Tuesday, December 20, 2016

Trump rally to continue lifting markets next year 2017

I wanted to wait until the new POTUS was in office before giving an update and combining with a year-ahead-type note. The planned delay was because I wanted more certainty on what Donald Trump is actually going to do rather than focus on current headlines and assumptions, but the pressure to write has been growing hence this note with a planned follow-up one early in Q1 next year.

The first thing to say is that Donald Trump's victory is not a massive surprise if one considers the anger and inequality created by central-bank-driven policies since the GFC for those not in the winning camp – the top 1-10% of our societies in the West. And the second key point is that Mr Trump's win is a big deal, in particular because he will enjoy a Republican congress (for now) and he will also have the power to shape the US Supreme Court for a generation. Make no mistake Washington will now shape our future much more than the tired old central bank story which is exhausted and lacking credibility when looking society-wide and in the context of markets. This outcome was not factored in at all by the Fed pre-election.

Looking ahead, we know Mr Trump's “known unknowns”. We expect attempts to deregulate (not just but notably in the areas of energy policy and financial sector rules), tax cuts, infrastructure spending, a re-working of Obama-care, and an anti-globalisation push particularly focused on trade, on-shoring and defence.

To use his own words, we all know that the new POTUS will be attempting to make America great again in the face of some extremely powerful long-term global forces. Not just the US, but the West in general, and now also many of the so-called Emerging Markets are facing the same very prevalent long-term challenges: 

-    deteriorating demographics, with a lack of young workers butting up against a rapidly aging population and where the anti-immigration trend in the West is hugely unhelpful;
-    dangerous levels of debt and deficits – since the GFC debt and leverage levels have risen almost universally, with most big economies either already at or close to the 100% debt/GDP level which many see as a tipping point from when debt can be helpful for growth to when additional debt and deficits become a drag on growth;
-    technology and globalization, which are here for good and which are very powerful when it comes to generating deflation by lowering wages and by crushing the production cost of virtually everything; and global regulations covering many if not most parts of our lives, including energy policy (climate change, for example) and financial sector regulation (the BIS for example).

With all this in mind, what does it mean for markets and asset allocation into 2017?

It looks to me like we have come (thankfully) to the end of the phase where central bank utterances dominate. Central policy options are widely considered to be exhausted and lacking credibility. Going forward, I expect eventually some form of normalisation of monetary policy, not just at the Fed, which should trigger the next long-overdue recession. In the interim I think markets need to assume that further central bank easing, notably in the US, the UK, the eurozone and Japan, is now off the table and instead we will need to cope with de facto tighter monetary policy.

Further, there is a portfolio shock in place. After eight+ years of central bank cajoling, many funds are now long the wrong assets at the wrong price – not just portfolios that own DM government bonds, but also most obviously portfolios heavy in credit assets, especially in hard currencies, especially in the IG sphere. As such, I think the possibility of a liquidity shock hitting markets in 2017 is material as the portfolio shock will require a level of risk and portfolio transformation that the sell-side will likely struggle to provide in any kind of smooth and reliable manner.

Going forward, alpha should dominate beta. Markets and investors have ridden the central bank “beta-wave” for eight years. Markets are currently trying to change course towards riding some form of “Trump reflation and deregulation” beta-wave. I don't think this will last very long, but it has been powerful since Donald Trump's victory and I think has legs into 2017. Eventually, however, I expect generating alpha to be the name of the game.

In essence it comes down to the ability primarily of the US (other parts of the world still follow) to generate a sustainable increase in trend real GDP growth that outstrips the sustained increase in the cost of capital which we are seeing already most notably in USDs (through the rising USD, higher yields and now a hawkish Fed). If President Trump and the US can pull this off then it should generally benefit much of society. Unfortunately, I think Donald Trump is probably the wrong man at the wrong time. The world needed Trump reflation and Trumpian deregulation back in 2008-09 when unemployment, slack and output gaps were high. In 2017 I think Trumponomics is most likely to lead to a short-term boost to nominal GDP (which will be very tradable) giving way to serious inflationary concerns, which in turn will mean that the sustained increase in the cost of capital in USDs will ultimately trigger the next recession. And yes, I do not doubt that this Yellen Fed will be very active, even if it means that Mr Trump ends up as a single-term president. As Bill Clinton once said, “It's the economy stupid!” And in today's world Mr Trump has made promises that he will find very difficult to deliver to his voter base, as we now live in a multi-polar world which the US can no longer control and drive, and where the issues around demographics, globalisation, technology, over-indebtedness and global regulation cannot simply be brushed aside and ignored.

So, bringing this all together by focusing on markets, how to view 2017?

In the very short term risk assets are overbought, optimism rules the roost especially in the US (but where Wall Street yet again gave Main Street another reason to vilify it, by almost overnight flipping from “we love Hillary” to “we love Trump”), expectations around President Trump are high, and as discussed above, we see a liquidity mismatch likely early in 2017. So Q1 may be very difficult and we could see a repeat of the market pain of Q1 this year.

Beyond this short term, the trends over H1 [First Half] 2017 should be higher (especially US) equities and yields, steeper curves, a stronger USD, and mixed performance in credit (especially in the IG sphere) and EM. Equity markets in particular are initially likely to ignore the inflation issue and focus on the idea that Donald Trump can overnight rebuild the US economy into a “4-5% nominal GDP” limo, vs the underlying current sense of a “3% and falling fast” jalopy. So for me, most likely over the middle two quarters of 2017, I can see the S&P 500 cash index up at 2450 +/- 50 points, with the Nasdaq weakest and the Dow strongest of the big three US indices.

Eventually, this optimism must give way to reality – we can call that reality “inflation” and “inability to deliver” when it comes to President Trump and his promises. For markets, that really means that the old rule whereby long-term bond yields track trend nominal GDP over time needs to become the key focus. I think we could easily see the long bond at well over 4.5% yield levels, UST10s at 4% and the DXY index up at 120. Initially nominal assets like equities should celebrate the better outlook for reflation and higher nominal GDP. But I would expect this to give way quickly – maybe as soon as Q3 or Q4 2017 – to a realisation that we are likely to end up with either much more inflation than is currently anticipated (Trumponomics should take the US unemployment rate to 3% or lower) whereby a 4.5% nominal growth rate is made up of 3%+ inflation + only 1-2% real GDP, or a much more stagflationary outcome with even lower real growth (bar a short-term boost) and much higher core and headline inflation. Here the pain of USD strength on US corporate profits could be severe and easily outweigh the short-term boost to domestic US revenues and profits that might be seen under Trumponomics in 2017.

I worry particularly about this Fed, which at the top is ideologically as far away from Donald Trump and Team Trump as it could be. If President Trump does what I think he will attempt to do early in his tenure, this Fed will see itself as way behind the curve and will have an overwhelming flow of inflationary and credit growth data to respond to. So the idea that this Fed will hike by at least another 100bp in the next year, backloaded into H2 2017, is very much my base case.

Remembering that MV = PY, we have seen base “M” in particular explode globally over the last eight years, but this has been offset by falling “V”. Trumponomics will, in my base case, not create new demand but merely bring forward two to four years’ worth of demand into the next year or so. Money Velocity should take off. With base M now 8-10 fold larger than before 2008, I think the overall impact of Trumponomics plus what has been seen with base money will lead to much larger “PY” outcomes than currently anticipated. If I am right then the Fed will have to be super-aggressive, probably by, but not before, H1 2017.

Looking ahead, we will need to see exactly how aggressive the new POTUS is and how far a Republican congress is willing to bankroll and accommodate him. H1 should be good (overall, but a Q1 correction is overdue, as mentioned above) for risk assets and should spill over globally, especially into commodity exporters and surplus EM countries, as well as into Europe and Japan. Beyond H1, the reality of limited sustained positive impact on real GDP together with a more aggressive Fed and general tightening in financial conditions, likely in gap moves, is likely to lead to the next recession and market crash. I doubt this would play out fully in 2017, but the process could certainly begin in 2017. So keep watching for the next six months or so, or maybe for the next six quarters at an extreme – the most likely is somewhere in between. The risk hurdles are likely to come thick and fast. Aggressive China devaluations, Turkey and major political risks in the eurozone, which may well result in markets once again pricing in break-up risk, are three of many such hurdles/challenges outside of the US, alongside the US-driven ones discussed here. Stay close to the exit door and beware the complacency around inflation, the Fed and the impact of rapidly tightening financial conditions, especially in USD. Over my 25+ years in this job, the one certainty I have found is that when the cost of capital rises as quickly and aggressively as it has and as I think it will continue to do so, at a time when debt levels are so high, then nasty accidents are virtually guaranteed.

Merry Christmas and happy New Year to all.

Tuesday, November 8, 2016

Interview with Bloomberg November 2016

Q: What's your U.S. election view?
A: I don't really think it matters a whole heap whoever wins, unless we get the most unlikely outcome where Hillary wins and the Democrats take Congress. From the perspective of a Hillary or Trump presidency doing bad things like deporting millions of people or building a wall with Mexico, I just don't think that's going to be doable. Neither Hillary nor Trump in my base case view will have the strong support of Congress.

Q: What if Clinton wins?
A: While the short-term market impact will be positive, I think it very quickly would give way to a realization that a Republican Congress is going to make life incredibly difficult. Her ability to get through any kind of meaningful fiscal package for the U.S. economy would be remarkably small. Over the course of time, I think that a Hillary victory would result in an even more abrasive relationship with Congress. If there's a clean Democrat sweep, bonds will probably sell off, curves will steepen, but equities will like it.

Q: What are the Fed implications?
A: [A Clinton] victory, assuming that Democrats do not take Congress, means very little fiscal policy, all eyes back on the Fed and that makes [Fed Chair Janet] Yellen's decision to hike a little bit harder. She will realize over time that she's the only game in town. More issuance, together with a Fed that is either standing still or even tightening at the margin, should in theory mean slightly higher bond yields. If the U.S. starts to slow down again — which I think it will, if we're involved in some kind of cyclical, normal business cycle recession — all the pressure will be back on the Fed because I don't think Washington is going to be in a position to help.

Q: What happens to U.S. rates?
A: Do I think the Fed's going to hike in December? Probably. Do I think that the Fed's going to go on a big hiking cycle? Absolutely not. A new round of QE is more likely over the next two years than the Fed hiking by 100 basis points. With Washington in gridlock, the pressure on the Fed to do more will go through the roof. The residual credibility they have will need to be used up.

Q: What's your U.S. growth view?
A: Nominal GDP in the U.S. is trending towards 2 percent. Real GDP is one point something on a trend basis, which clearly isn't enough to support earnings and jobs in a negative productivity cycle, so I worry that we may end up seeing some kind of technical recession in the U.S. next year. Eventually, we’re going to end up in a situation where asset prices will be so far out of line with the income and earnings potential of the U.S. economy that we risk a significant repricing event.

Q: What if it's Trump?
A: Equities will be negative. It could easily be 100-200 points lower than here on the S&P 500. I'm not as worried as other people: A Trump victory would see him put in a box by his own party. There's a bit more hope for some kind of fiscal package backed by the Republican Congress, but I think the market focus is going to be: "Oh my God, he's going to go after Yellen."

Q: What's the geopolitical impact?
A: A Trump presidency would probably want to have as little to do with the Middle East as possible. It would attempt to open up the Alaska pipeline properly and allow unabated drilling for energy wherever you want in the U.S. I don't worry about war, or some kind of global escalation because too many people have too much to lose. I think [Russian President Vladimir] Putin would be more wary of Clinton, though I'm not sure what she could do. The future of NATO would be a very interesting debating point. It could be very different under a Trump outcome versus a Hillary outcome. The future of Brexit could be quite different. The bottom line is that Trump seems more like an isolationist. The U.S. from an energy perspective can be more isolationist now.

Q: How do you position?
A: From a bond market perspective, I like Treasuries. I like duration in the U.S. I want to buy the 10-year in the 2-2.25 percent yield area on a one-year basis. The 2s-10s curve I was looking to steepen a bit more up to 100-105, we're at that kind of level. On a one-two year basis, because I'm in the camp that's lower for longer on growth and I don't worry about any takeoff in inflation, Treasuries at 2 point something percent when nominal GDP is 2 point something look very fair value at worst.

Monday, October 24, 2016

Markets will rally regardless Trump or Clinton wins

We are in a very mature cycle. I think the Fed has limited tool-kits, but it has more in a toolkit than other central banks, which is why betting against the Fed at-least in the short term is probably risky because there is some flexibility there. 

You may want to sit more passively and buy the dip for the rally into year end. I think we will have a rally post elections irrespective of who wins. I think the real hard work begins next year. 

Limited or No Rate Hikes ahead

There is no hiking cycle of any meaningful degree ahead of us. The Fed can cut rates. Not many other central banks can credibly cut rates. The Fed I think can if we can get over this little obsession with inflation we've got right now which I don't think will last very long,

Monday, September 12, 2016

A sustainable reflation is not sustainable

What we learnt over history is interest rates do not need to move much anymore to have an adverse impact.........

Tuesday, September 6, 2016

China wants to be seen as stable during the G20 summit | VIDEO

Things are okay in China. The risks are still wrapped around further currency devaluations....

[Watch the video above for the full commentary]

Monday, August 15, 2016

Big divergences between Market vs Real Economy


The initial feel good is there, but the reality of a positive fiscal multiplier. I think the outcome will be very, very poor.


The argument against bonds I have heard for the last five years. (German) bunds can't get any lower than 2 percent, Treasurys can't get lower … I am not going to say it is going to happen but we can get negative rates at -3 percent. We are in a world where policymakers are making up as we go along

Monday, May 30, 2016

Thursday, May 26, 2016

Surprising reasons why a Trump presidency could be good for the US economy

In the U.S. we have not had credible fiscal policy since 2008. Now don't laugh, but if Mr. Trump is elected president, as a Republican, and you have a Republican Congress, you might get a fiscal package going. But if Mrs. Clinton is elected president and you have a Republican Congress — which is what you are going to have for another two years give or take — I don't think they are going to get any fiscal policy in the US.

Hillary Clinton has some big supporters including Warren Buffett

Wednesday, April 20, 2016

Every country seems to want a weaker currency

The critical longer-term question to my mind is whether the Fed is going to re-introduce QE and/or cut rates ultimately into negative territory. This takes us into the realm of when and what would the necessary pre-conditions need to be. This in turn takes us into the realm of credibility. My view – and it is only my view, as nobody can know the answers to these three questions for sure, is still that the Fed does not actually do anything more than jaw-bone until or unless the S&P500 cash index is into the 1500's and the outlook for growth, employment and inflation get significantly worse – perhaps with the unemployment rate inching higher not lower. Timing wise late Q2 or Q3 is still my target, though the closer we get to the US presidential election the more the Fed will be hampered. In terms of credibility, while I think the ECB and the BOJ are scrapping the barrel, the Fed still has the ability to influence things, at least for now.

I do not think that this current rally leg has much left in it – the power of Fed speak without Fed action is already waning I think. Consecutive weekly closes above 2116 (possibly) and/or 2135 (definitely) would force me to reconsider my views for the rest of Q2 and Q3. Until or unless these levels are crossed I would urge investors to be extremely cautious about getting too long risk and getting overly complacent.

The underlying global growth and earnings outlooks are poor and deflation is still running rampant, albeit right now perhaps more so (at least in terms of perception) in Europe and Japan than in the USD-bloc (which includes almost all EM economies, as well as the usual economies such as Canada and Australia). 

As everyone wants a weaker currency, I do not expect the period of USD weakness we have seen since early March, and which has been the real catalyst for the latest ramp-up in risk assets and hope, to last unabated for much longer without much more explicit easing/explicit promises of easing by the Fed which, as I have said above, is unlikely until things get much worse. 

More likely are fresh attempts by the ECB and/or the BOJ to ease to drive down the EUR and JPY before the Fed can actually do anything explicit. In my view, this, of course, will put Chinese devals back on the table. The global FX war continues, which on any meaningful timeframe is ultimately a destructive outcome for the global economy. It seems sad that central bankers are so focused on transitory and largely illusory wins, which have served the global economy so badly over the last decade.

Monday, April 18, 2016

Could see a further bear market rally because of the Fed

I would expect at least one violent countertrend bear market rally, perhaps over late Q2 or early Q3, taking the S&P from the 1700's (if I am right!) up into the 1900's before the leg lower into the 1500's over late Q2 or most likely Q3.

I am comfortable that such a period of positive counter-trend price action for risk assets will NOT be based on material and sustained improvements in global growth or earnings, rather the drivers would still be hope and a strong view that the Fed is actually going to ease (i.e., action or promises of action in the dovish direction rather than just words or promises not to hike).

Wednesday, April 13, 2016

We are in a multi year bear market rally | We could see 1500's on the S&P500

I am even more convinced now that we are about 10 months through a multi-year bear market that likely won’t bottom until late 2017 or early 2018. This will be a stair-step decline with all the strength to the downside punctuated by occasional (very) violent bear market counter-trend rallies driven by short covering, hope and residual (albeit rapidly decaying) belief in policymakers. 

I still feel confident that we will see 1500s on the cash S&P500 index in late Q2 or Q3, and some of the things I look at suggest a final bear market bottom for the cash S&P500 index around the same levels as the 2011 lows of sub-1100. However, this is a longer-term idea that will be subject to refinement. The focus must be on the next few days, weeks and months.

Monday, April 11, 2016

Feds recent flip has helped China and hurt Japan, Europe

In March I re-emphasized my view that the Fed ‘put’ (i.e., the point at which the Fed admits failure and flips from hawk to dove) would not be seen until mid-2016 and would require the cash S&P500 index to drop into the 1500s. Clearly, I had given the Fed too much credit – it flipped after a drop to 1810 and shifted in March, all much earlier than I had expected.

Clearly, my confidence on my negative views for global growth, on my belief in deflation over inflation and on the deeply negative outlook for earnings are now set even more in stone. The Fed has told me as much. In fact, I suspect that the Fed in private is far more concerned about these factors then it is currently willing to admit.

The Fed’s change in March was all about weakening the USD, which in turn is designed to help the US economy fight off imported deflation, instead of which the Fed hopes to import inflation into its economy (all to try and hit the 5% nominal GDP growth target which I discussed in my March note) and with it the hope that it helps US exporters regain competitiveness. USD weakness also helps crude and commodity exporters, and it helps the EM world, which has suffered from commodity price weakness and tight USD financial conditions at a time when the EM world is drowning in USD debt. 

China is a huge beneficiary as the Fed’s flip and USD weakness allow China to continue devaluing vs the world ex-the US without having to do anything itself, and it helps (at the margin) the heavily USD-indebted Chinese economy. The big losers are of course Japan and Europe, and this is compounded by the fact that both the ECB and the BOJ are, in my view, already at the limits of what they can do credibly. Just look at price action on the EUR, on European stocks, on core duration in Europe, on the JPY, on the Nikkei and/or on JGBs. The charts speak for themselves and should concern policymakers at both these institutions.

Friday, March 11, 2016

Crude Oil to go below $30 and Gold to $1400

Highlights of the above CNBC interview 

-China to export deflation to the rest of the world.
-Fed backed to a corner
-S&P500 to trade in the 1500's range this year
-WTI Oil to drop below $30 this year
-Gold could see $1400

Thursday, March 10, 2016

Bob Janjuah looking to Gold as a safe haven for this year

In a world of NIRP and QE, and where the bid for liquidity in markets is many multiples of the levels of liquidity the sell-side can offer, I find it extremely difficult to get any visibility in FX markets. FX markets are the most exposed to central bank credibility and are also where significant flows can drive markets most immediately, more so than in other markets like Rates or Equities. 

My bias is to believe that the USD is the least worst “long” until the Fed flips on its current policy path. But as with the BOJ's recent easing and the market’s response (the opposite of what was trying to be achieved), the credibility issue of central banks in general, and of some central banks more than others at any given time, has now become a major uncertainty factor. 

As such, I feel that this is an extremely difficult market to call on anything other than a very medium-term basis. I am not alone here – the 20% rally in gold since December testifies to this. My key message for 2016 remains unchanged in terms of FX markets (strong USD until the Fed reverses course), but I am increasingly inclined to look at gold again as a safe haven for 2016, and am increasingly inclined to avoid tactical calls on FX markets.

The over-reach of central bankers and their failed policies is not news to me. What is news to me, especially after the BOJ's easing in January, is that markets are now either at or very close to losing all confidence in the post-GFC policy response crafted by the Fed/ECB/BOJ et al much earlier in 2016 than even I had expected.

Wednesday, March 9, 2016

Fed will ease by end of 2016

I am a little surprised by the desperation already evident among central bankers. As per my January note, I expected the BOJ to ease in Q1, but going straight to negative rates has seriously harmed the BOJ’s credibility and the credibility of Abenomics. ECB QQE has clearly failed to create the inflation Mario Draghi promised us, but I have no doubt the ECB will ease again this month. And even the Fed is now “drip-feeding” negative rates into the market through its usual channels. 

The Fed has made a major policy error already, and I remain convinced that the Fed will be easing by the end of the year. But I would not be surprised if Fed hubris “forces” it to tighten once more before end-June. Focusing so much on an extremely lagging and “technically created” number like the unemployment rate is at the root of this policy error. 

The Fed is simply not focusing enough on important issues like weak earnings, poor quality jobs, imported deflation, weakness in investment spending, weakness in corporate revenue and profit (not EPS) growth, and deeply scarred consumer behavior. I could go on, but suffice it to say that I think the Fed has backed itself into a corner, and will only be able to free itself to get ahead of the curve (rather than as it is now, way behind the curve) once the data and markets truly hit some form of capitulation bottom. 

As I have written in the past, I don’t see a “Fed put” until the S&P500 trades down into the 1500's.

Tuesday, March 8, 2016

Central banks monetary policies have not been helpful

To stress that central bank credibility is draining fast and, assuming that the BOJ and ECB go again this month, I now see a risk of a breakdown in markets and outcomes that are the opposite of what central bankers are trying – and have been failing for over seven years now – to achieve, i.e. nominal GDP at 5%, EVEN IF THIS 5% CONSISTS OF 0% REAL AND ALL 5% FROM INFLATION. 

We are entering an extremely worrying time and we have got here even faster that I had feared – a place where monetary policy and central banks become the problem and not the cure. 

The Fed is in a hole of its own making by using self-serving metrics to fix a debt and asset bubble crisis with a policy that relies on more debt and even bigger asset bubbles. But in the short term – this next month – I am concerned that markets will react badly and contrary to policymaker expectations when both the BOJ and the ECB attempt to ease further this month. I suspect the ECB and the BOJ are – as far as markets are concerned – “damned if they do, and damned if they don’t” with any residual credibility likely to decay away this month. But both institutions should realise this is down to their own mistakes, whereby (like the Fed) they have sought to fix the ills of excessive debt, asset bubbles and a lack of competitiveness thorough policies which merely result in a zero-sum outcomes (FX wars) and/or which rely on the “greater fool” theory requiring “someone” to take on more debt to continually speculate on an un-burstable asset price bubble. 

Sadly, of course, mankind has so far failed to create un-burstable bubbles, especially where the underlying foundations are so flimsy. This competitiveness issue is global and critical. Since the global financial crisis (GFC) very little production capacity reduction has been allowed to occur in the Developed Markets (courtesy of QE and ZIRP, which together facilitate the avoidance of default cycles, which are central to reducing capacity). At the same time, globally, particularly in places like China and in industries like Energy and Shipping, we have seen significant production capacity added since the global financial crisis. 

Again, in part due to QE and ZIRP policies in Developed Markets. Of course, this would be less of a problem if global aggregate demand growth had increased strongly over the last seven years, but this has clearly not happened. In particular, the debt-driven consumption frenzy of the years leading up to the global financial crisis in the Developed Markets has barely come back, while at the same time demand growth in the EM sphere has been much slower than hoped for (and needed), and latterly severe economic downturns in places like Russia, China, the Middle East and Brazil have hampered this handover even more. So the response to all of this has been the zero-sum game referred to above, FX wars, which merely operate to allow temporary and transitory relative shifts in competitiveness but with severe (unintended?) consequences.

For now, I have decided to stick with what I published in January, but now I think we are facing an even more difficult 2016 than I had anticipated at the outset of this year.

Monday, March 7, 2016


In January I said that the S&P500 would fall from 2000/2050 to the 1500's as my target over 2016. I reaffirm this view.

To reiterate my bearish views on risk assets for H1 2016 (1st Half of Year) – I continue to see much lower equity prices, lower core bond yields, wider credit spreads, and weakness in EM and commodities over the next four months (at least),

To highlight that, in my view, stocks’ counter-trend bounce off the February lows has now run its course and I believe we are – in early March – likely to see the onset of the next leg weaker in risk, vs stronger in core duration. I expect this next leg of weakness to last three to five weeks and to result in new lows so far in this cycle in stocks (S&P500 into the 1700's) and new lows in core government bond yields (target 1.5% in 10yr USTs).

It is important to remember that in bear markets the strength is to the downside, the violence is to the upside, with counter-trend rallies in bear markets often being the most painful. Markets simply do not go down (or up) in straight lines. But if I am right that this bounce is over, we should continue to see a series of lower lows and lower highs in stocks around the globe.

Thursday, February 11, 2016

What the US Dollar strength signals of the economy

This is where I get very worried, if we are saying it (Dollar - Yen) is a safe haven trade. The move in the dollar, to me is beginning to inform me that perhaps the U.S. market is pricing in a much worse outcome for the U.S. economy now, than it was 3 weeks.

Friday, January 8, 2016

My top 6 predictions for 2016

Instead of writing in my normal narrative style, with each new note a direct follow-on from each previous one, I wanted to do something a little different. Not that my views have changed – rather I now feel even more certain that debt-driven asset bubble implosions (such as the GFC) cannot merely be ‘fixed’ with even more debt and another round of central bank-driven asset bubbles.

Policy since the GFC has resulted in a deeply unstable outcome in the global economy and across markets.    

Alan Greenspan and US legislators addressed the early 2000's debt-driven asset bubble collapse (primarily in corporate equities) by driving another round of debt-driven asset bubbles (primarily in housing and the financial sector). And we know how that ended!

So I wanted to present my top 6 predictions for the year ahead, split by asset class, albeit the key drivers of my 2016 views (weak global growth, with the US at/near the centre of the storm; EM weakness particularly in China and oil/commodity producers) and how they will act across all asset classes:

1 – Rates – I like core duration pretty much across DMs, including the eurozone periphery, but particularly in the US. Before the end of 2016 I think the 30yr UST will be yielding well below 2.5% and the 10yr UST will be closer to 1.5% than 2%. The Fed may hike once or twice more in H1 (1st Half of Year), but before 2016 is finished I think the Fed will be on hold/hinting at a new round of easing/actually easing.

2 – FX – The USD can do OK in Q1, but by the end of Q2/early Q3 the market will price in the Fed’s policy error (before the Fed acknowledges it) and the USD will then turn lower in a trend fashion. Until then China and the commodity/EM bloc will continue to be under pressure. We think China will keep devaluing (we could see 7 vs the USD). The Saudi USD peg is at risk, but may well hold and then get some relief if I am right about the Fed and the USD in H2 (2nd half) 2016. In H1, and possibly in Q1, the BOJ will have to ease further to prevent further JPY appreciation, not just vs the USD, but also vs the EUR and China.

3 – Stocks – I think the S&P 500 will trade down around 20% to 25% from current levels in H1, down to the 1500s level that I wrote about last year as a target for 2016 (we are already 7% off from the 2015 highs), before a recovery (once the Fed ‘turns’). I am looking for an earnings and jobs recession in the US this year, to become clear sooner rather than later in the year. I do not want to be ‘invested’ in equities at least over H1, rather equities are a trading asset. As I am confident the BOJ will out-ease the Fed, particularly into end Q1/Q2, for H1 2016 I am happy to own Japanese equities vs short US equities, FX hedged, over H1 2016.

4 – Commodities – Further weakness ahead in H1. I look for WTI to trade below $30. And I hope the situation between Saudi Arabia and Iran remains as controlled as it can be, because the type of oil price spike that could result if things between these two nations deteriorate much further would I fear be extremely painful for the global economy. I am old enough to remember the 1970s oil price shocks.

5 – Credit – I am very concerned about the outlook for EM credit and DM high yield markets, particularly in the US. A possible safe haven is the eurozone IG credit space, albeit there is a rising level of idiosyncratic concerns even in this relative safe haven, and at some point markets may react to further instances of such risks by pricing in much greater correlated risks, à la 2007 and 2008. Liquidity will likely remain a major concern. EM and high yield markets MAY get relief if I am right about the Fed turning from hawk to dove during the belly of 2016, but until that becomes more obvious, my general recommendation is to focus on only the best, most transparent (and least spread heavy) parts of credit markets. For choice, I would rather own core duration in government bond markets.

6 – EM – Until the Fed turns I remain bearish China, commodities and EM. If the Fed turns (as I forecast), or more likely once the markets begin to price in a reversal by the Fed, which should then lead to looser USD global liquidity and a weaker USD on a trend basis, then I will look to reconsider my EM views more positively. As discussed above, that means the next three to six months will likely continue to be a major challenge for the EM world, particularly commodity producers, but of course also including China.

Let’s see how things play out – I will refer back to this note as the year unfolds, by way of an audit/sanity check. To end I wanted to highlight the two areas that would force me to reconsider my views herein sooner rather than later.

First, if we get major fiscal policy action across China, Japan, the US and the euro-zone, I will have to review my outlook. As of now, I feel this is a low risk to my views. Second, the US (and to some extent the global) consumer could surprise me and all of a sudden start levering up to consume at an annualized rate to 4% to 5%, rather than 1% to 2%. If this looks like it is happening, I will have to review. As of now I think this is also a low probability outcome, but it would be foolish to ignore this risk.