: A long strategy based on selecting the top decile stocks according to their EA score outperformed both domestic and global indices (Chart I-14). The quality factor has been one of the better determinants of future stock market returns. The EA quality score is based on return on equity, asset growth, accruals, and margins. On this basis, the bourses with a higher concentration of quality stocks in their indices are found outside the US (Chart I-15). Using an overall blended score, which includes not only the quality factor, but also others such as value, size, and momentum, suggests investors will be rewarded by tilting away from the US. For example, 20%-30% of stocks in Scandinavian bourses make it into the top decile EA portfolio (Chart I-16). Even if one focuses solely on growth sectors such as technology and health care, non-US companies are still more attractive (Chart I-17). Chart I-14The BCA EA Platform Allows Investors To Pick Winners Chart I-15Quality Stocks Are Heavily Weighted Outside The US Chart I-16A Composite Score Ranks US Stocks Poorly Chart I-17Lots Of Attractive Growth Stocks Outside The US In a nutshell, non-US markets are attractive from a valuation standpoint and across a swathe of other metrics that have been useful in benchmarking future returns. An outperformance of non-US stocks will favor cyclical currencies, as portfolio flows gravitate to these markets. We are already selectively long a basket of Scandinavian currencies; we will be gradually accumulating other currencies such as the GBP, the CAD, and the JPY on weakness. Specifically, the yen is becoming interesting not only as portfolio insurance, but also as a play on the cyclical Japanese market. We will be covering these currencies in depth in upcoming reports. Housekeeping Three important central banks met this week. The general tone was dovish. The Bank of England kept policy roughly unchanged, but there were three important takeaways. First, the BoE suggested any pickup in UK inflation will be transitory. Second, the BoE will slow its bond purchases, as they approach the central bank’s target. And finally, growth estimates were revised upward. Our take is that the meeting was a non-event for cable in the near term and bullish longer term. The message from the Reserve Bank of Australia was bit more dovish. They kept open the possibility of additional measures on the July 6 meeting. Our bias is that the RBA is trying to fend off deflationary pressures from a strong currency. This only delays the bullish backdrop for the AUD. Next Tuesday’s budget will provide some information about additional support to the Aussie economy. The Norges bank remains on the path to hike interest rates later this year. This supports our bullish NOK thesis. We have been reluctant to establish fresh long positions as we enter a seasonally strong month for the dollar. However, our buy list is growing as we highlighted above. For now our open positions are highlighted on page 14.    Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Special Report, "Currencies And The Value-Versus-Growth Debate," dated July 10, 2020. Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 The recent data out of the US were mildly positive. The ISM Manufacturing PMI came in at 60.7 in April, well below an estimate of 65. The ISM Manufacturing New Orders Index came in at 64.3 in April, slightly below an expectation of 66.6. The trade deficit for March was -74.4B USD, in line with expectations. Personal Spending for March was 4.2% month-on-month, as expected. The dollar DXY index rose by 0.8% this week. While the PMI data for April came in on the mild side, inflationary pressures continue to build up as reflected in the robust New Orders, Backlog of Orders as well as the Prices Paid indices. That said, the Fed’s current stance is that price surges will likely be transitory. This is near-term negative for the greenback since it implies policy will not be tightened anytime soon. Report Links: Arbitrating Between Dollar Bulls And Bears - March 19, 2021 The Dollar Bull Case Will Soon Fade - March 5, 2021 Are Rising Bond Yields Bullish For The Dollar? - February 19, 2021 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 The recent Euro data have been mildly positive. Unemployment rate for March was 8.1%, slightly better than the predicted 8.3%. GDP fell 1.8% year-on-year, compared to an expected 2% decrease. CPI came in at 1.6% for April year-on-year, in line with expectation. German Retail Sales for March came in at 7.7% month-on-month comfortably beating a 3% expectation. Overall euro area retail sales surged 12% year-on-year in March, comfortably outpacing consensus of a 9.4% rise. The euro was down 0.9% against USD this week. However, as the weekly vaccination increase in both the US and the UK are slowing down, it continues to rise in the euro area.  Infections are stabilizing in Germany and the Netherlands, and are on a downtrend in France and Italy. This puts a floor under the euro. Report Links: Relative Growth, The Euro, And The Loonie - April 16, 2021 Portfolio And Model Review - February 5, 2021 On Japanese Inflation And The Yen - January 29, 2021 The Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 The recent data out of Japan have been strong. The unemployment rate for March came in at 2.6%. Industrial Production for March came in at 2.2% month-on-month, versus the estimate of -2%. Tokyo Core CPI came in at -0.2%, below market consensus. Vehicles sales surged by 22.2% year-on-year in April. The Japanese yen was flat against USD this week. A lagging vaccine campaign, rising COVID-19 case count, and the state of emergency continue to drag down sentiment towards Japan. However, the yen’s real effective exchange rate is trading at one standard deviation below fair value and our intermediate-term indicator is hinting at a rebound. Report Links: The Dollar Bull Case Will Soon Fade - March 5, 2021 On Japanese Inflation And The Yen - January 29, 2021 The Dollar Conundrum And Protection - November 6, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 The recent data out of UK have been positive. The Nationwide HPI for April was 7.1% higher than a year ago, beating an expectation of 5%. The BoE kept interest rates at 0.1% and its asset purchase target at £895bn. The pound was flat against the USD this week. The Bank of England kept policy on hold this week, but there were three important takeaways. First, the BoE sees any near-term pickup in inflation as temporary. This should keep a near-term lid on rate hike expectations and the pound. Second, the BoE will slow its bond purchases, as they approach the central bank’s target. And finally, growth estimates were revised upward, especially for 2022. This is bullish cable longer term. On the political front, a potential surprise of another Scottish independence may put some downward pressure on the currency. Report Links: Portfolio And Model Review - February 5, 2021 The Dollar Conundrum And Protection - November 6, 2020 Revisiting Our High-Conviction Trades - September 11, 2020 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 The recent data out of Australia have been strong. The AIG Manufacturing Index for April came in at 61.7, higher than the prior 59.9 reading. The AIG Construction Index for April came in at 59.1, below the 61.8 print in March. The trade balance for March came in at AUD 5.6bn, below an expectation of AUD 8bn. The RBA cash rate remained at 0.1%. The Australian dollar was flat this week against the USD. The RBA provided a dovish tone at its meeting this week, extending QE until February, and kept open the possibility of additional measures on the July 6 meeting. In the near term, upbeat economic data continue to provide support for the AUD. However, the tourism industry (6% of employment) is needed to get Australia back to full employment. Our bias is that the RBA will continue to fight against an appreciating currency, until the economy reaches escape velocity. Report Links: The Dollar Bull Case Will Soon Fade - March 5, 2021 Portfolio And Model Review - February 5, 2021 Australia: Regime Change For Bond Yields & The Currency? - January 20, 2021 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 The recent data out of New Zealand have been strong. Employment grew by 0.6% quarter-on-quarter in Q1. The Labor Cost Index for Q1 came in at 0.4% over prior quarter, and 1.6% year-on-year. The unemployment rate for Q1 declined to 4.7%, from 4.9%. Building consents increased 17.9% month-on-month in March. The New Zealand dollar was down 0.5% against USD this week. As we indicated in our report last week, the NZD is overpriced by several measures and the elevated equity market is of particular concern. The weakening GlobalDairyTrade Price Index could potentially be a harbinger of peaking agricultural prices in the coming months. This will lead the NZD to underperform other commodity currencies.  Report Links: Portfolio And Model Review - February 5, 2021 Currencies And The Value-Versus-Growth Debate - July 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 The recent data out of Canada have been soft. The trade balance for March came in at -1.14bn CAD versus CAD 1.42bn the previous month. Building permits rose 5.7% month-on-month in March. The CAD was flat against USD this week. Despite concerns over elevated commodity prices and a vaccination campaign that is lagging other advanced economies, recent strong employment growth and the tapering of asset purchases by the BoC should continue to boost the currency, the top performing among G10 so far this year. In the near term, Canadian exports will benefit from US fiscal stimulus, which will also provide support for the loonie. Report Links: Relative Growth, The Euro, And The Loonie - April 16, 2021 Will The Canadian Recovery Lead Or Lag The Global Cycle? - February 12, 2021 Currencies And The Value-Versus-Growth Debate - July 10, 2020 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 The recent Swiss data have been strong. The KOF Leading Indicator for April came in at 134, beating the 119.5 estimate.  CPI for April came in at 0.3%. SECO Consumer Climate for Q2 came in at -18, higher than the -30 back in Q1. The Swiss franc was down 0.5% against the USD this week. The Swiss economy continues to surprise to the upside. With our intermediate-term indicator on a downward path, we remain optimistic on our long EUR/CHF position for now, despite potential upside risks to the franc given the Indian COVID-19 outbreak. Report Links: Portfolio And Model Review - February 5, 2021 The Dollar Conundrum And Protection - November 6, 2020 On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 The recent data out of Norway have been strong. The unemployment rate for April came in at 4%, from 4.2% the prior month. The house price index for April came in at 12.2% year-on-year, similar to the 12.5% reading of March. Interest rate were held at 0% by the Norges Bank. The NOK was down 1.8% against the USD this week. The krone is the winning currency since the pandemic hit, suggesting some consolidation was much due. With Norwegian inflation rising sharply above the central bank’s 2% target earlier this year, the Norges Bank reiterated during its meeting on Thursday that a rate hike later this year is well in sight. Against the backdrop of the impending European recovery this summer and Norway’s own commendable vaccination progress, we continue to be long the NOK against the USD and EUR.  Report Links: Portfolio And Model Review - February 5, 2021 Revisiting Our High-Conviction Trades - September 11, 2020 A New Paradigm For Petrocurrencies - April 10, 2020 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 The recent Swedish data have been strong. Industrial Production for March came in at 1.1% month-on-month. Year-on-year, IP is rising by 5.7%. Industrial New Orders for March came in at 10% year-on-year. GDP in Q1 was 1.1% higher than the prior quarter, beating the estimate of 0.5%. The Swedish krona was down 1.4% against the USD this week. BCA Research’s European Investment Strategy service indicated that there is significantly more upside to Swedish stocks against both Eurozone and US equities over the remainder of the cycle. Sweden is levered to the global industrial cycle with exports representing 45% of GDP. The recovery in both Europe and across the globe should continue to benefit the krona. The tapering of asset purchases by the Riksbank later this year will also provide support to the currency in the meantime. We continue to be long SEK/USD and SEK/EUR. Report Links: Revisiting Our High-Conviction Trades - September 11, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

特別レポート

BCAリサーチの グローバル・アセット・アロケーション（GAA）フォーラム は5月18日にオンラインで開催されます。私たちはCIOや資産配分担当者にとって重要な課題について議論する優れた講演者陣を揃えました。ポートフォリオ構築、ファクター投資、オルタナティブ投資、ESGに関する最新の考え方が含まれます。基調講演はKPAアドバイザリーの創設者であり、『The Future of Pension Management: Integrating Design, Governance and Investing』（2016）を含む投資運用に関する多数の著書の著者であるKeith Ambachtsheerが務めます。彼のプレゼンテーションに続き、CDPQのMaxime Aucoin、OPTrustのJames Davis、ドレクセル大学エンダウメントのCatherine UlozasらトップCIOによるパネルディスカッションが行われます。 本イベントはGAA購読者に対しては無料で、購読者はフルアジェンダを確認し、こちらから登録できます。その他の方はこちらからお申し込みください。5月18日に、刺激的で有益な一日の議論にご参加いただけることを願っています。 ハイライト ここ数年の投資家による利回り追求は、レバレッジド・ローンを魅力的な投資とみなす要因となりました。 低ボラティリティと魅力的なリスク調整後リターンを特徴とするレバレッジド・ローンは、ポートフォリオに付加価値をもたらす可能性があります。 レバレッジド・ローンは、金利上昇局面と魅力的なバリュエーションがそろった出発点では（例えばハイイールド債などの）固定金利債をアウトパフォームする傾向があります。現在は後者の基準のみが当てはまります。 しかしリスクは存在します。コベナント・ライト債の増加や企業部門のレバレッジ上昇が特に懸念されます。 今後6〜12カ月では、金利が大幅に上昇するとは予想しておらず、この資産クラスは短期的にはやや魅力に欠けるでしょう。 それでも長期的な見通しは魅力的です。今後数年でインフレが上昇すれば金利も上昇する可能性が高くなります。 特集 超金融緩和的な金融政策、低金利、そしてフィクスト・インカム系リスク資産のバリュエーションが魅力的でない現況において、投資家は従来のフィクスト・インカム手段を超えて検討し、リスク許容度を引き上げるほか選択肢がありません。 このスペシャルレポートでは、レバレッジド・ローン市場の仕組みを整理します。過去のリスク・リターン特性を分析し、レバレッジド・ローンと他の資産を比較します。また、金融市場のストレス期や金利・インフレ上昇局面でのパフォーマンスも評価します。最後に、レバレッジド・ローン保有に伴うリスクについて論じます。 レバレッジド・ローンとは何か？ レバレッジド・ローンは、サブインベストメントグレードの企業向けに行われるシンジケートローンの一種です。一般に、これらの企業は多額の負債を抱え、格付けは低い傾向があります。シンジケートローンは、1行または複数の商業銀行や投資銀行によって組成、アレンジ、管理されます。1 これらのローンの大部分はシニア担保付きのローンであり、変動金利がベースで、主にLIBORにリスクプレミアム（一般に150〜200bp以上）を上乗せして設定されます。これはリスクの大きさを反映するとともに、非銀行系の機関投資家を呼び込む目的があります。これらのローンの金利は短期金利の変化を反映して定期的に調整されるため、金利上昇を懸念する投資家にとっては利点となります。 レバレッジド・ローンを分類する定義にはばらつきがあります。ある者は借り手のリスクや格付けに基づいてグループ化します。別の者はデット・トゥ・キャピタルやデット・トゥ・EBITDAといったレバレッジ指標を重視します。さらに、発行時のスプレッドや資金調達の目的（M&Aの資金調達、レバレッジド・バイアウト（LBO）、既存債務のリファイナンス、一般的な資金調達など）で分類する場合もあります。 過去5年間で、米国で発行されたレバレッジド・ローンの約50%がリファイナンス目的でした（図表1、パネル1）。3つのカテゴリのうち、LBO資金は最もリスクが高いと見なされ、そのことはより高いスプレッドに反映されています（図表1、パネル2）。レバレッジド・ローン市場は、1980年代中盤にM&A活動が急増したことで特に人気を博しました（図表2）。 Chart 1 Uses Of Leveraged Loans レバレッジド・ローンへの投資は今が適切な時期ですか？ レバレッジド・ローンへの投資は今が適切な時期ですか？ Chart 2 The Boom In Corporate Activity In The 1980s Fueled Leveraged Loan Growth 1980年代の企業活動のブームがレバレッジド・ローンの成長を押し上げた 1980年代の企業活動のブームがレバレッジド・ローンの成長を押し上げた 一般的に二つの代表的なファイナンス形態があります：2 タームローン： 一定の返済スケジュールに基づいて借入金を返済するという契約です。これらのローンは主に非銀行主体によって提供されます。 リボルビング・ファシリティ：繰り返し借入れと返済が可能なローンの一種です。これらのローンは主に銀行が組成し保有します。 レバレッジド・ローン市場の規模に関する推計は、用いられる基準や定義によって異なります。過去十年の初めからの急速な成長を経て、レバレッジド・ローン市場の規模は2020年第2四半期時点で1.2兆ドル超と推定されています。3 とはいえ、これは企業債務全体のごく一部に過ぎません（企業債市場の規模の約15%に相当します）が、主要市場参加者間の相互関係や市場における銀行の役割が、米国財務長官Janet Yellenやデット投資家のHoward Marks、国際機関である国際決済銀行（BIS）などの注目を集めています。彼らの懸念は、特に「コベナント・ライト（cov-lite）」ローンの発行増加、ローン契約におけるEBITDAの定義の不一致、「EBITDAアドバック」の使用拡大、4およびレバレッジド・ローンの格付けの精度に集中しています。5 これらの懸念の一部は「リスク」セクションで論じます。 Table 1 Risky Loans Are Mainly Held By Non-Bank Entities… レバレッジド・ローンは今が適切な時期ですか？ レバレッジド・ローンは今が適切な時期ですか？ 過去数十年で、レバレッジド・ローン市場への資本供給における銀行の役割は縮小し、ミューチュアルファンド、ヘッジファンド、保険会社、アセットマネージャーなどの非銀行貸し手に置き換えられてきました。6 Shared National Credit（SNC）プログラムのデータは、米国において非銀行主体が非投資適格のタームローンの約83%を保有していることを示しています（表1）。7 また、イングランド銀行（BoE）の推計によれば、世界のレバレッジド・ローン残高（同行の推計で約3.4兆ドル）の約4分の1がCLOを通じて保有され、残りの約半分が非銀行機関によって保有されています。8 さらに、これらの非銀行機関がCLOのかなりの部分、特にリスクの高いトランシェを保有しています。とはいえ、銀行がレバレッジド・ローンに全くエクスポージャーがないわけではありません。銀行は主にCLOの最上位であるAAAトランシェやインベストメントグレードのローンに投資しています。10 よりリスクの高い格付けのローンはCLO、ミューチュアルファンド、ヘッジファンドなどの貸し手によって保有されています（図表3）。11 Chart 3 …Particularly Those Rated Below BB レバレッジド・ローンは今が買い時ですか？ レバレッジド・ローンは今が買い時ですか？ 過去のリスクとリターン Chart 4 Leveraged Loans' Relative Performance Moves With Interest Rates レバレッジド・ローンの相対パフォーマンスは金利と連動して変動する レバレッジド・ローンの相対パフォーマンスは金利と連動して変動する 1997年以降、レバレッジド・ローンは年率換算で4.9%のリターンを記録しており、これは米国債を25ベーシスポイント上回り、米国のインベストメントグレード債およびハイイールド債よりそれぞれ約100bpおよび200bp下回っています。同期間で米国株式には年率換算で約400bpのアンダーパフォームとなっています。過去20年間の金利低下が、レバレッジド・ローンが固定金利の同業資産に対してアンダーパフォームした主な理由と考えられます。レバレッジド・ローンの投資適格債に対する相対的パフォーマンスは、国債利回りの推移と密接に連動してきました（図表4）。ハイイールド債に対する相対パフォーマンスでも同様の傾向が見られますが、関係はやや明確ではありません。 しかし、リスク調整後のリターンでは、ボラティリティの低さによりレバレッジド・ローンは株式やハイイールド社債をアウトパフォームしました（表2）。それでも、尖度が高いことを考慮すると、ボラティリティは過小評価されている可能性が高いと考えます。大きな負の歪度と過剰な尖度は、大幅なマイナスリターンの確率が高いことを示唆している可能性があります（図表5）。   Table 2 Historical Risk-Return Characteristics レバレッジド・ローンは今が適切な時期か？ レバレッジド・ローンは今が適切な時期か？ Chart 5 Leveraged Loans' Returns Exhibit High Kurtosis And Negative Skewness レバレッジド・ローンのリターンは高い尖度と負の歪度を示す レバレッジド・ローンのリターンは高い尖度と負の歪度を示す なぜ投資家はレバレッジド・ローンを検討すべきか？ Chart 6 Rising Rates Support Higher Return From Leveraged Loans... 金利上昇はレバレッジド・ローンのより高いリターンを後押しする... 金利上昇はレバレッジド・ローンのより高いリターンを後押しする... 当社の米国債ストラテジストは、特定の条件が整うとレバレッジド・ローンが固定金利のハイイールド債をアウトパフォームする確率が高まることを示しています。特に、バリュエーションがローンに有利に傾いており、かつ国債利回りが上昇している場合です。13 現在は後者の基準のみが当てはまります。 年初来では、レバレッジド・ローンは2.2%のリターンを記録しており、これは米国債の-3.2%、インベストメントグレード債の-3.4%、ハイイールド債の1.6%、新興国国債の-3.4%より高い成績です（図表6）。同期間中、国債利回りは65ベーシスポイント上昇しました。 国債利回りが上昇する局面では、資金フローがこの資産クラスに向かう傾向があることが分かります（図表7）。さらに興味深いのは、フォワードカーブで織り込まれている以上に翌12カ月で国債利回りが上昇する場合、レバレッジド・ローンはジャンク債をアウトパフォームするという点です（図表8）。 Chart 7 ...As Well As Increased Fund Flows …およびファンドフローの増加 …およびファンドフローの増加 Chart 8 Leveraged Loans Will Benefit If Interest Rates Rise By More Than What Is Discounted In The Forward Curve レバレッジド・ローンは、金利がフォワード・カーブに織り込まれている以上に上昇すれば恩恵を受ける レバレッジド・ローンは、金利がフォワード・カーブに織り込まれている以上に上昇すれば恩恵を受ける     しかし現時点では、5年物の1年フォワードが現在の5年物国債利回りより約40ベーシスポイント高くなっており、これは今後6〜12カ月で金利が大幅に上昇する可能性は低いという当社見解と一致します。インフレは今後数カ月の一時的なスパイクを除き抑制されたままであり、少なくとも雇用が賃金に上方圧力をかける水準に戻るまでは目立った上昇は見込みにくいと考えます。これは2023年以前には起こりにくいでしょう。 金融政策の今後の軌跡や長期利回りの変化も重要な検討要素です。FRBはドットプロットを通じて2024年以前のFF金利引き上げを示唆していませんが、市場はインフレ圧力を懸念し、より早期の利上げを織り込みつつあります。当社は、労働市場が今後12カ月で「最大限の雇用」に戻らない限り、市場が期待するより早くFRBが利上げを行う可能性は低いと考えています。 レバレッジド・ローンの利回りは、データのほとんどの期間でハイイールド債の利回りより低く推移しています（2020年初のみ例外）。これは、レバレッジド・ローンが企業の資本構成において優先的地位（シニア）にあるため、利回りが低くなるのは理にかなっています。加えて、両市場のセクター構成も影響します：レバレッジド・ローンはテクノロジーや通信セクターへのエクスポージャーが高く、エネルギーセクターへの配分は過去7年の平均で1%程度と限定的です。一方、ハイイールドの固定金利債ではエネルギーの比重は平均13%でした（図表9）。これは、2014/2015年の原油暴落時に利回り差が-3%以下に縮小した際に特に顕著でした（図表10）。 Chart 9 Leveraged Loans’ Sector Weightings レバレッジド・ローンは今が適切な時期ですか？ レバレッジド・ローンは今が適切な時期ですか？ Chart 10 Loan Spreads Are Not Looking Attractive ローン・スプレッドは魅力的に見えない ローン・スプレッドは魅力的に見えない Chart 11 Recent Investor Demand Pushed Up Leveraged Loan Prices 最近の投資家需要がレバレッジド・ローンの価格を押し上げた 最近の投資家需要がレバレッジド・ローンの価格を押し上げた 利回り差はその後上昇傾向にあり、現状の価格水準では上値余地は限られるかもしれません。投資家需要の急増は新規発行のレバレッジド・ローンの利回りを押し下げ、レバレッジド・ローンの平均ビッド価格はパンデミック前の高値を上回りました（図表11）。 次節では、景気後退やその他の金融市場ストレス期におけるレバレッジド・ローンの挙動を分析します。   金融市場のストレス 危機時のパフォーマンス インデックスの歴史が短いため、取り上げられるのは過去3回の景気後退（ドットコム・バブル崩壊、世界金融危機（GFC）、COVID-19リセッション）に限られます。さらに2013年のテーパリング・タンタラムと2014/2015年の原油価格ショックも分析対象としました。 いずれの場合も、レバレッジド・ローンは下落し、他のフィクスト・インカム資産クラスとともに回復しました。テーパリング・タンタラムはレバレッジド・ローンにとって最も好条件で、10年物国債利回りは4か月で100ベーシスポイント上昇しました（図表12）。 表3は、金利上昇局面が金利低下局面よりもレバレッジド・ローンにとって良好な環境であることを示しています。さらに、FRBの引き締め・緩和サイクルの期間も検討しましたが、緩和サイクルのタイミングは景気後退と重複することが多く、レバレッジド・ローンのパフォーマンスを押し下げています。 当社はまた、インフレの影響を当社のインフレヘッジに関するスペシャルレポートのフレームワークを用いて評価しました。14 そのレポートはインフレを4つの四分位（レジーム）に分解しています：2.3%未満、2.3〜3.3%の間、3.3〜4.9%の間、4.9%以上。分析にはインフレが低下している期間も加えました。ただし、4.9%を超える期間は1回しか観測されなかった点に注意します。 Chart 12 Leveraged Loans Fared Well In Periods Of Credit- And Sector-Specific Distress レバレッジド・ローンは、クレジットおよびセクター特有のストレス期間において良好に推移した。 レバレッジド・ローンは、クレジットおよびセクター特有のストレス期間において良好に推移した。   Table 3 Leveraged Loans’ Performance During Different Rate Cycles… レバレッジド・ローンは今が適切なタイミングですか？ レバレッジド・ローンは今が適切なタイミングですか？ Table 4 …And Inflation Regimes レバレッジド・ローンは今が適切な時期ですか？ レバレッジド・ローンは今が適切な時期ですか？ インフレの第1・第2四分位における期間では、レバレッジド・ローンは絶対リターンで最も高い年率平均リターン（それぞれ8.1%と10%）を記録しました。これらのレジームでは政策金利が低く、堅調な成長を受けて債券利回りが上昇し始めるため、理にかなった結果です。ただし、これらの期間ではレバレッジド・ローンは固定金利債に対してアンダーパフォームしました。 インフレ率が3.3%を上回るのは、経済が過熱し成長が鈍化し始める環境を示します。このレジームでは、レバレッジド・ローンはハイイールド債に対して年率換算で1.5%上回りました。インフレが低下する期間でも、レバレッジド・ローンは適度にプラスの年率リターンを示しました（表4）。   リスク Chart 13 Corporate Health Has Worsened... 企業の健全性は悪化しています... 企業の健全性は悪化しています... レバレッジド・ローン市場の成長は複数のトレンドを反映していますが、最も重要なのは企業レバレッジの全般的な上昇です。これは金利低下と安価な資金の利用可能性の増大によって促進されました。非金融企業の負債対資産比率は企業レバレッジを示す指標であり、20年ぶりの高水準にあります（図表13、パネル1）。これは企業セクター全体の健全性、特に企業が負債をサービスする能力に関する懸念を高めます。利息負担能力の中央値はGFC時と同水準付近にあり、この指標は第25パーセンタイルの企業ではマイナスにさえなっており、そのバケットに属する企業は利息支払いを維持する資金が不足していることを意味します（図表13、パネル2）。 レバレッジド・ローン市場のトレンドも同様の構図を示しています。最も高いレバレッジ、すなわちデット・トゥ・EBITDA比率が6倍以上の企業による新規発行ローンのシェアは新高値に達し、2020年第3四半期には新規ローンの37%に達しました（図表14）。 Chart 14 …Even For Leveraged Lending レバレッジド・ローンに投資するのに、今は適切な時期ですか？ レバレッジド・ローンに投資するのに、今は適切な時期ですか？ Chart 15 Cov-Lite Issuances Make Up Almost 80% Of New Issuances レバレッジド・ローンへの投資は今が適切な時期ですか？ レバレッジド・ローンへの投資は今が適切な時期ですか？ 資本の供給者にも一因があります。信用基準が劣化しているにもかかわらず、資金を求める企業は大半が資金を調達できています。コベナント・ライト構造（従来のローンで見られる保護的なコベナントを欠くローン）の割合は増加を続け、現在では新規発行のほぼ80%を占めています（図表15）。 コベナント・ライト債は通常、レバレッジや利息カバレッジ比率などの特定の比率を維持することを求めるメンテナンス・コベナントを持ちません。15 代わりに、発行体が追加の負債を負うなど特定の行動を取りたい場合にのみ満たす必要があるインカレンス・コベナントを特徴とします。16 この信用条件の緩和は、特にCLO買い手やその他の非銀行系機関投資家による需要増加という低利回り環境下の需要拡大の機能であることが大半です。 一部の指摘では、レバレッジド・ローン市場の脆弱性が金融システム全体に混乱を引き起こす可能性があると警鐘を鳴らしています。特にGFCの記憶や、銀行がローンを組成するが簿外に配分する「オリジネート・トゥ・ディストリビュート」モデルに関する懸念は、クレジットのリスクある拡大につながり新たな金融危機を誘発するという見方に結び付けられています。 Chart 16 Leveraged Loans Have Higher Average Credit Ratings… レバレッジド・ローンにとって今は適切なタイミングですか？ レバレッジド・ローンにとって今は適切なタイミングですか？ 我々はこの懐疑論に全面的には同意しません。銀行のレバレッジド・ローンへのエクスポージャーは主にCLOの最上位トランシェを通じたものです。銀行の流動性要件はGFC以降増加しており、したがってローン市場で問題が発生した場合でも伝播は最小限にとどまるはずです。米国政府会計検査院（GAO）による最近の報告も、レバレッジド・レンディングが金融安定性に対して重大な脅威をもたらしているという証拠は見つからなかったとしています。17 さらに、ほとんどのレバレッジド・ローンは第1担保権（ファースト・リーン）であり、資本構成上のシニア担保位置にあります。平均格付けはハイイールド債より高く（図表16）、デフォルト率も低めです（図表17）。また、5年平均の回収率は63%とシニア無担保債の40%を上回っています（図表18）。 Chart 17 ...Lower Default Rates... ...より低いデフォルト率、... ...より低いデフォルト率、... Chart 18 ...And Higher Recovery Rates Than High-Yield Bonds ...そしてハイイールドボンドよりも高い回収率 ...そしてハイイールドボンドよりも高い回収率   結論 超低金利とリスク資産のバリュエーションが行き過ぎた状況下で、レバレッジド・ローンは投資家にとって興味深いアセットクラスとして浮上しています。 ボラティリティが低いため、レバレッジド・ローンは歴史的に固定金利のハイイールド債よりも高いリスク調整後リターンを生み出してきました。ただし、尖度が高いことからボラティリティは過小評価されている可能性があります。 歴史的には、国債利回りの上昇と魅力的なバリュエーションの出発点がレバレッジド・ローンのアウトパフォーマンスのシグナルとなっていました。現在はその二つの基準のうち一つのみが整っています。 今後6〜12カ月は金利が大幅に上昇するとは考えておらず、この資産クラスは短期的にはやや魅力に欠けます。 しかし中長期的な見通しは魅力的です。今後2〜3年でインフレとそれに伴う金利上昇が進めば、レバレッジド・ローンへの適度な配分は投資家にとって有用なヘッジとなる可能性があります。   Amr Hanafy シニアアナリスト amrh@bcaresearch.com   脚注 1 “LCD Loan Primer – Syndicated Loans: The Market and the Mechanics,” S&P Global Market Intelligence を参照してください。 2 “Leverage Lending FAQ & Fact Sheet,” SIFMA, 2019年2月を参照してください。 3 “Federal Reserve Financial Stability Report,” 2020年11月を参照してください。 4 “EBITDA add backs”は費用やコスト削減分を収益に加算するもので、借り手の返済能力を過大に見積もる可能性があります。 5 Todd Vermilyea, “Perspectives On Leveraged Lending,” The Loan Syndications and Trading Association 23rd Annual Conference, New York, 2018年10月24日を参照してください。 6 “Global Financial Stability Report: Vulnerabilities in a Maturing Credit Cycle, Chapter 1,” IMF, 2019年4月を参照してください。 7 SNCプログラムは、複数の金融機関が共有する最大かつ最も複雑な信用をレビュー・評価するための政府間プログラムです。SNCプログラムは、連邦準備制度理事会（FRB）、連邦預金保険公社（FDIC）、および通貨監督庁（OCC）という3つの連邦銀行規制機関間の政府間協定により運営されています。 8 “Financial Stability Report,” Bank of England, 2020年8月を参照してください。 9 CLOは、特別目的事業体が発行するアセットバック証券で、レバレッジド・ローンのポートフォリオを取得します。 10 “Turns Out Leveraged Loans Aren’t a Systemic Risk After All,” Bank Policy Institute, 2020年2月8日を参照してください。 11 Seung Jung Lee, Dan Li, Ralf R. Meisenzahl, and Martin J. Sicilian, “The U.S. Syndicated Term Loan Market: Who holds what and when?”, 2019年11月25日を参照してください。 12 本レポートでは、米ドル建ての機関投資家向けレバレッジド・ローンポートフォリオの時価加重パフォーマンスを追跡するS&P/LSTA Leveraged Loan Indexを使用しています。 13 US Bond Strategy Report, “The Price Of Safety,” 2015年1月27日を参照してください。 14 Global Asset Allocation Special Report, “Investors’ Guide To Inflation Hedging: How To Invest When Inflation Rises,” 2019年5月22日を参照してください。 15 Eric Goodison and Margot Wagner, Paul, Weiss, Rifkind, Wharton & Garrison Llp, “Covenant-Lite Loans: Overview,” 2019年8月を参照してください。 16 Scott Essexx, Alexander Ott, Partners Group, “The Current State Of The Leveraged Loan Market: Are There Echoes Of The 2008 Subprime Market?”, 2019年3月を参照してください。 17 “Financial Stability: Agencies Have Not Found Leveraged Lending To Significantly Threaten Stability But Remain Cautious Amid Pandemic,” United States Government Accountability Office, 2020年12月を参照してください。

来週のストラテジー・レポートの代わりに、初回のカウンターポイント・ウェブキャスト『メガテーマ、差し迫るショック、そして注目トレード』を発表します。ご参加いただければ幸いです。 ハイライト 標準的な経済理論では、貨幣は完全に代替可能であると想定します。しかし実務では、人々は収入と貯蓄というメンタル・アカウントに異なる感情を結び付けるため、貨幣は代替可能ではありません。これは「メンタル・アカウンティング・バイアス」として知られています。 メンタル・アカウンティング・バイアスは、パンデミック期に蓄積された大量の貯蓄を消費に回すよりも、債務返済に使う可能性が高いことを意味します。 メンタル・アカウンティング・バイアスはまた、高利回りの株式に対して過剰な支払いをしていることを意味します。 長期投資家は銀行を避けるべきであり、「バリュー」も避けるべきです。 正しく計算すると、株式リスクプレミアムは現在ほとんど存在しません。 米国の長期債利回りは、上方に動くよりも下方に動く余地の方がはるかに大きいです。 フラクタルトレード候補：株式対債券、PKR、およびニュージーランド株式。 特集 今週のチャート 消費は賃金で説明される… 消費は賃金によって説明される... 消費は賃金によって説明される... 今週のチャート …給付金では説明されない ...景気刺激策による給付金ではない ...景気刺激策による給付金ではない 多くの経済学者は、経済が完全に再開されれば、パンデミック期に家計に蓄積された大量の貯蓄が家計支出の津波を引き起こすと予測しています。 しかし、この予測をするのに適切なのは経済学者ではありません。家計が蓄積した貯蓄を使うかどうかの答えは、心理学の領域に属します。 お金を使うかどうかはどの「メンタル・アカウント」に属しているかによる 私たちは 債券市場における大きな異常 で、収入から支出する傾向は高い一方で、富から支出する傾向は低いと指摘しました。つまり、未消化の収入が消費に回るかどうかは、世帯がそれを追加の収入とみなすか追加の富とみなすかによって決まるということです。 これにより次の疑問が生じます。どうしてお金を使うかどうかの判断が、それを収入と分類するか富と分類するかによって左右されるのでしょうか？答えは心理学、すなわち「メンタル・アカウンティング・バイアス」として知られる現象にあります。 ノーベル賞受賞の心理学者ダニエル・カーネマンは、私たちはお金をさまざまなアカウントに分類しており、それらは時に物理的であり、時に単に心の中だけのものであると指摘しています。そして、私たちがこれらのアカウントから支出する意欲には明確な階層が存在します。 私たちの「メンタル・アカウント」から支出する意欲には明確な階層があります。 階層の最上位には月々の賃金があり、次に当座（チェック）口座の資金が続きます。これらの「収入」アカウントからは支出しやすいのです。階層のさらに下には貯蓄口座や投資ポートフォリオがあります。これらの「貯蓄」または「富」のアカウントからは支出しにくいのです。 標準的な経済理論は貨幣が完全に代替可能だと仮定するため、当座口座の1ポンドは貯蓄口座の1ポンドと何の違いもないとします。しかし実務では、人々は収入と貯蓄のメンタル・アカウントに異なる感情を結び付けるため、貨幣は代替可能ではありません。 賃金や当座口座から貯蓄口座に資金を移すと、その資金を支出する意欲は崩れます。これが、消費が収入のメンタル・アカウントを支配する賃金に密接に追随する一方で、主に貯蓄のメンタル・アカウントに入る給付金とは意味のある関連がない理由を説明します（今週のチャートおよびチャートI-2）。 Chart I-2 給付金は消費傾向に有意な影響を与えなかった 景気刺激策による現金給付は消費動向に有意な影響を与えなかった 景気刺激策による現金給付は消費動向に有意な影響を与えなかった 貯蓄のメンタル・アカウントから支出することには消極的でも、貯蓄を使って債務を返済することには積極的です。実際、貯蓄と債務の間にあるこの感情的な結びつきを踏まえ、多くの貸し手は貯蓄口座を住宅ローン債務と相殺する住宅ローン商品の提供を行っています。 これらを総合すると、パンデミック期に蓄積された家計貯蓄の在庫は、消費動向を押し上げる可能性は低く、むしろ家計債務の削減に使われる可能性が高いということになります。そうなれば、最近の公的債務の一部は民間債務の返済に回るだけであり、1990年代の日本で起きたことと同様の展開となるでしょう（チャートI-3）。 Chart I-3 日本では公的債務が結局民間債務の返済に回った 日本では、公的債務が結局、民間債務の返済に充てられた 日本では、公的債務が結局、民間債務の返済に充てられた これは銀行の資産成長にとって問題です。 「バリュー」は価値をもたらさない メンタル・アカウンティング・バイアスは、近年の金融市場で支配的な現象であるいわゆる「利回りの追求」も説明します。一見すると利回りの追求は理にかなっているように見えますが、利回りと値上がり（キャピタル・アプリシエーション）を区別すること自体が非合理的なのです。 収入と富の関係と同様に、投資の利回りから得られるお金と値上がりから得られるお金は（税制が同等であると仮定すれば）完全に代替可能です。しかし実際には、多くの投資家は利回りと値上がりを別々のメンタル・アカウントに割り当て、投資の利回りを支出用のお金、資本の増加を貯蓄用のお金と分類します。 したがって、たとえばリタイアした投資家のように、資産が支出用のメンタル・アカウントに資金を生み出すことを望む投資家は、利回りを生む投資に対して非合理的なバイアスを持ちます。一方、資産を貯蓄のメンタル・アカウントで増やしたい投資家は、値上がりを生む投資に偏ります。繰り返しますが、資金は本来代替可能であるため、これらのメンタル・アカウントは非合理的です。 通常の状況下では、これらの非合理的なバイアスは問題になりません。なぜなら、支出用と貯蓄用の両方のメンタル・アカウントに適した投資先が十分に存在していたからです。しかし近年では、かつて支出用アカウントに安全なインカムを供給していた現金や国債といった資産はもはやそうしていません。 したがって、その後の利回りを求める殺到の中で、インカム志向の投資家は危険なトンネルビジョンに陥っています。株式の将来のトータルリターンではなく利回りに固執することで、利回り追求型の投資家は高利回りの株式に対して過剰に支払いを行い、長期的な富を犠牲にしています。 株式の将来のトータルリターンではなく利回りに固執することで、投資家は高利回り株に過剰に支払っている。 一例を挙げます。グローバルな金融株のフォワード・利益利回りが8％であることは、ヘルスケアの5％やテクノロジーの3.5％よりもはるかに割安に見えるかもしれません。しかし本当に重要なのは、そのフォワード・利益利回りが将来のトータルリターンにどのように変換されるかです。この観点から見ると、金融株の見かけ上の割安さは幻影であることがわかります。 金融危機後のフォワード・利益利回りと将来リターンの関係を用いると、高利回りの金融株は、ごく最近まで低利回りのテクノロジーよりも低いリターンをもたらすように価格付けされていました。現在でも金融株は、低利回りのヘルスケアよりも低いリターンをもたらすように価格付けされています。ヘルスケアと同じ長期リターンを提供するためには、金融株のバリュエーションは20％下落する必要があります（チャート I-4 - チャート I-6）。 Chart I-4 金融株の8％予想利益利回り = 2％の見込みリターン 金融セクターの利益利回り8％＝見込みリターン2％ 金融セクターの利益利回り8％＝見込みリターン2％ Chart I-5 ヘルスケアの5％予想利益利回り = 8％の見込みリターン ヘルスケアのアーニングス・イールド5パーセント＝見込みリターン8パーセント ヘルスケアのアーニングス・イールド5パーセント＝見込みリターン8パーセント Chart I-6 テクノロジーは割高 テックは割高 テックは割高 したがって、メンタル・アカウンティング・バイアスは銀行にとって二重の打撃となります。銀行の資産成長に問題をもたらし、投資家が高利回り株に過剰に支払う原因にもなります。これが投資の究極の逆説を生み出します。『バリュー』の定義的特徴は、それ自体が価値を提供しないということです！ 長期投資家は銀行を避け、またバリューを避けるべきです。 米国債利回りは上方より下方に動く余地が大きい 前述の分析は、株式の適正な評価アプローチ、特に株式リスクプレミアム、すなわち高品質債券に対する株式の将来の超過リターンに関して重要な含意を持ちます。 よくある誤ったアプローチは、株式のフォワード利益利回りから10年債利回りを引くことです。米国のフォワード利益利回りを4.5％とすると、名目債利回り1.5％に対して株式リスクプレミアムは余裕のある3％、あるいは実質債利回り-1％に対しては非常に余裕のある5.5％であると示唆されます。 このアプローチの明白な誤りは、リンゴとオレンジを引き算している点です。10年債利回りは今後10年間にその債券から受け取るリターンです。しかし先に見たように、フォワード利益利回りは今後10年間に株式から受け取るリターンではありません。 リンゴ同士を比較するためには、まずフォワード利益利回りを将来的な10年のトータルリターンに変換する必要があります。現在の変換値は名目で2％のリターン（チャート I-7 - チャート I-8）、実質で0％のリターン（チャート I-9 - チャート I-10）となります。これらを名目・実質の債利回りと比較すると、株式リスクプレミアムはほとんど存在しないことがわかります。 Chart I-7 利益利回りを予想名目リターンに変換すると… 利益利回りを将来の名目リターンに変換する... 利益利回りを将来の名目リターンに変換する... Chart I-8 …株式リスクプレミアムがほとんど存在しないことがわかる ...株式リスクプレミアムがほとんど存在しないことを見出す ...株式リスクプレミアムがほとんど存在しないことを見出す Chart I-9 利益利回りを予想実質リターンに変換すると… アーニングス・イールドを将来の実質リターンに換算する... アーニングス・イールドを将来の実質リターンに換算する... Chart I-10 …株式リスクプレミアムがほとんど存在しないことがわかる ...株式リスクプレミアムがほとんど存在しないことを示す ...株式リスクプレミアムがほとんど存在しないことを示す ほとんど存在しない株式リスクプレミアムは、株式が高く評価されていることを意味し、またこの高い評価は債利回りが大きく上昇しないことに依存しています。さらに、評価が高いのは株式だけではありません。私たちが The Road To Inflation Ends At Deflation で指摘したように、300兆ドルにのぼる世界の不動産の評価もまた、債利回りが大きく上昇しないことに大きく依存しています。 株式は高く評価されており、その高い評価は債利回りが大きく上昇しないことに依存している。 結論として、現在の水準から見ると、米国の長期債利回りは上昇するよりも下落する余地の方がはるかに大きいと考えます。 カウンタートレンド反転の候補 パンデミック安以来の株式対債券の力強いラリーは、2013年のブルランの終わりや2020年初めのベアランの終わりに見られたようなフラクタル的な脆弱性のポイントに達しています（チャート I-11）。したがって現在のラリーは一服する局面にあります。 Chart I-11 株式対債券のラリーは一服の局面にある エクイティ対ボンドのラリーは小休止が見込まれる エクイティ対ボンドのラリーは小休止が見込まれる アジア太平洋地域では、最近のパキスタン・ルピーの強いパフォーマンスはカウンタートレンドの売りに脆弱であることに注意しています（チャート I-12）。 Chart I-12 PKRはアンダーウェイト PKRをアンダーウェイト PKRをアンダーウェイト 最後に、非常にディフェンシブなニュージーランド株式市場は過去1年で大きくアンダーパフォームしました。しかし、130日と65日の両方のフラクタル構造における脆弱性は、カウンタートレンドでアウトパフォームする準備が整っていることを示唆しています（チャート I-13）。 Chart I-13 ニュージーランドをオーバーウェイト ニュージーランドをオーバーウェイト ニュージーランドをオーバーウェイト したがって、今週の推奨は世界に対してニュージーランドをオーバーウェイトとし、利食い目標と対称的なストップロスを4％に設定することです。   Dhaval Joshi チーフ・ストラテジスト dhaval@bcaresearch.com フラクタル・トレーディング・システム フラクタルトレード 6か月の推奨 構造的な推奨 クローズド・フラクタルトレード クローズド・トレード 資産パフォーマンス 株式市場パフォーマンス   注目指標 - 債券利回り Chart II-1 注目指標 - 債券利回り - ユーロ圏 注目すべき指標 - 債券利回り - ユーロ圏 注目すべき指標 - 債券利回り - ユーロ圏 Chart II-2 注目指標 - 債券利回り - ユーロ圏を除く欧州 注目すべき指標 - 債券利回り - ユーロ圏を除く欧州 注目すべき指標 - 債券利回り - ユーロ圏を除く欧州 Chart II-3 注目指標 - 債券利回り - アジア 注目指標 - 債券利回り - アジア 注目指標 - 債券利回り - アジア Chart II-4 注目指標 - 債券利回り - その他の先進国 注目指標 - 債券利回り - その他先進国 注目指標 - 債券利回り - その他先進国   注目指標 - 金利見通し Chart II-5 注目指標 - 金利見通し 注目すべき指標 - 金利見通し 注目すべき指標 - 金利見通し Chart II-6 注目指標 - 金利見通し 注目すべき指標 - 金利見通し 注目すべき指標 - 金利見通し Chart II-7 注目指標 - 金利見通し 注目すべき指標 - 金利見通し 注目すべき指標 - 金利見通し Chart II-8 注目指標 - 金利見通し 注目すべき指標 - 金利見通し 注目すべき指標 - 金利見通し    

Highlights Fiscal stimulus is no longer a free lunch. US mortgage applications are down by 20 percent since the start of February. With rising bond yields now starting to choke private sector borrowing, bond yields are nearing an upper-limit, and even a reversal point. In which case, the tide out of defensives into cyclicals, and growth into value, will be a tide that reverses. New 6-month recommendation: underweight US banks (XLF) versus consumer staples (XLP). Fractal trade shortlist: US banks, bitcoin, ether, and GBP/JPY. Feature Chart of the WeekMortgage Applications Are Down 20 Percent Why would anybody not get excited about trillions of dollars of fiscal stimulus? The two word answer is: crowding out. If a dollar that is borrowed and spent by the government (or even forecast to be borrowed and spent by the government) pushes up the bond yield, it makes it more expensive for the private sector to borrow and spend. If, as a result, the private sector scales back its borrowing by a dollar, the dollar of government spending has crowded out a dollar of private sector spending. In this case, fiscal stimulus will have no impact on GDP. The fiscal multiplier will be zero. Under some circumstances though, fiscal stimulus does not crowd out the private sector and the fiscal multiplier is extremely high. 2020 was the perfect case in point. As the pandemic gripped the world, much of the private sector was on its knees. Or to be more precise, in lockdown at home, doing nothing, receiving no income, and unwilling and unable to borrow. In such a crisis, the government became the ‘borrower of last resort’. It could, and had to, borrow at will to replace the private sector’s lost income and thereby to stabilise the collapse in demand. With no competition from private sector borrowers for the glut of excess savings, bond yields stayed depressed. Meaning that fiscal stimulus was a free lunch: it had lots of benefit with little cost (Chart I-2). Chart I-2Fiscal Stimulus Was A Free Lunch In 2020, But Not In 2021 Fiscal Stimulus Is No Longer A Free Lunch Covid-19 is still with us, and could be with us forever. Yet the economy will adapt and even thrive with structural changes, such as decentralisation, hybrid office/home working, a shift to online shopping, and less international travel. In fact, all these structural changes were underway long before Covid-19. Meaning that the pandemic was the accelerant rather than the cause of what was happening to the economy anyway. As the private sector now gets back on its feet to restructure, spend, and invest accordingly, fiscal stimulus is no longer a free lunch. Fiscal stimulus is most effective when it is not pushing up the bond yield. To repeat, last year’s massive fiscal stimulus was highly effective because it had little impact on the bond yield, so there was no crowding out of private sector borrowing. The markets have fully priced the 2021 stimulus, but not the crowding out. However, the most recent stimulus package has pushed up the bond yield or, at least, is a major culprit for the recent spike in yields. Hence, there will be some crowding out of private sector borrowing. Worryingly, US mortgage applications, for both purchasing and refinancing, are down by 20 percent since the start of February (Chart of the Week and Chart I-3). Chart I-3Mortgage Applications For Refi Are Down 20 Percent The resulting choke on private sector borrowing and investment will at least partly negate any putative boost from this fiscal stimulus. The concern is that the markets have fully priced the stimulus, but not the crowding out. Time To Rotate Back In our February 18 report, The Rational Bubble Is Turning Irrational, we warned that high-flying tech stocks were at a point of vulnerability. Specifically, since 2009, the technology sector earnings yield had always maintained a minimum 2.5 percent premium over the 10-year T-bond yield, defining the envelope of a ‘rational bubble.’ In February, this envelope was breached, indicating that tech stock valuations were in a new and irrational phase (Chart I-4). Chart I-4The Rational Bubble Turned Irrational The warning proved to be prescient. In the second half of February, tech stocks did sell off sharply and entered a technical correction.1 As a result, tech-dominated stock markets such as China and the Netherlands also suffered sharp declines. Proving once again that regional and country stock market performance is nothing more than an extension of sector performance (Chart I-5). Chart I-5As Tech Corrected, So Did Tech-Heavy Markets But the aggregate stock market has remained more resilient than we expected, and is only modestly down versus its mid-February peak. The reason is that while highly-valued growth stocks suffered the anticipated correction, value stocks continued to advance (Chart I-6). Chart I-6Time To Rotate Back We can explain this divergence in terms of the three components of stock market valuation: The bond yield. The additional return or ‘risk premium’ for owning stocks. The expected growth of earnings. Tech and other growth stocks are ‘long-duration’ assets meaning that their earnings are weighted into the distant future. Hence, for growth stocks the relevant valuation comparison is a long-duration bond yield, say the 10-year yield. Whereas for ‘shorter-duration’ value stocks the relevant valuation comparison is a shorter-duration bond yield, say the 2-year yield. Given that the 10-year yield has risen much more than the 2-year yield, the pain has been much more pronounced for growth stock valuations. Turning to the ‘risk premium’ for owning stocks, at ultra-low bond yields the risk premium just moves in tandem with the bond yield. Hence, as the 10-year yield has spiked, the combination of a rising yield plus a rising risk premium has doubled the pain for growth stock valuations. For a detailed explanation of this dynamic please see our February 18 report. Regarding the expected growth of earnings, the market believes that stimulus is much more beneficial for economically sensitive value stocks than for economically insensitive growth stocks. But now that we are at the point where rising bond yields are starting to choke private demand, the rise in bond yields is nearing a limit, and even a reversal point. In which case, the strong tide out of defensives into cyclicals will also be a tide that reverses. On this basis, and supported by the strong technical arguments in the next section, we are opening a new 6-month position: Underweight US banks versus US consumer staples, expressed as underweight XLF versus XLP. US Banks, Bitcoin, Ether, And The Pound This week we have identified susceptibilities to countertrend moves in three areas. The bullish groupthink in US banks is at an extreme. First, based on its fragile fractal structure, the (bullish) groupthink in US banks versus consumer staples is at an extreme approaching February 2016 (bearish), December 2016 (bullish), and March 2020 (bearish). All these previous extremes in fragility proved to be turning points in relative performance. If this proves true again, the next six months could see a reversal of US bank outperformance (Chart I-7). Chart I-7The Groupthink In US Banks Is At An Extreme Second, we are extremely bullish on the structural prospects for cryptocurrencies, and are preparing a report detailing the compelling investment case. Look out for it. That said, the composite fractal structures of both bitcoin and ethereum indicate that they are technically very overbought (Chart I-8 and Chart I-9). Accordingly, we are hoping for pullbacks that provide better strategic entry points for bitcoin at $40,000, and for ethereum at $1300. Chart I-8Bitcoin Is Technically Overbought Chart I-9Ethereum Is Technically Overbought Third, the UK’s Covid-19 vaccination program was one of the fastest out of the blocks. As the vaccination rate quickly rose to over half the adult population (based on at least one vaccination dose), the pound was a major beneficiary. But now, the UK vaccination program is facing the hurdle of reduced supplies. Additionally, there is the danger that the third wave of infections in Continental Europe washes onto the shores of Britain. Hence, the recent strong rally in the pound is susceptible to a countertrend reversal (Chart 10). This week’s recommended trade is short GBP/JPY setting the profit target and symmetrical stop-loss at 2.2 percent. Chart I-10The Pound Is Susceptible To A Reversal Dhaval Joshi Chief Strategist dhaval@bcaresearch.com Footnotes 1 A technical correction is defined as a 10 percent price decline. Fractal Trading System Structural Recommendations Closed Fractal Trades Asset Performance Equity Market Performance Indicators Bond Yields Chart II-1Euro Area Chart II-2Europe Ex Euro Area Chart II-3Asia Chart II-4Other Developed   Interest Rate Chart II-5Expectations Chart II-6Expectations Chart II-7Expectations Chart II-8Expectations ​​​​​​