The sharks are circling Chris Christie who just sprung a bloody leak (either that or the population must really need to be distracted from a horrible January for stocks and what may be coming next). Moments ago the NYT reported that the former Port Authority official who personally oversaw the lane closings on the George Washington Bridge said that the governor knew about the lane closings when they were happening, and that he had the evidence to prove it. Of course, if such evidence exists, Christie can call it a career after claiming the opposite on numerous occasions in the past month. Of course, one wonders whether Obama would have been impeached by now had the “independent and impartial media” hounded him with the same fervor for his numerous transgressions and repeated lies to the American public. Alas, we will never know the answer.
In a letter released by his lawyer, the official, David Wildstein, a high school friend of Mr. Christie’s who was appointed with the governor’s blessing at the Port Authority of New York and New Jersey, which controls the bridge, described the order to close the lanes as “the Christie administration’s order” and said “evidence exists as well tying Mr. Christie to having knowledge of the lane closures, during the period when the lanes were closed, contrary to what the governor stated publicly in a two-hour press conference” three weeks ago.
“Mr. Wildstein contests the accuracy of various statements that the governor made about him and he can prove the inaccuracy of some,” the letter added.
The letter marked the first signal that Mr. Christie may have been aware of the closings, something he repeatedly denied during a two-hour press conference earlier this month.
One tangential observation is that if the level of circuses, if not so much bread, is picking up to such extensive levels, and the US public is in such dire need of distraction from their everyday lives, then truly something big is about to hit… or this is simply the traditional pre-election circus act designed to set the stage for the grotesque farce that are the midterm elections.
This past week I read some very diverse articles that I wanted to share with you. Hopefully, they will stimulate your grey matter over the weekend as you indulge in melted artifical cheese, processed fillers, and copious amounts of artificial colorings and flavors during the Super Bowl showdown (I am assuming you did not order any of the party packs).
In yesterdays missive I discussed the recent selloff and the likelihood that, despite yesterdays bounce, the correction process was likely not complete. However, one thing I did not get to was the "January Barometer."
I spend much of my time analyzing statistical data to help refine a strategic "guess" about the future. I recently reviewed the Decennial and Presidential Cycles which suggested that the current cyclical bull market likely has 18 to 24 months of life left. Over the next 11 months, the the Presidential Cycle suggested that it could be a more difficult year than what we enjoyed in 2013 by experiencing a greater than 10% correction during the summer months. That historical analysis is now being potentially supported by the "January Barometer."
The January Barometer, a theory that was initially postulated by Yale Hirsch in 1972, states that the overall gain or loss of the S&P 500 during the month of January will set the stock market's tone for the rest of the year. If the S&P ends January higher than the first trading day of the year, the market (as represented by the S&P) has generally trended higher for the rest of the year as well and vice versa if January ends in a loss.
"Statistically… In the 75-year history examined last Friday [1/18/2013], there were only 22 full-year declines. So yes, the S&P 500 has posted annual gains 70.7% of the time since 1938. What is missing from this argument is the fact that when January was positive, the full year was also positive 89.4% of the time and when January was down the year was down 60.7% of the time. Also, every down January on the S&P 500 since 1938, without exception, has preceded a new or extended bear market, a 10% correction, or a flat year."
Another interesting tidbit here is that the volatility index (as measured by the VIX) is up 26% this month. Since 1986, when the VIX was launched, there has been only three previous instances when that index gained over 15% in January. In two of those instances, the S&P ended the year down more than -5%. The third instance was 1987 when the market crashed in October, however, the year did manage to close to the positive.
The table below shows the history of the January Barometer via CNBC:
The January Barometer is just the latest in a string of historical statistical evidence that suggests a more significant correction is likely coming. While it is certainly possible that the market could defy the odds, particularly with the Federal Reserve still priming the pump (although less so), "hoping" for such an outcome has never qualified as a valid investment strategy.
With that tucked away here are some random things to ponder this weekend.
I have discussed many times in the past (here and here) about the economic and demographic similarities between Japan and the U.S. However, Mr. Long gives a very good history of Japan and how, at their peak of prosperity, they were not so very different from where the U.S. is today.
"With one-third the population of the United States, Japan was unlikely ever to become the world's preeminent economic superpower. But Japan would close the 30% gap (adjusted for purchasing power parity) between its per capita GDP and that of the US. The prevailing belief was that, by 2015 or so, Japan's per capita GDP would more likely than not be 10% higher than in the US (in PPP terms).
None of that happened. Japan's economy today is some 40% smaller than observers back in the late 1980's confidently predicted. The 70% of per capita US GDP that Japan achieved back then proved to be the high-water mark. Its economy-wide relative productivity level has since declined, with two decades of malaise eliminating the pressures to upgrade in agriculture, distribution, and other services."
It is a very interesting read.
2) Bank Regulator Fears Bubble And Warns Fundsvia Reuters
"The Office of the Comptroller of the Currency has already told banks to avoid some of the riskiest junk loans to companies, but is alarmed that banks may still do such deals by sharing some of the risk with asset managers.
'We do not see any benefit to banks working with alternative asset managers or shadow banks to skirt the regulation and continue to have weak deals flooding markets,' said Martin Pfinsgraff, senior deputy comptroller for large bank supervision at the OCC, in a statement in response to questions from Reuters.
Among the investors in alternative asset managers are pension funds that have funding issues of their own, he said.
'Transferring future losses from banks to pension funds does not aid long-term financial stability for the U.S. economy,' he added.
That may be happening with leveraged loan issuance, which hit a record $1.14 trillion in the U.S. in 2013, up 72 percent from the year before, according to Thomson Reuters Loan Pricing Corp (LPC).
A measure of the riskiness of these loans has also been rising – the average size of the debt for companies taking these loans in 2013 was 6.21 times a form of cash flow known as EBITDA or earnings before interest, tax, depreciation and amortization, up from 5.86 times in 2012 and the highest since 2007, LPC said."
Is it just me, or have we seen this before?
3) Real Disposable Income Collapses In December via Zero Hedge
I have been rather vocal as of late that the "pop" in GDP in the last half of 2013 was not a sign of economic liftoff, as hoped by many economists, but rather an inventory restocking cycle due to post Hurricane Sandy/Fiscal Cliff economic drag in the first half of the year. Considering that 70% of the economy is driven by personal consumption the latest reading on real disposable incomes does not suggest stronger economic growth in the coming quarters.
"We may not know much about "Keynesian economics" (and neither does anyone else: they just plug and pray, literally), but we know one thing: when real disposable personal income drops by 0.2% from a month earlier, and plummets by 2.7% from a year ago, the biggest collapse since the semi-depression in 1974, something is wrong with the US consumer."
Cullen pointed out something very interesting in regards to margin debt.
"Of course, it would be silly to assume that this indicator is going to tell you when the market’s turning and I know a number of people have raised valid concerns about this metric, but I still find it to be a useful indication of broader sentiment. That is, as equities rally and euphoria increases we tend to see increasing levels of debt accumulation. And yes, we know that much of this is long only debt because short interest has actually been declining at the NYSE over the past 5 years. This is all consistent with the idea of a disaggregation of credit and the tendency for herding behavior to lead to increased euphoria as market participants view the bull market as increasingly invulnerable. Classic debt dynamics in an equity market cycle."
He is correct. There are many people that have dismissed the surge in margin debt as it has not immediately caused a market reversion. However, as I stated earlier this week:
"It is important to note that it is not the rise in margin debt that is the problem for the markets – it is the fall. When the ultimate reversal begins, and investors are forced to liquidate to meet margin calls, the market begins to feed upon itself. This forced liquidation quickly accelerates downside reversions in equity markets leaving investors little opportunity to react. The last two peaks in margin debts have had nasty outcomes for this very reason.
Lastly, spikes in margin date on an annualized basis (brought to my attention by my colleague Eric Hull) has typically marked either short term peaks are larger market corrections. This chart below is a log chart of the S&P 500. While this makes the chart easier to read, it also smooths some of the more relevant market reversion like Long Term Capital Management or the Asian Contagion in the late 90's."
As I stated above, there are many "hopes" for stronger economic growth in the 2014 and beyond despite the fact that we are already in one of the longest post-recession economic recoveries on record. While I have my own ideas for how to obtain stronger economic growth (lower tax rates, reduce regulations, etc.); David Malpass laid out some ideas worthy of consideration.
Let interest rates rise.
Rewrite the debt limit so it restrains spending growth.
Yen ceiling
Reduce the size of government
Liberalize trade
He concludes with a most interesting point:
"Most governments plan to stay the course in 2014, hoping growth in other countries picks up enough to keep them in power. That’s possible, but each decision to maintain the status quo means slower job growth than that needed to meet the coming increase in the elderly population."
With everybody hoping that someone else is going to pull them out of the quicksand – who is left to do the pulling?
Today’s AM fix was USD 1246.50, EUR 920.538 and GBP 757.336 per ounce. Yesterday’s AM fix was USD 1,254.00, EUR 922.20 and GBP 761.89 per ounce.
Gold fell $26.80 or nearly 2% yesterday to $1,243.00/oz. Silver fell $0.58 or nearly 3% to $19.20/oz.
Gold in USD – This Week
Gold is marginally higher in all currencies this morning but is trading near a one-week low and headed for the first weekly loss since December. Gold rose as much as 8.2% from the 6 month low set December 31 and reached a 2 month high of $1,279.61/oz prior to weakness this week.
Speculation that the Federal Reserve may reduce their massive bond buying programme may be making traders nervous. The Fed said on Wednesday that it will cut its monthly bond buying to $65 billion from $75 billion.
Gold traders and analysts are bullish for prices next week due to the likelihood that the emerging market asset sell will lead to haven demand. The Bloomberg gold survey shows that that for next week, there are 16 bullish analysts, 10 are bearish and 4 were neutral on prices.
Gold in USD – 3 Month
It is important to note that gold has rallied since and despite the Fed’s taper in late December. It is also worth noting that the Fed’s printing of nearly $0.78 trillion a year or $65 billion a month to buy U.S. government debt remains extraordinary and shows how fragile the U.S debt markets and economy still are.
There is also the possibility that the emerging markets crisis impacts developed markets as was seen in the Asian crisis in 1998. In our vastly interconnected financial and economic world, the notion that there will not be knock on effects may be proven to be optimistic. The risk of contagion remains as turmoil in markets tends to be contagious
As long as the turmoil continues in the emerging economies and U.S. and global stock markets come under pressure, gold is likely to remain in demand as a safe haven.
Economic concerns and the risk of currency devaluations in emerging markets may lead to greater demand for gold in those markets.
People in Asia and especially China, India view gold as a store of value and one of the key reasons that they own gold is in order to protect against the devaluation of paper currencies. It is hard to get data on gold demand in many smaller emerging markets countries such as Argentina, Venezuela and South Africa but it is safe to say that a sudden bout of currency weakness should lead to inflation hedging buying.
The data from Turkey shows that demand has been very robust there in recent months and should the lira continue to decline in value, the gold souks in Istanbul will do brisk business.
Growth in emerging markets, especially China and India, contributed to much of the commodities demand we have seen in recent years. Thus a slowdown in China and other economies could hurt demand for commodities in general. However, gold’s store of wealth and money credentials should see it insulated from this due to safe haven demand.
There is still a debate amongst many in the western world about whether gold is a safe haven.
However, in China, Asia and most emerging markets there is a strong belief in gold as a safe haven due to their experience with paper currencies. People in Argentina can attest to that fact after their currency, the peso, fell 25% against gold in January alone.
The currency crisis in the emerging markets may lead to a renewal of the recently dormant currency wars and may be a prelude to a global currency crisis. Just this week, the World Bank’s former chief economist said the world should replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.
“The dominance of the greenback is the root cause of global financial and economic crises,” Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. “The solution to this is to replace the national currency with a global currency.”
The currency and gold wars of recent years are set to continue.
Grant Williams’ excellent recent article on the continuing gold wars is a must read.
Grant Williams and the team at Mauldin Economics have been producing excellent market commentary and insights for many years. Williams has written ‘Things That Make You Go Hmmm’ since 2009 and it has become a must read weekly commentary.
Grant’s recent edition grabbed our attention for a number of reasons:
It’s timely and very relevant.
For years we have been expressing concerns that the gold price may be manipulated. These concerns have long been dismissed as “conspiracy theories” but the theories may become “conspiracy facts” as financial regulators investigate price manipulation today.
Grant brings together many strands that we have covered in our Market Update in recent months and years. He is fast becoming one of the more knowledgeable commentators writing about the gold market.
He is a very good writer and it’s a thoroughly engaging read!
Chris Christie was
accused of lying about what he did and didn’t know about the
politically-motivated lane closures at the George Washington Bridge
in a letter (pdf)
from the attorney for David Wildstein, the former Port Authority of
New York and New Jersey official, and childhood friend of
Christie’s, at the center of the scandal. Wildstein resigned from
his position when e-mails from Christie aides to him were revealed
that showed the lane closures were retribution for the Democrat
Fort Lee mayor’s refusal to endorse the Republican Christie.
Earlier this month, CNN
reportedthat the position
Wildstein held, “director of Interstate Capital Projects” was
created specifically for the Christie crony friend. Wildstein
plead the Fifth in a hearing at the state legislature about the
scandal.
The attorney’s letter, addressed to the Port Authority’s general
counsel, firstly asks that the Port Authority reconsider its
decision not to pay for Wildstein’s legal defense costs. According
to the letter, the Port Authority had previously explained it was
“apparent” Wildstein wasn’t entitled to indemnification. The lawyer
then cited unspecified “reports” of improper land deals involving
Christie allies and the Port Authority, before moving on to a
similarly vague claim that Christie lied:
It has also come to light that a person within the
Christie administration communicated the Christie administration’s
order that certain lanes on the George Washington Bridge were to be
closed, and evidence exists as well tying Mr. Christie to having
knowledge of the lane closures, during the period when the lanes
were closed, contrary to what the Governor stated publicly in a
two-hour press conference he gave immediately before Mr. Wildstein
was scheduled to appear before the Transportation Committee. Mr.
Wildstein contests the accuracy of various statements that the
Governor made about him and he can prove the inaccuracy of
some.
There’s little actually new here. The involvement of people
within the Christie administration in relaying an order to close
lanes is the “it” of the scandal. The actual accusation is broad,
an vague. Christie must have known about the lane closures as they
were happening, after all, it was a huge local news story even
before it was a national political scandal. Coupled with
Wildstein’s attorney’s “demand” that ongoing, and future, legal
costs be covered by the Port Authority, the accusation of lyting
appears self-serving.
Nevertheless, many columnists declared in their opinion on
the issue that if Christie knew about the political
retribution the lane closures were meant to be, it would be
the end of his career. They’re probably right, but that’s probably
not what Wildstein’s attorney has evidence of. We’ll have to wait
and see until it’s no longer being used as leverage to get money
out of the Port Authority. New Jersey’s taxpayers, it should be
noted, are paying
$650 an hour for the legal defense of the governor’s aides.
Lakemaid Beer, “the
hottest beer on ice,” arranged for beer-delivering octocopters to
carry 12-packs over frosty lakes to thirsty ice fishers. But as
soon as it learned of Lakemaid’s plan, the Federal Aviation
Administration (FAA) grounded
it.
Released about a week ago, the Minnesota-based company’s beer commercial
instantly went viral. Drones delivering Wisconsin-brewed beer
rather than targeted killings? Consumers loved the idea.
But the FAA says it isn’t ready for the technology.
The Star Tribuneexplains:
The nation’s stewards of the air are still studying how to
safely bring drones into modern life, and until then, their
commercial use isn’t permitted.
Meanwhile, Lakemaid president Jack Supple broke his printer
printing all the documents the agency sent him.
When Supple saw Amazon Prime Air commercials he had his doubts.
But he believes Lakemaid is a little different. Supple wasn’t
planning on navigating drones through mazes of skyscrapers and
stoplights. They would traverse open lakes. He explained
to Star
Tribune:
That would be a far better testing ground because
they’re vast and flat and people are in little fish houses out
there.
Eager entrepreneurs have brainstormed a zillion uses for the new
technology. FedEx has toyed around with replacing its delivery
trucks with a drone fleet. Taco deliveries are anticipated in California.
Other countries have already legalized commercial drone use.
South Africa companies have operated beer
drones. China based company InCake started
delivering cakes last July, and the Australian textbook
delivery company Zookal has plans to
utilize drones early this year.
In response to growing enthusiasm for commercial drones, the FAA
released a road map to cautiously guide the country toward safe,
reliable domestic drone use. Administrator Michael Huerta
expects its integration plan will take five years. The FAA
projects “7,500 unmanned aircraft in the skies within that period
if regulations are in place.” But the roll out is already months
behind schedule.
Entrepreneurs like Jack Supple have to wait for the green light
from the FAA whether or not they’re sure their individual
enterprise is safe.
California is attempting once
again to
ban plastic grocery bags statewide. SB 270 would require all
grocery stores, liquor stores and pharmacies to offer reusable bags
or recycled paper bags instead. It’s been well-established that bag
bans will
barely make any dent at all in the state’s waste make-up or fix
litter problems. Even a company that produces reusable bags
and hates plastic bags thinks a bag ban is a
bad idea, because it’s “an emotional response which fails to
strike at the heart of the issue; instead of a market-based
solution, a ban shifts production to paper bags and compostable
bags, both of which have heavy environmental consequences.”
California is also in the middle of a drought so severe that
Gov. Jerry Brown is trying to discourage people from
flushing the toilet. Californians are urged to cut water
consumption by 20 percent and rural communities are in potential
danger of running out.
We have a contradiction in environmental goals. If Californians
do switch to reusable bags, in order to use them safely, the bags
will need to be washed regularly, increasing residents’ water
consumption. Here’s the full list of tips from the
state’s Department of Public Health (pdf) when turning to
reusable grocery bags:
At home:
Reusable grocery bags should be machine or hand-washed
frequently! Dry the bags in a clothes dryer or allow them to air
dry.
After putting groceries away, clean the areas where the bags
were placed while
unbagging your groceries, especially the kitchen counter and
the kitchen table where food items may later be prepared or
served.
If food residues from any food products have leaked into the
bag, make sure to wash and dry the bag thoroughly before
reuse.
If reusable grocery bags have been used to transport non-food
items, such as detergents, household cleaners, and other chemicals,
wash and dry the bags before using them to transport food items.
Alternatively, you may wish to use bags of one color for food items
and bags of a different color for non-food items.
Store grocery bags away from sources of contamination, such as
pets, children,and chemicals. Storing reusable grocery bags in the
trunk of cars is not recommended. During the warmer months, the
increased temperatures can promote the growth of bacteria that may
be present on the bags.
At the store:
Place reusable bags on the bottom shelf of the grocery cart
(below the cart basket where food products are placed).
When selecting packages of meat, poultry, or fish, consider
putting the packages in clear plastic bags (often available in the
meat and produce sections) to prevent leaking juices from
contaminating other food items and the reusable grocery bags.
Fresh produce should be placed in clear plastic bags to help
protect the items from contamination.
At checkout, do not place reusable grocery bags on the conveyor
belt. Hand the bags to the checker/bagger or, if self-bagging,
carry the bags to the bagging area at the end of the checkout
counter.
Meat, poultry, and fish should be placed in separate reusable
bags from fresh produce and ready-to-eat foods.
Non-food items should be placed in separate reusable bags from
food products
There’s quite a bit of cleaning and water consumption suggested
by the state itself (and note the recommendation of single-use
plastic bags!). But does it add up to much? A researcher at
California State University, Chico, assessed the energy
consumption, waste production and water use involved over the
lifetime of various
types of bags (pdf). The results vary, but for certain types of
reusable plastic bags, their manufacture and use over the course of
a year will consume four times as much water as the same number of
single-use plastic bags. The trade-off is that the reuse of
the bag reduces waste and energy consumption in other areas.
Paper bags, by the way, are an awful alternative for anybody
wanting to conserve water. The manufacture of single-use paper bags
uses 17 times the amount of water as single-use plastic bags. The
bags they’re offering in grocery stores in Los Angeles, for
example, may not have been made in California, so they may not be
adding to the state’s drought woes. Still, though, nobody who is
actually in favor of conservation should support paper bags over
single-use plastic bags.
The larger point, other than plastic bag bans being poorly
considered manifestations of green populism, is that priorities
matter in environmental regulation. The state of California’s water
supply is much more important than its consumption of plastic bags.
Going for a state-wide ban on plastic bags runs counter to the
state’s need to conserve water.
Another volatile day ended with the Dow is down around 5% in January – the worst start to a year since 2009 (and 2nd worst since 1990) and the worst month since May 2012 (a 3-sigma miss of the average +1.5% per month gain since 2009's lows). Japan, Brazil, and Russia suffered greatly on the month as gold miners, Egypt?, and US Biotech did well. There is a huge 380bps spread between the performance of the Industrials and the Transports YTD. Gold had its best month in the last 5; Treasuries rallied with 10Y yields dropping their most since May 2012; USD rallied the most in 8 months with JPY's biggest rally (and Nikkei's biggest loss) since April 2012.
Quite a January…
Perhaps this image of a huge boulder ploughing through the Italian countryside sums up the effect the Fed has had on EM (the shed that is destroyed) and the US (the house is still standing but the foundations are faltering)…
On the week, the S&P and Nasdaq pushed up to unchanged on the week and EM was proclaimed fixed – only for the market to drop rapidly into the close
It seems stocks disconnected briefly from JPY carry only to revert lower into the close…
Year to date there is a huge performance gap between the Dow Industrials and the Transports…
and since the start of the Taper, the Dow is red…
Treasuries rallied 3-6bps on the week…but down 25 to 38bps on the year!!
Gold dropped 2% on the week, Silver 3.75% but on the month gold is up 3.2% (as copper has lost 6%)… (note the shit on January 22/23)
Across the world's equity markets, Nikkei Volatility, Argentina, Arca Gold Bugs and Egypt are among the best performers so far in 2014 and Japanese REITs, Brazil, Russia, and India are worst…
(click image for huge legible version)
In the US equity markets, Junior Gold Miners and Biotech were the best performers and Nasdaq Insurance and Arca Oil ETF the worst…
Rothschild has identified four different scenarios that, in their view, are the most likely to occur. The series of scenarios for GDP growth and inflation in the main western economies, Japan and China may guide investor thinking but their somewhat ominous conclusion is worth bearing in mind: "Further monetary 'experiments' are becoming less probable. However, significant imbalances and risks persist. This is the reason why we have left the size (probability) of our depression scenario unchanged."
Notably, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero...exposing equities to a potentially sharp correction."
Setting the scene
The scenarios presented here are intended to illustrate our economic outlook over the next few years.
What this is
A series of scenarios for GDP growth and inflation in the main western economies, Japan and China.
A simplification. The global economy is complex and multi-dimensional, and can be represented in many different ways. While narrowing in on just growth and inflation involves some simplification, we believe it is still worthwhile – most other economic variables and policy actions can be covered in relation to their impact on growth and inflation.
A guide to our thinking. The scenarios flow from our investment analysis. They are intended to illustrate the thinking that shapes the way we have built our clients’ portfolios. They can also help identify some of the main investment risks and opportunities.
What this isn’t
A series of detailed forecasts. In any exercise like this, there is always a danger of giving a false sense of certainty. We have kept our comments at a fairly high level, providing a sketch of what we see as the most likely outcomes.
Something set in stone. Our analysis evolves over time: the scenarios provide a snapshot of our outlook in 2014.
Something prescriptive. The scenarios are mainly a tool for communication. While they are valuable in our investment decisionmaking, they are not something we use rigidly.
What has changed?
Since we last published this report, the global economy has continued to recover, driven by the US. Although growth remains weak, conditions in the eurozone have also improved. Meanwhile, Japan appears to be making progress with efforts to stimulate its economy and China seems to have avoided a sharp slowdown.
Improving global economic data suggests to us that the world could begin to move away from the current situation of sluggish growth and loose monetary policies. Further monetary “experiments” are becoming less probable. However, significant imbalances and risks persist. This is the reason why we have left the size (probability) of our depression scenario unchanged.
Four main scenarios
We have identified four different scenarios that, in our view, are the most likely to occur.
For each scenario, the position of the bubble shows the combination of growth and inflation that we expect to see in the next one to three years.
The size of the bubble illustrates our view on the likelihood of this scenario occurring – this is subjective, and is intended just to illustrate our thinking.
Growth is expressed in relation to the potential for each country. For example, a growth rate of 4% would be low for China but very high for Europe. Similarly, inflation relates to a country’s individual inflation target.
We have adjusted the size of the bubbles to reflect our view that conditions in the global economy should continue to improve in 2014. We believe the world could begin to move away from our core “muddling through” scenario towards “economic renaissance” and that the “new monetary world” situation has become less likely.
(click image for huge legible version)
Implications for returns from asset classes
The table summarises the expected returns of the major asset classes under each of our four main scenarios.
The circles in the boxes show the expected return over the next three years, relative to the long-term expected returns*. Light green means higher than long-term expected returns*, while light red means lower.
These figures are an illustration of our thinking. They are based on an informed interpretation of our fundamental valuation models.
(click image for huge legible version)
Our conclusions
In most scenarios equities are the most attractive asset class. But valuation support is limited, exposing equities to a potentially sharp correction.
1. Continue to favour equities
We continue to favour equities despite their demanding valuations:
Abundant liquidity and repressed interest rates in our “muddling through” and “new monetary world” scenarios continue to support equities.
Improved earnings prospects in our economic renaissance” scenario should also boost equity prices despite the prospect of higher interest rates.
This pattern applies particularly to the US market. It is the most overvalued region but prices could continue to rise if the “economic renaissance” scenario becomes increasingly likely.
2. Remain cautious on bonds
We are avoiding long-maturity nominal bonds because they would be negatively affected by a normalisation of monetary policy in our “economic renaissance” scenario.
Within fixed income we continue to like shorter-maturity corporate bonds. This part of the market has two attractive features. First, there is still a decent yield advantage relative to government bonds. Second, the short maturity would offer some protection against rising interest rates, especially in our “economic renaissance” scenario.
3. Maintain exposure to real assets
The still sizeable probability of our “new monetary world” scenario lies behind our ongoing exposure to real assets such as gold, real estate and possibly inflation-linked bonds.
We are also confident that over an economic cycle equities continue to offer protection against inflation.
Additionally, we are focusing on hedge funds that have the flexibility to adjust to an unexpected increase in inflation.
4. Maintain our portfolio hedges
Although we believe the “depression” scenario is the least likely, its impact would be so disruptive that it must be considered within our investment strategy. Notably, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero.
Therefore, we include hedging strategies that can limit the potential losses from our portfolios:
We have a sizeable allocation to hedge funds that can provide significant protection in a bear market or which are not affected by movements in equity markets and therefore provide true diversification.
Additionally, we have direct equity hedges usually in the form of out-of-the-money put options on broad equity indices.
Piedmont Healthcare announced Friday afternoon that it has reached agreement with Aetna/Coventry on a new three-year contract.
Under the agreement, Aetna/Coventry members will continue to receive covered benefits, at in-network rates, from five hospitals within Piedmont Healthcare (Piedmont Atlanta Hospital, Piedmont Fayette Hospital, Piedmont Mountainside Hospital, Piedmont Newnan Hospital and Piedmont Henry Hospital) and the affiliated outpatient centers/services, said Piedmont Healthcare spokesperson Diana Lewis.
President Obama said he
wants private companies and the federal government to do more
for the long-term unemployed. The chair of his Council of Economic
Advisors, meanwhile,
insisted the anxiety of wealthy Americans over the president’s
economic policies were mere “hyperventilation.”
A report from the State Department
found the environmental impact of the XL Keystone pipeline
would be minimal, but did not set a deadline for the White House to
approve it.
Vice Admiral Michael Rogers will be
appointed the NSA’s new chief, while Richard Ledgett, who
previously floated the idea of an amnesty for Edward Snowden, will
become the agency’s top civilian official.
Hillary Clinton leads Democrat primary voters in an
early poll in New Hampshire, getting 75 percent to Joe Biden’s
10 percent. With 16 percent of Republican primary voters, Rand Paul
has a slim lead in a crowded field. The state’s Republican senator,
Kelly Ayotte, came in second at 13 percent.
Lawmakers in Washingtoon, Republican and Democrat, are
pushing the feds to look into why propane prices are getting so
high as the country gets so cold.
Bomb squads were
sent out to several hotels near the site of this weekend’s
Super Bowl in New Jersey after envelopes containing an unknown
white powder were found. Preliminary tests
indicated the substance, also sent to Rudy Giuliani’s office in
New York City, was corn starch.
Jesse Eisenberg was
cast in the role of Lex Luthor in the upcoming Superman/Batman
film.