Friday, April 29, 2011

Beijing To Battle Stubbornly High Inflation?

I do not do this often, but this took me to the edge today. Media is failing every day in trying to explain the markets, however, today the headlines of Yuan Breaks Past 6.50/Dollar, Further Gains Seen and alike bring me laughing down on the floor, in particular assertions like this:

Beijing will continue to let the currency strengthen quickly to battle stubbornly high inflation.

Focus on US dollar is so misleading, if one considers to look at, e.g., NEER. Click on chart to enlarge, courtesy of Standard Chartered.

The success should be obvious?

Tuesday, April 26, 2011

Reading Wake-Up Call By Jeremy Grantham

The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.

Finding statements alike interesting? Go and read the entire message here.

Thursday, April 21, 2011

Fed's "Masochism"? Well, Sadism

These charts from economists at BNP Paribas tell the bitter story. Click on charts to enlarge, courtesy of BNP Paribas.

Enjoy the long Easter holiday!

Wednesday, April 20, 2011

Tuesday, April 19, 2011

Which Asset Classes Will Outperform In 2011?

While I have no clue which asset classes will outperform this year, but the latest results from Citi institutional investor survey are indeed intriguing, as Tobias Levkovich writes:

Our most recent fund managers’ poll, conducted this past week, and encompassing nearly 100 responses, shows meaningful changes from early January’s results. In particular, enthusiasm for the dollar has weakened significantly, as average cash holdings dipped and the desire to buy stocks has edged lower. Plus, more than 50% see a bigger chance of the markets sliding 20% than gaining 20%, a sharp reversal from the January 2011 view, when nearly 70% saw a large gain as being more likely.

While more than 50% see a bigger chance of markets falling 20%:

Overall, investors still like US stocks compared with other asset classes (see Figure), but commodities have gained some traction of late, as dollar weakness fears probably are contributing to the mix. Indeed, most investors now think that the dollar will weaken further as opposed to what proved to be inaccurate optimism for greenback strength in January. This may reflect the budget fears but also the expectation that the Fed will not be lifting short-term rates until 1H12.

Click on chart to enlarge, courtesy of Citigroup Global Markets.

Indeed, why not falling in love with US equities? Well, I still prefer to be contrarian ...

Monday, April 18, 2011

S&P Makes Indecent Reminder The US Has A Debt

S&P shrugs off the fear of being black-listed at all US intelligence services and to gain the ranks in status of public enemy by cutting the outlook for US credit rating to be negative. Reuters points to federal budget deficit ... The total debt of US still sits at mind-blowing heights, while the public money is being spent on bailing out reckless risk takers, feeding the commodity inflation and other God's works.

Click on chart to enlarge, courtesy of Bank Degroof.

Well, risk assets took a minor beating today. Was it in fear of more pragmatic government spending?

Friday, April 15, 2011

Chinese Food Prices Show No Respite, While New Loans Up By 33%y/y

Playing the game of sell-side establishment with close to peak in Chinese rate cycle propaganda? These guys are credit addicted and cannot stop the poisoning of the economy with new loans up by 33% year on year.

These are not the charts from CME pricing service, but there is little evidence of momentum slowing? Click on chart to enlarge, courtesy of Standard Chartered.

 Bullish charts for food prices are not necessary bullish for other assets ...

Thursday, April 14, 2011

Merrill's Fund Managers Are "Reluctant Equity Bulls"

While the last month was "Wait & see", this month key messages from BofA Merrill Lynch Global Fund Manager Survey are as follows:

Equities: a reluctant default position

In the April FMS, global growth expectations fell for the second consecutive month while inflation expectations remain high. But with no imminent change in Fed policy anticipated and bonds looking more risky, investors feel compelled to stay in stocks. Equity allocations rose in April despite another sharp drop in profit expectations: a net 19% see higher profits in the next 12m, down from 32% last month and 51% in Feb.

Monetary policy: gone wild
A net 51% of investors regard monetary policy as too stimulative, the highest level since July 2004, and commodity price inflation is now regarded as the largest tail risk for financial markets. Just 6% of the panel think long-term interest rates will be lower in 12 months’ time. Liquidity expectations remain high, nonetheless, with Q1-2012 seen as the most likely date for the first Fed rate hike.

Equity risk-reward: poor
Cash balances fell to 3.7% from 4.1%. No sell-signal is triggered for equities but upside looks constrained. Risk-taking has increased: our Risk Appetite index is at 45 vs. a long-term avg of 40; levels of hedge fund gearing rose to 1.49 from 1.38.

Asset allocation: equities over bonds and cash
The equity risk premium for investors continues to fall (3.79% vs. 3.86%) and supports an increase in equity allocation (net 50% O/W from 45%). The big U/W in bonds (58%) continues and cash O/W was cut to 10% from 14%. A long position in commodities was extended, rising to 24% from 21% in March.

Regions: out of Japan, back into Emerging Markets
In a growth-constrained world, investors want profit visibility and this month sees a big rotation out of Japan (to an 18% U/W from an 8% O/W) back into Emerging Markets (to a net 22% O/W from neutral in March). The US remains the most favoured region at 30% O/W while the consensus is neutral on Europe.

Sectors: Energy now #1 sector; but defensive shift
Energy is now the most popular sector at a net 40% O/W displacing the under performing tech sector. But the sector mood is more defensive with rotation into utilities, pharma, staples & telecom, out of discretionary, industrials and materials. Financials remain stubbornly unpopular; the net global position falling to 15% UW.

Contrarian trades
Long bonds, short equities/commodities; long Japan equities, short EM; long Europe equities, short US; long consumer discretionary, short energy; long utilities, short tech/ industrials.

Let's ride the biggest "tail risk"? Click on chart to enlarge, courtesy of BofAML.

I prefer to be contrarian ...

Wednesday, April 13, 2011

Chart Of The Day

Inflation fear mongering by economists at Societe Generale. Following the lines in the chart one should assume that 2012 should be key for US, as Chinese CPI leads the US core CPI ex services by 20 months ...

Click on chart to enlarge, courtesy of Societe Generale.

But should NOT the US core CPI ex services move south still some time before turning up, if one believes in this relationship?

Reading Hoisington's "No Help" From QE

Right on top of my German musings yesterday, you get the US story in full from Hoisington. This sentence at the very beginning gives kind of lead into the subject:

If the objectives of Quantitative Easing 2 (QE2) were to: a) raise interest rates; b) slow economic growth; c) encourage speculation, and d) eviscerate the standard of living of the average American family, then it has been enormously successful.

So, it is worth considering to read the paper in full.

Looking For Savers Bailed Out By Governments?

I was refering to "savers, often bailed out by governments" yesterday. If you are desperate for them, look no further than The Real Housewives of Wall Street at

Tuesday, April 12, 2011

German Savings Rate & Spending On Must Haves By Income Class

Everyone is so focused on inequality in the US, and for right reasons. However, German social welfare state has its headwinds due to rising commodity prices too. Nice charts from UniCredit, click on charts to enlarge.

These sentences by economists at UniCredit describe the essence of distribution problems for incomes and benefits from bailouts:

Apart from the psychological effects of perceived inflation on consumer climate, however, the surge in prices of daily essentials is in fact having a disproportionately negative impact on households’ propensity to buy. In general, consumers with lower household incomes exhibit the highest propensity to consume. That means that they use incrementally available funds more for consumption. Households with higher incomes, in contrast, save a rising percentage of the incremental income. This is reflected in the personal savings rates by household income classes calculated by the Federal Statistical Office as part of its sample survey of income and expenditure (see chart next page). And higher energy and food prices hit low income earners especially hard. The share of expenditures in total disposable income varies considerably according to the level of income. While the share for households with a monthly income of between EUR 5,000 and EUR 18,000 is "only" just shy of 13%, the number for the lowest income class is a very high 35.5%.

While the savers, often bailed out by governments, are fearing the destructive effects of negative real rates and pile into real assets, also raw commodities, the payers of these policies are lower income households.

Monday, April 11, 2011

Folks Simply Cannot Agree On International Political Economy?

Lots of diverging paths at Bretton Woods Conference ... agreement seems to be still distant!

George Soros's talk.

Wednesday, April 06, 2011

The Big US Corporate Squeeze

While the come-back of financial sector profits in US is more than impressive, especially assuming the "God's Work" they do on the yield curve, there has not been a lot of noise about non-financial profits lately.

The graphical depiction of US financial profits is so stunning that nothing else was left as to reproduce it from Ritholtz' s The Big Picture here again, click on picture to enlarge.

Well, but economists at BNP Paribas shared couple of words on US non-financial profits last week:

Profits at financial companies surged 15.6% q/q in Q4 2010 following a 10.4% increase in Q3, while profits at non-financial companies declined for the first time since the end of the recession, by 1.1% q/q. Rest-of-world profits dropped most in Q4, declining 2.5%.

In 2011, corporate profits may get squeezed on all sides.

Corporations have limited ability to pass higher input costs onto consumers given sluggish wage growth. In addition, continuing gradual increases in payrolls should curb productivity growth.

Click on charts to enlarge, courtesy of BNP Paribas.

Those bears getting boring?

Rate Hikes, Equity Pullbacks & Relative Sector Performance

European equity strategists at Morgan Stanley remind us how the stocks behave anticipating rate hikes by Fed, at least in 2004 tightening episode. Click on charts to enlarge, courtesy of Morgan Stanley.

ECB prepared to hike rates tomorrow?

While the Portuguese left hand makes markets with right hand, Credit Agricole assures there is no reason to fear the End in periphery.

Tuesday, April 05, 2011

Look At Paintings By Japanese Candlestick Masters

Last time they were spot on, let's see how good they will be this time around! Click on chart to enlarge, courtesy of Nomura.

So, expect a setback?

Monday, April 04, 2011

Focus On Some Risk Scenarios Written By BNP Paribas

Economists at BNP Paribas presented their latest Global Outlook, entitled "Struggling with Inflation", today. Here is the excerpt from the risk scenarios:

Under our base case, to which we apportion a 60% probability, we assume that global growth remains robust at 4% or above over the coming years. We expect emerging markets to grow significantly faster than the advanced economies where growth is expected to be modest.

Global overheating (20% probability)

Policy conditions globally are accommodative. Financial and monetary conditions are looser than average in most economies and considerably looser than average in some cases. In emerging markets, particularly Asia and Latin America, conditions are looser than they should be – especially where economies are operating with the unemployment rate below the NAIRU. Hence, geopolitical events and adverse weather aside, it is not entirely surprising that commodity prices have been rising, with a resultant increase in headline inflation nearly everywhere.

Against this background, there is a risk that growth is much stronger than assumed in our central case. With PMI surveys in a number of developed economies close to 60, and little in the way of policy tightening being delivered, there is a risk of overheating. Such overheating could be fuelled by firms putting to work the stockpiles of cash that have built up due to uncertainty about future demand.

In this scenario, accelerating inflation is likely to become a greater concern. In most cases, the likely further narrowing in output gaps and lower unemployment rates would help to propel inflation higher. Moreover, the reduction of economic slack would facilitate a greater pass-through of commodity price increases into underlying inflation. A USD 10/bbl higher profile for oil prices relative to our base case would reinforce a higher path for headline inflation.

Increased inflation fears, combined with above-trend GDP growth rates, would bring forward policy normalisation. The ECB is already on the path towards tightening. This scenario would probably involve a steeper trajectory for the refi rate. Attention would also turn to the question of when the Fed and others begin to reverse asset purchases.

MENA tensions escalate (10% probability)

Social unrest in the MENA area has reinforced the upward trend in crude oil prices. There is a risk that the tensions spread to other countries in the region and threaten the supply of oil from bigger producers. In such a scenario, the price of crude oil could spike up to USD 180/bbl.

Such a spike in the oil price would probably result in stagflation. A typical rule of thumb suggests that it would cause the level of GDP to be 3.5% below the profile in the base forecast primarily as a result of a far greater squeeze on profit margins and households’ real incomes.

Similarly, headline inflation is likely to be around 2½pp higher than in our base case forecasts.

The response of monetary policy in this scenario would depend on the individual central banks. We assume that the Fed would leave interest rates on hold at current levels as the economy slips back into recession and there is a renewed increase in unemployment that outweighs concerns over inflation. Nonetheless, with inflation approaching 5% y/y, it is unlikely that the Fed would engage in additional quantitative easing.

Meanwhile, the ECB is likely to have already begun to raise the refi rate. We assume that, in the early stages, the ECB would probably tighten a little further in the face of the worsening inflation outlook. However, towards the end of the year, falls in GDP would probably bring the rate-hiking cycle to a halt.

Global slowdown (10% probability)

There are several possible catalysts for a scenario whereby growth surprises to the downside relative to our base case.

In particular, the surge in commodity prices and other costs is imposing an increased burden on households and businesses. In many cases, real household incomes are being squeezed as employment and wage inflation fall short of consumer price inflation. Similarly, producer output prices are rising far slower than input costs. That is squeezing profit margins, reducing the willingness to hire and to invest.

Although survey indicators are at, or close to, record highs, there is a danger that their ascent has been based on policy accommodation delivered over the last two years, which is coming to an end. In the absence of self-sustaining momentum, and given the continued overhang of restrictive credit conditions, it is possible that growth slips back below trend.

Events in Japan in recent weeks have highlighted the vulnerability of the global recovery to an adverse shock. The abrupt shift in sentiment and markets is an illustration of how quickly a downward shock can spread. A fall in sentiment indicators and equity markets in response to a shock is likely to hold back hiring and investment intentions as well as personal consumption.

A global slowdown would slow or even reverse the narrowing in output gaps in developed economies. In addition, a deterioration in global growth prospects would take some of the heat out of commodity prices. Both would mean a lower trajectory for headline and core inflation.

With regards to policy, a slowdown in the pace of growth to below that consistent with job creation means that the Fed would continue to fail to meet its dual mandate. In turn, that is likely to push back the timing of the first interest rate hike. It could even reignite speculation about QE3 if there are signs of disinflation.

The ECB is likely to have already started to raise the refi rate by the time a slowdown became apparent. However, as GDP ground to a virtual standstill, and upstream price indicators fell back, it is likely that the hiking cycle would come to an abrupt end.

So, quite risky with 10% probability for global slowdown?

Friday, April 01, 2011

Fed's Bird Cage

There are millions of topics to post, but bulls are sticking their horns in my body... should act before they kill me. China was ugly today? No, dumb apes celebrated the killing ceremony.

Well, as Fed-speak increases the intensity of chirp, the friendly economists at Societe Generale have painted the guide to the bird cage. Click to enlarge, courtesy of Societe Generale.