Global Lack of Growth versus Central Banks

Tuesday, July 10th, 2012

It’s been just over a week since the euphoria over Euro fix 19.0 came to light, but as we awake Spanish yields are back over 7% and Italian yields are over 6% – the same levels they were at before “the breakthrough” a week ago Thursday night.  Since zombies have become so popular in our culture, one can parallel the European mess to these creatures of the night – it just cannot be killed.  That said, the market recognizes each time push comes to shove, Germany relents – the main trick is figuring out which periods the market is calmed by this, and which periods the market forgets that.  Of course each “solution” thus far has been little more than papering over the structural issues, but at some point the end game comes.

Meanwhile, the drama in Europe has distracted some from the fact global growth is slowing dramatically.  China joined the central bank cutting party last Thursday, riding shotgun with the Bank of England and the ECB – signaling to some to expect some poor economic data out of the country this week.  Overnight Chinese inflation was released at a paltry 2.2% (the lowest in about 2.5 years) – of course you can believe what you wish about the real number, [Sep 13, 2010: BW - What's China's Real Inflation Rate? (What's China's Real Anything?)] [Nov 12, 2010: Even China Accuses China of Fibbing About Inflation] but the weakness in commodities through much of 2012 signals China has slowed significantly.  ”Reported” inflation was 5.5% as recently as November 2011.  Premier Wen Jiabao was reported as saying downward pressure on the economy is still “relatively large.”  Chinese stocks continue to suffer.

Meanwhile the U.S. economic data continues to stagnate as the ECRI predictions of recessions in latter 2011 look much more probable.  Of course the difference between a statistical recession and what it feels like to the common man can be two worlds.   U.S. markets were hit Friday by a weak labor report but a late day “The Fed is coming!” story out of the WSJ helped lift indexes well off their lows.  For those of bullish conviction this was an excuse to work off a short term overbought condition, and the S&P 500 dipped exactly to its gap up open post Euro summit announcement Friday, which also happened to be very near a 38.2% retracement of the move off the June 26th lows – funny how that works.

Long story short if you were not “in” the market Thursday night ahead of a binary outcome Friday (or no announcement at all out of Europe) there were no gains to be had by the end of day Friday.  The extent of the advance that remained was only that gap up Friday morning.   Go forward pulling back not much more than the 50% retracement (134.20 on SPY) or worse case the 61.8% retracement (133.40 on SPY) of this move off June 26th would be the base cases for bulls.  The latter would fill the entire European summit gap.

After a very heavy few weeks of news, and European headlines the news flow should slow down.  China releases GDP later this week along with other news, and the FOMC speculation should be quiet until next week when Bernanke speaks to Congress.   FOMC minutes are released Wednesday so that could move markets.  Most of the U.S. economic data this week is not market moving.  That said, we now transition to earnings season.  Despite all the hubbub across the globe the past few years, U.S. corporate profits have been able to rebound smartly off their dramatic lows of 2008/early 2009.  But that story is now potentially getting long in the tooth, so the tailwind this provided in 2010 and 2011 might be coming to an end.  More on this in a later post.

Tags: Bank Of England, Central Banks, Chinese Stocks, Common Man, Creatures Of The Night, Downward Pressure, ECB, End Game, Euphoria, Global Growth, Inflation Rate, Last Thursday, Poor Economic Data, Premier Wen Jiabao, Recession, Recessions, Riding Shotgun, Two Worlds, Wen Jiabao, Zombies
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Bob Janjuah: “Markets Are So Rigged By Policy Makers That I Have No Meaningful Insights To Offer”

Thursday, February 23rd, 2012

Bob Janjuah is back.

Bob’s World: Monetary Anarchy

Since my last note from early January I have spent the last few weeks assessing data and price action, as well as spending a lot of time talking to clients and trying to analyse the words and deeds of policymakers. In no particular order, my takeaways are as follows:

1 – Greece (and the whole eurozone story) continues to lurch about, seemingly perpetually, from Farce to Tragedy. Policy seems to be focused on protecting and preserving vested interests, with little consideration given to the dreadful conditions the people of Greece and other “peripherals” are being forced to live with. However, it seems that eurozone leaders may be about to pour even more taxpayer money down into the black hole that is Greece, primarily to help the banks in Europe, at the expense of perhaps a decade of suffering by the Greek populace. For my part, I am now consigning the Greece/Peripherals/Eurozone story to the box marked “self-serving political debacle” and from here on in I will simplify Europe as follows: Until, and unless, Germany signs up to full fiscal union, a eurozone breakup is likely. And depending on how long we can continue to “kick the can” down the road in order to protect the eurozone banks, the eurozone will be consigned to an extended period of weak growth, which in turn means ever decreasing debt sustainability. Ultimately this means that the end game will simply be more devastating for us all the longer we are forced to wait. Investors should be fully aware that “home” bias amongst real money investors is now “off the charts”. This is not a good development for the eurozone, unless of course our leaders are preparing for break up, or at least considering it as a viable option.

2 – I am staggered at how easily the concepts of Democracy and the Rule of Law – two of the pillars of the modern world – have been brushed aside in the interests of political expediency. This is not just a eurozone phenomenon but of course the removal of elected governments and the instalment of “insider” technocrats who simply serve the interests of the elite has become a specialisation in Europe. Many will think this kind of development is not a big deal and is instead may be what is needed. Personally I am absolutely certain that the kind of totalitarianism being pushed on us by our leaders will – if allowed to persist and fester – end with consequences which are way beyond anything the printing presses of our central banks could ever hope to contain. Communism failed badly. Why then are we arguably trying to resurrect a version of it, particularly in Europe? Are the banks so powerful that we are all beholden to them and the biggest nonsense of all – that defaults should never happen (unless said defaults are trivial or largely meaningless)?

3 – More broadly, with Mr Draghi now in situ, it is clear that I misread and misunderstood two things. First, I am simply stunned that our  policymakers seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas. It now seems obvious that in response to the financial crisis that has been with us for five years and counting, we are being “told” to double up on these same policy decisions. The crisis was caused by central bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hideous asset bubble which then collapsed, destroying the lives and livelihoods of tens of millions of relatively innocent people. Well now, if you listen to the latest from Bernanke and Draghi, it seems that the only solution they can offer up  is to yet again misprice the cost of capital, in the hope that, yet again, through increased leverage/debt, we are yet again “greedy” enough to misallocate capital, which in turn will lead to yet another round of asset bubbles. Such asset bubbles are meant to delude us into believing that we are now “richer”. When – as they do by definition – these bubbles burst, those who have been suckered in will realise that their “wealth” is instead an illusion, which in turn will be replaced by default risk.

Secondly, I have clearly underestimated the ‘market’s’ willingness, nay desperation, to go along with this ultimately ruinous policy path. Personally, I think this is extremely worrying – the number of clients who tell me that they know they are being forced into playing a game that will end in disaster, but who feel they have to play along and who hope they will get out before it turns, is a depressingly familiar old tale. Some such folks hang onto the idea that Draghi/LTRO changed the asymmetry of risk from deeply negative to positive. Yet even these folks know that printing more money/more liquidity/more debt/more leverage is not a viable solution to our ills, and in fact will mean true supply side reform and the search for true competiveness and sustainable growth will be further cast aside, as the focus will be on the “easy gains” to be made in markets.

4 – Assuming that we are in yet another liquidity fuelled rally courtesy of Bernanke and Draghi, then there are some key things to remember. First, such rallies can last days, weeks, months, perhaps we could even extend into 2013. And – to give a proxy guide – the S&P could end up in the high 1500s again if this current binge lasts into 2013. The problem with such liquidity fuelled set-ups is that they can last longer and get bigger than any reasonable logic would dictate. The issue here is not what central bankers say – it now seems clear that Bernanke and Draghi will say whatever it takes to keep the market supplied with ample liquidity – but what they can do. In this respect one either believes that central bankers can do whatever they like whenever they like, or one believes there are limits. I think there are limits to what Bernanke and Draghi can do, and once we hit those limits these bubbles will burst, with increasingly greater consequences the longer we are forced to wait. Do I know when we may hit these limits? I hope that it is sooner rather than later, but I have no real conviction.

Secondly, when looking for where the bubbles may be, realise this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere – in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices – you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market.

Third, when this bubble bursts, I don’t think there is an easy way out. Who will be the bail-out provider? We already have extraordinarily weak and fragile government balance sheets, ditto banking balance sheets and consumer balance sheets. The big cap corporate balance sheet is sound, but it already worries about how bad the real economy hit will be when the next bubble bursts. As such, the corporate sector – which has a huge degree of “control” over the political classes – will keeps its powder dry until asset prices fall to clearing levels. When this happens they will be the biggest buyer of truly cheap assets in town, but not before then. The really dangerous thing about this next bubble is that it will likely ruin current central bank credibility, as their balance sheet expansion, accumulating ever more “toxic” assets, is at the centre of the current cycle. As a result, the central bank decision-making function is now (increasingly) deeply compromised, if not utterly at odds with its own raison d’être. This of course means that if/when the current cycle implodes, central banks which have seen explosive balance sheet growth will add to the problems, rather than being able to act as credible lenders of last resort. A resulting consequence is that we will, at that point, usher in a new era of central banking and policy settings, where the key will be to regain a semblance of credibility and independence. This will be good news. But we will likely have to go through the “bust” first.

5 – I am not well equipped to navigate bubbles where tactical views and secular views are all thrown into the melting pot together, where there is no visibility, where – as one client put it to me recently – we have Monetary Anarchy running riot, where the elastic band between the ‘real’ economy and the current liquidity-fuelled markets is stretched further and further beyond credulity, and where history tells us that policymakers will happily stand by whilst bubbles are being pumped up, and hope that they are onto their next job before it all comes tumbling down. It seems that the 07/08/09 part of this crisis has resulted in zero lessons learned. In fact it is much worse than that as we are instead being asked to double up on a strategy which I fear will end in failure. As such, clearly my outlook in my last note needs to be re-assessed in terms of the latest developments. Whilst equity market levels are still within the tolerance limits set out in this previous note, my timing is clearly being “stretched”. Unfortunately for me, and as warned in the prior note, if my outlook set out therein is proven to be wrong, it is because I am overly cautious. I say “unfortunately” because the longer we have to wait for the “final” resolution to the global financial crisis, the bigger and more devastating the final leg lower will be. I have an extremely high level of conviction on this point.

6 – So, in terms of markets, be warned. My personal recommendation is to sit in Gold and non-financial high quality corporate credit and blue-chip big cap non-financial global equities. Bond and Currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears. Real assets are relatively attractive. But I am going to wait for this current central bank bubble to burst before going all in. I may be waiting 5 days, 5 weeks, 5 months, perhaps 5 quarters. It all depends on when and how our central bank leaders are exposed as lacking credibility and/or lacking the mandates to keep pumping liquidity into the system. The end of the bubble will be sign posted by either monetary anarchy creating major real economy inflation or by a deflationary credit collapse (if they run out of pumping “mandates”). The end game is incredibly binary in my view, but in between it is pretty much a random walk. Either way, “bonds are toast” in any secular timeframe (due either to huge inflationary pressures, or due to a deflationary credit collapse), which in turn means that asset bubbles in risky assets will get crushed on a secular basis.

My colleague Kevin Gaynor has a more nuanced view and he feels that we may well avoid the bubble outcome, as political hurdles, political changes, growth and earnings data will all very quickly undermine central bankers and their bubble vision. For all our (long term) sakes, I hope I am wrong when it comes to fearing another round of liquidity-fuelled bubbles, and that he is right that “good sense? will prevail soon.

I will continue to use the Dow/Gold charts to continue to guide me going forward. The USD price of an ounce of gold and the Dow will, I believe, converge at/around 1, at some point over the next 2 years or so. I have extremely high conviction on this. What I am not sure on is whether we converge at 7000+/-, or at 14000+/-. Because I do believe that even Bernanke and Draghi cannot do as they wish and that there are some limits to the recklessness of policymakers, I still lean towards a deflationary resolution at/about 7000 in the next year or two. Pretty vague, I know, buts it’s the best I can do right now, and what is clear is that, in the world I fear ahead, gold is a winner either way – remember, gold is a great (monetary) inflation hedge, and in a deflationary credit collapse gold works as a store of value/wealth as it carries zero credit risk.

As a “credit” guy at heart I see more likelihood in a deflationary credit (i.e., a “real”) collapse rather than a real economy inflationary (nominal) collapse. Either way however, what is clear is that if Bernanke and Draghi are allowed to continue on their current policy path for much longer, then whatever the final outcome will be, it will likely leave a deep scar on us for decades. Which on a ten-year timeframe may not be such a bad thing as it should kill off monetarism and usher in a new era of monetary and fiscal prudence? In the near term, LTRO2 at month-end is the next clear focus for markets, more so than Greece.

If LTRO2 is USD1trn or more, the market will take that as a signal to load on more leverage, more risk and more ‘carry’. If LTRO2 is in the order of USD250bn to USD500bn, Risk Off will be the order of the day as markets will start to fear that central bankers are having to reign back-in their current policies, and that as a result we face another period where central bankers and policymakers fall back behind the curve. LTRO1 clearly took policymakers from behind to ahead of the curve, but this is an extremely fluid situation, where doing nothing is, in reality, the same as going backwards. As the skew of expectations is to a large LTRO2, a LTRO2 take-up in between these ranges is likely to be viewed with neutrality/mild disappointment.

Tags: Anarchy, Black Hole, Debacle, Debt Sustainability, Democracy And The Rule Of Law, End Game, Eurozone, Farce, Home Bias, Little Consideration, Lurch, Meaningful Insights, Pillars, Policymakers, Populace, Real Money, Rule Of Law, Takeaways, Taxpayer Money, Viable Option
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Stock Market – Liquidity and Long-Term Technical Indicators Still Bullish

Monday, May 2nd, 2011

“The end game for this bullish phase [on stock markets] needs to be considered well before the event. While the timing is largely guesswork at this stage, the usual causes are not. Bull markets are usually assassinated by tighter monetary policy,” said David Fuller (Fullermoney) from across the pond.

“A good, although not precise, indicator of bear market risk will be provided by the yield curve, currently showing the premium of US 10-year over 2-year government yields. Years often go by before this chart shows anything important but it should not be forgotten by any of us. When this next approaches 0.0, we should have at least trailing stops, mental or actual, for all of our equity long positions. When it inverts to negative, indicating that 2-year rates are higher than 10-year rates, and the longer it stays negative, the more we should assume that a bear market is approaching.

Source: Fullermoney.com

The good news today, is that the next inverted yield curve is probably a while away. Consequently, it would most likely take a true “black swan” to derail the current bull market anytime soon. These are unpredictable by definition so I would not worry about them without evidence of a game-changing event,” said Fuller.

The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and in 2007. And 2011? With the ROC fairly comfortably above the zero line, the primary bullish trend remains intact.

Source: StockCharts.com

Having said the above, a short-term correction could happen at any time in the light of the overbought charts and stretched fundamentals.

Tags: Bear Market, Black Swan, Bull Markets, Bullish Trend, David Fuller, End Game, Guesswork, Inverted Yield Curve, Market Risk, Market Timing, Monetary Policy, News Today, Red Line, Stock Market Liquidity, Stock Markets, Swan, Technical Indicators, Term Trend, Trailing Stops, Zero Line
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Economic and Earnings Environment Presents Attractive Backdrop for Equities

Wednesday, November 24th, 2010

Economic and Earnings Environment Presents Attractive Backdrop for Equities

by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock, Inc.

Equity markets started last week by continuing the correction of the previous week, and experienced their largest peak-to-trough selloff since August, falling 4.5%. The factors driving the downturn included sovereign debt instability in Ireland, policy tightening in China and an overall sense that markets had become overbought in the strong run-up they experienced over the previous few months. Toward the end of last week, markets staged a comeback, and ended basically flat. For the week, the Dow Jones Industrial Average advanced 0.1% to 11,203, the S&P 500 Index was unchanged at 1,199 and the Nasdaq Composite rose 0.7% to 2,518.

The Irish debt crisis has been all across the headlines lately, and the ultimate end game for how Ireland will solve its funding problems remains a wildcard. In these sorts of crisis situations, perception often determines reality. If investors become convinced that a sovereign nation will default on its debt, they will withdraw capital from that country, which in turn will cause a further escalation of borrowing costs, putting further pressure on that country’s debt in a sort of self-fulfilling downward spiral. Although the situation has quieted in recent days, and Ireland appears to have enough funding to sustain itself through the next several months, further problems on this front have the potential to rattle global financial markets.

Another issue much in the news has been the potential extension of the Bush tax cuts past the end of 2010. The bipartisan summit that was supposed to take up this issue has been postponed until after Thanksgiving, but despite the delay, we continue to believe that the most likely outcome will be a one- or two-year extension of all of the tax cuts. There is a possibility that the lame duck Congress will do nothing, but we expect a deal to be made, if for no other reason than no one wants to be blamed for enacting a de facto tax increase on January 1.

Economic data continues to show that the US recovery is continuing. The Conference Board’s Index of Leading Economic Indicators rose 0.5% in October, which met expectations and matched the increase from September. Since one year ago, that index is up 6.3%, suggesting that economic momentum might be picking up as we head into the end of the year. Additionally, initial jobless claims trends have been slowly improving, which points to the possibility of jobs creation. We have also been paying close attention to the easing in bank lending standards over the past few months as a potential sign that the economic backdrop is getting better. The Federal Reserve’s recent loan officer surveys show that standards are easing, and as we discussed in recent weeks, smaller banks are beginning to get in on the easing trend in addition to the larger national banks. Although credit conditions as a whole remain tight, the steady trend of easing should be helpful in terms of promoting jobs creation and should help bolster the economic outlook. On the whole, we believe that economic data supports the view that gross domestic product growth should improve over the coming quarters.

The corporate earnings backdrop is also a positive one. At this point, the third-quarter earnings season is essentially complete, and the results show that the most recent quarter was yet another strong one. Profits were up 6.5% over the initial consensus expectations, and more than 70% of companies that reported earnings beat expectations. This marks the sixth consecutive quarter of upside surprises over that 70% level, which is unprecedented.

At present, we believe that equity markets should continue to head unevenly higher over the next several months. Earnings expectations have been on an upward trend and the economic backdrop as a whole seems to be improving. Economic projections were weaker in the April to August period, stabilized in September and October and have since been moving higher. Our view is that global growth will continue to improve in 2011. There are a number of risks, including ongoing sovereign debt issues, escalating inflation in China and the potential breakdown in global policy coordination, but our baseline scenario is for a continued cyclical recovery. For stocks, this should present a supportive backdrop, and while we are likely to continue to see additional price pullbacks, we believe they should be viewed as part of a consolidation process in a market that is headed higher.

Tags: Bipartisan Summit, Blackrock Inc, Bob Doll, Bush Tax Cuts, China, Crisis Situations, Debt Crisis, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Downturn, Downward Spiral, End Game, Escalation, Global Financial Markets, Lame Duck Congress, Nasdaq Composite, Selloff, Sovereign Debt, Sovereign Nation, Strong Run
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Chris Wood: The U.S. Will be the Endgame

Monday, March 8th, 2010

In this video interview, Chris Wood, CLSA’s Asia strategist and author of the top “Greed & Fear” newsletter, shares his views on global markets with CNBC.

Click here or the image of the report to read Wood’s full report that precedes his appearance on CNBC below.

Wood said: “My view is that there is an inevitable endgame as a result of all this massive spending of taxpayer money in the West and Japan to bail out bankrupt banking systems, so in my view unfortunately the end game will be systemic government debt crisis in the western world.

“It will probably happen in Europe and will climax in the US, and I am expecting on a five year view the collapse of the US Dollar paper standard … The key reason why that is the endgame is that this credit crisis we saw in the west in 2008 and 2009 has simply been deferred, because 95% of the so-called government policy solutions to deal with this crisis have simply been to extend government guarantees.

“So the problem has been transferred from the private sector to the public sector. It is just a matter of time before investors revolt against these sovereign guarantees … The crisis is going to happen first in Europe. The US will be the endgame.” (Hat tip for transcript: Zero Hedge.)

Source: CNBC, March 1, 2010.

Tags: Banking Systems, Clsa, Cnbc, Collapse, Credit Crisis, Debt Crisis, Emerging Markets, End Game, Endgame, Global Markets, Government Debt, Government Guarantees, Government Policy, Greed, Hat Tip, Matter Of Time, Policy Solutions, Revolt, Strategist, Taxpayer Money, Video Interview
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Inflation is Tomorrow’s End-game

Friday, March 20th, 2009

There seems to be a fair amount of knee-jerk enthusiasm about inflation and inflationary assets, though according to some analysts, its too early in the offing to be taking a big stance in that direction. We’ve covered this off in many stories during the course of the year.

Everybody is reading from the same story book, but many of us are skipping to the end of the story, instead of fully appreciating the economic forces which have led to Fed’s decision to adopt quantitative easing, by adding a trillion dollars to its balance sheet. Bill Gross, PIMCO Managing Director, echoes that we will only see inflation as of 2010-2011. Here are some additional comments:

From Reuters:

Not all analysts agree the plan is a good idea or that it will cure what ails the heavily indebted economy, but many expect it to bring the benchmark 10-year note yield back down to the 50 year lows seen around 2.0 per cent seen last December.

“They can hold them down as low and as long as they want because they can print as much money as they want,” said Marty Mitchell head of government bond trading at Stifel Nicolaus in Baltimore.

“Yields can stay low and probably are headed lower.”

Inflation will ultimately become an issue, Mitchell said, but the more immediate concern was the prospect of a downward deflationary spiral in prices, wages and economic activity.

This means inflation is not on the agenda and will not be for at least a matter of months and possibly a couple of years.

“Inflation is tomorrow’s end game,” Mitchell added. “Right now they’re fighting off a deflationary environment.”

Mary-Ann Hurley, VP, Fixed Income Trading, D. A. Davidson says:

“While we’re not concerned about inflation right now, boy we potentially have a huge problem down the road. I don’t think it’s this year or next year’s problem but maybe 2011.”

“We’ve got a huge amount of stimulus and how is the Fed going to unwind all this? I can see a scenario where interest rates go up dramatically, which will hurt the economy. So, it’s a mess.”

Howard Simons, Bianco Research:

“We’ve crossed the Rubicon,” said Howard Simons, strategist at Bianco Research in Chicago. “We have absolutely severed any connection between our dollar and reality. It’s as fast as you can print it right now.”

The Feds decision is more likely at this stage to be bullish for bonds than for equities, as the rest of the developed world is forced to swallow the QE pill. There is also the age-old adage, “Don’t Fight the Fed.” If the Fed is buying bonds…for the time being in any case.

After all, how many of us really understand deflation?

Source: Reuters, Fed Plan May Lower Rates, But at What Cost?, March 19, 2009

Tags: Ails, Balance Sheet, Bill Gross, Bill Gross Pimco, Bond Trading, Deflationary Spiral, Downward Spiral, Echoes, Economic Activity, Economic Forces, End Game, Fixed Income Trading, Government Bond, Hurley, inflation, Lows, Managing Director, Marty Mitchell, Quantitative Easing, Reuters, Stimulus, Trillion, Vp, Wages
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