Ahead of what we hope will be a relatively quiet week following the juggernaut from the past 7 days, we present readers with another excerpt from the latest weekly note from Eric Peters, CIO of One River, which is not only appropriate in the context of recent observation by UBS, involving the sudden collapse of the global credit impulse, but far more importantly, may be critical for those who are in the business of timing key market inflection points.
From Weekend Notes by Eric Peters
“The change of change is now negative,” said the CIO.
“Global growth is still rising, but the rate of improvement is slowing,” he explained. “Same holds true for global inflation, oil prices, copper, iron ore. Credit growth is slowing in the US, Europe, Japan, China.” If these things were all contracting, we’d plunge into recession, but we’re not there. We’re simply at the point in the cycle where the rate of acceleration is slowing - which is both evidence of a pause, and a precondition for every major turn.
“The last time we had a major shift in the change of change was a year ago.” In Jan/Feb 2016, China was imploding. Commodity prices were tanking with equity markets, the dollar soared alongside volatility. Then China unleashed explosive credit stimulus, while the Fed blinked, guiding forward interest rates dramatically lower.
Within a short time, the change of change turned positive. Which is not to say things immediately accelerated, it’s just that they started contracting more slowly. And that marked the time to buy.
“Pretty much everything that happened in 2016 can be explained by two things; China and oil prices,” he said. “Literally, that’s it.”
China’s stimulus-induced rebound and the oil price recovery is all that mattered.
“Brexit was a joke. Trump was a joke. In fact, the only real significance of those events was that they provided investors with opportunities to jump on board the reflation trade at back near Q1 prices.” The reflation trade quietly began in the Q1 collapse, and accelerated off the extreme post-Brexit summer lows in global interest rates.
“That’s what made last year remarkable. Even investors who missed the first opportunity, had two chances to make a lot of money.” You see, that reward is usually reserved for those who act on the first signs of a change in the change of change.
Summary: as Peters helpfully points out, the change of change - that "green light" to buy risk one year ago when it flipped positive - is now negative. Or, as UBS summarized it simply in just one chart several weeks ago...