Tag: finance

While moderate recovery in growth and inflation is BofAML’s rates team’s base case, there are numerous risks to that forecast. The risk of tapering is already quite well known and they suspect it may not result in the significant market-moving event many expect when it actually happens; however, the following downside and upside risks threaten BofAML’s central scenarios for 2014 as well.

 

Via BofAML,

1. Downside risk from US inflation

This is probably the most important risk the market is underpricing, in our view. We forecast US real GDP growth will accelerate to 2.6% in 2014 while inflation will continue to hover at current levels. With weaker fiscal headwinds, and the potential for the Fed to taper very gradually, we see a risk that the data may surprise to the upside. This could benefit EM via the trade channel. However, if the output gap narrows by more than commonly estimated due to lower potential growth or higher structural unemployment, US inflation could increase faster than we forecast. This would primarily impact the belly of the US and EM curves.

To watch: Growth improvements without a corresponding healing of the labor market could be a sign of a structural rise in unemployment. We would also watch long-run inflation expectations in the University of Michigan Consumer Sentiment Survey, core inflation readings, and wage growth data.

2. Upside risk from European inflation

Continued disinflation is a worrisome risk to the European economy in the coming quarters. In our Global Economics Year Ahead, our EU economists argue that the biggest risk to debt dynamics is persistently weak inflation. Worsening debt dynamics or fiscal slip-ups combined with uncertainty surrounding the banking exercise could reignite negative sentiment. CEE FX and yields would move lower. However, this may prove a trading opportunity. The ECB would likely respond with an LTRO to combat such weakness. Also, the ECB could turn aggressive with the LTRO, or even embark on weakening the EUR. Given these risks, we maintain a bullish HUF bias versus the EUR, and prefer to fund long BRL and MXN positions against the EUR.

To watch: CPI readings and fiscal performance in the periphery, particularly in Spain given the relatively large primary deficit, should be a focus. Also look for shifts in the ECB’s stance on extraordinary measures; we are already seeing some of this with the discussion of negative deposit rates.

3. Downside risk from China hard-landing

We expect growth to pick up slightly in 1H14 before moderating in 2H14 and then again in 2015. This will require fine-tuning from the authorities, balancing still ambitious growth targets with the planned shift in the composition of domestic demand towards consumption. Doing so, while reining in the property sector, may be no easy task. A sharper deceleration of growth would impact commodity prices negatively. Exporters like Brazil, Argentina, Peru, South Africa, Indonesia and Colombia would be hurt. ZAR could be most at risk given the continued current account concerns.

To watch: Pay attention to sharper rhetoric from authorities regarding the property sector, especially after the raising of minimum down payments in Shenzhen and Shanghai. Also, our ChinaLEAP indicator (MECILEAP Index <GO>) and credit data should provide leading information on activity.

4. Mixed risks from the BRIC election season

There will be important elections in two of the BRICS in 2014: Brazil and India. Both are in great need of fresh thinking to enact much-needed structural reforms after growing evidence of slowing potential growth (see GEMs in Focus: On surfers and workers). In Brazil, the polls suggest the risk of an opposition victory is very low, certainly lower than what we believe it is on the basis of the country’s relatively poor economic performance. An opposition victory would likely result in improved policy management and faster implementation of structural reforms.

In India, there is some risk of a hung Parliament, where neither national party is able to form a government. If this materialized, it would likely exacerbate pressures on the INR due to the continued threat of political instability and a lower chance of structural changes, especially in the infrastructure sector. Alternatively, a strong and decisive outcome with a stable coalition government led by either national party could benefit the INR, one of the most undervalued currencies according to Compass (down 13%).

To watch: Watch out for the evolution of polls in both countries. On 8 December, state poll results in India will be released. Then, national elections will take place around April/May 2014; Brazil’s presidential elections will be in October 2014.

5. Russian bear comes out of its cave

We see some chance that President Vladimir Putin will decide to reshuffle the government and/or push much-needed reforms in order to spur the stagnating economy, despite possible high political and social costs. An ambitious privatization agenda and improvements in the investment climate would fuel capital inflows, supporting EXD and LDM. Less positively, “reforms” could also take the form of tighter supervision of businesses and even greater state control of the economy.

To watch: Any government reshuffle could be a sign of impending changes, with personalities of new government officials most likely setting the direction of the change. The likelihood of changes will most likely increase after the politically important Winter Olympics in February.

6. Brazil gets ratings downgrade

S&P already has a negative outlook for Brazil and we believe a ratings downgrade could be coming next year. It is still unclear whether government efforts to curb public lending will be sufficient to contain fiscal risks. As we pointed out in a recent Brazil Viewpoint, the structural fiscal dynamics are still expansionary, and this may force the central bank to hike rates more than what we currently forecast. In other words, the current fiscal policy may prove inconsistent with Bacen’s objective of lowering inflation. Although Selic futures price in more hikes than we forecast, it is for these reasons why we view the riskreward as unattractive and prefer to stay square.

To watch: Pay attention to the evolution of the primary fiscal surplus and whether this converges on the target of 2.3% of GDP from 1.6%, and whether authorities actually follow through with their intentions to slow public lending in the face of weak growth

7. Tail risks to the Mexican reform tiger

Everybody loves Mexico, but there is a risk that the disappointment with the fiscal reform extends to the restructuring of the energy sector, which we expect to be enacted in 2013-14. Our base case is for the reform to constitute a productivity-enhancing game changer for the country. We see both upside and downside risks. The reform could allow production contracts for the riskier projects as well.

On the negative side, the reform could prove insufficient to entice foreign oil companies and open up the sector, which would have a large negative market impact. An upside surprise is more likely than a negative one, in our view, but the latter would have a more significant market impact. Prospects of lower foreign direct investment flows would weigh on the MXN, which is one of our top FX picks next year (vs EUR).

To watch: We expect constitutional changes to be approved by 15 December while secondary laws may not be approved until 1Q14. The devil will be in the details of implementation with respect to private sector participation through profit-sharing contracts, the lowering of Pemex’s fiscal burden and private electricity generation.

8. Geopolitics rears its ugly head

Saudi Arabia and Israel may become increasingly worried about Iran in the next six months, possibly even resorting to tactics that would shake the region’s stability. Beyond the interim period, the deal may not live up to expectations given what appears to be little commitment at the top level in Iran. Therefore, medium-term risks to oil prices will remain.

Countries with relatively higher shares of energy in their CPI baskets could have upward pressures on their local curves if prices tend to adjust rapidly (e.g., Chile, CEE, Turkey or India), or to their CDS curves if governments tend to take the brunt of the adjustment (e.g., Indonesia).

To watch: It will be important to see how domestic politics in Iran change over the next six months with respect to the deal, as well as the stance of the other regional powers, Israel and Saudi Arabia. Actions by the US Congress could also derail the process.

Global sentiment could sour if tensions escalate between China and Japan over islands in the East China Sea. Japan and the US have yet to comply with the Chinese introduction of an air zone around the islands, which leaves room for tensions to escalate. The latest developments increase the risks for error and misjudgment, but the market is unlikely to increase the risk premium for now. There are risks that this may spill over into retaliatory economic policies (trade, investment, tourism).

To watch: The US recently tested China’s air defense zone and further US involvement could prevent some escalation by reducing the boldness of some hawks in China.

9. FX mortgages lawsuits in Eastern Europe

Lawsuits against banks on FX mortgages have appeared in several Eastern European countries, introducing new uncertainty on potential future compensation costs for banks but also providing the opportunity to reach a final resolution to the legacy stock of FX loans. In Hungary, the Kuria, which is the highest court, is due to give guidance on FX loans validity (outstanding stock US$17bn) and whether unilateral changes to the contract conditions should be permitted.

To watch: The Kuria will start the debate on 16 December. The completion date is unclear, but the government will announce its final relief package for FX borrowers as soon as the ruling is announced. The government is aware of the importance of preserving financial stability, and we believe it is unlikely to opt for an immediate and extreme resolution, even in the case of a harsh ruling from the court (i.e., immediate conversion in HUF at a preferential rate). However, the court ruling may provide legitimacy to drastic solutions that may be implemented over the course of several years. The Hungarian case may also prove to be a template for other countries with widespread FX loans.

10. Faulty bailouts

Ukraine can play contradictions between the EU and Russia for too long and end up with nothing after all. The country can fail to secure timely IMF funding early next year for political reasons (just as it did over the past two years), as well as fail to get any new loans from Russia without full membership in the Russia-led Customs Union (the key condition from Russia). As a result, domestic financial markets can destabilize, triggering a renewed currency run from the population in such a scenario. The latter could push the National Bank of Ukraine’s reserves below critical levels and force disorderly UAH devaluation and/or default.

To Watch: Be aware of NBU FX reserves dynamics. We estimate US$15bn (US$20.6bn as of 1 November) as a critical level, with reserves below it potentially forcing FX policy change. Any Ministry of Finance success in rollover of the FX debt can help to keep reserves above this critical level.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/bUQQZec4j1E/story01.htm Tyler Durden

With Thanksgiving comes Black Friday and Cyber Monday, two of the biggest days for retail stocks each year. Thanksgiving isn’t just an opportunity to gorge on turkey; it’s also one of the most important weekends of the year for the retail sector. As much as 40% of American shopping occurs on the now infamous Black Friday and Cyber Monday – the first two business days that fall after Thanksgiving. But to complicate the matter, meteorologists are tracking an epic super-storm that is slowly working its way east, threatening to bring even more chaos to the holiday season. So who will win?

 

Created by Kapitall

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4mogPUMaKes/story01.htm Tyler Durden

On America’s day most famous for over-consumption, we thought a few minutes of quiet ‘tryptophan-induced’ contemplation of the state of our world would be useful. Infamous for his correct predictions of the great recession, Europe’s demise, and the collapse of the US financial system (as well as profiting handsomely from being right), Dr. Michael Burry’s infamous UCLA commencement speech has much to offer (especially considering Burry is making a come-back – Bill Fleckenstein style – at Scion Asset Management). In this “age of infinite distraction”, the painful ‘truthiness’ of this brief speech stunningly summarizes the ominous truth facing most of the developed (and much of the emerging) world today: “when the entitled elect themselves, the party accelerates, and the brutal hangover is inevitable.” A quarter-of-an-hour well spent from a self-described ‘chicken-little’ who was “just trying to figure it all out”.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/EMe6TlTNcp4/story01.htm Tyler Durden

On America’s day most famous for over-consumption, we thought a few minutes of quiet ‘tryptophan-induced’ contemplation of the state of our world would be useful. Infamous for his correct predictions of the great recession, Europe’s demise, and the collapse of the US financial system (as well as profiting handsomely from being right), Dr. Michael Burry’s infamous UCLA commencement speech has much to offer (especially considering Burry is making a come-back – Bill Fleckenstein style – at Scion Asset Management). In this “age of infinite distraction”, the painful ‘truthiness’ of this brief speech stunningly summarizes the ominous truth facing most of the developed (and much of the emerging) world today: “when the entitled elect themselves, the party accelerates, and the brutal hangover is inevitable.” A quarter-of-an-hour well spent from a self-described ‘chicken-little’ who was “just trying to figure it all out”.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/EMe6TlTNcp4/story01.htm Tyler Durden

Despite the stock’s renaissance (eerily reminiscent of Eastman Kodak), recent images of the crammed and disorganized racks at various JCPenney stores do little to conjure confidence that staff or management either know what they are doing – or give a shit… except for this clarifying quote…

“What one may misconstrue as clutter is merely a strategic effort to meet high customer demand,” said Penney spokeswoman Daphne Avila.

Is that like saying, “one man’s trash…?” It seems, for JCPenney that marketing and product placement come a weak second to a pit full of tangled clothes…

 

 

 

h/t @BrianSozzi

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/n0_Ij5ghiHQ/story01.htm Tyler Durden

The definition of the term Hail Mary as it pertains to football, provided here by Wikipedia, does a sterling job of setting the stage for this week’s topic:

A Hail Mary pass or Hail Mary route is a very long forward pass in American football, made in desperation with only a small chance of success, especially at or near the end of a half.

Ah…

Yes, the Hail Mary is used in desperation, near the end of a contest when there is only a small chance of success…

When Abenomics was unveiled in Japan upon the re-election of Shinzo Abe as prime minister in late 2012, it is safe to say that, having been mired in a 20-year deflationary spiral and with debt totaling 240% of GDP, Japan was nearing an endgame of sorts.

For two decades the country had watched the yen strengthen and endemic deflation thwart any and all attempts to generate even moderate inflation, as repeated bouts of quantitative easing failed to administer the desired antidote to Japan’s ever-increasing debtload.

Realizing just how late in the game he found himself, Abe promised to change all this, but in order to do so he needed to pursue a high-risk strategy with a low probability of success.

The press (ever hungry for a new, catchy portmanteau word) dubbed it “Abenomics.”

Grant Williams, in his excellent letter below, prefers to call it “Avenomics”: the economics of the hopeless.

Abe’s opening (and perhaps his most important) gambit was the politicization of the Bank of Japan. Without a complicit governor quarterbacking Japan’s printing press, any attempt at reaching the endzone would be futile.

[The story twists and turns]

So here he is — Japan’s great hope — with time about to expire and the pressure mounting.

Facing the rush of a moribund economy, entrenched price deflation, an aging demographic that has drawn down its savings and actually likes the idea of lower prices, and a debt mountain that eclipses that of every other major economy on earth, is it any wonder that Abe-san has decided to hurl the ball into the endzone and hope that a helpful pair of hands hauls it in for a TD?

Of course, popular thinking goes that, since Japan has been doing the constant-stimulus thing for two decades without any noticeable consequences, all will be well; but the problem lies in the fact that, throughout the nineties and noughties, Japan was basically scrimmaging on its own practice field — alone, behind closed doors.

Now they find themselves in a competitive game with every other major economy in the world suited up and also needing higher inflation, weaker currencies, and genuine growth after littering the field with trillions in stimulus.

Say a prayer for Shinzo Abe, folks. For Avenomics to score, he’s gonna need a miracle.

Full Grant Williams Letter below:

TTMYGH – Avenomics

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Fg4r1JBfyX4/story01.htm Tyler Durden

The definition of the term Hail Mary as it pertains to football, provided here by Wikipedia, does a sterling job of setting the stage for this week’s topic:

A Hail Mary pass or Hail Mary route is a very long forward pass in American football, made in desperation with only a small chance of success, especially at or near the end of a half.

Ah…

Yes, the Hail Mary is used in desperation, near the end of a contest when there is only a small chance of success…

When Abenomics was unveiled in Japan upon the re-election of Shinzo Abe as prime minister in late 2012, it is safe to say that, having been mired in a 20-year deflationary spiral and with debt totaling 240% of GDP, Japan was nearing an endgame of sorts.

For two decades the country had watched the yen strengthen and endemic deflation thwart any and all attempts to generate even moderate inflation, as repeated bouts of quantitative easing failed to administer the desired antidote to Japan’s ever-increasing debtload.

Realizing just how late in the game he found himself, Abe promised to change all this, but in order to do so he needed to pursue a high-risk strategy with a low probability of success.

The press (ever hungry for a new, catchy portmanteau word) dubbed it “Abenomics.”

Grant Williams, in his excellent letter below, prefers to call it “Avenomics”: the economics of the hopeless.

Abe’s opening (and perhaps his most important) gambit was the politicization of the Bank of Japan. Without a complicit governor quarterbacking Japan’s printing press, any attempt at reaching the endzone would be futile.

[The story twists and turns]

So here he is — Japan’s great hope — with time about to expire and the pressure mounting.

Facing the rush of a moribund economy, entrenched price deflation, an aging demographic that has drawn down its savings and actually likes the idea of lower prices, and a debt mountain that eclipses that of every other major economy on earth, is it any wonder that Abe-san has decided to hurl the ball into the endzone and hope that a helpful pair of hands hauls it in for a TD?

Of course, popular thinking goes that, since Japan has been doing the constant-stimulus thing for two decades without any noticeable consequences, all will be well; but the problem lies in the fact that, throughout the nineties and noughties, Japan was basically scrimmaging on its own practice field — alone, behind closed doors.

Now they find themselves in a competitive game with every other major economy in the world suited up and also needing higher inflation, weaker currencies, and genuine growth after littering the field with trillions in stimulus.

Say a prayer for Shinzo Abe, folks. For Avenomics to score, he’s gonna need a miracle.

Full Grant Williams Letter below:

TTMYGH – Avenomics

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Fg4r1JBfyX4/story01.htm Tyler Durden

With delays, glitches, and broken promises plaguing the President’s healthcare reform, it is perhaps surprising that the level of coverage among the mainstream media of the SNAFU – and more importantly its potential implications – is not higher. Of course, in each news cycle, Obamacare is mentioned, along with a soundbite of how it will all be fixed soon and it’s only the website, but, as the following uncomfortable clip shows, there are notable and far-reaching implications (not the least of which is the progression to a part-time economy that we have so vociferously pointed out – explicitly here and anecdotally here) for Americans and the US economy as a whole.

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/kPJjgyb-BkQ/story01.htm Tyler Durden

If one of the initial fears surrounding Bitcoin, or rather digital currencies of which there suddenly appears to be a veritable tsunami now that anyone with an algorithm can become their own central bank (and all are exploding in value in what should make at least a few people nervous) is lack of adoption, that may be put to rest courtesy of a new initiative called “Bitcoin Black Friday” which, as TechCrunch reports, has been adopted by over 400 online retailers who starting on Friday will be offering special deals just for Bitcoin users.

Since this is Bitcoin’s first unofficial Thanksgiving, having stormed on the public scene after exploding in price from under $100 to nearly trading on parity with an ounce of gold, many of the Bitcoin-only offers are gimmicky: “you can use bitcoins to buy a bacon-flavored lollipop or a ticket to space on Virgin Atlantic, for example. That’s not really going to help you with your holiday shopping list, though. However, there are some decent choices on the site, too, but for obvious reasons, they tend to be a little more geeky in nature. Adafruit, for instance, is offering 10% off of everything in stock, including Raspberry Pi. Reddit is selling Reddit Gold. The Humble Bundle has deals up for grabs. There are also software, electronics, domain name and hosting deals, and so on.”

A sampling of the deals from the site is shown below:

And while there are some good deals to be found…

Mobile gift card app Gyft is one of the better deals available, giving Bitcoin shoppers 4 percentage points back when you buy gift cards from its supported retailer partners, like Target, Gamestop, Gap, Zappos, Nike, Old Navy, and hundreds of others. If you were stocking up on gift cards anyway, that’s worth taking advantage of. (For what it’s worth, PayPal users will get 3% back, while credit card users get 2% back, the company says.)

… TechCrunch correctly observes that the catalog is no Amazon, for obvious reasons: “the deal quality on “Bitcoin Black Friday” is a good indicator of where Bitcoin is in terms of mainstream adoption. That is, not so much. There really aren’t big-name retailers on board with the digital currency at this time… big-name tech companies like Google, Amazon and eBay aren’t going to play along either, as they all have their own payment mechanisms to push (Google Wallet, PayPal and Amazon’s one-click checkout experience, respectively).”

But the list of vendors is growing at a pace that only rivals the explosion in the price of Bitcoin itself:

The Bitcoin Black Friday movement is still growing, however. Earlier this week, it was touting that 250 retailers had signed up, and today there are nearly 200 more. Evan Greer of Fight the Future also tells us the site has seen over 30,000 unique visitors to date, almost half of which arrived yesterday. Meanwhile, over 4,000 people have signed up to get an email when the deals go live.

And even if the popularity of Bitcoin adoption also follows a parabolic curve, a bigger problem is accurately observed by TechCrunch. Consider that on one hand Internet activists Fight for the Future are trying to spread the word about the Bitcoin Black Friday efforts, somewhat radicalizing the event by pointing to Bitcoin’s potential to be disruptive to the status quo. “Bitcoin is an amazing new technology, but because it challenges established industries, it will face serious political opposition–especially in the U.S. where those industries are strongest,” the message reads on the project’s site. “Bitcoin will only be safe once millions of people rely on it every day.”

Yet on the other hand, it is the sheer surge in the USD-denominated value of Bitcoin itself that may be turning off many people due to the law of large numbers (Bitcoin can’t do a reverse stock split), and instead potential entrants to the digital currency world are looking at far cheaper BTC competitors (and there are plenty), as an alternative:

Of course, Bitcoin won’t reach those mainstream “millions” while speculators drive the price of the cryptocurrency to crazy new heights. That doesn’t discount its long-term potential though as a money transfer platform, though. But as a payment mechanism for online shopping? While it’s great that there are over 441 retailers on board with Bitcoin Black Friday, it would be better if there were more deals mainstream users would actually want to buy. Instead of say, Bitcoin t-shirts, stickers, glasses, mining equipment….and, oh yeah, more Bitcoin.

Then there is the flipside to the argument. If and when the inevitable correction comes, how many of those who decided to give bitcoin “a try” will end up losing substantial disposable income and be turned off by the whole concept of alternative currencies? Someone with a paranoid bent may see how such a scenario could be put to great use by those who can create fiat de novo and use it to bid up BTC to stratospheric levels only to force a crash subsequently.

* * *

And in totally unrelated news, and showing that sometimes nothing beats having a physical currency in one’s hand is the story of James Howells from Wales, who bought 7500 Bitcoins in 2009, forgot about them, threw away his hard disk and is now scrambling to retrieve because the value of his “digital wallet” has exploded to over $7 million! From BBC:

A Newport man has been searching a landfill site in south Wales hoping to find a computer hard drive he threw away which is now worth over £4m.

 

James Howells’s hard drive contains 7,500 bitcoins – which is a virtual form of currency for use online. It had sat in a drawer for years and he had forgotten it contained the bitcoins, which he obtained in 2009 for almost nothing, when he threw it out.

 

But this week, a single bitcoin’s value hit $1,000 (£613) for the first time. It means Mr Howells’s collection is now worth $7.5m (£4.6m).

 

A few years ago Mr Howells, who works in IT, had dismantled his computer after spilling a drink on it. “I stored a couple of parts away like the hard drive, and the rest of the bits and pieces which were still working I sold for spares,” he told BBC Radio Wales.

 

“I kept the hard drive in a drawer in my office for three years without a second thought – totally forgot about bitcoin all together. I had been distracted by family life and moving house.

 

“Fast forward to 2013 which is when I had a clearout of my old IT equipment – I hadn’t used this drive for over three years, I believed I’d taken everything off it… so it got thrown in the bin.”

 

Mr Howells later realised what was left on the hard drive.

 

He added: “I had been hearing a few stories of a chap from Norway who had bought a number of
coins for a very low price and had sold them for a high price and that’s when I got back into checking the price and seeing what I’d done.

 

“When I found out what the price was, the penny dropped and I realised the coins I have ‘mined’ were on the drive I had thrown away.

 

“There was not a lot I could do.”

Good luck James.

The irony here is that while many owners of the barbarous relic, (which may not be rising parabolically in price right now, but at least feels quite firm to the touch) are known to have “unfortunate boating accidents”, water has a less than desired effect on electronics. But that’s ok: we are confident that any Bitcoin lost in the electronic ether can always be retrieved eventually: just call 1-800-NSA.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Rq5pGDIQD4s/story01.htm Tyler Durden