The world of bits is growing, the world of things is in quarantine.
Stay long the new economy and short the old.
Here I compare the Nasdaq NDX vs. SPY vs. VIX. While many analysts think we were in a technology bubble, the bubble regime is short and seems to be beginning now. Like in the late 90s, with the default of Russia and the LTCM crash, Alan Greenspan, chairman of the Federal Reserve, was forced to inject massive liquidity into the market. The graph shows that after the spike in the VIX in September 1998, the following 8 months rally in tech was enormous.
The world of things is in quarantine, not the world of bits. This is a powerful narrative that could boost the parabolic leg of the tech bull market driven by the massive fiscal and monetary stimulus.
Source: Tradingview.
The unwinding of the carry trade will continue putting pressure on Emerging Markets.
I see the AUDJPY as a proxy to the global carry trade. The tech bubble was bigger in 1998 where the risk aversion was the highest in the world of things. AUDJPY around 60 is a warning signal of when the tech bubble will pop.
Source: Tradingview.
Source: Alpine Macro.
So, long the USD against the TRY, ZAR, BRL, IDR is still a good trade. I think it is close to the tipping point of a massive devaluation.
Emerging markets are more about things than bits:
With the oil crash the rupture of globalization begins in emerging markets.
The next two weeks are going to be critical for emerging markets. Two countries in particular are facing exponential acceleration of the spread of COVID-19: Turkey and Brazil. How these countries handle this event will not only have dramatic repercussions on the economy, but on politics as well. Erdogan and Bolsonaro are each facing a massive political challenge. The ministers of finance and central banks will need to increase deficits, debt levels and print money in order to overcome the health care and economic challenges. In a situation like this, it can be very challenging to defend the local currency.Many other emerging economies are trapped in the same situation.
Source: Tradingview.
There is no Silicon Valley in Europe….. strong USD Vs EUR.
The recession pressure over the old economy and the pandemics antiglobalization force favor the USD over the EURO.
Source: Tradingview.
What falsifies all my thinking?
A major cyberattack that compromises the internet infrastructure.
Thanks for reading,
Guillermo Valencia A.
Co-founder of Macrowise
April 15, 2020.