MACRO ALERT: Europe towards disinflation...MAJOR turn on economic data....

 

Summary:

 

Strategy: The key theme has been that US 10 YR nominal rates and US Yield curve dictates ALL markets….. I have been very long duration in US, Germany and Denmark since early September – this is now being supported by dis-inflation trend which can ruin the "Year-end rally" party in equities.

 

The simplest way to define the present market is: It's a race between the perceived further stimulus from global central banks and the consequent re-pricing of yield curves and nominal rates relative to poorer data especially on inflation but also housing and employment.

 

Trades:

 

We have been calling for 1770/1800 in S&P, 8000+ in DAX, 78-79 in DXY (US dollar index), higher gold and 2.25% in 10 Y  Yield. The last few days: A slightly more hawkish Fed (ignoring data but indicating December still possible for tapering), the target reached in both DAX and S&P plus now disinflation threat have changed my Alpha from 100% long equities to now short 50%- The fixed income remains in place with a long term goal of new lows in global rates in 2014.  Fixed income is under-owned even now and we will after consolidation reach 2.10/2.25 this year before pause. EUR/USD clearly now suffering from air sickness – 1.4000 = Europe in recession, but ironically it will be dis-inflation which drives ECB to cut rates into negative rates.

 

Alpha:

 

Short S&P from 1758.00 stop @ 1815.00 in Dec Futures

Long IEF, Bunds, Danish 1.5% 2035, 10 Y futures

Neutral on all FX – but looking to sell GBP.USD & AUD.USD

Long small EMG

 

Beta:

 

80% long Fixed income

20% cash

 

Macro comment on inflation

 

This is becoming theme and drivers over recent days:

 

Eurozone CPI "collapse" from 1.0% to 0.7% (vs. 1.1% expected!!!!!!!!) 

Europe now have LESS inflation than Japan (See chart)

 

 

 

Unemployment "dis-improved" to 12.2% - If this is a recovery….. I do not want to see a crisis!

 

Over last few weeks every policy maker in the world have proclaimed stability and improvement – now one day of data ruins the illusion. Do not forget disinflation is worst of all evils in economics from policy makers perspective:

 

The non-savers lose purchasing power, the savers gain. Creating even bigger divide and more inequality.

Debt is now an even bigger tax on growth and outlook – and debt projection will shoot much higher upsetting present budget goals and projections being performed among government officials..

Balance sheets of corporates will no longer expand as taking on new investments and machinery is cheaper done by….waiting…..

 

Europe basically asked for it (disinflation) and is now getting: Japanisation. No reforms and a lost decade where extend-and-pretend and hope was main driver but now the non-action policy is running out of time – It also increases odds on our main call for Europe next year: ZERO GROWTH in Germany and new lows in global interest rates. We had this call for a long time (Since August) and remain confident in it.

 

The economic impulses have different Sinus curve around a mean, what's so significant in our forward looking work is that most of our indicators TURNS DOWN in 2014 – hence our call for lower interest rates, lower employment, lower inflation, lower valuations and lower housing. 2014 is a year where all macro impulses turns down and hence create downward movement , but… the good news is 2014 is the low in our projected cycle – Q4-2014 / Q1-2015 will see low and quick true recovery with inflation right behind it. Of course this early on our projections is uncertain but the trend is clear: Into 2014 and 2015 it's about final deleveraging, about rediscovery of monetary pricing and an exit forced or non-forced from QE.

 

Too many paper is now indicating the futility of QE and Fed can't ignore it, what makes the point even more actual is the fact that all papers point to that QE have INCREASED INEQUALITY not improved it, which is a growing theme in policy cycle, where even Merkel is trying to construct EU policy where she at least in name acknowledge the need for more social balance on macro policies.

 

Below is what I call my 5+ - Five themes which is important to watch, the below is screen dump from presentation this morning (ahead of shock data)

 

 

 

 

 

 

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

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Stress Indicators being renamed: Complacency Indicators :-)

Overall comments:

 

The Stress Indicators may need to be renamed: "Complacency Indicators" – The market is sleeping – ignoring systemic, VaR risk, and valuation conservatism – this DOES NOT mean however we can't go higher first. The repricing of None-tapering is

Impacting yield curve which in my opinion drives absolutely everything…….. 

 

We have since 3.00% in 10 Y US yield called for return to 2.25% - (September 9th interview on Saxo TV: Why I'm moving to 80% in fixed income: http://www.tradingfloor.com/posts/jakobsen-moving-80-portfolio-bonds-1020127498)

 

We remain with that call and still see even lower rates when the economic reality hits home  - This is our projection from June 24^th, 2013:

 

 

 

 

 

Headlines:

 

Comment: Drives EVERY asset in the world – nothing is excluded.

 

Comment: Considering the equity optismism it's a poor showing….

 

Comment: Up on stocks as market reprice FOMC is the easy trade, but market and prices elevated – still, though, "relatively" cheaper than in early May..

 

Comment: We note that Gasoline price is big part of "momentum change" in surveys (We value survey's value overall as ZERO – it's a questionnaire for Christ sake!)

 

 

Comment: EURUSD certainly not driven by relative rate spread – biggest spread in memory… something needs to give…..

 

Comment: Should support Gold toward our 1525 $ target end of Q4

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

Steen's Chronicle: Rediscovering the price of money

 

Rediscovering the price of money

 

When things can't get worse

 

For some time now, I've been starting start my speeches by saying: "I am the most optimistic I have been in almost thirty years in the market, if not only because things can't get any worse."

 

Is that true, and more importantly how do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world?

 

History will tell us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world – at least not yet – but on the other hand we have never had less growth, worse demographics, or higher unemployment since WW II.  This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of European youths.

 

Policy makers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that's a mere illusion. Italian banks today own more government debt than before the banking crisis, leaving them systematically more exposed to their own government, not less.  The spread on government bonds between Germany and Club Med is down to below historic averages, but the price has been a total suspension of the "price discovery" of money.

 

The price discovery of money is the cruel capitalistic part of any system. An economics  textbook would call it the modus operandi by which capital is allocated where it can find the highest marginal utility. In practice, this should mean that the market dictates the price of money beyond one year – while at durations of less than one year, the central banks determine the price of money. The beauty of the system is that money is allocated in an auction where the highest bidder for "money" or "credit" gets filled on the price he or she deems to match his expected price of money.

 

Contrast the market driven model with the present "success story" of relatively low sovereign spreads in Europe, which are driven by ECB President Draghi's promise to do whatever it takes to keep the Euro out of trouble. He has threatened to activate the EFSF and the ESM plus the full arsenal of policy tools to ensure stability.

 

By doing so, he has effectively suspended price discovery for sovereign debt and for money, as the ECB and local central banks will provide infinite liquidity to local banks and hence indirectly to their government in any market conditions. This one-sided offer from the ECB and the market means there is the market has no power to discipline the government with higher rates or to allocate credit more generally. We have simply disconnected the market and the price of money.

This comes after Draghi's LTRO, a cheap funding for banks with little or no collateral, or the closest thing to QE you can have without calling it QE.

 

This is a problem because corporations that need to finance long-term projects, like building a power stations over six to eight years, need a price for the credit they require throughout the building period. Right now they have an almost flat yield curve from zero to 30 years, which would be fine if it was realistic, but the problem is that one day in the "distant future" when the market normalizes, interest rates should revert to their normal price, which is roughly inflation plus a risk premium.

 

In the case of an industrial company, an appropriate loan rate calculation could be something like inflation + Libor + a risk spread, which might work out to about 7%. Compare this with the rates available for highly credit-worthy companies Recently, Nestle  was able to issue a four-year corporate bond at 0.75% - the lowest ever. Yes, it's nice for Nestle but remember the situation is created by the central banks presence in the market, not just due to the financial strength of Nestle.

 

A move from less than one percent to seven percent would administer an ugly shock to companies.  We have created a negative vicious circle in which not only investors, but also companies are depending on low interest rates forever. They have priced their future earnings and costs on government support prices rather than on realistic market prices.

 

The worst thing about the situation, however, is that the reason a blue chip company like Nestle can borrow at less than one percent in the capital market is the lack of alternatives for banks and investors. Less credit worthy SME's, which make up as much as 80% of many countries' economies are not allowed to borrow. They are deemed too risky to lend to at the current "market rates" even though they hold the key to improving the employment and productivity picture. They are willing to work cheaper, longer, harder and with higher risk tolerance in order to survive. So the remaining 20% of the economy occupied by large and publicly listed companies and banks get 95% of all credit and 99% of all political capital. In other words, blue chips receive artificially low interest rates only because the SME's don't get any credit. Herein lies my continued belief in the my traditional opening statement: things must get better soon because they can hardly get any worse.

 

We have never been in a more dysfunctional state at the corporate, political and individual level in history. It's time to realize that the reason capitalism won the war against communism in the 1980s was its strong market based economy – based on price discovery. Now the policy makers in their "wisdom" are copying everything a planned economy entails: central planning and control, no price discovery, one supplier of credit, money and the corollary effect of suppressing SME's and even individuals.

 

Finally, history offers a compelling lesson: the last time the Federal Reserve engaged in a sizeable QE was in the 1940s. The low growth and falling inflation only reversed when Federal Reserve stopped intervening due to a severe recession brought on by the policy mistakes of keeping QE in place too long.

 

In 2014, a bout of near or real recession in Germany and the US could kick start the price discovery mechanism again, which will help us to start healing the deep wounds left by years of policymakers compounding their errors with round after round of extend-and-pretend. Getting to the bottom is good in one sense: the only way is up.

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

 

 

 

 

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Outrageous Predictions 2014 - Do you have a strong call

Dear All,

 

We are just about to start on the Outrageous Predictions 2014. I would love to get some input from you on your thoughts and big calls for 2014.

 

Remember the definition of OP from us is always about single events which could upset the present calm and extend-and-pretend. You can submit one, two or ten we will appreciate any contribution and like last year will make an addendum with all the calls.

 

Looking forward to some great calls – and Yes, we will check some of last year calls as the year ends.

 

http://www.tradingfloor.com/posts/saxo-banks-outrageous-predictions-2013-extreme-complacency-1677653761

 

Thank you in advance,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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FOMC and forward guidance....

 

Hat-tip – Ian

 

http://www.telegraph.co.uk/finance/alex/

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MACRO DIGEST: Impasse is the word...

Just touched down in Brazil and I am slightly surprised to see the calm with which the market deals with the US government shut-down. True in the short-term economic impact its damage is limited, but how about the politicians and their inability to reconcile themselves with their voters? 

A stunning 72 pc of Americans oppose the government shut-down, CNN reports that 46 pc will blame the shut down on the Republicans and 36 pc on Obama. Meanwhile 800.000 public employees will be furlonged and an additional 1 million workers will go without pay.

The damage done is hard to quantify as its dependent on how long the shut down is in place, but here is a few estimates:

IHS says one week will cost 0.2 pc of GDP. 21 days will ocst 0.9-1,4 pc of GDP, meanwhile Bank of America Merill says two weeks equate to 0.5 pc and all October will cost 2 pc of GDP.  Basically the price for from 0,2 pc to 2,0 pc which is a lot in an economy which by Wall Street prior to the shut down was on track for less than 1.6 pc growth YoY after 2.5 pc in 2012.

It has been 17 years since the last shut down during the Clinton years and as the bulls like to point out the US economy grew stronger not worse after the shut down, but more importantly it was preceded by a  massive sweep by Newt Gringrich and the Republican party using the the Contract for America to unseat the Democrats - Wikipedia

This led to the President Clinton eating something of a humble pie on the budget having to promise to balance the budget over seven years.

The early 1995 shut down was from November 13th to November 19th. Clinton vetoed a continuing resolution passed by the Republican controlled Congress. A deal was reached allowing for 75 pc funding for four weeks, and Clinton agreed to a seven year timetable for a balanced budget.

This was followed by second shut down from December 16th, 1995 to January 6th 1996 where subsequently the Republicans demanded Clinto propose a budget with a seven year-year time table using the Congressional Budget Office numbers, rather than Clinton's Office of Management and Budget. However Clinton refused. Eventually, Congress and Clinton agreed to pass a compromise budget.

The US economy went on to perform and the Congress at that time worked to keep each other in line, rather than to ruin any attempts to make politics. Much have changed since and to be honest having lived in the US and as someone who have to deal with politicians on a regular basis I am losing faith in this breed of humans calling themselves politicians. They stopped representing their voters long time ago, now is its all Facebook updates with empty statements and pointed fingers.

The first practical impact on the market will be a lack of Non-farm payroll next Friday and then the October 17th debt ceiling limit expiring. The government shut down could merely be an appetizer to the debt ceiling debate but to me, still, the most important thing will be that FOMC will not be able to have any data available to them before we go into 2014 due to distortion, late fillings, refilling and the like. 

Meanwhile our expected trend change in housing and employment is about to start as we enter Q4 today. The increase in noise will make the consumer and corporations more defensive and unlike 1995/96 the US economy is running on empty.

Strategy:

Remain long core fixed income. 2.25% yield(10 Year US government bonds) still likely despite the odd talk of 'default' in the US after October 17th .

The price tag which politicians keeps missing remains:  No real reforms and a potential growth outlook which at best is now at 1.2% for the full year in the US - if that's 'recovery' then I need my school money back.

Steen jakobsen

 

 

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