Gross Domestic Product
In addition to its three previously announced so far "Top Trades" for 2014 (see here, here and here), just over an hour ago Goldman revealed its fourth top recommendation to clients. To wit: Goldman is selling China equities (via the HSCWI Index), while buying copper (via Dec 2014 futs), or at least advising its flow clients to do the opposite while admitting that "for the long China equity/short commodity pair trade to “work” best, these two assets, which are usually positively correlated, will have to move in opposite directions." For that and many other reasons why betting on a divergence of two very closely correlating assets will lead to suffering, read on. Finally - do as Goldman says, or as it does? That is the eternal question, one whose answer is a tad more problematic since the author in this case is not Tom Stolper but Noah Weisberger.
Asian equities have gotten off to a rocky start to the week despite some initial optimism around the twin-Chinese PMI beats at the start of the session. That optimism has been replaced by selling in Chinese equities, particularly small-cap Chinese stocks and A-shares after the Chinese security regulator issued a reform plan for domestic IPOs over the weekend. The market is expecting the reforms to lead to a higher number of IPOs in the coming quarters, and the fear is that this will bring a wave of new supply of stock to an already-underperforming market. Indeed, the Chinese securities regulator expects about 50 firms to complete IPOs by January 2014 – and another 763 firms have already submitted their IPO applications and are currently awaiting approval. A large number of small cap stocks listed on Hong Kong’s Growth Enterprise Market were down by more than 5% this morning, while the Shanghai Composite is down by 0.9%. The Hang Seng (+0.4%), Hang Seng China Enterprises Index (+0.8%) are performing better on a relative basis, and other China-growth assets including the AUDUSD is up 0.5%. The Nikkei (-0.1%) is also a touch weaker after Japan’s Q3 capital expenditure numbers came in well below estimates (1.5% YoY vs 3.6% forecast). Elsewhere Sterling continues to forge new multi-year highs against the USD (+0.3% overnight).
Overview of the week's economic and poltiical calendar in the context of the investment climate.
If somehow the scramble to open stores earlier and earlier on Thanksgiving day, until such time as the very Thanksgiving dinner had to be interrupted early for the annual rush out to the (un)friendly neighborhood Thug-Mart (Toys'R'Us opened at a ridiculous 5pm on Thanksgiving day) and punching people in the face just to get that 42 inch, 2010-model Plasma TV for $99, was supposed to boost overall sales instead of merely pulling them forward (see cash for clunkers), it didn't work. According to ShopperTrak, total Black Friday traffic plunged 11% and total sales fell 13.2%, the second consecutive year of declines following last year's 1.8%. The reason, as largely expected, is that a substantial portion of Friday shopping was pulled back to Thursday: as ShopperTrak founder Bill Martin said, "if retailers continue to promote Thanksgiving as the start of the holiday buying season, he thinks the holiday will eventually surpass Black Friday in sales. "We're just taking Black Friday sales and spreading them across a larger number of days," Martin said."
On the heels of his recent appearance pouring cold water on Jim Cramer's housing recovery exuberance, recent Nobel Prize winner Bob Shiller unloads another round of uncomfortable truthiness (presumably on the basis of his future-proofing tenure guaranteed by the Nobel). "Bubbles look like this," Shiller tells Der Spiegel, adding that he is, "most worried about the boom in US stock prices." As Reuters reports, Shiller is concerned since "the world is still very vulnerable to a bubble," and with stock exchanges around the world at record highs despite an economy that is "still weak," the Nobel winner proclaimed, "this could end badly."
Think of it this way: You’re a baseball player trying to break into the majors despite mediocre fielding skills, no foot speed, and a batting average that hovers around 250. Egged on by your friend, A-Rod, you think you can make it by using steroids and turning yourself into a power hitter. But it doesn’t work out as planned. After a year, you’re losing hair, your skull’s gotten bigger, there’s fatty tissue on your chest that wasn’t there before, and you’ve still only managed 18 home runs in a season. You finally accept that it’s not going to happen for you. In the baseball scenario, steroids didn’t show enough payoff before the side effects told you enough was enough. And you can say pretty much the same thing about our economic scenario and monetary steroids. We’re seeing dubious benefits and fast developing side effects from the Fed’s actions, causing many observers to recommend a rethink of the Big Experiment. Yet, the experiment continues...
Overview of the near-term outlook for the major currencies.
The early effects of the reform program have triggered a surge in the Japanese stock market, accelerated by the anticipation of growth revival. So far, so good for the markets and traders. But how will Abenomics accommodate public debt of over 200% GDP, and will Abe’s radical policies inspire a long-term economic recovery in Japan? Saxo Capital Markets’ new infographic explores the efficacy of Japan's prime minister's dangerous experiment to stimulate economic growth.
"We have to be careful of these kind of exponentially rising markets," chides Marc Faber, adding that he "sees no value in stocks." Fearful of shorting, however, because "the bubble in all asset prices" can keep going due to the printing of money by world central banks, Faber explains to a blind Steve Liesman the difference between valuations and bubbles (as we noted here), warning that "future return expectations from stocks are now very low."
This brings me back to an earlier point, that profits and earnings are likely peaking. All of these point to a top forming.
A hungover America slowly wakes up from a day of society-mandated consumption and purchasing excess to engage in even more Fed-mandated excess in the equity markets. The only difference is that while the "90%" was engaged in the former and depleting their equity, and savings, accounts in the process, far less than 10% will be doing the latter. Overnight attention was drawn to the rapidly escalating territorial dispute between China and Japan, now in the air, Bitcoin's brief surge above the price of an ounce of gold, and the ejection of the Holland from the AAA Eurozone club (where only Germany and Finland remain), following an S&P downgrade of the Netherlands from AAA to AA+, which however had been largely priced in long ago (and was coupled with an upgrade of Spain from negative to stable outlook, as well as an upgrade of Spain from CCC+ to B-). Europe surprised pleasantly on both the inflation (better than expected) and unemployment rate (dropped from an all time high of 12.2% to 12.1%), even if youth unemployment rose to fresh record highs.
While moderate recovery in growth and inflation is BofAML's rates team's base case, there are numerous risks to that forecast. The risk of tapering is already quite well known and they suspect it may not result in the significant market-moving event many expect when it actually happens; however, the following downside and upside risks threaten BofAML's central scenarios for 2014 as well.
When Abenomics was unveiled in Japan upon the re-election of Shinzo Abe as prime minister in late 2012, it is safe to say that, having been mired in a 20-year deflationary spiral and with debt totaling 240% of GDP, Japan was nearing an endgame of sorts. Realizing just how late in the game he found himself, Abe promised to change all this, but in order to do so he needed to pursue a high-risk strategy with a low probability of success. The press (ever hungry for a new, catchy portmanteau word) dubbed it "Abenomics." Grant Williams, in his latest excellent letter prefers to call it "Avenomics": the economics of the hopeless. Bringing Kyle Bass' thesis up to date, Williams concludes, "say a prayer for Shinzo Abe, folks. For Avenomics to score, he's gonna need a miracle."
The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what it considers to be “normal.” But the problem is that the recent past was not normal. For the Fed to achieve anything even close to the historical rate of credit growth, the dollar will have to lose a lot of value. This may in fact be the Fed’s grand plan, and it’s entirely about keeping the financial system primed with sufficient new credit to prevent it from imploding.
In Feb 2007, Oaktree Capital's Howard Marks wrote 'The Race to the Bottom', providing a timely warning about the capital market behavior that ultimately led to the mortgage meltdown of 2007 and the crisis of 2008 as he worried about "carelessness-induced behavior." In the pre-crisis years, as described in his 2007 memo, the race to the bottom manifested itself in a number of ways, and as Marks notes, "now we’re seeing another upswing in risky behavior." Simply put, Marks warns, "when people start to posit that fundamentals don’t matter and momentum will carry the day, it’s an omen we must heed," adding that "the riskiest thing in the investment world is the belief that there’s no risk."