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The last time the Russian “Doomsday Plane” was seen in the air doing its trademark loops at 27,000 feet telegraphing Vladimir Putin was somewhere nearby, was on March 31, just days after the formerly Ukrainian region was annexed by the Kremlin. Until today, when over the past 4 hours, the Tu-214 has been quietly circling in position just shy of Finland and the Baltics, where as it is known, NATO has been depositing hundreds of western soldiers in a “defensive” build up.
What is the “Doomsday Plane”? Here is a reminder:
The Tupolev Tu-214SR is a Russian Special Mission Aircraft believed to act as a communication relay aircraft. This kind of aircraft is often dispatched by the Russian Air Force to accompany Putin’s presidential aircraft on its travels and for this reason it is considered the Russian version of the U.S. E-4B, a so-called “doomsday” plane, with an airborne command and control role.
* * *
America isn’t the only superpower with a “Doomsday Plane” for its head of state. When Russian President Vladimir Putin needs to escape danger, he hops aboard this top-secret flying communications center.
A special missions variant of the Tupolev Tu-214 commercial transport aircraft, the Tu-214SR is Russia’s answer to the US E-4B, an airborne command and control plane built specifically for the Russian president’s use and considered successor to the Ilyushin Il-20 Coot, which has been in service for the better part of four decades. Produced by Aviastar SP and Kazan Aircraft Production Association, the twin-engine, long-endurance jet can carry 62 passengers with comparable range and speed to a Boeing 757. But unlike the Boeing, the Tu-214SR is packed to the gills with cutting-edge sensor and communications equipment.
While significantly less is known about capabilities of the 214SR than the E-4B , we do know that it carries an MRC-411 multi-intelligence payload, which includes electronic intelligence (ELINT) sensors, side-looking Synthetic Aperture Radar (to spot incoming air threats from long range), and a variety of Signals Intelligence (SIGINT) and Communications Intelligence (COMINT) equipment. Four onboard generators provide ample amperage while a set of external fuel tanks allow the plane to remain aloft for trips up to 10,000 km.
The two such 214SRs entered service in 2008 with the Presidential Special Applications Squad and are operated by a crew of four. However, the plane was only declassified last year when it made its public debut at the Moscow Air Show. Since then, it’s been spotted in the skies above both the Sochi Olympics, and more recently—and ominously—in Crimea.
Why was the Doomsday Plane circling so close to the Baltics today of all days, and is this nothing but a welcome sign from Russia to the NATO build out in Eastern and Central Europe? And does it indicate that Putin was – as he usually does – either traveling in the vicinity, or is it an omen of something more ominous?
As can be seen on the image below (courtesy of Flightradar24), after circling for hours just east of the Finland border, it is now en route to land back in St. Petersburg, from where it took off several hours ago.
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Earlier today, it was BNP which, after launching the first rumors that a QE from the ECB is imminent (it isn’t as Mario Draghi himself explained back in November 2011, but the ECB sure knows how to jawbone idiots to duration death) back in November, admitted it really had no idea what it was talking about and said “there’s now a meaningful risk ECB’s policy May meeting disappoints investors betting on fresh easing” adding that it saw a near-term chance of profit-taking before euro-area April inflation data. Its conclusion – unwind trades that have benefited from expectations of ECB QE such as the wave of unquestionable lunacy lifting each and every Spanish, Italian and Greek bond, all of which are simply trading where they are on hopes the ECB will be the dumbest money buyer left standing.
Moments ago it was Goldman’s turn. In a rhetorical self-QE released by its strategist Peter Oppenheimer, discussing recent changes to long-running market trends, among which the crash in momo stocks, and the EM to DM inversion, the punchline was the most important. To wit: “We see less scope for this peripheral index… Peripheral spreads may narrow further, but more now via higher bund yields. After all, 5-year Spanish and Italian bond yields have converged to the same levels as the US. We still like selected parts of the peripheral markets, particularly the banks, but would prefer to express this via single names than via index overweights… the drivers of returns may have shifted away from some areas such as US growth and European periphery towards more of a cyclical bias across markets, with a particular focus on exposure to a DM macro recovery.“
In other words, while the momentum bubble may have popped (if still has a loooooong way to go before it deflates) the European peripheral bubble is about to go pop as well. For all those who just bought Spanish 10 Years at a record low yield (yes, record low) yesterday, our condolences. Then again, it’s only other people’s money.
For everything else, here is the full Oppenheimer note:
Taking Stock: Rally Driving
The year has so far been a challenging one for many investors. The uncertainty regarding macro data and EM weakness in Q1 has transitioned into a period of rapid momentum damage in Q2. In this Taking Stock Q&A, we describe our take on recent events and where we go from here for equities around the world.
Q: What has this momentum reversal been about?
A: The damage has been widespread, but, as we described in Strategy Matters: Momentum, rotation and the gradual grind higher, April10, 2014, the reversal in performance seen across most markets has been swift, but has manifest itself differently across markets. To us, this suggests that the damage is first and foremost about positioning as opposed to a dramatic change of fundamental expectations.
In the US, it has mainly taken the form of a sharp reversal of the growth/value trade, mainly reflecting the damage in performance to the technology and biotech sectors, in particular. Asia has also seen a reversal of growth/value.
But in other parts of the world, growth/value indices have hardly budged. Europe and Japan are both good examples as the charts below show.
US has seen a sharp Growth vs. Value reversal recently, while Europe and Japan have seen very little change.
Even in the US, the tech sector underperformance has not been very aggressive, but the concentration of positions has been an important ingredient. As David Kostin and team in the US have shown with their hedge fund VIP basket – a basket of heavily concentrated hedge fund positions – the pain in recent weeks has been very significant but has already started to reverse.
Concentrated hedge fund positions have seen a sharp reversal in performance but have begun to rebound
Of course, the damage has not been confined to the US. Japan, for example, has been one of the worst performers YTD (-11% in local currency) having previously led the global rally in 2013. In Europe’s case, the performance damage has reflected the rebound of many EM related stocks (previous laggards) and modest underperformance of the peripheral markets (previous leaders).
EM-exposed stocks have rebounded recently, while periphery stocks have underperformed
In EM, meanwhile, there has been a bounce across the board with prior laggards, such as Turkey, Korea and Mexico as well as China and India, outperforming.
All of this suggests that there has not been a very common theme across the markets during the correction. If it had been about a wholesale shift in investor views about, say growth, one would have expected a more consistent pattern of returns across markets with cyclicals underperforming defensives. As yet, this has not really happened in any consistent or uniform way. As the exhibit below shows, the global averages of cyclicals relative to defensives has not demonstrated any significant reversal, and this is true when we dissect the markets beneath the average too.
World Cyclicals vs. defensives
Q: Maybe not all the returns have been consistent, but one thing that is clear has been the bounce in EM equity markets, as well as other EM assets. Is this sustainable?
A: In our view the general pattern of DM outperformance relative to EM in equities will re assert itself as economic data improves.
A bounce has occurred both in EM markets directly – and the stocks with high EM exposure within the DM markets have also bounced, particularly in Europe (see exhibits below).
But this does not necessarily mark a major turn and indeed some of the strength seems to be fading already. In both cases (direct EM exposure and EM exposure in Europe), the rebound has been very modest relative to the underperformance of the last couple of years.
The rebound in EM is modest relative to past underperformance
While there may not be an imminent setback for EM assets, the better performance in recent weeks has shifted some EM asset valuations, notably FX and rates, more away from equilibrium rather than towards it, particularly in deficit countries like Brazil and Turkey. The rally has also brought equity risk premia down from very high level, leaving equities exposed to any disappointment over a cyclical recovery in China growth or from low US rates (see EM Weekly: A higher bar for the EM rally to extend, April 17, 2014). Also given that the rally was probably triggered by China stimulus and US rates being restrained, and has mainly benefited commodities and banks, these drivers may be fading as our economists see upside risks to rate expectations and the latest batch of China data has not surprised to the upside. That said, we continue to think that differentiation within EM is likely to be a major factor, with some countries with improved fundamentals (such as Indonesia and India) being less vulnerable to setbacks than many others.
Q: So what is your expectation about market direction generally from here?
A: We continue to believe that equity markets will gradually grind higher. The macro backdrop remains supportive. We believe that global growth will continue to pick up through the second quarter and that interest rates will remain generally lower for longer than the market is pricing. Our April Advanced GLI came in at 3.5%yoy, down from last month’s reading of 3.6%yoy, but momentum increased to 0.27%mom from 0.20%mom last month. The reading further supports recent signals of a positive turn in acceleration after six months of slowing growth, and locates the global cycle back in the ‘Expansion’ phase – a part of the cycle that tends to be supportive for equities. Similarly, our March US current activity indicator stands at 3.3%, up from 2.0% in February – broadly in line with our expectation for a rebound from the weather hit of recent months. While Japan’s growth is likely to fall sharply into Q2 due to the consumption tax impact, we expect more policy easing later in the year. Our economists also expect China growth to pick up from around 5% to 7.3% this year as the mix of domestic easing and an improving external environment alleviates some of the extraordinary weakness that marked the start of this year.
These observations are also at odds with the interpretation that the hit to markets in recent weeks has been about a shift in macro views. On the corporate side too, we remain of the view that results are about to improve. We expect earnings to rise this year by between 8% in the US to over 20% in Japan with Europe and Asia roughly in between. In all cases except the US, we expect an improvement in margins as well as top-line growth. It is also notable that while earnings revisions have been very negative in all regions (with the exception of Japan) over recent months, there is some evidence that they are just starting to get less negative in terms of balance between upgrades and downgrades.
CY14E earnings sentiment for MSCI AC World has started to turn, although still negative
Q: So has anything really changed?
A: Not really; we continue to believe that while valuations are unlikely to expand as they have done since the trough on 2009, equities can move higher alongside improved earnings and dividends. If anything, the risk to this view is that an economic recovery drives investors further up the risk curve and forces valuations higher still resulting in stronger markets shorter term, but lower returns subsequently. But on balance, we expect a more moderate but steady rise in equities driven by improving macro fundamentals and profits with the highest returns in Japan followed by Europe, Asia and the US.
Q: What about sectors and themes?
A: We do think that some of the leadership of recent months in the markets will have shifted in favour of value, but largely as a result of exposure to a DM recovery more than anything else. From a leadership perspective, David Kostin and team have argued that similar momentum reversals in the US are typically followed by a change in leadership – in particular towards value (please see US Weekly Kickstart: The stock market, but not momentum stocks, will likely recover during the next few months, April 11, 2014) – but in the US, the value indices are quite heavily dominated by cyclicals (in particular Oil & Gas 14%, Technology 13% and Industrial Goods & Services 11%). Our US strategists still like their operational leverage basket (GSTHOPHI).
Elsewhere, we generally have a cyclical bias too. In the case of Japan, Kathy Matsui and team have kept their sector views largely unchanged, but have increased allocations more toward exporters in anticipation of a reacceleration in global growth. They also continue to focus on domestic demand beneficiaries – a theme before the recent momentum hit – as they see the pause in domestic demand to be temporary; also on the growth theme, they remain focused on industries with strong earnings momentum and capex beneficiaries.
In Asia, Tim Moe and team also have a more cyclical stance (see Asia Pacific 2Q Views: Rebound; favour a three-part cyclical cocktail, March 31, 2014). They favour North Asia including Korea and Taiwan to recoup some of its recent underperformance vs. South Asia as DM growth/rate dynamics begin to shift to North Asia’s favour. They also like China for the cyclical rebound prospects. In South Asia, they prefer India, which is also reflecting its recovering growth. Their recent upgrades of insurance and capital goods and downgrades of Malaysia to underweight (alongside Australia, HK, and Thailand) also reflect our pro-cyclical bias.
In Europe, the recent rotation has largely been away from the periphery towards more EM exposed areas of the market. The peripheral index leadership may have shifted – at least there are some good macro and valuation-led reasons to suggest this. Much of the peripheral outperformance over the past several months was a direct reflection of falling risk premia and narrowing bond spreads.
The outperformance in the periphery over the past few months was driven largely by falling risk premia and narrowing bond yields
We see less scope for this peripheral index outperformance to continue. German bunds are expensive and our bond strategists argue for 10-year bund yields to rise to 2% this quarter. Peripheral spreads may narrow further, but more now via higher bund yields. After all, 5-year Spanish and Italian bond yields have converged to the same levels as the US. We still like selected parts of the peripheral markets, particularly the banks, but would prefer to express this via single names than via index overweights. On EM exposures, alongside our EM strategists, we continue to see the rebound as mainly tactical. In Europe, we have made some moves to moderate our EM underweights -raising luxury goods to an overweight to reflect improved valuations, for example – or because of general cyclical exposure to global growth -as in the case of Industrial goods and services where we are now neutral. That said, we continue to have a fair degree of underweight exposure in EM exposed parts of the market. We remain underweight industrial areas like capital goods, chemicals and basic resources that are likely to continue to suffer from weakness in capex demand from EM infrastructure and commodity end markets. Elsewhere, consumer exposed staples like food remain expensive, in our view, and we continue to be underweight. We continue to focus on the DAX and our DM cyclical exposure basket GSSTDMGR.
All in all, we would describe the rotation as being more a reflection of damage to concentrated positioning than a reflection of a change in market views. As such, the drivers of returns may have shifted away from some areas such as US growth and European periphery towards more of a cyclical bias across markets, with a particular focus on exposure to a DM macro recovery. We believe the market set back in DM has been temporary and expect equities overall to continue to outperform bonds and to resume their rally.
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Over five years ago, when we first dared to make the “bold” claim (a tangent of which now serves as the basis for bestselling books that paraphrase Karl Marx) that all Bernanke’s idiotic assault on the average American, known as Quantitative Easing, would achieve, would be to crush the US middle class, it was ridiculed – perhaps we too should have charged a perfectly capitalist $23.97 for this profound assessment to be taken seriously. Still, we are gratified to learn, some five years later, that indeed, the US middle class, well on its way to extinction, just took out the first and most critical milestone, to wit – the US middle class is no longer the world’s richest. And yes, “it’s all downhill from here.”
Sadly, mostly for America’s chauvinism, the distinction of the world’s richest middle class now goes to Canada, while the poor in much of Europe now earn more than poor Americans.
From the NYT:
The American middle class, long the most affluent in the world, has lost that distinction.
While the wealthiest Americans are outpacing many of their global peers, a New York Times analysis shows that across the lower- and middle-income tiers, citizens of other advanced countries have received considerably larger raises over the last three decades.
After-tax middle-class incomes in Canada — substantially behind in 2000 — now appear to be higher than in the United States. The poor in much of Europe earn more than poor Americans.
The numbers, based on surveys conducted over the past 35 years, offer some of the most detailed publicly available comparisons for different income groups in different countries over time. They suggest that most American families are paying a steep price for high and rising income inequality.
Much more in the full NYT article which in many words says what we said in a very few words back in 2009. Here is Pew’s take on it too:
This week’s chart of the week (our screenshot doesn’t capture the interactive version)shows how after-tax incomes at different levels grew between 1980 and 2010 in the U.S. and 10 other advanced economies. (The data come from the Luxembourg Income Study Database.) Besides showing how steep income growth was at the upper levels relative to the lowest ones, the graphic shows how much different tiers of Americans have fallen behind their peers in other countries.
For instance, Americans in the 20th income percentile earned less in 2010 than Norwegians, Canadians, Dutch, Germans, Swedes and Finns in those countries’ respective 20th percentiles. Three decades earlier, 20th-percentile Americans earned more than everyone except Canadians. American and Canadian median per capita incomes were about equal in 2010, at $18,700, according to the LIS data. But other, more recent income surveys, “suggest that since 2010 pay in Canada has risen faster than pay in the United States and is now most likely higher,” the Times wrote.
But the American rich still make considerably more than other
countries’ rich. At the 95th percentile, U.S. per-capita income was nearly $60,000, more than $10,000 ahead of Canada’s top earners.
Enough words, here are the charts.
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Hollande’s promise to bring jobs to the nation is failing dismally. It is no surprise that Le Front National are gaining power as for the 32nd time in the last 34 months, joblessness has risen in France (to a new record high). Nothing to add here, yields continue to fall in Europe as nothing matters but hope for ECB QE as the 2nd biggest economy in Europe (and 5th largest in the world) is getting worse faster…
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The verbal combat continues as the US resorts to using Jack Lew in its latest barrage of panic-inducing threats:
As a gentle reminder, while the Ruble has weakened since the sanctions (oh and Russia's credit rating has been downgraded), it is US equities that suffered the largest "costs"…
Of course, we should not forget what happened last time things got close to the edge…
Here’s a startling fact most investors have never heard: During the last financial meltdown in 2008, when the U.S. economy was on the brink, Russian leaders met with China to persuade them to dump the dollar – and destroy the world’s reserve currency.
Before they could act, the Fed pumped over $700 billion into the economy and delayed their day of reckoning. Still, the threat remains. China holds over $1.2 trillion in U.S. debt today. And with their Russian allies, they could drop the dollar at any moment. This excerpt from our eye-opening documentary called “Meltdown America” explains the severity of this imminent threat:
For the full story and to learn more about what could be “the early stages of the end of the West,” click here to watch the full version of this documentary.
You’ll hear the harrowing and true stories of three people who survived economic and political collapse in Zimbabwe, Yugoslavia, and Argentina… and discover how their powerful stories of hardship foreshadow what's happening in the U.S.
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In response to the verbal attacks pitched at him over thelast few days, Cliven Bundy has held a brief press conference to explain his perspective on ‘slavery’ and allegations of racism. Much as the world seems ‘happy’ to live a life of debt serfdom, Bundy notably remarked that he wonders if any of us are better off now “as slaves to charity and government subsided homes.”
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Gold climbed $8.50 or 0.66% yesterday to $1,292.90/oz. Silver rose $0.24 or 1.24% yesterday to $19.67/oz.
Gold consolidated on yesterdays sharp recovery after a sudden sell off but remained near its weakest level in more than two months. Thursday saw the expiry of US Comex May options and weakness and concentrated selling is often seen on options expiration – indeed, short term bottoms often occur after such bouts of selling.
Increasing tensions between NATO and Russia are underpinning the metal’s safe-haven appeal and leading to safe haven demand.
Ukrainian forces killed up to five pro-Moscow rebels late yesterday and attacked the separatists military stronghold in the east. Russia launched army drills near the border in response, raising fears of a military conflict with NATO.
U.S. Secretary of State John Kerry warned on Thursday that the United States was drawing closer to imposing more sanctions on Russia. He warned that time was running out for Moscow to change its course in Ukraine.
Economic sanctions are likely to see retaliation by Russia and an intensification of currency wars.
European and Asian stocks struggled on Friday, as fears of an escalating Ukraine crisis eclipsed mixed U.S. economic data and buoyant tech earnings.
Traders are now looking at next week’s U.S. Federal Reserve Open Market Committee’s meeting on interest rates for trading cues.
Premiums for gold bars in Hong Kong were quoted at 80 cents to $1 an ounce to spot London prices, while the premiums for gold bars in Singapore, the increasingly important centre for bullion trading in Southeast Asia, were at $1 to $1.20 to the spot London prices – both mostly unchanged from a week ago.
CME Group Inc plans to launch a physically deliverable gold futures contract in Asia, three sources familiar with the matter said according to Reuters. In the first three months of 2014, U.S. COMEX gold futures volume fell 10% from a year ago. This is partly due to an increased preference by some speculators and investors to own physical gold coins and bars rather than paper gold in the form of futures contracts. The new Asian contract could help boost volumes for CME.
The world’s largest futures exchange is targeting rising hedging, investor and store of wealth demand in Hong Kong and Singapore – Asia’s increasingly important precious metals hubs.
Pensions Exposed Without Diversification To Gold As Pensions ‘Time Bomb’ Looms
The ‘pensions time bomb’ looms: pension funds’ lack of diversification, and overexposure to traditional assets may cost pension holders dearly according to research we have just released. Pensions allocations to gold are very low internationally and yet gold has an important role to play over the long term in preserving and growing pension wealth.
The Guide To Gold In UK Pensions shows the importance of owning gold as a diversification in a pension in the UK. Allocations to gold in pensions are very low internationally and therefore the research is relevant for pension owners internationally.
Professor of Finance in Trinity College Dublin, Dr Brian Lucey wrote the Foreword and warned about the lack of diversification in pension funds. “Pensions need balance. UK pension funds have been slow to embrace gold and this imbalance may cost pension holders dearly” said Dr Lucey.
“Small allocations to gold balance and stabilise pensions in the long term and gold should be an essential part of UK pension funds. The Guide To Gold In UK Pensions should be read by pension owners and pension managers,” said Dr Lucey who is a respected independent authority on gold.
British citizens are slowly waking up to the growing pensions crisis. The
pension ‘time bomb’ looms closer and millions of people are at risk of having insufficient resources to fund their retirement years.
It is estimated that some 11 million people in the UK face entering “pension poverty.” Average earners may need to save over six times more than they currently do if they’re to generate an adequate retirement income, according to some calculations.
Head of Research in GoldCore, Mark O’Byrne, said that “pension funds should include gold as part of a diversified portfolio. It has a very long track record, and possesses valuable investment attributes. Gold should form part of a diversified pension investment – it will protect from the pensions time bomb.”
“Conservative wealth management and asset diversification naturally grow in importance as people get older. Prudent asset diversification will enable pension funds to preserve and grow their pension savings,” according to O’Byrne.
The UK’s financial and economic outlook remains uncertain. “While the UK is recovering, the overall debt to GDP position remains worrisome and there is a real risk of a property bubble in London,” said O’Byrne.
There is also a risk that the state may find it difficult to pay for the massive entitlements of an aging population.
“Today’s uncertain world makes the investment and pensions landscape a more challenging place for pension owners and again underlines the importance of being properly diversified and not having all your eggs in certain assets,” according to O’Byrne.
Gold is once more being considered as an important asset to have in a properly diversified pension portfolios. Gold plays an important role in stabilising and reducing volatility in the overall portfolio and as financial insurance to protect against worst case scenarios.
These include the risk of inflation and stock and property crashes. Bail-ins or deposit confiscation, as was seen in EU country Cyprus, is a new unappreciated risk to pension owners and another reason to have an allocation to gold.
Currency devaluations as was seen on Black Wednesday in September 1992 when George Soros “broke the Bank of England” is another risk that gold hedges against.
The UK’s influential research institute Chatham House , has said that gold can be used to hedge against currency devaluation and other risks as part of a diversified portfolio. “Gold can serve as a hedge against declining values of key fiat currencies, and can also be useful for central banks looking to diversify their foreign reserves,” Chatham House said.
“As we draw close and closer to the pensions ‘time bomb,’ diversification will become even more important and an allocation to gold in a pension portfolio will again preserve and grow wealth in the coming years,” concluded Dr Lucey.
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Since Fed’s Tarullo uttered those ugly words that “valuations are stretched,” US growthy momentum stocks have been hammered. The rally of the last few days was met with exuberant BTFWWIII proclamations from various talking-heads as all the problems in the world were fixed and leveraged long high-beta was once again the no-miss trade du jour… until today…
It appears investors – for once – are seeing through channel-stuffed iPhone sales and non-GAAP Facebook magical operating income as ‘real’ growth is sorely lacking…
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