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

This is a BEAR MARKET RALLY

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.