Category: Macro Posts

Throw those projections out. If you want to know where equity markets are headed , then look no further than the chart below which shows the correlation between M1 and MSCI world Index.Central banks probably need to do something to turn around real M1 growth, otherwise MSCI World will face another tough run in H1 of 2019.Do you think CBs will turn around? Oh yes they will..

If we compare the current debt super-cycle to the previous one, which ended with the outbreak of World War II in 1939, 2007-09 were similar in nature to 1929-32, and the phase we are going through now is similar to 1935-39, where a sharply rising gap between poor and rich led to a monumental rise in monster like Adolf Hitler

It looks like the US credit market is about to hit the wall. US wall of maturity is around 2020 to 2022, according to calculations by SRP boxing central bankers into the corner.

Debt-fuelled buybacks under threat as creditors get demanding ask GE or GM. Companies no longer ‘happy to use cash’ towards payouts. This was the significant tailwind for US stock market which is now under threat.

My two cents
The charts above are signaling that investment landscape is shifting. I can easily put the blame on central bankers for cutting the rates so low that saving money amounted to stupidity and borrowing to spend or buyback your own share was seen as the right thing. This led to higher level of indebtedness at household and corporate level along with rise in asset prices. Poor don’t have assets,so they were left behind in this orgy of asset bubble as seen below which is leading to rise in populism ( seen those yellow vest protests)

what will happen when this Everything Bubble burst’s? any guesses

Niels Jenson writes in this month Absolute return letter….

Three conditions are typically prevalent during the bubble stage (see chart below)
1. Debt grows faster than income.
2. Equity markets rally.
3. The yield curve flattens.
All three conditions have been prevalent in recent years. I should also point out that monetary authorities don’t always play ball at this stage of the debt cycle. Where they should seek to constrain the bubble, they often inflate it instead by being far too lenient.

But debt and GDP grows more or less in line during the early stages of debt super-cycles. As the bubble in stage 2 gets bigger and bigger, it takes more and more debt to deliver a dollar of GDP growth. As you near the end of the bubble stage, the debt-to-GDP ratio, which was about 1:1 earlier on, changes dramatically. It now takes about $5 of additional debt to generate a dollar of GDP growth. In some of the largest economies in the world, and that would include both China and the United States, the ratio is now 0.20-0.25; i.e. we are not far from hitting the proverbial wall.
Borrowings eventually peak (stage 3), and depression follows (stage 4) which Ray, as mentioned earlier, defines as a dive in GDP of 3% or more. All the debt cycles that he reviews in his book go through a slump in GDP of that magnitude or more.
Deleveraging (stage 5) follows, which Ray calls Beautiful Deleveraging. He assumes (which is almost always the case) that the stimulation offered by monetary authorities is powerful enough to offset the deflationary forces. In practice, this is done by providing ample liquidity and credit support.
Most of the time, that is it. Stage 5 marks the end of the debt cycle. Conditions normalise, and a new cycle can commence, but that is not always the case. Every now and then, consumers and companies don’t react to central bank policies the way the theory books prescribe. Consequently, monetary policy becomes inefficient.
This was a condition first recognised by central bankers in the 1930s, and they even coined a phrase to describe it: Pushing on a String, they called it. When that happens, you have come to the end of the debt super-cycle.

Read The full letter below

https://www.arpinvestments.com/arl/the-art-of-defaulting#.XAaKLVsI0Cw.twitter

US treasury 5 year yield fell below US 2 year bond yield inverting the yield curve. Not a good sign for Us economy but as can be seen in the chart below stock market historically has continued to rally for 2 years after this inversion.

US treasury 3year over 5 year also inverted. Danielle Di Martino writes ” Courage of the Fed to raise rates on December 19 being put to the test by the market.”

US Treasury curve for 10 year also spells trouble as 2s/10s gap moved within ~14bps of going negative. If the Fed moves ahead with a 25bp hike in this month FOMC meeting, as is widely expected, the 2s/10s yield curve could easily outright invert.

if the inversion was not enough then Dr Copper also retraced all of the post US-China “truce” gains. Speaks volumes.

My two cents

Bond market is getting worried and Dr copper is not far behind in signaling that all is not well. There is no more inventory restocking led GDP to be created to beat the tariffs. It is early days but I think capital has started rotating back into Gold and US bonds as an insurance policy in spite of continued dollar strength. Any dollar weakness at this level will lead to some of this money finding its way into beaten down Emerging Markets

Diana Choyleva at Enodo economics writes “Washington needs to rewrite the economic and financial rules of engagement with Beijing, but now is not the time for it to pursue regime change in China. The West was unscathed by the collapse of the communist bloc because their economies were distinctly separate. By contrast, China’s integration into global supply chains is deep enough to suggest the US has no interest in pushing Beijing so hard as to risk an economic collapse. From a short-term perspective, China also holds the key to the resolution of the North Korean conflict, even though Kim Jong-un is far from China’s friend.
From Beijing’s point of view, the transformation of its economy and military has further to go before it feels fully confident of standing up to America. So, the top leadership needs to buy time, while not sacrificing its long-term goals. Over the past few years China has started to rein in financial risks, rebalance growth towards consumer spending and focus on moving up the value-added chain. Beijing is far from changing its fundamental economic model, but it is working towards its understanding of achieving economic self-sufficiency and technological supremacy.”

China would be willing to ramp up imports and to run an overall trade deficit

Powell has smartly passed the buck to Trump and now eyes are on Trump to make some compromise at G-20 failing which markets might reverse their recent gains. The next selloff then cannot be blamed on FED and Powell will be free of any more tongue lashing from the President

In this context, Buenos Aires could well bring some short-term respite to struggling global equity markets.
But the long-term investor would be better off selling into any upturn, as the trade war is set to morph into a tech war – though hopefully not into an actual war over Taiwan.
A fleshed-out deal is neither expected nor it  going to be announced in Buenos Aires. After all, the two sides have just about started talking again. Moreover, America is still putting significant pressure on Beijing, as was evident when Mike Pence rounded on China in Xi’s presence at the APEC summit in Papua New Guinea. Trump’s reaffirmation of his intention to raise tariffs on Chinese imports to 25% in January is also part of his administration’s scare tactics.
Hence, for the Sino-US negotiations to advance, Washington must offer Xi a respite from the pressure.
It is difficult to anticipate what concessions Beijing is ready to make and whether they will be enough to allow the two sides to move on, but here is our list. We are cautiously optimistic that we will see some progress along these lines.

Diana concludes “Argentina is the home of the tango. Trump and Xi would be the last to hit the dance floor, so it’s best not to get carried away. But we do expect some sort of progress to keep the world’s most crucial bilateral relationship from veering completely off the rails.”

full report ( subscription required)

https://enodoeconomics.com/members/reports/226?

Today 3 months LIBOR touched 10 year High

The Global Dow Index is currently testing a very important support line. The MACD momentum indicator is also at a level where help arrived every time except for 2008, when the central banks underestimated the subprime crisis. via Nedbank

Dropping oil like it’s hot? Crude oil prices are dropping once again, with WTI falling below $50/bbl for the first time since Oct2017. This is a continuation of the bearish narrative over the last month, although stops seem to have triggered this test of $50, Citi says.

Wealth held by richest Indians rose close to 22% in 2017 compared with the previous year. Graphic: Bloomberg

Indian govt needs to start cutting expenditure to offset shortfall in revenue collection

There we go again, a binary outcome awaits as we head into G-20 meeting. Mehul Daya  and Neels Heyneke of Nebank explains is their Macro Strategy note “At the G20 meeting in Shanghai in February 2016, policy makers pledged to boost economic growth and restore stability to financial markets. This was in the midst of global economic growth faltering and as financial markets were grappling with heightened volatility amid fears of deflation. Stock markets were under pressure, the US bond was rallying and EMs experienced large outflows. The strong US dollar tightened global financial conditions considerably.As a result of the globally coordinated effort by policy makers, i.e., the “Shanghai Accord”, a risk-on phase ensued. This led to a weaker US dollar (easing financial conditions), triggering an outperformance in many risk assets, in particular, EMs.

G-20 might have lost its relevance as leaders cant even agree on joint communique ,but we need another shanghai accord to ease high levels of economic policy/geopolitical uncertainty as can be seen in the chart . There is another issue of contracting dollar liquidity as FED continues to unwind its balancesheet

Nedbank concludes “We are sceptical about whether a “Buenos Aires Accord” could be re-engineered again, for the following reasons:

1. Rise in geopolitical tensions

2. Global US dollar shortage

3. Expectations of tighter monetary policy by global Central Banks

4. Contraction in China’s credit cycle

Their Investment recommendation: “We have been underweight risk assets in 2018 and advise investors to remain conservative in their asset allocation towards risk assets going into 2019, unless there is consensus among global policy makers to boost liquidity“.

My two cents. A G-20 accord even remotely like shanghai will give new lease of life to markets and possibly a new high in US markets irrespective of FED stance and rate hike in its December policy.

Afterall availability of LIQUIDITY is more important than the cost of liquidity.

Going Going Gone
The graph on Lodha developers ( largest in India) debt pricing which shows acute concerns on the financial health of the company. ( Yield at 24%).  If the largest player in the market gets into the discount pricing model – this could imply a fall in asset prices across Mumbai ( largest real estate market in India) impacting other leading players in the region.
While US

First Buyback, then restructure, then default.
Households have deleveraged since the financial crisis, corporations have piled on more debt.

Dollar is my currency but it is your problem
Raoul Pal’s Dollar chart….This is THE chart that counts…Fed Broad Dollar Trade Weighted Index. 130 and there will be a confirmed large cup and handle formation.

This is my favourite trade at the moment
Copper to gold ratio provides strong indication of where yields should be, and their recent divergence suggests further upside for USTs.Yield curve inversion could quickly become Fed’s next problem

Look at the love Indians have for their former colonial master and US of A
“Which country would you like to live in (besides your own)?”

Albert Edwards latest this week was more like “WINTER IS COMING” from game of thrones ( I still remember his ice age thesis). So lets jump on to him. But before that, look at this chart from BLOOMBERG which is now pricing in just one more FED rate hike in 2019 .

 

Heisenberg writes “Albert also flags the recent aggressive paring of the spec short in the 10Y, which was rebuilt slightly in the week through last Tuesday after being trimmed by the most since April 2017 in the week ended November 13”

But why is suddenly the narrative changing and market becoming confident that FED is almost done and bond positioning becoming bullish?
Albert comes to rescue again and writes
“One of the joys of following David Rosenberg on Twitter (@EconguyRosie) is that he always seems to come up with new indicators I have never seen. His latest is the FIBER leading economic index (link, see below), which confirms the slowdown the ECRI is also flagging”.

He finally sticks SOCGEN necks out by writing “Our very own Quant guru, Solomon Tadesse, did some really interesting work back in May this year showing that the Fed’’s monetary tightening was already close to what would historically trigger a recession”

My two cents

I have been bullish bonds (early I guess) but evidence is now falling into place.I still think that couple of more rate increase by FED will first lead to inversion of yield curve and hence long bond is great place to be positioned till the FED continues tightening. This will give way to steepness as and when FED signals rate pause and rally in the Belly of the yield curve

Global Auto Sales, through September YoY:This kind of fall was seen a decade back, but then it was a crisis.

I think the consumer is getting increasingly tapped out and this also applies to Emerging Markets.

Fund managers expect deterioration in global corporate margins over the next twelve months.

Multiple headwinds of rising rates along with trade war. Lower oil prices actually shaves off  GDP growth because Capex in oil and gas comes to a complete halt.

Does South Korea’s export data point to further weakness in the global economy?

Historically South Korean exports have acted as canary in global export growth.

Financial conditions in the US continue to tighten.

I don’t care what rates are ….. I care how good is the LIQUIDITY and LIQUIDITY is getting drained through tightening Financial conditions