Jim Reid and his team from Deutsche have produced another magnificent compendium of information and prognostication in their 2012 Credit Outlook and while their up-in-quality preference (non-financial) may not be earth-shattering strategically, their timing view is of note. Instead of viewing the looming refi-ganza among European sovereigns and financials in H1 2012 as a reason for doom and gloom, they see it as the necessary evil to drive the ECB into the markets in size only for the latter half of the year to disappoint significantly as the reality of the underlying problems rear their ugly head once more. The down-then-up-then-worse-down perspective on markets for next year hardly sounds optimistic but it is the following six scenarios away from European woes that keep them up at night. From the positivity of a US housing rebound or Election year cycle to much more extreme downside risks such as geo-political concerns and non-European sovereign risks, their views on China, QE-evolution and Inflation concerns are noteworthy.
First Moody's and now Fitch are coming out with negative comments about the summit. That provides mores more air cover for S&P to downgrade France 1 notch. The EU and EIB may also get notched in that case, further hurting the reputation of the EU and their plans. Political pressure may stay the hand of S&P but if not, this should spark a steep decline in risk asset prices. It may even make it more difficult for the ECB to print as one of its strongest members stumbles.
It’s time we admit the truth, the EU and its banking system are literally on the edge of collapse. Think 2008… for an entire region. And politicians are going to solve this mess with a March 2012 meeting!?!
Maybe, but not in the way everyone seems to think. Haven't we already decoupled? Sure, but maybe we will just finally catch up to the rest of the world. The US stock market has outperformed the world this year. It seems just as easy that we decouple by other markets outperforming - especially since most people talk about the opposite occurring. We have decoupled, so I would be worried about re-coupling, or that we decouple in a bad way. The "decoupling" theory seems very priced in global stock markets so be careful using this as a reason to get too bullish.
- Moody's said that the European crisis is still in a critical and volatile stage, adding that it will revisit ratings of all EU sovereigns in the first quarter of next year
- According to S&P, it wanted to send a strong signal that the Eurozone is facing risk of a major recession, and significant credit crunch
- The Italian/German 10-year government bond yield spread widened despite a successful T-Bill auction from Italy as well as market talk of the ECB buying Italian government paper
- Deutsche Bank cut its UK growth forecast for 2012 to zero, and said it now expects the BoE to buy a further GBP 75bln of Gilts in February, then a final GBP 50bln in May
What is there to be so optimistic about (in resource investing)?
1. We are going to face an awful lot of volatility. And I should start by saying that volatility can be good news for you if you are prepared for it. It gives you frequent sales. Why the volatility? In the first instance, there are seven or eight trillion dollars sitting on the sidelines just in the United States looking to be invested. That has some upward bias.
2. We are in a secular bull market in 'stuff'. The bottom of the [global] demographic pyramid as it gets richer, and it is getting a bit richer, uses a lot more stuff than the top of the pyramid. So per capita consumption of stuff is growing, spread over lots and lots and lots of capitas.
3. Resource stocks have not kept pace with commodity prices. So resource stocks for the first time in several years are attractively priced.
4. The senior resource companies, including the mining companies that have been real under-performers for the last decade, are starting to make an awful lot of money. And one of the themes I think that you are going to see in the resource space is mergers and acquisitions.
As we head into the artificial investing horizon of year-end, sell-side research is compelled to offer its best-guess at what will be key for the year ahead. We certainly head into 2012 with considerable potential downside risks - US recession?, breakup of the Euro?, hard-landing in China? - and BofA Merrill Lynch's RIC Report bears these in mind as it suggests investors position for these ten key macro themes (some positive, some negative) from slower global growth to a weakening US consumer and QE in US and Europe. Starting from a neutral equities, long gold, long US corporate bonds, they favor growth, quality, and yield in one of the more complete summaries of expectations we have read.
Gold traded higher after the ECB interest rate cut yesterday, prior to sharp selling that came into the market at 1335 GMT. This led to gold falling 2% on the day and it is now down 1.3% on the week – again outperforming many equity indices. Market News International (MNI) reported that market sources said that the Bank for International Settlements, the Bank of England and the Federal Reserve have been “good sellers of gold” after it had popped to a fresh session high of $1,755.90/oz. The MNI report has not been explored and there have not been any official denials of official selling. From a trading perspective there is at least a ring of truth to the MNI report as the sharp fall in the gold price was counterintuitive given there was no negative gold news and indeed the news was bullish with significant risk ahead of the EU summit and continued ultra loose monetary policies and negative real interest rates. Given the scale of the coordinated intervention in markets by central banks recently one would have to be completely naïve to dismiss the report out of hand. There is of course the historical precedent of the London Gold Pool which ended in failure. However, before jumping to conclusions it would be good if the MNI report was looked at and some questions asked - in the finest traditions of journalism.
- Tensions Rise at EU Summit (WSJ)
- Cameron faces showdown with Sarkozy (FT)
- Euro Leaders’ Fiscal Union Pact Leaves Next Step to ECB (Bloomberg)
- IMF China Chief Says Worsening Crisis May Force Hong Kong to Back Banks (Bloomberg) - same China expected to bail out Europe again
- Putin blames Moscow protests on US (FT)
- Boehner: Payroll Tax Cut Can Pass U.S. House (Bloomberg)
- EU Leaders Drop Demands for Investor Write-Offs (Bloomberg)
- Japan Imposes New Iran Sanctions (WSJ)
The overnight agreement by 17 European countries to tighten euro-area budget controls and expand bailout funds fails to address key aspects of the crisis and may fall at the first hurdle, analysts and investors say. The summary of various Wall Street expert opinions is compiled and presented below from Bloomberg. It is not pretty.
In case you haven't noticed, the rest of the world continues to slow down and the negative data is accelerating. The big powerhouses of the world, the eurozone including Germany, Japan, and China are leading this trend and there is no reason to believe that the U.S. will not follow.
I've been writing about this theme frequently lately because, while we are seeing some positive numbers here in the U.S., we are also seeing signs of weakness starting to show up, and since we live in a world of international trade, the world's woes will hit us.
With most of the world’s major economies as well as the financial system bankrupt, there is only one solution that can save the world economy. Like in the Greek tragedies, Deus ex Machina is now the only way that the world can avoid a total economic collapse. This would involve God being lowered down onto the world stage and miraculously saving the plot. For those few who believe in this, may God bless them. But since this is a very unlikely solution most people will instead rely on governments and central banks to save us. But how can anyone possibly believe that totally incompetent and clueless politicians and central bankers could solve anything. They created the problem in the first place and are therefore totally unsuitable to play the role of Deus. The main objective of governments is to stay in power and thus to buy votes. Therefore they are incapable of taking the right decisions. And the opposition, aspiring to power is even less suitable since they will lie through their teeth and promise the earth in order to be elected. (We know that there are exceptions like Ron Paul, but the voters will most probably find his medicine too strong to swallow.). What about central bankers, can’t they save us? Unfortunately any sensible person who becomes a central banker loses all his senses and becomes a prisoner of the political system. So if there is no Deus ex Machina and if governments or bankers can’t rescue the world, who can and what is the solution. Let us return to the wise von Mises to look at the options available now:
“THERE IS NO MEANS OF AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS A RESULT OF A VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION, OR LATER AS A FINAL OR TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED”
Ludwig von Mises
While one of the bigger commodity funds out there, in this case Fortress Commodities Fund, has not done too hot recently (down 7.4% in October), which it humbly admits to and says, "the month of October was a wakeup call for us and we are adjusting accordingly" here are some must read perspectives that lead the Fortress Commodity group to conclude that "We're Long Gold, Short Base Metals, Patient Crude Strength Seller & Buyer Of Corn On Any Real Flush In Prices." Oh, and that it's "macroeconomic outlook remains pessimistic."