Until we have more robust macro data we recommend investors to take profit on some of the gains for 2019 or utilise the low implied volatility to hedge some degree of market risk.
Earnings season takeaways The earnings season is unfolding as predicted. US and European earnings are slowing down to the worst earnings season in three years. US earnings are relatively stronger than Europe due 1) larger technology and media segment, 2) higher growth and 3) more buybacks, pushing down the index divisor. But this earnings season is much more than the aggregates. There were two earnings releases that stand out. providing clear signals to investors.
1)
Google’s miss on advertising revenue was more an Amazon story than a Google story. For the first time ever, Google has finally got a competitor that is taking market share in online advertising on products and that’s Amazon. Our channel checks suggest that this trend is real and that has implications for Google. Advertisers will love a choice so Amazon will see more allocation by advertising agencies and the bigger question is whether Amazon has a better value proposition because advertising on their platform is better integrated with actual products (on Amazon.com) and buying behaviour. We believe the Amazon vs Google story will drive sentiment on Google over the coming years and Alphabet (Google’s parent company) will be forced to step up monetisation across its other digital assets such as YouTube.
2)
Intel’s big miss, driven by lower than estimated revenue from Datacentres and their negative revenue forecast for that segment this year, was a big surprise. Some interpreted the news as demand weakness for datacentres tying it to recent macro weakness, but Nvidia’s data suggest that Intel is merely losing market share to Nvidia. Demand for datacenters is still very strong judging by Amazon’s Q1 figures for AWS revenue.
What is MMT and is it coming? Everyone engaged in financial markets will have to understand MMT (Modern Monetary Theory), because the subject could take center stage during the 2020 election in the US. But elsewhere the conversation is also heating up with the CEO Hans Sterte of the Swedish pension giant Alecta giving ammunition as he has criticised the current Swedish policy framework on monetary affairs.
From the papers we have read it seems MMT is better at explaining what we actually observe on the economy. MMT will most likely increase nominal GDP growth but the question is whether it will raise real GDP growth as well, or inflation will just eat up the increase in nominal growth.
If inflation rises meaningfully this will most likely help changing the income and wealth distribution (which has worsened due to financial asset QE in many countries) without raising direct taxes. Another big question still remains around inflation as the real constraint on fiscal spending. The proponents of MMT are still adequately addressing how the government should be able to forecast when inflation is accelerating out of control. History shows that inflation dynamics are conditional and thus after a certain point it may not easily be tamed again.
Below are a couple of links to articles about MMT that are worth reading.
- A Swedish Investing Giant Is Sick of His Country's Policy Misses
- The Macro Tourist Presents: A Practitioner’s Guide To MMT
- How government deficits fund private savings
