TradeSmith Daily

August 2020

Long-term Rates Can’t Rise Too Much — If they Did, the US Government Would Go Broke

August 24, 2020John Banks

The yield on the U.S. Treasury 10-year note, as of this writing, is 65 basis points. This means that, for every $10,000 worth of 10-year notes purchased at recent prices, you get $65 in annual interest payments. That is an incredibly low yield, not far from the all-time low for interest rates — with “all time” covering 5,000 years of financial history. (There is interest rate data for ancient Mesopotamia circa 3,000 BC.) That 65 basis-point yield is also low

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The Market is Bidding Up Winner-Take-All Cash Flow Streams

August 21, 2020John Banks

The market is bidding up pandemic-proof cash flow streams. When you look at stock price behavior through this lens, the picture makes more sense. This further implies the stock market is not reflecting economic recovery, or a “return to normal,” but rather the stark realities of a post-pandemic landscape. To put it another way: In a world where consumer behavior has radically shifted because of the pandemic, a great many companies will be net losers, but a handful of companies

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Why is the U.S. Housing Market So Strong?

August 20, 2020John Banks

The U.S. housing market is bizarrely strong right now. But why? Before attempting to answer, we’ll look at some data. On Aug. 17, the U.S. National Association of Home Builders (NAHB) reported home buyer foot-traffic at all-time highs. Based on the NAHB/Wells Fargo Housing Market Index, or HMI for short, homebuilder confidence levels are also at all-time highs, matching a December 1998 peak that represents the highest point in the 35-year data series. Then, too, we know houses are being

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Programmable Digital Currencies Are Coming — Here’s What That Means

August 17, 2020John Banks

On Aug. 13, a top official confirmed that the U.S. Federal Reserve is preparing for a digital currency. Lael Brainard, a member of the Federal Reserve Board of Governors since 2014, told an audience last week that the Federal Reserve was experimenting with “a hypothetical digital dollar for research purposes,” according to Bloomberg. Brainard also said the Federal Reserve was partnered with research teams from the Boston Federal Reserve and the Massachusetts Institute of Technology (MIT) in a “multi-year effort

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How Gresham’s Law Drives the Bitcoin Price

August 14, 2020John Banks

“Gresham’s Law” has been around a long time. It was coined in 1860 by Henry Dunning Macleod, a Scottish economist. But Macleod named Gresham’s Law after Sir Thomas Gresham, a 16th century English financier. Nicolaus Copernicus, the Renaissance-era astronomer who proposed that the Earth revolves around the sun, rather than vice versa, also described a version of Gresham’s Law in a treatise written in 1519, the year Sir Thomas Gresham was born. For this reason, it is sometimes referred to

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Berkshire Hathaway Should Rationally Own Bitcoin

August 13, 2020John Banks

Believe it or not, Berkshire Hathaway is a concentrated stock with a high degree of geopolitical risk. Its positioning is risky, with heavy exposure in a handful of notably vulnerable areas today. The solution is elegant and simple: Berkshire should purchase billions worth of Bitcoin. In fact, we think it would be irresponsible for Berkshire not to do so. Buying Bitcoin would offset Berkshire’s concentrated risk and help the company fulfill its fiduciary duty to investors. There is really no

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Stimulus Failure Today Means More Stimulus Tomorrow (the Stock Market Knows This)

August 11, 2020John Banks

The stock market continues to trade vigorously, with the S&P 500 in touching distance of all-time highs. This bullish behavior has many investors confused. Those who are optimistic about a U.S. economic recovery think the market is looking past the short-term news and forecasting blue skies ahead. Those paying attention to the data, meanwhile, are left wondering whether the market has lost its mind. The answer, in our view, goes back to the inevitable nature of stimulus, and the “policy

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Terms You Should Know: Financial Repression and Fiscal Dominance

August 10, 2020John Banks

There are two financial terms that explain what is happening right now. Most investors don’t know these terms, but they are common knowledge among central bankers. The Bank of International Settlements, also known as “the central bank for central banks,” has even published white papers discussing them. The terms are “Financial Repression” and “Fiscal Dominance.” Financial Repression is about what the Federal Reserve is doing now. Fiscal Dominance, meanwhile, covers the factors that are forcing the Fed to engage in

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