Just before we turned the clock on 2010 I commented on the recent increase in US yields and noted the following simple issue;
How investors perceive and interpret this will [rising yields] determine great many things; is it a reflection of higher growth in the future and thus a sooner than expected normalisation by the Fed. Or is it a result of supply concerns and the continuing double digit budget deficit by the Fed and thus the bond vigilantes attempt to go for the biggest prey in the park.
(Work in progress, but I thought that I would publish it thus far, stay tuned for more additions)
I did have some plans to do a series of posts to give a brief overview of my main macro and trade themes for 2011, but time has, not surprisingly, caught up with me. As such, you will have to make due with a special version of random shots.
Risky Assets to fly in 2011? – This one is a bit too general to answer in full of course, but one interesting discourse that has emerged lately is that as bond vigilantes are feasting on the Eurozone (and even going for an alltogether larger prey in the US), investors are being pushed into equities.
So, the butcher’s bill on Ireland is in and stands at 85 billion Euro jointly financed by the EU (the European Financial Stability Fund (EFSF) and the European Financial Stability Mechanism), the IMF and bilateral loans from a number of countries including Sweden, Denmark and the UK. Of course, it only worked a couple of hours and today markets are reeling again in the face of the Eurozone crisis which seem to have no end. Worryingly, markets seem to be contend on going for all together larger game this time around with Spanish bonds bearing the brunt of the attention.
Update: I was so caught up with Ireland [the other day] that I didn’t notice how Greece also wants its part of the limelight. But fear not; Joseph Cotterhill from Alphaville delivers the goods as Greek spreads to the German benchmark rose above 10%. Basically, it is a mess at the moment in Greece with one of the biggest risks that the political balance is also shifting. Most remarkably however was the comments made by the Finance Minister Papaconstantinou that growth rate this year would be -4.0 and -2.5 to -3.0 in 2011. Add to this ongoing deficits (which will of course be smaller due to the contraction) and you are looking at an overall debt level that does not look too nice at all. Basically, the 2009 deficit is likely to be revised to 15% of GDP by the EU commission according to Alphaville and the IMF puts the 2010 deficit to around 7%. Now, figures are scarce here but wikipedia puts debt to GDP at 115% in 2009. So, with let us say a 5% deficit in 2011, a nominal growth rate of -2.5% and an initial debt level of 115% (just to play nice) my calculations suggest that Greece will be facing a debt to GDP level of some 130% at the end of 2011, a number which naturally will grow as we move on.
It is not that I don’t enjoy a good old bull/teflon run as much as the next guy but just to provide some form of balance to the current QEeasy Money Hymn I almost choked on my oatmeal earlier this week when I loaded up Bloomberg and learned that everything suddenly was fine in the erstwhile whipping boy (alongside Greece) of the Eurozone as the economy apparently has the cash to starve off any foreign bond vigilantes;
I have just been listening to Ben Davies’ podcast (see also FT Alphaville here) from Hinde Capital about the funding issues of the Japanese government and the points he makes are important. I have used the methaphor of Japan as a bumblebee before and while I believe that the story on Japanese savings may just be a little more complicated than many believe I think Ben points his finger at two very important points. One is how Japan has difficulty with both deflation and potential inflation (higher yields) at the same time which not only puts the economy in a very tight spot, but also locks in Japan towards a balance between veering to far in either direction, a balance which can be difficult to strike. The second is that while Ben believes that Japan will ultimately pop, the central bank (and indeed Japan itself) will try to do everything it can before that happens. Especially the last point is very important. Coupled with the need for Japan to attempt to maintain a structural external surplus it brings me back to a point I have made before (and which I will continue to make again and again).
Aging societies are not, in the main, characterised by aggregate dissaving but rather by the fight against it.
The financial and economic discourse is a funny beast really; it can, if harnessed properly, shed light on future investor and market performance, it can give a diversified and detailed picture of any given economic or financial topic, and it is a place where stories, no matter how counterintuitive and misplaced, can linger and grow for a long time.
Perhaps it would be a good time for investors and analysts alike to lean back and have a good bottle of Pinot Noir and let markets be markets. Surely, with the likes of Hindenburg Omens still getting its share of the tape and with the macro backdrop turning decidedly sour, it seems a prudent moment to kick back and just accept risk-off as it is.
And indeed, macro news has been awful lately. Both real economic and housing activity in the US have resumed their downward path, in Europe Ireland got a knock by the S&P, and in general hitherto positive voices have either retreated into the rabbit hole or turned very cautious. Basically, after leafing through a lot of independent as well as buy/sell side research I am pretty convinced that analysts and investors are in brace yourselves mode since they are all frontloading the recession/double dip theme; “You know, it MIGHT happen but we still don’t think it will and even if it does happen, it is still a low probability event”. This is called covering your a” and the fact that many research houses who were formerly sure that the US would see no double dip are now backtracking is significant in itself. Of course, this is understandable given the underlying change in the flow of economic data, but the real interesting thing is that while their models do not support the idea of a double dip, the wording is tilted in favor of a return to recession in H02-10 (in the US; i.e. I think a recession in Europe is given). Personally, I welcome such deviance from models when circumstances call for it and even I have to admit that the economic picture in the US is very poor at the moment.
I am great believer in divergence when it comes to the global economy if anything then because it allows you to take a slightly more nuanced perspective than the risk off/risk on debate that has dominated the discourse for the past two years now.
BBC’s travel program Fast Track had a story about how Santiago has been working hard since the earthquake to (re)build its position as a cool global city. I have never been to Santiago (let alone Chile) so I cannot say whether there is any position to rebuild or whether Santiago isn’t simply moving up and ahead regardless of the recent blow to tourism in the wake of the earthquake. However, what I can say for certain is that when it comes to Chile’s economy at large it is in no need to rebuild anything; it is both global, cool and very strong.