Month: September 2014

The Central Bank policies of the last five years have damaged the capital markets to the point that the single most important item is no longer developments in the real world, but how Central banks will respond to said developments.

 

Let us take a moment to digest that. Before 2008, for the most part, when something happened in the world, an investor would think about how that issue would affect the markets.

 

Today, that same investor will try to analyze how the Central Banks will react to that issue, not the impact of the issue itself. This is why, for various periods between 2008 and today, the markets would rally on terrible economic data and other economic negatives: traders believed that because the data was bad the Fed would be more inclined to engage in more easing.

 

After all, why do we invest? We invest because we want to make money. And when it comes to investing, we prefer easy money: gains that have a high probability of success. And thanks to Central Banks cutting interest rates over 500 times and printing over $10 trillion in money since 2008, what’s the easiest way to make money by investing today?

 

Front-run Central Banks policies.

 

Consider Europe. In 2012, ECB President Mario Draghi promised to do “whatever it takes” to keep the Euro in one piece. Since that time, nothing has really improved in Europe’s economy.

 

France is approaching a triple dip recession. Germany may re-enter recession before the year’s end. Spain remains an economic basket-case. Portugal just suffered another major bank failure. And on and on.

 

And yet, bond yields on European Sovereign debt have fallen to multi-century lows. Germany’s 10 year is now at 1%… an ALL TIME low. The reason for this? Investors, convinced that the ECB will buy sovereign bonds or, at a minimum, drive bond yields lower, have poured into European bonds.

 

As a result, European bonds are now stretched to levels that far exceed a bubble. Remember, the entire sovereign debt crisis in Europe was based on the fact that most European countries are insolvent. When you include unfunded liabilities, most European countries are running Debt to GDP ratios north of 400%.

 

The basic premise of investing is that you should be compensated for your risk exposure. The riskier an investment, the higher your expected returns should be.

 

However, thanks to Central Bank meddling, today this is no longer the case. In Europe, where lending money to sovereign nations is in fact a high risk proposition, you are given almost nothing in the way of yields.

 

This will not end well. In fact, the ending will likely be catastrophic as the fast money herd panics and tries to move out of the various assets it only bought based on the assumption that it could unload its position on someone willing to pay a higher price (likely a Central Bank) down the road.

 

We don’t know when this will happen, but it WILL happen. And unlike stocks, when bond bubbles implode things tend to get VERY serious VERY quickly.

 

This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://ift.tt/170oFLH.

 

This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.

 

Best Regards

 

Phoenix Capital Research

 

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It appears JPY weakness (or generalized USD strength) is mirroring the demise of precious metals (and oil) this morning. Gold’s 1.7% drop is the biggest in 6 weeks and drops the yellow metal to near 3-month lows. Treasury yields are up 5-8bps at the long-end. Troublingly, for the carry bulls, equity futures are not playing along with the JPY weakness.

 

Gold and JPY inseparable…

 

S&P fuitures bumped back up to VWAP but are not following through with JPY carry…

 

Charts: Bloomberg

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ISM Manufacturing has risen almost without hesitation for the seven months from the January collapse to new 3-year highs, printing at a dramatic 59.0, its biggest beat in over a year, just shy of the recovery cycle’s highs in 2011, roundly rejecting the manufacturing signals heard around the world. New orders grew for the 15th month in a row to the highest reading since 2004! Earlier, Markit’s US PMI missed expectations and fell modestly from preliminary data to 57.9, but moved to its highest since April 2010. Construction spending also surged, rising 1.8% (smashing expectations) – its biggest MoM gain since May 2012.

Construction spending continues to flip flop from great to terrible to great etc.

 

But the story of the day was the ISM index, which following last week’s blistering Chicago PMI, just printed at 59.0, well above the 57.0 expected, and up from the 57.1 last month.

 

 

 

New Orders surged to 10-year highs… beware the extrapolators off this high…

 

But sadly left employment behind once again…

 

The breakdown:

A sampling of what the “unbiased” selection of ISM respondents said:

• “Business is looking good for food manufacturing. Packaging materials prices are staying in check, minimum wage is up a bit, but manageable.” (Food, Beverage & Tobacco Products)
• “The commercial building business is good, our business is up.” (Fabricated Metal Products)
• “Overall business conditions are flat. World issues taking a toll on business. Consumers are cutting back on spending.” (Transportation Equipment)
• “Overall business is improving. Order backlog is increasing. Quotes are increasing. Much more positive outlook in our sector.” (Electrical Equipment, Appliances & Components)
• “Business in the energy sector continues to remain very robust with no signs of backing off in the near future.” (Computer & Electronic Products)
• “Demand in the United States is consistent and geopolitics remain a concern.” (Chemical Products)
• “International markets are slower due to Euro holidays, political unrest and slowing Chinese markets. North American business off slightly.” (Wood Products)
• “Business is strong. Labor is becoming a difficult issue.” (Furniture & Related Products)
• “Demand is strong. Numbers are up over last year.” (Machinery)
• “Strongest month in years. Business is solid…Awesome!” (Primary Metals)

From the ISM’ Holcombe: “The August PMI® registered 59 percent, an increase of 1.9 percentage points from July’s reading of 57.1 percent, indicating continued expansion in manufacturing. This month’s PMI® reflects the highest reading since March 2011 when the index registered 59.1 percent. The New Orders Index registered 66.7 percent, an increase of 3.3 percentage points from the 63.4 percent reading in July, indicating growth in new orders for the 15th consecutive month. The Production Index registered 64.5 percent, 3.3 percentage points above the July reading of 61.2 percent. The Employment Index grew for the 14th consecutive month, registering 58.1 percent, a slight decrease of 0.1 percentage point below the July reading of 58.2 percent. Inventories of raw materials registered 52 percent, an increase of 3.5 percentage points from the July reading of 48.5 percent, indicating growth in inventories following one month of contraction. The August PMI® is led by the highest recorded New Orders Index since April 2004 when it registered 67.1 percent. At the same time, comments from the panel reflect a positive outlook mixed with caution over global geopolitical unrest.”

The main reason for this dramatic beat: a surge in New Orders, which on a seasonally adjusted basis rose to 66.7 from 63.4, the highest number since April 2004. This can be explained by the whopping 38% who responded they are seeing better conditions and just 48% same, compared to 29% Better and 57% same in July. And then there is the infamous seasonal adjustment factor. In short this is how the SA and NSA New Orders look for 2014:

 

Ironically, employment actually declined from 58.2 to 58.1 despite this unprecedented surge in alleged new orders, the bulk of which is certainly on the back of ExIm bank Boeing orders and subprime funded GM auto construction.

Even more ironically, stocks faded on this great news… we are sure Yellen will have some excuse for why the foot needs to remain to the floor…

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The weekend’s headlines reeled from the collapse in global manufacturing PMIs and with them the last best hope for the world’s economies to reach escape velocity all on their own. However, there was one nation that did not plunge… there was one country whose growth (based on the soft survey data) is at 10-month highs. Perhaps this is the chart that President ‘we need moar sanctions and costs’ Obama does not want Angela ‘umm, wait a minute’ Merkel to see…

 

Since sanctions began the plunge in Euro-Area PMIs has been commensurate with the rise in Russia’s (oh and according to survey-data, US is as good as it has ever been)…

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Seems pretty clear who is paying the price and suffering the costs of Western sanctions…

 

When does Europe draw its own red line around Obama’s sanctions?

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According to Piers, this is breaking news. Which, incidentally, may explain not only his show’s abysmal ratings, but why he is now unemployed.

BREAKING NEWS: I am no longer a @CNN employee.

— Piers Morgan (@piersmorgan) September 2, 2014

I was offered a new 2-year deal by @CNN boss Jeff Zucker to host 40 big interview ‘specials’.

— Piers Morgan (@piersmorgan) September 2, 2014

But after considerable thought, I decided not to accept it – and to try pastures new.

— Piers Morgan (@piersmorgan) September 2, 2014

I had a fantastic time in my 4 years @CNN and have huge respect for Jeff & all the people who work there. Great company, great network.

— Piers Morgan (@piersmorgan) September 2, 2014

 

As for his parting words:

I wouldn’t crack the champagne open too quickly though, @NRA – I haven’t finished with you lot yet.

— Piers Morgan (@piersmorgan) September 2, 2014

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Some very spot on observations (which contain the amusing line: “inflation has been a modern day (last 100 years) phenomenon tied to the evolution of central banks (the Fed started in 1913) and the gradual demise of precious metal currency systems“) of what will be the biggest trouble with the credit bubble, from Deutsche Bank’s Jim Reid:

One of the more interesting stories of yesterday was a €1bn 50 year private placement bond issued by the Spanish Government with a 4% coupon. It’s a measure of how far things have come in a couple of years that such a deal could be launched. It was also a day when 2 year French yields traded below zero for the first time ever. We still live in remarkable financial times. Back to the Spanish deal, although current low levels of inflation make this deal look optically attractive on a real yield basis we thought we’d look at the rolling average 50 year level of inflation in Spain to highlight what real returns might potentially be over the lifetime of the bond. I hope I survive to see it mature but I hope I won’t be writing about it then. Anyway the average annual inflation over the last 50 years in Spain is 7.0% and as the graph in today’s pdf shows the last time the 50-year rolling average was below 4% was in 1956. Clearly prior to this the average rate of inflation was constantly below this level as inflation has been a modern day (last 100 years) phenomenon tied to the evolution of central banks (the Fed started in 1913) and the gradual demise of precious metal currency systems. So it’s a measure of how buoyant fixed income markets are that investors are prepared to ignore that last half century’s inflation record and the current fiat currency world when pricing long-term bonds. This is not a Spain-specific issue but on a slow news day the story stood out. The same would be true for most countries issuing similar long-dated debt today. Indeed yields elsewhere would likely be even lower.

 

 

Herein lies our dilemma with bonds. We’ve been a member of the lower yields for longer camp for a number of years now due to our near-term growth and inflation outlook and our belief that financial repression is rife. However we also think that debt restructuring or inflation will eventually be the only way of successfully reducing debt burdens for many countries with the latter route the most likely. As such whilst bonds are a near-term safe haven they are also likely to be very poor real investments longer term. Timing the big switch in view on this will be one of the defining investment moments of the next few years. Let’s hope we’re lucky.

* * *

Perhpas “pray” to the likes of Yellen et al is a better way of phrasing it?

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While yesterday everyone was focusing on the ongoing escalation in Ukraine, or BBQing, the real story was the sudden and quite dramatic collapse, or as we called it, “bloodbath” in global manufacturing as tracked by various PMI indices.

Here, via Bank of America, is the bottom line: as the below table shows, out of the 26 countries that have reported so far, 9 reported improvements in their manufacturing sectors in August, while 15 recorded a weakening, and 2 remained unchanged. A reading above 50 reflects expansion, while below 50 indicates contraction. In this regard, there were 5 countries in negative territory and 21 in positive. In particular, Brazil, Greece, Korea and Turkey moved from contraction to expansion, while Australia and Italy did the reverse. The biggest concern: virtually every core and pierphral Eurozone country of note (from France and Germany to Spain and Italy) saw substantial contraciton. Which, as is well-known in the New Normal, is the stuff new all time S&P500 highs are made of.

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As we explained previously, the market appeared woefully under-priced for the potential risk of a Scottish "yes" vote. However, this weekend saw the margin between 'yes' and 'no' voters narrowed dramatically (53% "No" vs 47% "Yes" – a 6-point spread now versus a 14 point spread just 2 weeks ago). UK Gilt yields are higher, GBP is falling (its lowest since March) and implied volatility has spiked by the most since 2008 as hedgers pile in, now suddenly fearful.

 

GBP vol spikes on narrowing "Yes" vote…

 

 

*  *  *

As we concluded previously,

Some Possible Implications Of a “Yes” Vote

Nevertheless, even if a ”yes” vote looks unlikely at present, it is not impossible. In our view, a “yes” vote would have several key implications:

Bad for UK growth. Uncertainties over the economic prospects, policies and currency arrangements of an independent Scotland probably would hit growth in both Scotland and the rest of the UK (rUK), raising the incentive for firms to “wait and see” or to expand elsewhere. Exports to Scotland account for roughly 4% of GDP for the rUK and Scotland would immediately be the rUK’s second biggest trading partner, slightly behind the US and slightly above Germany. Moreover, many banks and businesses have sizeable cross-border exposures between Scotland and rUK, and some firms may seek to limit such exposure as a hedge against the possible breakup of sterlingisation (if that is the policy adopted).

 

Bad for mainstream UK political parties, good for the anti-EU vote. Once independence happens, Scottish MPs would no longer attend or vote at the Westminster parliament. This would disproportionately hurt both Labour and the Lib Dems: Scotland accounts for 9% of seats at the Westminster parliament (59 out of 650 seats in 2010), but accounts for 16% of Labour seats, and 19% of Lib Dem seats. Conversely, only one out of the 306 Conservative MPs elected in 2010 is from a Scottish seat. However, although the maths of a postindependence Parliament would favour the Conservatives, we believe a “yes” vote would also badly hurt the personal position of PM Cameron, by making him the PM “who lost the UK”. The key winner in UK political terms would probably be UKIP: this reflects the damage to the three main Westminster parties, the evidence that voters are prepared to reject the establishment and vote for radical change, and also the extent to which the themes in the Scottish referendum debate — a choice between membership of a larger bloc or independence — are likely to have echoes in any future EU referendum. A secondary winner might be London Mayor Boris Johnson, who seems to be positioning himself as the radical outsider as candidate to succeed Cameron as Conservative party leader.

 

Uncertainties are likely to drag on for a while. The Scottish government has said that in the event of a “yes” vote, it would aim to complete negotiations quickly and for Scotland to become independent in March 201611, ahead of the Scottish parliament elections scheduled for May 2016. In practice, the process might well take longer, especially given the interruption of the UK general election in May 2015 and possibility that the election might change the UK government. Indeed, given that Labour has now moved slightly ahead of the SNP in voting intentions for the Scottish parliament in recent YouGov polls, one can imagine scenarios under which negotiations on Scottish independence have to be completed after May 2016 under a Labour-led Scottish government (which opposed independence), a Labour-led rUK government and with a Johnson-led Conservative party in opposition that is moving towards advocating EU exit.

 

BoE on the alert: BoE Governor Carney noted in his Inflation Report press conference that the BoE would be ready to act if Scotland-related uncertainties escalate: “we also have responsibilities, as you know, for financial stability in the United Kingdom and we will continue to discharge those responsibilities until they change… Uncertainty about the currency arrangements could raise financial stability issues. We will, as you would expect us to have contingency plans for various possibilities”.

*  *  *

With a “no” vote, the UK would still face rising political uncertainties. The UK political landscape is in a state of extreme flux, with the enduring Scottish independence movement, the rise of UKIP as a political force and resultant change in UK party political dynamics, the moderate-to-high probability of a change of government in the 2015 elections and uncertainties over post-election fiscal policy, plus the non-negligible risk of a referendum on UK exit from the EU in 2017-18 or so. Even if the “no” camp prevails in September, we do not foresee a return to the pre-referendum political status quo in the UK. In our view, the outlook for UK political risks will remain elevated well beyond the referendum, and we suspect these UK political risks are underpriced in markets.

More broadly, "Referendum Risk" is one of the more powerful manifestations of what we have termed Vox Populi risk, the Crimea being a particularly powerful, if extreme, example. In particular, what happens in Scotland will be particularly closely watched in Spain, which is facing a referendum on Catalan independence. Latent independence movements elsewhere, such as Belgium, could also be influenced by the outcome in Scotland. We regard the revival of local/national concerns, from Scotland to Spain and beyond, as part of continuing anti-establishment sentiment and a backlash against globalisation. And the UK experience (with growing support for UKIP alongside faster economic growth) raises the issue that economic recovery alone may not be enough to reverse the rise in anti-elite, anti-establishment sentiment.

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