... countries that are most likely to be affected by the current turbulent political environment are those who show the weaker combination of some crucial economic indicators, particularly higher inflation rates, lower per-capita income and higher youth unemployment.Click on charts to enlarge, courtesy of BNP Paribas.
Did you pick up?Germany: Retail sales picked up to -0.3% m-o-m in December following a 1.9% drop in November (consensus: 2.0%).
28 Jan 2011 *DJ DAVOS: Sweden's Borg: Domestic Bank Lending UnsustainableWhat's that? Go on, and figure out!
So this is a message to bankers and anyone else who at least putatively cares about capitalism and commercial exchange. I am probably among the most sympathetic to both and to the institutions that support them. I am losing sympathy. Nay, I have lost it. This is the stuff from which revolutions are born and you will have brought it on yourselves. The problem is that capitalism when done right yields real value, real benefits to us all. So when it dies, when you have killed it, as with all of your other financial chicanery, we will all pay the price.In memoriam ...
You can be wrong in company; that’s okay. For example, every single CEO of, say, the 30 largest financial companies failed to see the housing bust coming and the inevitable crisis that would follow it. Naturally enough, “Nobody saw it coming!” was their cry, although we knew 30 or so strategists, economists, letter writers, and so on who all saw it coming. But in general, those who danced off the cliff had enough company that, if they didn’t commit other large errors, they were safe; missing the pending crisis was far from a sufficient reason for getting fired, apparently. Keynes had it right: “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” So, what you have to do is look around and see what the other guy is doing and, if you want to be successful, just beat him to the draw. Be quicker and slicker. And if everyone is looking at everybody else to see what’s going on to minimize their career risk, then we are going to have herding. We are all going to surge in one direction, and then we are all going to surge in the other direction. We are going to generate substantial momentum, which is measurable in every financial asset class, and has been so forever. Sometimes the periodicity of the momentum shifts, but it’s always there. It’s the single largest inefficiency in the market. There are plenty of inefficiencies, probably hundreds. But the overwhelmingly biggest one is momentum (created through a perfectly rational reason, Paul Woolley would say): acting to keep your job is rational. But it doesn’t create an efficient market. In fact, in many ways this herding can be inefficient, even dysfunctional.Go, read ...
The two pioneers of modern monetary economics – Irving Fisher and Knut Wicksell – were passionately concerned to find monetary arrangements that would insure against arbitrary redistributions of income and wealth. They saw such distributive effects as offenses against social justice and consequently as a threat to social and political stability.Are these sentences worth keeping in mind when arguing about the sustainability? Well, the case is rather clear and applicable to whatever country, including Spain:
* The Fed is supplying the banks with reserves at a near-zero rate. Not much results in bank lending to business, but banks can buy Treasuries that pay 3% to 4%.However, it is all about "arbitrary redistributions of income and wealth":
* This hefty subsidy to the banking system is ultimately borne by taxpayers. Neither the subsidy, nor the tax liability has been voted for by Congress.
* The bailouts of the banks during the crisis were clear for all to see and caused widespread outrage; now the public is being told that they are being repaid at no cost to the taxpayer.I am wondering is there a way to return to normal interest rates at all? I do not see how this ends well either, but cream lickers at efficient frontiers will sing the song of victory!
* What the public is not told is that the repayments come to a substantial extent out of revenues paid by taxpayers for the banks to hold Treasuries.
* Both parties supported the bailouts so neither party seems ready to protest the claim that they are being repaid at no cost to taxpayers.
Indeed, sentiment data is beginning to send out some worrisome signals. For instance, the proprietary Panic/Euphoria Model, which captures investor activity rather than just feelings, via various metrics including margin debt, short interest and the ratio of price premiums in puts versus calls, to name a few, is beginning to edge up closer to euphoria territory (see Figure 3). Moreover, our shorter-term lead measure, the Cyclical Expectations model actually is even more ominous. Specifically, the CEM captures data from the bond market (such as the shape of the yield curve and credit spreads), the commodity market (the price of copper and oil) as well as the real economy (via weekly retail sales and freight transport) to collate the weekly changes in confidence about cyclical conditions. Importantly, the CEM leads weekly stock price trends by one-to-three weeks (see Figure 4) and its recent dip from elevated levels suggests that equity markets may be facing a more challenging environment next month.Click on charts to enlarge, courtesy of Citigroup Global Markets.
Stronger Q4 GDP 9.8% y/y or 11.2% SAAR on exports and property. Strong Inflation pressure spills over to decade-high core CPI as result of excess liquidity, robust food prices and strong inflation expectation. Loose monetary condition calling for more tightening, peaking PMI suggests domestic demand soft landing, cushioned by exports.Danske Markets writes about China: Growth accelerates, but December data weak.
What is CAPE? — Benjamin Graham, who taught Warren Buffet at Columbia Business School, argued that one should use average profit over a number of years in calculating PER. Based on this, Yale professor Dr. Robert Shiller uses average profits over ten years in calculating the PER for the S&P 500. The ten year average more or less factors out economic impact, so today we refer to the measure as cyclically adjusted PER (or CAPE).Click on charts, courtesy of Citigroup Global Markets.
Fed delivering on firmer growth and higher inflation
Our panel of 287 institutional investors enter the New Year optimistic on growth and bullish on equities. The firm hand of the Fed is evident in inflation expectations rising sharply but with no imminent rate increase expected, investors see few alternatives than to stay with risk assets. The level of equity enthusiasm and relatively low cash levels signal some concern but there is to us little evidence of over-exuberance in the survey. The risk to a bullish consensus is if US growth expectations are de-railed by either weaker data or tighter policy. This suggests time for portfolio protection & diversification rather than out and out selling.
Inflation view at 6-year high
Global economic optimism is back to the highs of Apr-10, helped by monetary policy which is seen as the most expansionary since Jul-04. A net 72% expect higher inflation in the next 12m, the highest in almost 6 years, and yet views on the first Fed rate rise continue to be pushed back well into 2012. Risk appetite is strong (risk composite 46 vs. a long term avg 40) but contained with average cash holdings rising slightly to 3.7% and hedge funds reigning back equity exposure.
Loose money, pro-growth; allocation straightforward
A net 55% of asset allocators are O/W equities, the highest reading since Jul-07. With the lowest bond weighting, net 54% U/W, since Aug-07 and a cash U/W of net 5% investors have little cushion against any growth disappointment.
Signs of life in developed markets
Investors are the most positive on US equities (+27% O/W) since late-08. Japan at +5% O/W is also benefiting from not being Europe which allocators cut to a net 9% U/W, a 6-month low. EM remains the most favoured region (net 43% O/W) but this is sharply down on +56% seen in Nov-10 as profit hopes for GEM continue to fall back. Despite economic growth optimism, views on corporate profit outlook moderated in January with a net 50% expecting improvement vs. 51% in Dec.
Cyclical rotation and (very) selective bank improvement
Investors want to retain a cyclical tilt but are prepared to rotate portfolio exposure: tech (+39%) and industrials (+17%) benefit this month at the expense of materials (cut to net 20% O/W from +28%). Banks had the biggest rise in sector positioning, to a net 21% U/W (from -28% in Dec) but it remains a deeply unloved sector with Japan the only region showing improvement. Tech regained most favoured sector status and alongside energy (+36%) are the two high conviction sector trades.
Contrarian trades
For the contrarian: short equities, long bonds; short US, long Europe; short tech and energy, long banks and utilities.
Spain's Treasury issued 5.5 billion euros ($7.34 billion) of 12- and 18-month T-bills on Tuesday, in the middle of the targeted range and with both issues at a lower yield than the previous auction in December.However, the rate strategists at Nomura are posing some questions about Spanish issuance policy:
The debt sale was the first time this year the Treasury has taken its short-term paper to the markets.
An auction of 5-year bonds Jan. 13 went better than expected, helping boost sentiment toward the euro zone's peripheral economies. ...
One of the key innovations the Spanish Treasury introduced for 2011 is its monthly publication of the list of references to be auctioned, rather than its previous quarterly updates. This was done with an aim “to provide the Treasury with greater flexibility when it comes to adapting its issuance to market preferences in a very volatile environment” (see link). Yesterday’s decision to cancel the Oct 20 and Jan 24 taps, which were announced last Friday in favour of syndication of a new 10yr benchmark perhaps brings into question the transparency. The syndication proceeded well, with the Treasury able to place a larger than expected €6bn. However, pricing terms were very cheap (taking the market lower) and if the experience of issuers in 2010 is any guide, this is not necessarily a great set-up for digestion. Meanwhile, such a rapid about-face suggests either an element of desperation or a communication policy gone badly wrong.Add to the fundamental background the QOTD: On the Real Economy, German ZEW, Shanghai Composite, and look at bullish break-out of European bastard child:
Policies have contributed to a stronger stock market, just as they did in March of 09 when we did the last iteration of this. The S&P is up 20% plus and the Russell, which is small cap stocks, is up 30%, so I think a stronger economy helps small businesses more than it helps large businesses.
So far, the commodity rally has been absorbed quite well by the US economy and we do not yet see the commodity price shock as strong enough to derail the recovery. However, it is a growing risk that could start to squeeze profit margins. If prices continue to rise at the current pace, the recovery could be threatened.Sure, also in the unfortunate case the US administration will find a solution, like another round of fiscal and monetary stimulus for the benefit of bond vigilantes ... so that China can finally collapse and pull the rest of the world into deflationary spiral?
A few more successes and the European periphery will be destroyed.Interestingly, cream lickers at efficient frontiers do not bother about relativity of Chinese, Japanese and German apparent prosperity. You just add the fiction that banks are private enterprises, and the animal spirits are set free. EuroStoxx Banks Index added only 7.28% today, spreading the panic among squeezed shorts ...
Bullish at a lower price. Investors seem nervous about buying our Buys after the rally the sector has had (e.g. BKX up 19% vs. SPX up 7% since Nov 26 relative low). That said, investors seem equally nervous about selling our sells given steadily rising GDP estimates (e.g. 4Q consensus GDP estimate has risen from 2.4% to 3.5% over the same period).Click on chart to enlarge, courtesy of Nomura.
Long horizons, equally long memories. Bank bulls are looking at a cyclical sector with below-average valuation amidst economic improvement. However, they also remember the pattern of banks rallying into earnings, peaking when JPM reports, and selling off thereafter.
... most people don't know what they want unless they see it in context. We don't know what kind of racing bike we want - until we see a champ in the Tour de France ratcheting the gears on a particular model.
RELATIVITY IS (RELATIVELY) easy to understand. But there's one aspect of relativity that consistently trips us up. It's this: we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable - and avoid comparing things that cannot be compared easily.I see also this relatively ... bullying cognitive dissonance.
... the more we have, the more we want. And the only cure is to break the cycle of relativity.
Meanwhile, while the discussion over foreign US funding risks remains hot, US credit default spreads have been stable. Sure, US foreign held assets are substantial, but of the USD 8trn of foreign liabilities, more than half are held by foreign central banks. Official accounts are unlikely to move these assets out of the USD unless there is a credible alternative as a reserve currency. The EUR has failed the test for now with its peripheral debt and competitiveness problems and the RMB is not yet fully convertible. The lack of alternatives will keep the USD in place as a reserve currency, buying the US authorities time to get their fiscal house in order. If there was be an alternative reserve currency on hand now, the USD would be much more vulnerable to a funding crisis. In this sense, bad news from EMU and China going slow in making the RMB fully convertible is good news for the US. Chart 2 shows that the US CDS spread has moved less compared to the GDPweighted EMU CDS spread, despite the eurozone running at an aggregate level lower private and public debt levels than the US. The muted reaction of the US CDS to ballooning US deficits is related to the USD’s still-unchallenged status as a reserve currency.Click on charts to enlarge, courtesy of BNP Paribas.
Still GREED & fear will admit that there is a real risk of more of an inflation scare from a tactical standpoint. Such an inflation scare in Asia is likely to be manifested, as was also the case in 2008, in a focus on inflation driven by rising food prices and a price spike in other commodities. But the other important point to remember is that the more commodity prices rise in a correlated fashion, a process driven in the current environment of QE2 to a significant degree by financial speculation, the more the spike creates the seeds of its own destruction given the resulting demand destruction. This is because the higher commodity prices, be it petrol prices or food prices, are deflationary in terms of their impact in the West given the lack of income growth. Thus, average hourly earnings growth of all US private employees fell to 1.6% YoY in November, down from 3.6% YoY in February 2009 (see Figure 1). This is why the oil price does not have to rise very far from here to start hitting current growing optimism on the US recovery.Click on charts to enlarge, courtesy of CLSA Asia-Pacific Markets.
For the last several years, investors have heard and thus have been worried about the world’s superpower losing its mojo and that its place in the global economy has diminished given the financial crisis and a decade of underperformance. Yet such views may be a bit too severe when one looks at the most recent 40 years, which include both the challenging 1970s and 2000s. Indeed, the US economy has slipped only modestly from 30.4% of worldwide real GDP in 1970 to 28.4% in 2009.Click on Citi's January 2011 Chart of the Month, courtesy of Citigroup Global Markets.
For the first time in five years, our one-year-ahead forecast for real GDP growth is well above the published consensus. The main reason is a slowdown in the pace of private sector deleveraging, which has become evident in a sharp improvement in the economic data despite the loss of growth support from fiscal policy and the inventory cycle. The enactment of the fiscal compromise has also helped.Fed rate hikes should be "long way off", while the "surge in organic growth" does matter more than deficits ... click on charts to enlarge, courtesy of Goldman Sachs.
