Prak central bank balance sheets are still ahead. Interest rate increases are still several quarters out. Austerity has peaked. The output gap has peaked. What does this mean in the week ahead ?
We highlighted the CRB/BLS Spot Foodstuffs Index last week. It’s continuing to rise but still remains lower year-on-year at this point. The question is whether this is the start of a broadly-based period of food price inflation?
Overview of the events and data that will be of interest to investors.
There are two major concerns that everyone should be concerned about that we see taking this sell-off further and faster than anyone else expects...
Tomorrow we prepare for a “new” Fed. It looks a lot like the old Fed, but one can hope. In the meantime we wonder if QE is worth it? Does it do what it is “supposed” to do? No. We don’t think it has done much for jobs or inflation or housing. We look at the pre QE data and the post QE data and we are underwhelmed. But what real evidence is there that QE is helping the economy? Would we be the same without it? Better even? I am told no, but I am told a lot of things that turn out not to be true. If it was clear that QE was really helping the economy, I wouldn’t be wondering why we do it. But is there any harm to QE? That is the other side of the coin. Ask any person from an Emerging Market whether QE is harmful and you will likely get a very different answer than the one Ben has given.
Curious which were the best and worst performing asset classes for the month of October? Deutsche Bank explains.
Commodities are no longer on investors’ radar screens. Various signals, however, are pointing to a new rally within the commodities super cycle.
The volatility of recent weeks is but a mere small taste of the volatility in store for all markets in the coming months and years. The global debt crisis is likely to continue for the rest of the decade as politicians and central bankers have merely delayed the day of reckoning. They have ensured that when the day of reckoning comes it will be even more painful and costly then it would have been previously.
Think gold and silver were the worst performing financial asset in June? Think again: that dubious distinction falls to the Bovespa, the Shanghai Composite and the Greek stock market index, all of which tumbled more than the precious metal complex did in the past month. Yet what an odd month for hard assets - on one hand WTI, Corn and Brent were the best performing assets, while gold, silver, copper and wheat tumbled.
A sense among investors that the global economy is unraveling has injected tremendous volatility into the markets. As Bloomberg's Rich Yamarone notes, if the global equity market decline is not a “Sell in May” event, but the beginning of a great unwinding, then the economy, skating on thin ice, may be even more susceptible to recession. However, most of the US equity disconnect from the reality of weak data (and other markets) can be laid at the feet of the Fed's ever-generous monetary policy. However, given all of this 'weakness' - or missing of Fed benchmarks that we discuss below - that the Fed is well aware of, we ask again, why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions.
The financial and other markets do not seem to reflect the reality of subdued growth is how Hoisington Investment's Lacy Hunt describes the current environment. Stock prices are high, or at least back to levels reached more than a decade ago, and bond yields contain a significant inflationary expectations premium. Stock and commodity prices have risen in concert with the announcement of QE1, QE2 and QE3. Theoretically, as well as from a long-term historical perspective, a mechanical link between an expansion of the Fed's balance sheet and these markets is lacking. It is possible to conclude, therefore, that psychology typical of irrational market behavior is at play. As Lance Roberts notes, Hunt suggests that when expectations shift from inflation to deflation, irrational behavior might adjust risk asset prices significantly. Such signs that a shift is beginning can be viewed in the commodity markets. "Debt is future consumption denied," and regardless of the current debate - Reinhart and Rogoff were right. Simply put, "the problems have not been solved, they have merely been contained."
The weakness in economic data (not to be confused with the centrally-planned anachronism known as the "markets") started overnight when despite a surge in Japanese consumer spending (up 5.2% on expectations of 1.6%, the most in nine years) by those with access to the stock market and mostly of the "richer" variety, did not quite jive with a miss in retail sales, which actually missed estimates of dropping "only" -0.8%, instead declining -1.4%. As the FT reported what we said five months ago, "Four-fifths of Japanese households have never held any securities, and 88 per cent have never invested in a mutual fund, according to a survey last year by the Japan Securities Dealers Association." In other words any transient strength will be on the back of the Japanese "1%" - those where the "wealth effect" has had an impact and whose stock gains have offset the impact of non-core inflation. In other words, once the Yen's impact on the Nikkei225 tapers off (which means the USDJPY stops soaring), that will be it for even the transitory effects of Abenomics. Confirming this was Japanese Industrial production which also missed, rising by only 0.2%, on expectations of a 0.4% increase. But the biggest news of the night was European inflation data: the April Eurozone CPI reading at 1.2% on expectations of a 1.6% number, and down from 1.7%, which has now pretty much convinced all the analysts that a 25 bps cut in the ECB refi rate, if not deposit, is now merely a formality and will be announced following a unanimous decision.
There have been several recent developments that have flown in the face of both neo-liberalism and ordo-liberalism and thrown investors off balance. Discuss.
A high level overview of the drivers of the capital markets.