Steens Chronicle: New beginnings....

I can't say I am big fan of New Year and starting over but It's part of life and more importantly the investment cycle, by January 1st everyone is rested, they have all done a lot of reading and the forecasters are working overdrive (including me), but the best advice on January ever given was given by my old boss on Chase Propriataty desk: "Steen, never ever do any trades in the first two weeks of January and ignore all the forecasts...". Now two week have pasted so where are we in Steen-Land?

We have two major trends and two major potential upsets:

• Asia slow-down and how it makes deflation and lower yields my central strategy
• Deflation - the misunderstood economic realit
• Positive surprise: ECB put on stock market and economy
• Negative surprise: The EU election in May - things are about to get nasty

The two by two will be my first Chronicle this year, but as something new they will have a fifth point: Trading allocation. When I travel I am often told: "Love your newsletters, but... we don't really feel there is enough "trades" and accountability in them" - never one to shy away from challanges I have decided to add my internal trades to my research. All of these trades are done live, with a small amount of capital provided by Saxo Bank - so real time accountability and input.......

Asia slow-down

China is actively pursuing a strategy of lower growth as reducing the shadow economy now takes centre stage, on top of this most of Asia, certainly the current account deficit nations are all looking for weaker currencies, lower import and yes, lower growth.

US and European growth from 2009-2013 was artificially kept higher than business cycle would dictate by overinvestment by Asia. China did almost 600 bln. US of fiscal expansion in autumn of 2008 (ahead of S&P low in March 2009 @ 666.00) - and those investment came back to US and Europe through rising export orders. Now the risk is that to normalise investment to GDP ratio's in Asia a by product will be lower inflation and lower export volume for the high flying export companies of the world:

HSBC Global Research, 6 December 2013 piece: 'Lacking demand' have two great charts to illustrate this point - through looking at the GDP growth and the Investment-to-GDP ratio. Good growth is linear correlation indicating investment return is positve and creating growth. Bad growth is rising Investment to GDP ratio while growth trails.... 

The gap opening up means growth now is falling due to falling investment return. The "easy" part of Asia growth is now done. Don't forget Japan grew approximately 10% pro annum in 1960/70s, 4-5% in 1970s/1980s, and close to nothing in 1990s/2000s. I am in no way saying that Asia will evolve like Japan, but growth will come down as like for like growth gets tougher due to high investment levels and still imperfect allocations models (read: plan economies).

It's also important to note that this change is not something new. The trend has been in place for a few years, and this is in my opinion behind not only the slower growth in the world but also now the deflation risk. HSBC here shows how growth and investment to GDP have change pre-crisis vs. post-crisis. Stunning results!

China have worst of all: Falling growth and rising investment - not difficult to see why they want to slow-down! Similarly with India. China and India will provide much less input to world growth from here and a country like Indonesia is now having real tough outlook with falling growth and investments! No wonder IDR has been one of weakest currencies last six months.

In 2012 world growth was 4.0% - 36% of this came from China direct, and another 24% came from rest of Asia, so a significantly slower Asia will start to hurt Europe and the US exporters as we go into H2 of 2014!

Deflation

Barclays have estimated the chances of European deflation as 50/50 chance using inflation linked products, but being more subjective I will say that next three to six month almost certainly will push more and more European nations close to zero inflation. Greece and Ireland already in deflation, Spain, Sweden, Denmark very close, and for the investors fearing inflation in Germany on the back of the so called labor market reforms, the surprising drop from 1.4% to 1.2% must have been a positive surprise!

The good news is that you don't need to use me or others to gauge the risk of deflation - there is an ETF which tracks the inflation/deflation risk called:  Powershares DB US Deflation.  An exchange trade note issues in the US by Deutsche Bank AG. The note offers investors exposure to the monthly performance of the short inflation index plus the monthly T-bill index return, reduced by the investor. Where is it trading? All time high!

 

AND.... Producer Prices continues to trend lower both in China and Germany - two or the world most impressive exporters:

 

Finally, deflation is bad for debt holders and good for the rich: or in other words: Inequality will increase in times of deflation. European Club Med vs. Club North will be painful and likewise in the US FOMC and Yellen needs to negate two major impulses for inequality increases: QE and now potentially deflation.

Positive Surprise - ECB goes to full QE

One conclusion from my trip around major financial capitals in Europe last week is: Be long European equities. If Steen Jakobsen is right then ECB will issue put through full QE. If Steen Jakobsen, again, is wrong then market will return you 10-20% based on recovery. 

There is no doubt that the ECB and to some extend the German government have stepped up and helped the market each time it has been needed but is it safe to assume it will happen again? Asmussen, who by many was perceived to be the "mediator" between German government and to some extend Bundesbank and the Club Med is now a junio labor market minister in the new German government. 

Furthermore I still see German export volumes coming down dramatically this year, which gives Merkel et al less room to help out with, but there is no doubt in my mind that the hedge fund and mutual funds is betting their bottom Euro that whatever happens the ECB will save the day.

Negative Surprise - European Parliamentaty election in May

I could of course also have added VAT hike increase in Japan (April), but as its already signaled I think this one is bigger. The European Election normally makes investors and voters eyes glaze over, but this could be different. Not only is the Far Right and Far Left gaining in most opinion polls in general Anti-EU mood, but now they have a common theme: Welfare Tourism.

Government and pro EU parliamentarians are hiding as the expansion of Europe now includes free labor market movement for Bulgarians and Romanians. There is claims that this have created welfare tourism where these relatively poor countries goes to northern Europe and to the relatively higher social welfare in simple arbitrage seeking job, failing and then claiming benefits. This upsets the labor unions, the far left and the far right. 

It is of course a natural price of free labor market but the problem is that Europe now is not only split in North and South divided, but also in West vs. East (or Old Europe vs. New Europe) Europe is at risk should the anti EU vote prevail, but for now... ECB will help - right?

Fixed Income:

Bunds: Been long as you know from Tradingfloor - took profit yesterday on 141.00 CALL - now slightly short based on my model which indicates risk of short-term higher rates. It should be noted that weekly model still indicates plain sailing for lower rates (my main 2014 call)

10 Yr. US - same as Bunds. Big risk of high in place soon. FOMC is on 28/29 and in circular argument we cant expect FOMC to continue tapering as they will argue that continuing tapering is signal in their own belief in their higher growth projection despite latest Non-famr pay-roll being weak. No position yet.

Gilts: Looking to sell soon - Model is turning down and the "success" of UK economy will lead to higher short term rates.

OAT/Bonos: Both have some room, so spread could continue in vs. Germany but risk reward is poor.

Commodities:

Gold: Bought 1200 Put today (See Tradingfloor) - trigger is technical, but FOMC meeting, the overconfidence in consensus, higher World Bank and IMF projections for growth will drive next week into FOMC.

Silver: No position but model is short.

Nat. Gas: Long - building higher trend in both daily- and weekly.

Crude: Long

Stock Market:

S&P: No position

DAX: No position - but getting close to sell ...

IBEX50: Shorted today at 10.432. Was in Madrid last week. Mood is brilliant, apparently they are about to good into growth.... Not......

Nikkei: Really interesting. VAT hike in April. Premier Abe still looking for the 3rd arrow for this bow. USDJPY failing to take out 105.00 for real must be disappoint. Watch USDJPY for sign, but Nikkei will be sold tonight.

FX:

USDZAR: Short......10.8450.

AUDUSD: Short... trade on tradingfloor from before XMAS.

EURNOK: Neutral. Had good run, but it could go higher this week..

EURSEK: Long.... Riksbanken not offering relieve on downside in yields to an economy which is performing below standard.

EURUSD: Slightly long, through options

USDJPY: Slight short, through options.

PERFORMANCE INDEX – 101 (+1%)

=========================================================================================================

Safe travels,

Steen Jakobsen

Chief Investment Officer, Saxo Bank A/S

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From: John J. Hardy (JJH)
Sent: 21 January 2014 16:16
To: Steen Jakobsen (SJN)
Cc: Felicity Glover (FGL)
Subject: RE: Steen's Chronicle: New beginnings...

 

I can't look stuff over that is already in tfloor – can you copy and past text from there?

 

From: Steen Jakobsen (SJN)
Sent: Tuesday, January 21, 2014 4:10 PM
To: Felicity Glover (FGL); John J. Hardy (JJH)
Subject: Steen's Chronicle: New beginnings...

 

Can you edit publish..please.. if John have time.. can you look it over first?

 

http://www.tradingfloor.com/posts/beginnings-1017883111/edit

 

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

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.

Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.