Blain’s Morning Porridge, submitted by Bill Blain of Mint Partners
“Most Winter Olympic Sports are about staying alive. Curling is about staying awake.
Last chance to sell? Or time to change approach?
Do we have a theme emerging for this week? Latvian ECB Governing Council Member Ilmars Rimsevics is being investigated for corruption and bribery. This morning it’s the Greek ECB member Yannis Stournaras under the cosh and facing the bright lights over the Novartis bribery and drugs scandal estimated to have cost the country a staggering €23 billion. That’s a seriously grown up amount of money for a country as broke as Greece. What are they going to do about it?
Back on Planet Sensible, I was asking round the trading desks this morning for any particular themes or issues they’ve been picking up from clients. Nobody seems to be enjoying February.
You must understand my colleagues and crew are a hard-bitten crowd of former investment bankers, traders and other financial desperados who’ve spent careers up to their eyeballs in financial mayhem and gore… “Last chance to sell,” was the answer from one particular cynic.
As the 10-yr Treasury continues to flirt with a 3% yield, the 2 yr trades up to 2.25%, while the bid-cover on y’days auction was “unconvincing”, and stock markets remain as wobbly as a jelly that’s been injected with extra-wobbly super wobbly-gel, one has to wonder if he’s right? What are the prospects for markets? I’m afraid my guess is no better than anyone else’s.
However, I do have a strategic outlook.
I don’t buy the recession around the corner arguments. The world has changed. We don’t have to fear an oil shock – US producers can cover any OPEC action and only get richer if the price rises. Nor are we likely to see the classic “Fed Murders Recovery” mistakes – the fear central banks will make policy mistakes, and kill growth thru over aggressive tightening. (Even if they hike rates significantly, they will remain well below trend.) Its far more likely cautious central banks will err on the side of accommodation. (I can hear a scream of disbelief as seasoned market watchers read that line – its market rote that central bankers always get it wrong. This time I suspect they will err this side of loose (which is a reason to fear inflation…)
Inflation risks are real. Financial Asset prices are greatly inflated as a result of QE and ultra-low interest policy. A few years ago we feared deflation – and saw it across commodities – as breakeven inflation declined. This has all changed. China has largely completed its pivot from growth to consumer economy – addressing its economic and environmental issues – meaning the outlook for commodities improves. Inflation forecasts have risen dramatically – see the attached graph from my Macro Economist Martin Malone. Inflation fears are manageable – will central banks over-react? Not this time. Too much would be at stake.
In terms of financial assets, its no wonder bond yields are rising – we’ve got pretty solid economic performance and indicators around the globe. Many economies are at full employment. Even in Europe where employment is improving but is still only at crisis levels were running into structural constraints. Key factors will include the perception of rising inflation risks, expectation of tighter policy and the yield curve making a bear step-up. Growth is rising, fiscal spending is back in vogue.
Which leads us to the stock market – which now looks to have peaked, or certainly become less frothy. If you buy the global growth scenario, then why not higher stocks? However, much of that is priced in. The upside looks limited by inherent volatility.
So, my current strategy is two fold:
- First; stick with my alternatives view: buy real assets linked to global growth: infrastructure, utilities, renewables, transport etc. And in that subset, be thinking about opportunities in EM and other niches – where rising growth acts as a serious multiplier effect.
- Second; protect against inflation with assets that move in line with inflation (see above).
If only it was so simple…
via Zero Hedge http://ift.tt/2EXidL2 Tyler Durden