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The new Taper Tantrum – H2 outlook 2020

The new Taper Tantrum – H2 outlook 2020



The first half of this year saw one of the fastest and most aggressive market corrections in history, as Covid-19 spread around the globe.  Just as unprecedented was the speed and extent of the subsequent recovery, thanks above all to governments and central banks having sent in the cavalry to boost liquidity and plug the consumer confidence gap.  Combining fiscal and monetary stimulus, the global policy response is estimated to be $14 trillion and counting.  With all this in mind, what’s next for global markets as we enter the second half of 2020 and beyond?   

The 2020 Taper Tantrum

The second half will be all about the new Taper Tantrum.  The first one was about the Fed’s balance sheet unwind, leading to a surge in Treasury yields as the central bank announced the tapering of its quantitative easing (QE) programme in 2013.  This one will be about the end of furlough schemes in developed markets. 

Countries are opening up again in order to limit economic damage, especially in the northern hemisphere where governments are keen to support growth through holiday spending.  In the absence of a vaccine, this means that an acceleration of Covid-19 cases is almost inevitable, even with measures such as local lockdowns.  However, death rates will be lower than they were in the “first wave” for a number of reasons: we now have better treatments (e.g. steroids cut death rates in intensive care units), we have learned lessons on shielding the most vulnerable, and very sadly, many of most vulnerable may have died already in the first wave.  Most developed economies should return to some form of normality.

However, despite the recent rebound in employment (look at the US jobs numbers last week), unemployment is still exceptionally high.  US unemployment is up 12 million from February, while in the UK we have over 9 million people out of work—more than a quarter of the UK workforce.  So far, the economic damage done to individuals has been cushioned to a large extent by furlough schemes, in which the government pays a large percentage of salaries for staff whom would otherwise have been laid off.  As a result, with little to spend money on during lockdown, many people have been able to save or reduce debts.

In the US, thanks to the CARES Act, the largest economic stimulus package in US history, we have a situation in which some workers have actually been better off being out of work than they were in their previous jobs.  With direct payments to Americans and loans to business, the $2 trillion Bill amounts to 10% of US GDP, and is much larger than the $0.8 trillion Recovery Act of 2009.  Adding together compensation of employees plus government unemployment benefits, we have the strange situation in which people in the US are receiving more income on average now than they were before Covid-19.

This is a rather odd recession: they don’t normally send personal incomes soaring.

The danger is in the taper

But what will happen when this stimulus begins to wind down?  Government debt levels have exploded since March as tax receipts collapsed and unemployment costs rocketed.  Deficits have moved well above 10% for most developed market economies, while debt-to-GDP ratios have generally moved to, or above, 100%.  While there’s a lot of debate about whether this matters (see Stephanie Kelton’s recent book, The Deficit Myth, which suggests that we can print money to get ourselves out of the problem; or Eric Lonergan (of M&G) and Mark Blyth’s Angrynomics, which says that having negative sovereign interest rates makes this a time to invest in infrastructure), most governments want to start to taper assistance to the economy later this year.  In the UK, this means that government furlough payments will be reduced in August and October, putting some of the wage burden back onto employers.

What happens then?  In anticipation of furloughs ending, UK retailers in particular have already announced mass redundancies.  How many of the world’s furloughed workers don’t realise that they are actually unemployed?  For this reason, plus the continued impact of Covid-19 on global travel and trade along with social distancing nervousness (however reduced from its peak), talk of a V-shaped recovery seems difficult to square with the environment we now face, despite low rates and some continued fiscal stimulus. 

Lessons from history

It is likely that there will still be more fiscal stimulus and debt levels will continue to rise from here.  How will we deal with them?  The usual three options are: grow, inflate or default.  The answer is basically the same sort of policies that allowed the UK to deleverage from 250% debt-to-GDP after the second world war.  These included forms of financial repression like forcing high bank ownership of government bonds.  In the US, it involved pinning bond yields to low levels – like we have seen in Japan since 2016, and in Australia in March this year. Such yield curve control (YCC) is already under active debate within the Fed (YCC is different from QE in that it targets a bond price or yield, rather than simply being a purchase of a set volume of bonds).  Might we also see negative interest rates from the BoE and Fed?  On a further slowdown it is likely.

We should also consider central bank independence.  Former Bank of England Deputy Governor Paul Tucker has warned that, as the Bank is now buying basically the same value of gilts as is being issued by HM Treasury (as well as offering the government a Ways and Means overdraft for lost tax revenue), it is at risk of being seen as the financing arm of the UK authorities.

The return of inflation?

Does this make inflation more likely?  The jury is out, and this largely depends on who wins the battle between labour and capital in the recovery.  Labour has lost out for decades now.  Will Covid-19 change that?  The data so far are not promising: the latest research from the US Brooking Institute think tank says that it is the bottom 20% of wage earners that have suffered the highest unemployment rates, so hopes that we would emerge from the crisis wanting to reward low-paid key workers (nurses, delivery drivers, supermarket staff) might be dashed.  There’s still a chance of some supply side inflation, thanks to food going unpicked and disrupted logistics.  Shopping basket inflation did rise in March, as shops ended promotions and limited product ranges (and this inflation was inflicted disproportionately on lower income households as a result of how lockdowns have pushed them to buy more food while not spending as much on other, less inflationary items and activities).  But demand-driven inflation seems very unlikely overall.

Received wisdom is that QE = inflation.  Is this true?  The money supply expansion is huge – but so is the collapse of the velocity of money (i.e. the speed at which it circulates in the economy).  Some argue that the most powerful effect of QE is that on a currency: as money is printed, the currency depreciates and inflation is generated through higher imported goods prices.  But what if everyone is doing QE?  What if everyone is trying to get their currency down?  It has no impact.  Famous bear Albert Edwards goes further, to say that YCC will be even less inflationary, since countries like Japan have been able to keep yields low without even having to buy many bonds – the signalling effect is so powerful that there’s not even a monetary expansion.

Positioning for the new taper tantrum


We’ve come a long way since the lows of March, which offered some great opportunities to be overcompensated for default risk as a credit investor.  Corporate bonds, which at their lows were pricing in IG and HY default rates of 25% and 54% (23 March 2020) respectively, are now closer to fair value (pricing in 12% and 35% at 7 July 2020).  Undoubtedly this has been driven mainly by central bank buying, particularly in high yield where we have seen and can expect to see more defaults. 

Despite considerable volumes of issuance, high yield spreads have come a long way.  The main reason is not fundamental but rather the action of the Fed, which has for the first time been buying high yield ETFs and high yield bonds which were downgraded after 22nd March.  It’s hard to get excited about credit valuations at these levels.  There is still some value in investment grade: these companies are the big employers, so it is politically easy (and arguably a decent policy tool) to support them. 

The Fed’s support also begs the question, is it right that these companies survive?  We have lost the creative power of destruction, where the old makes way for the new.  Is capital really being allocated correctly and efficiently?  We have seen how growth and productivity stagnates under these conditions in Asia at the end of the last century.   

Developed markets

Despite the huge fiscal stimulus we have seen, it is difficult to be too bearish on government bonds now given the yield controlled world we live in.  And bonds like bad news: while they are clearly very expensive, they do offer potential upside in the event that negative sentiment returns to markets in the second half.  With inflation unlikely to rise significantly in the short term, I don’t mind owning duration.

In Europe, the planned recovery fund and continued Pandemic Emergency Purchase Programme (PEPP) have been supportive.  Just as important as the planned spend itself is the sentiment of burden-sharing, when it comes to helping contain EU break-up risk.  Despite some resistance to the stimulus plans from the more frugal Euro nations, Italian BTPs and other peripheral bonds have strongly outperformed core government bonds since the announcement.  I’m not convinced we’ll see much more outperformance from BTPs since their aggressive rally.  Flows are slowing as spreads are compressing, so demand is likely to shift to other high yielding sovereigns in the region that have been less aggressively bought so far by the ECB and investors.  For this reason I like bonds like 10 year Netherlands.

Emerging markets

One area in which I do see value is emerging market (EM) debt.  Firstly, it offers higher real yields than developed market bonds.  Also, EM currencies have lagged the recovery, meaning that some local currency bonds do offer attractive value (you can buy more per dollar).  Emerging markets clearly face challenges due to Covid-19, particularly as a result of headwinds to global trade, but greater EM central bank intervention than we have seen before is helping and there are regional pockets of relative value.  For example, I would expect Asia to outperform other EM regions, since high real rates make currencies here broadly attractive to investors.  Additionally, many of these economies are net exporters and so this should also improve current account balances.


We should see some mean reversion in valuations that moved aggressively in the first half.  While EM local currencies looked fundamentally cheap across the board in the first half, going forward I expect to see some more moves based on fundamentals.  I therefore anticipate rotating out of some of those currencies that have rallied aggressively (for example the Indonesian rupiah) to those where fiscal and central bank positions are strong, but valuations still look attractive (for example the Russian ruble).  I would also favour higher-beta currencies (for example those that are heavily commodity-driven, or with a reliance on external rather than domestic demand) to capture any second half mean reversion.  Likewise I am following central bank moves closely: currencies in those countries where central banks have been relatively conservative in expanding their balance sheets (e.g. the New Zealand dollar over the Australian dollar) are where I want to be (though in rates I would favour issuers where central banks are providing strong support).

Unlike many EM local currencies, the dollar looks quite expensive on a fundamental basis.  Despite this, I do own some dollar exposure, as it does its job in a risk off environment.  On balance though, I prefer the Japanese yen for the better diversification and risk off hedge it offers.  With the ECB having removed a lot of downside risk in the region through their aggressive buying programme, I also like holding the Euro.  It has become a very cyclical asset (rallying as sentiment improves, the opposite to the way the dollar is behaving), so I hold it against the safe haven currency of the region, the Swiss Franc.

Short term action, long term impact

The focus of financial markets moves quickly.  We saw over the first half of 2020 just how quickly.  After the deep and rapid panic-driven sell off as Covid-19 spread around the globe, the extent to which asset prices have recovered reveals markets’ new focus: the unprecedented magnitude of fiscal and monetary stimulus.  With millions of jobs lost in a few months, there is no doubt to my mind that it is this stimulus which is now driving markets: they are being driven by technical factors, not fundamentals.  I think the focus may change just as rapidly in the second half, and it will be to the other side of the coin: what will markets make of the inevitable end of the monetary and fiscal bridge?

Governments and central banks have, on the surface, succeeded in containing much of the financial fallout of the lockdown-driven fall in demand.  The danger now is in the taper.  In this light, it seems difficult to support the idea of a V-shaped recovery.  And the short term response of governments and central banks brings up longer term questions.  How will we get out of all this debt?  Grow?  It seems implausible that trend growth will be higher in the aftermath of this crisis than before.  Inflate?  Central banks haven’t been able to achieve their inflation targets even in the good times, so what chance do they have of inflating away the debt now?  Default?  There’s no need to default if you can print your own currency – but we might see some debt jubilees (cancellation of student loans for example), wealth taxes and confiscations, and even the cancellation of government bonds held by the central banks as part of QE.  And what happens if the market stops believing that central banks are independent?  Could that finally be the catalyst for inflation expectations to return to developed markets and, after decades of losing, will labour win over the power of capital this time round?  The actions of a few months bring up these questions and more.  We may have to wait for some years to learn the answers.

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Braxia and KetaMD, CEOs McIntyre and Gumpel Speak on Acquisition

Last week, the Canadian company Braxia Scientific acquired 100% of the issued and outstanding stock of KetaMD, Inc. This is an exciting acquisition, and…



Last week, the Canadian company Braxia Scientific acquired 100% of the issued and outstanding stock of KetaMD, Inc. This is an exciting acquisition, and in today’s interview, The Dales Report’s Nicole Hodges talks with CEOs Dr. Roger McIntyre and Warren Gumpel of Braxia Scientific and KetaMD respectively.

For some background information, KetaMD is a U.S. based, privately-held, innovative telemedicine company, with a mission to address mental health challenges via access to technology-facilitated ketamine-based treatments. Braxia Scientific is Canada’s first clinic specializing in ketamine treatments for mood disorders. They recorded revenue of $1.49m for 2022 fiscal year, ended March 31. On a year-over-year basis, revenue increased 47.5%.

Here’s some highlights from the interview.

KetaMD gives Braxia a presence in the US

Dr. McIntyre says that KetaMD gives Braxia what they’ve had as their vision from the beginning: a US presence. KetaMD is a living program. It’s already running, has infrastructure, and patients. McIntyre believes that a program like KetaMD is something Braxia’s needed to scale and obtain commercial success.

With telemedicine, Braxia has a potential to serve a gap in access. The zeitgeist of “patient going to medicine” has flipped, McIntyre says. “Now it’s medicine goes to the patient, and that is long overdue.”

COVID speeding a trend that was already happening

In 2020, 80% of physicians indicated they had virtual visits. That’s a number up from 22% the year before. But this is something that many doctors, McIntyre included, believe always should have happened. The pandemic only was the catalyst for innovation and making the option viable.

While some treatments will always need a clinic or a hospital, McIntyre believes some treatments can be done safely at home. And they are, for many chronic diseases. He feels implementing ketamine and psychedelics would be among these treatments where service could be expanded into the home. It would require careful SOPs in place, best practices, and surveillance. But he believes Braxia Scientific could deliver this with KetaMD.

Gumpel to stay as CEO of KetaMD

Gumpel says that KetaMD benefits in this acquisition from being part of the world’s most prominent researchers in depression, psychedelics, and ketamine. In the acquisition, he’ll stay on as CEO. He admits that Dr. McIntyre has been a huge part of collecting the data on the safety of ketamine treatment, and has a strong motivation to “see this thing through until most of society can access that – or at least the people that need it and want it.”

Gumpel admits he has a personal connection to ketamine treatment. As a person who has experienced bouts of depression for years, it saved his life, he says. He is grateful he was living within walking distance of ketamine treatment in Manhattan. It made him extremely aware of the accessibility gap, which in part inspired KetaMD.

Be sure to tune in for the full interview regarding Braxia and KetaMD, right here on The Dales Report!

The post Braxia and KetaMD, CEOs McIntyre and Gumpel Speak on Acquisition appeared first on The Dales Report.

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Spread & Containment

How to Use Dividends to Find the Best Tech Stock

Investors Alley
How to Use Dividends to Find the Best Tech Stock
When we talk about tech stock investing, we hear discussions of all sorts about different…



Investors Alley
How to Use Dividends to Find the Best Tech Stock

When we talk about tech stock investing, we hear discussions of all sorts about different measures used for picking stocks.

For example, some tech investors use year-over-year revenue growth. Others subscribe to a theory that has been floating around for many years, that the secret to picking tech stocks was looking at the percentage of cash flows spent on research and development.

All too often, tech stock analysis consists of storytelling and searching for ideas that will change the world, something I’ve heard thousands of times during my career. The number of companies that actually did change the world probably totals up to a few dozen over three decades.

Some of those beat the market. Others did not.

I have found a variable that can help tech investors spot promising opportunities to identify technology companies that have higher probabilities of providing market-beating returns: dividends.

Note a stock’s dividend yield: investors who want higher dividends with an overall total return would be smart to look into high-yield tech stocks as part of their income strategy. The key to using dividends to find market-beating tech stocks is to look at the rate of their dividend growth. It doesn’t matter how high the dividend is at any given time. We want to see companies that are consistently growing their dividends.

A tech company that pays a dividend is making a statement. It tells the world: “We are generating enough cash to pay the bills, hire great people, and fund our future growth plans as well as R&D. In fact, we are generating so much cash we have some left over to pay out to our investors.”

Ideally, we want to limit our universe of companies to those who are increasing their payout by at least 20% annually. Growing a dividend at that high a rate says that things are just continuing to get better.

Once we have a universe of tech companies that are growing their payouts at high levels, we want to make sure we only own those that really do have a wonderful business that just keeps getting better. We want to use a financial checklist to make sure our companies are in excellent financial shape and have what it takes to keep growing the business.

I prefer the nine-point checklist developed by Professor Joseph Piotroski when he was at the University of Chicago – known as the “Piotroski F-Score”. This is a list of nine criteria of profitability, leverage, and efficiency. On each criterion, a firm can either get one or zero points – pass or fail.

I limit my universe of tech stocks with paid dividend growth to just two to three with the highest scores on the Piotroski checklist.

Using this simple method for picking tech stock winners has crushed the S&P 500 over the past decade and even edged at the tech-heavy NASDAQ 100.

Texas Instruments (TXN) makes the current list of technology companies with high dividend growth and outstanding fundamentals and prospects. The company makes most of its revenues from semiconductors, but it does still have some revenues from its calculators and other business machines. (I have had one of these, a Texas BAII calculator, within arm’s reach for most of my career.)

Texas Instruments had a solid second quarter and increased its guidance for the third quarter. The company has not suffered the China slowdown problems that have plagued some of their competitors so far. The brightest spot in the recent report was semiconductors being sold to the automobile industry, which were up 20%.

Although we have seen some slowdown in semiconductors due to the supply chain issues created by the pandemic, Texas Instruments has powerful tailwinds from all the developments we see in technology over the next decade.

Every one of the hottest trends in the economy—from renewable energy to artificial intelligence and everything in between—is going to increase demand for semiconductor chips. There are thousands of semiconductors in every electric vehicle, which will be another massive source of demand for the industry.

Texas Instruments has a yield of 2.5% right now, and has been growing that payout by 20.5% annually.

Another semiconductor company, Broadcom (AVGO) has the fastest-growing payout on our list right now. The company makes chips for smartphones, networking, broadband, and wireless connectivity. Broadcom’s recent purchase of Symantec’s Enterprise Business also puts it in the cybersecurity business.

Broadcom’s shares currently yield 2.97% and the payment has risen by an average of 49% annually for the past five years.

Most investors will never think of using dividends as part of the stock selection process. Rigorous testing shows that dividend growth is actually an important part of identifying companies with the potential to be huge winners.

My favorite way to invest in those companies isn’t to buy their stock, though. Instead, I like to use a special, little-known investment that lets me invest in these companies for up to 18% less than what others pay…

While collecting twice or more the dividend yield!

All without any more risk. I’m tracking 5 opportunities like that right now, and I lay them all out right here.

Only 3% of investors even know these funds exist

But using them, I can beat the market 2-to-1 while collecting 2-10X MORE yield from regular dividend stocks.

I learned this trick while I was rubbing elbows with some of the biggest fund managers in US history.

They too are buying these little known funds, cashing in huge discounts and collecting income while they do it.

Click here to learn the secret yourself.


How to Use Dividends to Find the Best Tech Stock
Tim Melvin

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Where Carnival, Norwegian, Royal Caribbean Sit on Covid Vaccines

Do You still need to be vaccinated to go on a Royal Caribbean, Carnival, or Norwegian Cruise?



Do You still need to be vaccinated to go on a Royal Caribbean, Carnival, or Norwegian Cruise?

Cruise line covid-19 vaccination and testing rules, which were imposed by the Centers for Disease Control and Prevention at the beginning of the pandemic, have been stricter than most. After the pandemic started in early 2020, the CDC signed a No Sail Order on March 14, 2020, which was finally lifted after nearly eight months on Oct. 30, 2020.

After the No Sail Order was lifted, the CDC enacted extremely restrictive rules and regulations to help keep passengers safe with the covid pandemic still raging throughout the world. The rules and regulations were set forth to begin to return cruise lines to operational status.

The cruise lines first had to be staffed accordingly and set up with the ability to test, treat and quarantine for covid medical emergencies. Testing for crew and passengers before embarkment and before dis-embarkment was required. The testing at pre-embarkment was a measure to protect those boarding, while the post-trip testing was for determining if an infection started on the cruise line itself. Being able to track the virus was very important in the prevention of spreading the virus and protecting patrons.

Image source: Shutterstock

Vaccination Still Not a Free Pass to Board

Once the vaccination was developed and approved, it became part of the CDC guidelines for cruise line adult passengers to have their vaccination before boarding. Even with a vaccination, guests still needed to test before they boarded the cruise lines. As the vaccine was approved for younger age groups, those age groups were then also required to have the vaccine to travel. Passengers were required to be fully vaccinated unless they are exempt by some status.

Before boarding, cruise line passengers who tested positive, as well as their travel companions, were not allowed to board, depending on the cruise line and how long the cruise may be. Some passengers were allowed to board and then isolate, others would have to reschedule their trip. Trip insurance is a good buy these days.

Cruise Lines Letting Loose on Vaccine Policies

Carnival Cruise Line  (CCL) - Get Carnival Corporation Report has now removed pre-cruise testing for vaccinated guests and also welcomes unvaccinated guests to travel. Fully vaccinated guests traveling less than 16 nights with the cruise line will no longer be subjected to testing, but still must provide proof of their vaccination status. Unvaccinated travelers will only need to provide a negative covid test result to board the ships. All rules and regulations are still subject to the destination country’s guidelines.

According to the Healthy Sail Center for Royal Caribbean  (RCL) - Get Royal Caribbean Group Report, the cruise line has updated its covid vaccination protocol. The cruise line will now allow passengers regardless of vaccination status to board in some ports if the travelers meet the testing requirements. Testing requirements vary by cruise departure and destination. Check the cruise lines port departure for updated information on requirements.

There is, however, a major exception, at least for now, which is obvious when you look at the specific wording shared by the cruise line:

"Starting with September 5 departures, all travelers regardless of vaccination status can cruise on the following itineraries, as long as they meet any testing requirements to board.

  • Cruises from Los Angeles, California.
  • Cruises from Galveston, Texas.
  • Cruises from New Orleans, Louisiana.
  • Cruises from a European homeport.

Notice that Florida, a major port for the cruise line, is not currently on the list.

In the U.S. aside from Florida, any guest with a valid negative covid test within the last three days will be able to board. These guests will also not be required to take a second test at the boarding terminal. Fully vaccinated guests do not need to provide proof of a negative covid test for shorter cruises. See the cruise line website for all updated information as it is subject to change.

Beginning Sept. 3, Norwegian Cruise Line  (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report is dropping its covid vaccine requirements for all its cruises. The cruise line stated that it is continuing to follow requirements for all destination countries, so guests traveling will want to check on destination vaccine and testing requirements. All guests 12 and older regardless of vaccination need to show proof of a negative test within 72 hours. Check NCL online for further instructions prior to travel.

The CDC has taken the stance that travelers are now well informed enough to make their own decisions when it comes to traveling on cruise lines. The travelers are taking their own assumed risk for their health and well-being. Cruise lines are now welcoming this new freedom for their passengers. 

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