Bloomberg Opinion: Fed Ends With a Whimper. Can Georgia Cause a Bang? | Dec 17, 2020

December 17, 2020,  John Authers

One bizarrely technical issue might help over the next year. The Treasury department will need to draw down its enormous account at the Fed. This is how how the Treasury General Account, or TGA, a deposit that appears as a liability on the Fed balance sheet, has moved since the global financial crisis:

The chart is from Simon White of Variant Perception Ltd. in London, who kindly took me through the counterintuitive effects that this massive rainy day fund could have on markets and financial policy. The money in this account doesn’t increase either the Fed’s balance sheet, or any of the “M” numbers measuring the monetary base. It was built up by the Treasury to give it some leeway ahead of the next clash of heads with Congress over the debt limit. Then it became much bigger, as the chart shows, as the Treasury tried effectively to pre-fund a Covid-19 stimulus.

It did this by issuing more short-term bills. At the same time, the Fed was busily buying back bonds of generally longer maturities as part of its QE efforts. Those from whom the Fed bought were left with cash that they then used to buy the short-term bills the Treasury was offering. These funding logistics may explain a sharp fall in the average maturity of the Treasury debt held by the public this year:

Average Maturity of Treasury Debt Held By Public

While this move is neutral as far as the monetary base is concerned, it has an important effect on the dynamics of the bond market, and hence on financial conditions. All else equal, shortening the average maturity of debt held by institutions will mean more money pouring into shorter-term bonds; therefore it should also mean a steeper yield curve, as this will lead to shorter bond yields falling more than those on longer-term securities. As this chart shows, the direction of the average maturity of Treasury debt appears identical to the direction of the yield curve. The sudden switch to a shorter average duration this year coincided neatly with a sudden curve steepening:

Debt Maturity vs US 2s10s

All other things equal (which they won’t be, but still), we should expect the opposite to happen during 2021; the Treasury will wind down the account, which it can do easily by allowing the bills to expire. That will entail paying money to institutions that now need to find something to do with it. The chances are that the bulk of that money will go toward buying longer-dated bonds. Other things equal, yields on longer bonds will come down by more, and the yield curve will flatten.

The Fed might well want to control the yield curve next year. The TGA will probably provide a tailwind that will help it to avoid explicit yield curve targeting, or adopting an overt target for the weighted average maturity, or WAM, of assets on its balance sheet. Especially with Janet Yellen in charge of the Treasury, the chances look good that the Fed will have some coordinated help from fiscal policymakers.

If the TGA acts against the consensus when it comes to the yield curve, it may help the consensus when it comes to the dollar. The relationship isn’t strong, but in recent years declines in the TGA have overlapped with a weak dollar, while rises have coincided with a strong currency. A sustained decline in the TGA in 2021, leading to a flatter yield curve, would probably help bring down the dollar.


If there’s an impasse over the debt limit as expected in July, then the TGA will more or less have to be drawn down significantly. There is a “but,” though.

Next year will start with two special senatorial elections in Georgia. If the Democrats win both seats, the Senate will be split 50-50, giving Vice President Kamala Harris the casting vote. That could mean the debt limit would remain suspended, giving Yellen the freedom to spend money on fiscal expansion, rather than draw down her account at the Fed. That would be a big change.

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MoneyWeek: The return of the commodities supercycle | Dec 4, 2020

December 4, 2020,  Alex Rankine

The green transition 

Why is supply constrained? Raw materials have been in a bear market for much of the last decade, explains a note by investment analyst Variant Perception. That caused energy firms and miners to slash exploration budgets. Soaring prices encourage more supply but it can take years to get a copper mine up and running, for example. The result is “prolonged periods” of “surging demand” running into “inelastic supply”. That generates a “commodity supercycle”. Add in their inflation-hedging potential and commodities looks “primed to deliver long-term superior returns”.

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The Times: Covid has crystallised the future of work | Nov 29, 2020

November 29, 2020,  Cormac Lucey

London research provider Variant Perception believes we are on the cusp of a new commodity “super cycle”, that will result in commodity prices rising for several years to come after a long period in the doldrums. The report expects this reversal in the broad direction of commodity prices for several reasons.

Variant believes that the long dominance of monetary policy over fiscal policy is reversing and that this will cause a return of inflation risks not seen since the 1960s. The report warns that the private sector’s preference for saving — despite years of ever easier monetary policy — means that government must make up the shortfall by borrowing.

Across the world, this is now being supported by central banks buying government bonds. The pandemic has only magnified these trends and Variant feels we are heading towards “the fusion of monetary and fiscal policy”. It warns that this blurring of fiscal and monetary policy will create a very different investing environment, one in which normal and modest rises in inflation are more likely to trigger disorderly inflation hikes.

Variant believes that demand and supply imbalances drive the commodity cycle and that, while demand is set to pick up cyclically as economies recover, supply conditions remain cyclically tight. It warns that large commodity price spikes will become likely over the following 18 months after recovering demand runs into tight supply, and low inventories mean prices are more responsive to a demand pick-up.

On top of all that, Variant warns that investors are currently deeply underweight on commodities and may find themselves scrambling to acquire them in order to buy protection from rising inflation. It believes there is a risk of a huge supply-demand imbalance in commodity markets as investor preferences shift towards real assets. This could be the time to put some of your portfolio to work in deeply out-of-fashion sectors such as energy and metals.

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Bloomberg Opinion: The Lockdown Meltdown Is Coming for Everything | Oct 29, 2020

October 29, 2020,  John Authers

The Covid World Order

China’s current strength could also help another beleaguered group of assets — industrial commodities. As the following chart from Variant Perception illustrates, China remains a massive source of demand for a range of raw materials, and its importance at the margin hasn’t diminished in the slightest over the last five years:

Does that mean that commodities might shine again, if China can keep up its pace? This chart from Variant Perception suggests there is a good chance. Commodity prices tend to move in long waves (and stocks tend to rise when commodities are falling and have difficulties during commodity bull markets). On that basis, it looks like this might be the time for another commodity bull market:

Industrial metals have recovered all their losses during the Covid spasm in March, they are up for the year, and have been relatively unscathed so far in this selloff. If there is anywhere logical to look for shelter in this environment, it might be in the cluster of assets, like the big industrial metals, that are most closely attached to China. That could be the new world order that the virus has wrought.

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MacroVoices #243 Tian Yang: A New Commodity Bull Market is Coming | Oct 29, 2020

October 29, 2020, MacroVoices

Erik Townsend and Patrick Ceresna welcome Tian Yang to MacroVoices. Erik and Tian discuss:

  • Inflation driven commodity super cycle – when will it happen?
  • When will  consumer price inflation starts?
  • How to manage your portfolio to prepare for inflation
  • COVID-19 pandemic impacts on prices
  • How to position for commodity super cycle
  • How to approach different commodity sectors for allocation
  • Outlook on precious metals

Podcast Episode

Bloomberg Opinion: Everything's Too Expensive and Nothing Can Be Done | Oct 21, 2020

October 21, 2020,  John Authers

From Hope, Fear and Covid Set Free

It’s not the despair, it’s the hope. Variant Perception has produced much interesting research over the last few months suggesting that panic over the coronavirus has been exaggerated. The research group’s latest bulletin argues that the greatest reason for fear is fear itself. Research from the International Monetary Fund shows that during the first 90 days of the pandemic, “voluntary social distancing”  had a greater impact on mobility than formal government lockdowns:

This suggests that the focus on mandatory lockdowns per se is overdone. There are exceptions, but as a rule people aren’t stupid. If there is a risk of catching a potentially deadly virus, they will modify their behavior. Further IMF charts show that a lockdown had far less effect on mobility than a doubling in coronavirus cases:

Not only that, but lifting a lockdown generally had a far more limited impact than imposing one. For all the passionate opposition they have sparked across the world, ending lockdowns hasn’t tended to have much effect on how people behave. This suggests that the virus itself, or at least the fear of it, is more impactful on the economy. That in turn leads Variant Perception to say that the prevailing negative coverage of Covid needs to be lightened:

As long as policymakers and the media present a more alarmist view of the virus’s impact than can be justified by a dispassionate analysis of the data, recoveries will continue to stutter. On the other hand, an easing of the fear portrayed would likely allow recoveries to accelerate at a much faster rate.

While this is true, the debate in the last few weeks has grown to include far more voices suggesting that we should move more freely, just as infections have risen again. Journalists need to be confident that it is responsible to tell people it’s safe to go back in the water. Otherwise the consequences become hard to contemplate.

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Bloomberg Opinion: A Forgotten Tail Risk Rears Its Head Again | Sep 16, 2020

September 16, 2020,  John Authers

…the latest trade data suggest that the sudden stop caused by Covid-19 has intensified the imbalance between the world’s two biggest economies. Generally, most countries have seen imports and exports decrease by the same percentage, which means that their balances, whether positive or negative, have tightened. This is true of Canada, Japan, the U.K. and Germany, as Variant Perception illustrates below. But China and the U.S., whose balances had narrowed slightly during the Trump era, have bucked the trend., The Chinese trade surplus is widening, and the U.S. deficit is deepening:

Meanwhile in the U.S., support for people idled by the Covid shutdown has translated into sharply higher personal incomes. Thus, for now, American policy has backed retail over industry, tending to pull in more imports, while China’s policy of boosting manufacturing rather than consumers has buoyed its exports:

If Americans truly want to avoid a trade deficit with China, then, this is a problem. (It’s not clear to me that the deficit as such should matter much, but evidently plenty of American politicians disagree.) The most likely way to see this change would also involve pain; if politicians cannot find a way to extend the benefits passed to aid people through the Covid slowdown, and the pandemic continues to slow activity, then there is likely to be much less consumer demand, which will feed through into lower imports. But this wouldn’t be a good solution, and indeed Variant Perception suggests that it would probably lead to yet more easy money from the Federal Reserve, which would suck in yet more imports.

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Bloomberg Opinion: Robin Hood Is Pillaging the Sheriffs of BlackRock | Jul 29, 2020

July 29, 2020,  John Authers

Summertime, and the Trading’s Not Easy….

August is almost upon us, and the northeastern U.S. is now uncomfortably, not to say disgustingly hot. Even if it is harder for people to escape on vacation this year than usual, it seems reasonable to expect markets to give us a dose of calm for the next few weeks.

Unfortunately, history suggests that Augusts aren’t always that sleepy. This chart, produced by Variant Perception with Bloomberg and Macrobond data, shows average monthly returns over the last 30 years for a range of assets.

August turns out to have been the best single month for the VIX volatility index and for the dollar, and the worst month for 10-year Treasury bonds (meaning yields tend to go up). It is also the best month after January for gold.Why so many fireworks amid the blue sky of summer?

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Grant's Interest Rate Observer: Money Gusher | Jun 12th, 2020
June 12th, 2020, Grant’s Interest Rate Observer

Bloomberg Opinion: Crash Lesson No. 1? Don't Ignore the Fed's Gusher | Jun 9th, 2020

June 9th, 2020, John Authers

For another way to ram home just how unusual and different the Fed response was this time, take a look at this extraordinary chart of how excess liquidity grew during each of the last four bear markets, from Variant Perception. It is usual for the Fed to make liquidity available in difficult times for the stock market, and it has been harshly criticized for the way it did so after the last crash; but nothing compares to what has just happened:
In the context of such an enormous gush of liquidity it is clear at an intellectual level that there was immense pressure on share prices to rise. That doesn’t make this surge any easier to process at a personal level, and it doesn’t banish the fear that it cannot be sustained once the market has to confront underlying economic and corporate fundamentals. The same applies in the terrible event that human beings put their immune system into a second great contest with the novel coronavirus.
Financial Times: Federal Reserve has encouraged moral hazard on a grand scale | Apr 13, 2020

April 13, 2020, Jonathan Tepper

After a decade of economic growth and generous tax relief, US companies should have held cash piles to sustain them for short periods without revenue. But most borrowed all they could and never saved for a rainy day.


Today credit spreads are increasing, indicating a higher probability of default. However, the anomaly is not the current levels of stress but the unnatural calm that came before. Research by Variant Perception shows that, historically, companies with high levels of net debt compared with their cash flows have had higher costs of funding. But this relationship broke down after the last crisis. It is only now, during the coronavirus crisis, that fundamentals are reasserting themselves and terrible companies are seeing their spreads widen.

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WSJ: How Much Will U.S. GDP Decline in the Second Quarter? | Mar 23, 2020

March 23, 2020, Lev Borodovsky

8. Is recession risk fully priced in? According to Variant Perception, markets have often waited for tangible improvement to the underlying event that caused a sell-off before a tradable bottom occurs.

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WSJ: European High-Yield Bond Rally May Be Over-Hyped | Jan 22, 2020

January 22, 2020, Paul J Davies

Simon White, managing editor of research firm Variant Perception, expects spreads for both U.S. and European speculative-grade bonds to move slightly higher this year, although not as much as for investment-grade bonds.

“There are clear signs that the credit cycle is maturing,” Mr. White said.

“The fact is that investors are looking through the fundamentals, but central banks remain willing to support markets,” he said.

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WSJ: The Fed Is Pausing on Rate Cuts | Oct 31, 2019

October 31, 2019, Lev Borodovsky

The rise in the Variant Perception’s unemployment breadth index could signal higher volatility ahead.

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Real Vision: The Central Banks' Monetary Policy Is Backfiring | Sep 18, 2019

September 18, 2019

Simon White, co-founder of Variant Perception, explains his view that as interest rates approach the zero bound, conventional monetary policy tools do not achieve their intended goals, but instead create deflationary pressures. He argues that in a negative-rate world, the private sector increases savings rates to combat their lack of income – causing an even bigger deflationary push. White believes that conventional monetary policy is nearing its limits, and MMT will unleash a flurry of inflation as politicians take control of policy. Filmed on September 13, 2019 in London.

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