Archive - Jan 2013

To some, today is Martin Luther King day and as a result the US markets are closed, especially since today is also the day when Obama celebrates his second inauguration with Beyonce, Kelly Clarkson and James Taylor at his side (hopefully not on the taxpayers' dime). To others, January 21 is nothing more than the anniversary of the real beginning of the end, when five years ago a little known SocGen trader named Jerome Kerviel could no longer hide his massive futures positions and was forced to unwind them, sending global indices plunging resulting in the biggest single day drop in the Dax (-7.2%), and punking the Fed into an unannounced 75 bps cut. Luckily, today such cataclysmic unwinds are impossible as the market is priced perfectly efficiently, without central bank intervention, price transparency is ubiquitous and the Volcker rule has made prop trading by banks, funded by Fed reserves (which are nothing more than the monetization of excess budget deficits) and excess deposits, impossible.

An overview of the key factors and events that are shaping the investment climate in the week ahead.  It looks at some emerging market developments as well.  These are the main talking points and considerations that ought to be on your radar screen as investors or pundits.  

Little-Known Secrets to Boosting Mood …

For much of the twentieth century, the developed world saw a steady march upwards in wages and living standards, due primarily to huge quantities of cheap, high-yielding liquid hydrocarbon. As we find ourselves bumping along the plateau of Peak Oil's apex, suddenly we find that "growth" is a lot harder to come by. Of course, if you follow the news today, this is not the story you are hearing. Talk of an energy bonanza and imminent energy independence (in the U.S.) are everywhere, thanks to gas fracking and tight oil production. What is missing from the headlines is the cost side of the equation and a blindness towards future demand. McDonald begins: "I think the main conversation we are not having is that wages are very unlikely to ever return to a relationship to energy costs that would make the United States economy into a happy economic story once again."

Cogito Ergo Doom...

How many 'dips' before a recession cycle becomes a depression structure? That is likely the question on Carney's mind as he enters his role as top man at the BoE shortly. As The Guardian reports, an unprecedented third slump in four years looms for the UK as shoppers stay at home and vital transport links grind to a halt amid paralyzing weather. As snow blankets much of the nation, it would appear the next round of central bank easing will be to print 'sunshine'. A series of economic releases – including weak trade data, downbeat business surveys and dreary retail sales – have fueled concerns that official figures out this week will show that output fell in the final quarter of last year. Now analysts fear a cold snap in January could lead to another quarter of contraction in Q1. The snow, bitter cold and harsh easterly winds continue to cause widespread disruption to travel by air, road and rail.  "Clearly, the longer that the snow and ice lasts, the greater will be the negative impact on the economy," IHS' Archer added, though we are sure we will hear of the 'broken icicle fallacy' soon enough.

Cyprus is the euro area’s third-smallest economy in GDP terms, accounting for less than 0.2% of the region’s output. Yet, we believe it is big enough to cause trouble. The country urgently needs external funding and applied for an EU/IMF/ECB (in short: troika) program last summer. However, the conditionality that comes with this program does not go down well with the current Cypriot government, whereas politicians in core eurozone countries have started to point fingers at the small economy’s low-tax, soft banking regulation business model. What emerges is the threat of another deadlock, in which a small country pulls the eurozone’s consistency per se into question. So despite the small size of the economy, Cyprus therefore has the potential, in our view, to become a catalyst that may eventually end the complacency brought about by the ‘Draghi plan’ in H2 last year. If this proves correct, it would likely mean that peripheral spreads widen and risk assets could turn more volatile, especially in view of Italy’s election and Spain’s funding needs.

A week ago we reported that following what China said was a response to counter "Japanese military aircraft disrupting the routine patrols of Chinese administrative aircraft" over the East China Sea, the world's most populous country (and one which has the largest, 2.25 million strong, standing army) scrambled several jets and put its military on high alert. Now, it is the turn of Japan, and its brand new militant and nationalistic government, to "retaliate" and escalate tensions by one more notch, in the process crashing any hope that Chinese imports of Japanese goods may resume, and obviating the ongoing temporary plunge in the yen (which while doing nothing to boost exports to this 20% trading partner, has made imports so expensive, inflation in the past two months has already soared well above the 2% target for various key goods as previously reported). Moments ago, Japan says it may fire warning shots and take other measures to keep foreign aircraft from violating its airspace in the latest verbal blast between Tokyo and Beijing that raises concerns that a dispute over hotly contested islands could spin out of control.

In what is a surprising warning shot for Merkel's popularity ahead of the September general election in Germany, moments ago the CDU/FDP ruling coalition lost the vote in Lower Saxony to the center-left Social Democratic Party/Greens block by a last minute, one-seat win according to Reuters. The SPD and Greens won a combined 46.3 percent against 45.9 percent for the centre-right, with the FDP defying predictions they would fail to win a seat and scoring 9.9 percent - twice what they had been forecast to get, however the boost coming as a result of a CDU ballot-splitting strategy that may have now backfired.

While it is somewhat broadly understood that the 'market' is disconnected from 'fundamentals' currently - apparently on the basis of forward hope and central bank liquidity - we thought the following charts would be worthwhile paying attention to in an effort to shake off the anchoring biases that so strongly hold us as our nominally-priced markets break to new highs. Again and again over the past six years we have seen stocks ignore (just a blip) significant trend changes in macro data, only to revert aggressively back to reality soon after. Whether compared with pure 'macro' data or the liquidity-fueled fed balance-sheet driver, reversions come - especially when the market least expects them (and is most aggressively positioned). Presented with little comment...

I would expect that much more energy had to be used, and that much more electricity would be required just to keep regular business operations going, and keep the Chinese people from freezing to death.

In an increasingly globalised economy, we need more global data measurement. The Economist presents a new attempt to measure global GDP. Globally, there was a big and swift return to strong GDP growth, built on the backs of emerging countries and particularly the BRICs. Since early 2010, rather than getting stronger and stronger, global growth has actually become weaker and weaker. This is quite a departure from certain narratives popular today.

Biggest loser? China.