Welcome back, to the first Saturday edition of the new year. Hope you had a great break over Christmas. No new podcast this week, but if you missed our recording of entrepreneur and investor Jim Mellon talking at November’s MoneyWeek Wealth Summit, make sure you go and listen to it right now. It was absolutely fascinating and among the highlights of a day that was jam-packed with great information and speakers. (Oh, and just this week I’ve been in meetings about our plans and themes for this year – I’ll let you know which dates to keep in your diary as soon as I can!). Here are the links for this week’s editions of Money Morning, in case you missed them.
You can now get my book, The Sceptical Investor, for 40% off! It’s an absolutely scandalous bargain, even if I do say so myself. Here’s the link – just type in SCEPTICAL40 at the checkout stage, and you’ll get your discount. Alternatively, if you fancy signing up for an audiobook subscription with Audible (which I’d recommend – it’s very easy to cancel if you get fed up or don’t use the credits), you can get it for free over there.
The charts that matter
Last year, the yield curve inverted, triggering fear of recession across the globe. As we start this year, the yield curve is not inverted (ie interest rates on long-term government bonds are now higher than rates on short-term bonds, as you’d expect in ‘normal’ circumstances), but it is still rather flat. (When we discuss the yield curve here, we mean the one that gets the most attention – the gap between the yield on the ten-year and that on the two-year). This week the gap narrowed – that’s partly down to US Treasuries rising in price (yields fall when prices rise and vice versa) because of the post-Iran fear trade. In many ways the original inversion is what matters in any case. Since World War II, pretty much every time the yield curve has inverted, there has been a recession within 24 months. So we could be looking at a recession by summer 2021 at this rate.
(The gap between the yield on the ten-year US Treasury and that on the two-year: three months)
Gold (measured in dollar terms) has shot higher since the end of last year. Yes, it’s been smacked back down from its latest surge. But bear in mind that it made substantial gains even before the Iran-US spat. Gold had an excellent year overall last year, but it looks as though the bull market will continue for a while yet.
(Gold: three months)
The US dollar index – a measure of the strength of the dollar against a basket of the currencies of its major trading partners – has made an indecisive start to the year. It looked like it was breaking lower at the end of the year (which helped gold). It has since regained ground but it may drop back off now that markets are less worried about the situation in Iran.
(DXY: three months)
Here’s an unequivocally bullish signal – the Chinese yuan (or renminbi) is strengthening against the US dollar (USDCNY). It spent much of last year above the key “seven” yuan-to-the-dollar level, but it’s now back below that. When the dollar is strengthening (the line on the chart below is rising), that’s deflationary; when the yuan is strengthening (the line is falling), that’s inflationary.
(Chinese yuan to the US dollar: since 25 June 2019)
The ten-year yield on the US government bond slipped back as investors rushed for safe havens following the Iran incidents.
(Ten-year US Treasury yield: three months)
The yield on the Japanese ten-year managed to stay in positive territory.
(Ten-year Japanese government bond yield: three months)
And the yield on the ten-year German bund continued to rise. German economic data remains mixed but it’s looking as though it may have seen the worst.
(Ten-year Bund yield: three months)
Copper dipped amid the “risk-off” panic but remains above the $2.80 mark.
(Copper: six months)
The Aussie dollar had been doing very well over the festive period but has come back hard, partly due to a rally in the US dollar, and partly due to the “risk-off” mood.
(Aussie dollar vs US dollar exchange rate: three months)
Cryptocurrency bitcoin ticked higher this week.
(Bitcoin: ten days)
While the nonfarm payrolls data is the big employment release, we prefer to keep an eye on the more timely US weekly jobless claims data. These fell to a five-week low of 214,000 this week, a 9,000 drop on last week. This was the fourth drop in a row, and the figure was better than expected. The four-week moving average meanwhile slipped to 224,000. Looking at the chart however, the jury’s still out as to whether or not we might be seeing a trend higher. Let’s see what happens throughout the rest of the winter.
That said, if the jobless figures really did bottom out back in April of last year, it would suggest that a top for the market, if anything, should already have been on the cards, with a recession following not all that long after (bear in mind that this is based on a vanishingly small number of wildly varying historical samples). As we’re still seeing the market hit the highs – and it’s also an election year, which means rising unemployment is something the current administration will want to avoid at all costs – I wouldn’t rule out a fresh low for jobless claims just yet.
(US jobless claims, four-week moving average: since January 2016)
Here’s a reminder of just how complacent markets are about the oil price (as measured by Brent crude, the international/European benchmark) – this week, after surging in the wake of the Iran news, oil has fallen back to below where it was the last time we did this update, on December 20th. Markets, eh?
(Brent crude oil: three months)
Amazon is finally making a break higher along with the wider market. The share price of the one company that every fund manager knows that your boss will never fire you for owning, hasn’t been at this level since August last year.
(Amazon: three months)
Shares in electric car group Tesla meanwhile, have gone stratospheric. It seems to be mostly due to excitement that the company appears to have its production issues under control. The company is now valued more highly than Ford has ever been during its entire listed lifetime. It’s the most valuable US car maker of all time.
Look – I hope Tesla succeeds. And anyone who owns the Scottish Mortgage Trust, one of the investment trusts in the MoneyWeek investment trust model portfolio, has exposure to Tesla (and has done very well out of it as well). So for all that I adopt a somewhat cynical view of the stock, I like the idea of a world of self-driving electric cars. But is this company now worth more than Ford and GM are – combined? Or than either of them were at any point in their history? Really? That’s the kind of statistic that just makes me think that there is way too much hope baked into this cake.
Maybe I’m wrong. I have never been much of a tech investor, because when it comes to investing, I’m not a ‘blue sky’ thinker – I prefer to invest when everything looks at its bleakest. So take my opinion with a pinch of salt. But even so. Most valuable US car company ever? That’s a heck of a stretch.
(Tesla: three months)
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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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