Author: Alan Brazil

Alan Brazil SOM Macro

Alan Brazil

In 2007, Alan Brazil started a strategy group at Goldman that offered both internal and external investors a perspective on macro themes. Clients thought his views added value because they were unique versus their current sources of macro thinking.  

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Alan Brazil SOM Macro

Covid-19 – Part 3: The Fall Of The USD & The Rise Of EM

June 16, 2020 (Updated) Alan Brazil

  • Step 1: Macro Theme: The Sell-off In Commodity EM Assets Is A Buying Opportunity
    • EM x-China equities have lagged the rebound in US and China equities
    • EM x-China FX are at historical lows on a real basis
  • Step 2: Fundamental Economic Framework
    • EM economies will be harder hit than DM economies from the Covid-19 lockdowns
    • The fall in commodity prices adds to the downward pressures on EM
    • Capital outflows from EM is almost twice as large as in previous EM risk-off events
    • EM Covid cases and deaths seem to be accelerating vs DM countries
  • Step 3: Find Potential Repricing Catalysts
    • The return of US QE could push commodity EM assets higher by weakening the USD
      • Weaker USD could increase capital flows to EM
      • Weaker USD could strengthen commodity prices
      • Weaker USD could provide a tail wind to commodity EM GDP
    • Commodity EM countries have the capacity to deploy substantial fiscal stimulus to support their economies
    • EM countries are bending the Covid infection curve using even stricter lockdown strategies relative to the US
  • Step 4: Find Asymmetric Trade
    • Trade: Buy commodity EM FX vs the USD


Step 1: Identify Macro Theme

The Sell-Off In Commodity EM Assets Is A Buying Opportunity

EM x-China Equities Still Down over 25%

EM x-China FX at Historical Lows on Real Basis


Step 2: Fundamental Economic Framework

Economic Recovery Will Likely Be U-Shaped At Best Not V-Shaped

World GDP a “U” or A “W” Recovery


Advanced Economy Look Similar

EM Growth Could Fall Even More Than Advanced Economies

Near-term Growth Hit Is Substantial

Longer Term Still Great And Could Fall Even More With A

Falling GDP Combined With The Fall In Commodity Prices Led To Capital Outflows From EM

Demand Erosion Led To A Sudden Drop In Commodity Prices


Capital Outflows From EM Worse Than In Other Events


Compounding The Problem Was The Surge In Covid Cases In EM1


Cases Are Rising In EM While Falling For DM….

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Alan Brazil SOM Macro

Update On Strategies For The Coronavirus World

Hi. I hope all of you and your families are well and have found something to binge-watch.

Well, I was going to send this piece out a few days ago, but every time I was ready to send it, another academic study on the virus came out.… Read the rest

Alan Brazil SOM Macro

The Case For Residential Mortgage REITs

Step 1: Macro Theme: The Case For Residential Mortgage REITs
– Residential mortgage REITs are cheap because they represent buying Resi assets at distressed levels at a discount

  • Step 2: Fundamental Economic Framework
    • –  Sell-off in residential mortgage REITs have followed the sell-off in the entire mREIT market
    • –  Sell-off in residential mortgage REITs reflects the impact of the dislocation in the underlying resi assets and the resulting margin calls during the last week of March
      • REITs are a leverage strategy with leverage funded with short-term repo
      • Sell-offs in the underlying resi assets driven by historical widening of spreads drove margin calls across the business models of the REIT
      • All REITs delveraged, reduced repo lines, and raised cash
    • –  Risk across their business models have subsided
  • Step 3: Identify Potential Repricing Events
    • –  Residential REIT pricing should improve as the headwinds abate, and reflect the improvement in the underlying asset values
    • –  Leveraging agency pass-throughs offers mid-to high ROEs, while the Fed has reduced repo funding pressures on REITs and given a strong bid for agency pass-throughs
    • –  Non-agency credit assets offer double digit yields because the market is pricing in an unrealistic repeat of the GFC HPA/default cycle
      • HPA is unlikely to fall as much given the improvements in the underlying housing market versus the years prior to the GFC
      • Mortgage underwriting has tightened, particularly in the reduction of closed-end seconds (CES), e.g.
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