60 minutes: Is the US stock market rigged...

Michael Lewis getting maximum exposure for new book, but…. At the same time HFT is being investigated by all relevant agencies…. The story of "how it was discovered…." Interesting..

 

http://www.crossingwallstreet.com/archives/2014/03/60-minutes-is-the-u-s-stock-market-rigged.html

 

Reference:

 

NY AG's new crackdown targets HFT: http://www.forbes.com/sites/halahtouryalai/2014/03/18/ny-ags-new-crackdown-targets-high-frequency-trading/

 

Virtu Filing shines light on HFT: http://www.bloomberg.com/news/2014-03-11/virtu-filing-shines-light-on-business-of-high-frequency-trading.html

 

 

 

 

 

 

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

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
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Lucky? Australia is pre-Thatcher Britain: Economist... The Australian economy visited

Morning,

 

Always a risk letting a journalist express your views, but I think AFR's Philip Baker did a good job for me. Australia is back in total denial. Rates is going up, there seems to have been a magic moment where Australia must have done some reforms, reduced their horrible terms of trade, their trade unions and found the magic? It seems to be a rising housing market supported by the relatively dangerous systemic risk of letting SUPER FUNDS buy investment properties.

 

Let me stress: I love Australia! It's one of my favorite trips of the year. The Australians are open, engaging and extremely hospitable.

 

The new government seems willing to reign in some of the excess, even getting into fight with unions, but right now, the Australian capital market is dead certain RBA will hike once or twice, the AUDUSD going to parity, and that world is in recovery…… well like in Europe(and EURO @ 1.4000) if the AUDUSD does go to 1.000 then both the recovery and rate hike will be off and Australia close to the first recession in decades.

 

I found Australia so 2007/08 – no one wants to invest in anything but equities………I love equities but not the present risk reward of 5-10% upside vs. 25/30% downside, but……..hope is what dreams are made of.

 

My take:

 

RBA will not hike – cutting cycle will end in 1.75/2.00 .

AUD will see 0.95/.96 but then head down to 0.8000

AUS growth will be 2.25% max for the year.

 

Safe travels,

 

Steen

 

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The powerful illussion of central banking

The key market to observe today is EM FX

 

 

 

The "surprise" in the FOMC announcement was that the consensus among FOMC members for hike seems to have moved forward to June 2015 (from September-December). Personally, I think it's more positioning creating the volatility than actual believe in that FOMC projections, for once, should be right!  An excellent example of Fed's lack of reality during the 2008 crisis was released earlier this year and a nice summary was done by New York Times: The Fed's actions in 2008: What the transcripts reveal

 

Please, do not think for one minute that FOMC have any clue about the economy six months from and even less so looking into 2015 – That being the case though the fixed income market traded 20-25 bps higher in expected yield…. And.. we have seen rate sensitive assets like Silver drop pretty hard – trading now around: 20.31 in spot XAGUSD.

 

There is ample room for reversing this sell-off but still the key component to look at remains EM FX – especially the Fragile or even Fragile Eight…..

 

The main story remains that of ASIA's rebalancing and then indirectly the  EM FX though – this chart from Lawrence McDonalds tell a clear story – at least to me…:

 

 

Standard Chart – the EM Asia bank of choice(with HSBC) is now seeing its 5 YR "insurance premium" or rather CDS rise significantly – part of this of course explained by recent defaults in China, but mostly driven by an expected smaller growth/earnings in Asia plus the asynchronic rate setting by major central banks (read: BOE and FED)

 

The first chart(below) shows how the USD vs. EM FX Asia already had moved ahead of the FOMC this week, so now the key thing will be the reaction over the next 24 hours:

 

Silver is a bad sign, but for USD/EM to start a new crisis we probably need both higher US Yield……and some catalyst reflecting the need for weaker FX rates in these countries. A warning signal have been issued as a bare minimum.

 

I remain very positive US fixed income over the balance of the year, but fully expect the fire-works mainly to be in H2 of 2014 when the market, and even, FOMC realize that real recovery is still an illusion.

 

 

 

 

 

The Standard Chart CDS, Silver and USDCNY tells us that powerful trends which have been in place multi year is under pressure. This despite policy makers telling us that "rates will stay low for longer". The reality of course, my main point, is different as this final chart shows you. Short-term interest stopped going down a long, long time ago – an Einstein quote comes to mind (rewritten here): "…for us central bankers the separation between the past, present and future is only an illusion, although a convincing one"..

 

Safe travels,

 

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

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
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Macro Digest: State of flux. Productivity trends tells us we will have low growth for much, much longer...

 

This may be one of the most boring and data driven notes from me ever(Yes, I know – what news?)  but… it's probably one of the most important in terms of understanding the present economic condition which I have coined: 2014 – A state of flux:

 

Productivity and demographics remains the two most powerful drivers of our economic model – it's almost ex-ante assumed we can always keep growing (despite both the mathematically and practical limits to that concept), but how well are we doing in the one factor which have "saved" us in the past: New innovation and technology?

 

There are two major reports out:  The Conference Board – 2014 Productivity Brief – Key Findings  (Financial Times note on the report here) & Economic Report of The President where Chapter 5 deals with productivity. Both have bad news for you:

 

 

 

Chart online: http://www.tradingfloor.com/posts/macro-writing-report-productivity-morning-conc-1380444010

 

The trend is very clear – innovation/technology is reversing dramatically down in emerging markets, which of course explains the dramatic negative return on investment experienced in China and rest of Asia.

 

More concerning is the long term trend of the mature economies – an easy, and probably too easy, assumption would be that we have not 'really' invented much since the 1970s. There could be measure problems with a big data economy, but aligning this chart and the sub-par growth the world is experiencing under the easiest monetary conditions in history does however prove a point. The world is locked a lower rates unless we initiate and support innovation and technology use.

 

The problem as often stated by me being that under the Bermuda Triangle of economics model pursued by policy makers: The 20% companies listed on the global stock market gets 90% of all credit and 95% of political capital, while the SME's which is 100% of all private sector job growth gets 10% of credit and 5% of political capital. Failing to understand and get these numbers will only make the above chart and trends worse, not better.

 

The world is in a dire need of abolishing big business support and focus on SME's – which would even have the added advantage of reducing the inequality as QE and QQE supports directly the top 1% of the population relative to middle class and lower income.

 

The President report, of course, is less negative but using their own charts I think you get the point:

 

 

 

This shows how 52% of productivity since WW II is driven by "innovation/technology" – and how labor itself only directly adds 10% while using more capital production increases productivity by 38% - so again: access to financing and technology is the main drivers of long term growth. The lesson should be simple, but yet every government in the world fail to act on this.

 

This chart show overall non-farm productivity and multifactor productivity (innovation et al) side by side. Again – there is lead from investment in tech/innovation.

 

 

The San Francisco Fed does a "real time" time series although its relative late to market:

 

Finally, my inspiration to look at productivity came from reading this excellent blog: Conversable Ecnomist, Timothy Taylor: The US Productivity Challange

 

Timothy have a number of conclusions:

 

 

 

And the key point (as it supports my SME vision J):

 

'The agenda for productivity growth is a broad one, and it would include improving education and job training for American workers; tax and regulatory conditions to support business investment; innovation clusters that mix government, higher education, and the private sector; and sensible enforcement of intellectual property law. But here, I'll add a few words about research and development spending, which is often at that growth in innovative ideas that are a primary reason for rises in productivity over time'

 

The biggest problem? It means policy makers and politicians needs to step away from macro and let the micro-economy take its proper role that of the engine innovating, finding new markets and working with one of the few laws of economics that makes sense: Say's Law, in short: Supply creates its own demand  - the world is stuck in the middle of the road and as the late Baroness Thatcher said: Standing in the middle of the road is very dangerous; you get knocked down by the traffic from both sides.

 

Strategy:

 

This trend is not new, but its entering a dangerous phase as its moving into negative  - the immediate conclusion on investment remains the same:

 

#1: Asia needs to rebalance and invest in "better" quality

#2: Growth will be lower for longer than market and consensus dictates.

#3; Being long fixed income remain my asset of choice in 2014, as I expect it to be the only asset class up on the full year.

 

Safe travels,

 

Steen

 

 

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

 

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Japan and USDJPY - make or break?

March is always key month for companies in Japan – it marks the end of the financial report season (April 1^st – March 31^st) but this year is more important than normal due to three major factors:

 

#1: The VAT hike on April 1^st from 5% to 8% is making the Japanese the most pessimistic on the future relative the present conditions. Actually is beyond any norm we have seen:

 

 

Of course this looks to be a mean-reverting process which would indicate that the Japanese are too concerned about the VAT hike and its impact. An alternative interpretation being that the individual investor/Consumer actually knows better and reacts not to the monetary experiment of the BOJ and the government but to the reality of knowing spending money you don't have and printing money you don't have collateral for is a short-cut, but to ruin. Maybe the Japanese have seen this before?

 

# 2: Nikkei and TOPIX no longer outperforms, so even international investors is about to lose faith or?  This chart inspired by Barclay's research shows ratio of TOPIX to S and P. The normalization is always done…

 

 

 

#3: USDJPY is failing to make new highs – if anything we probably have seen this year hig, and USDJPY remains the biggest conviction trade among speculators and investors alike. I am yet to meet strategist or hedge fund manager who does not believe USDJPY is destined for 110+ ….minimum…. but…..looks at these two charts:

 

 

This shows a momemtum based model – its becoming "significant" meaning the best way to trade this is between… 70 and 30 (selling when 70 is broken and buying when 30 is pierced from below)….

 

Furthermore our forward looking model JABA have this to say – top is in… correction will 15 figures plus/minus

 

 

Finally, note this: 100 SMA – simple moving average – is used by Japanese hedgers almost exclusively to trade JPY instruments. 100 days equals three month and that's the average hedging program, meaning that the present 102.35 moving average vs. a spot of 101.50 means Japanese hedgers will need to sell more as we go down in order to be fully hedged. This being said: commercial flow remains small relative to the speculative, so far more important is the key support levels. My take is that 101.00 needs to hold.. if broken we are on route to first 96.00 then ultimate low 90s….

 

Whether is make or break I cant honest predict, but I would argue that the "non-miracle" of Japan called Abenomics is about to be exposed ……..

 

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

 

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Macro: Global risk in one chart:

This is 5 Year US CDS from Russia and China – Russia is concerning but the recently "accepted" defaults in China also have increased the CDS prices. China now trades ABOVE (worse than) Ireland:

 

 

http://www.bloomberg.com/news/2014-03-14/china-bond-risk-exceeds-ireland-as-defaults-unavoidable.html

 

 

 

 

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

 

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China: Slow down confirmed & politcally approved...

The overnight Retail Sales & Industrial Production came in below expected and this despite the big media focus on China's NPC & CPPCC 2014 annual session

 

 

By Bloomberg News

     March 13 (Bloomberg) -- China's industrial-output, investment and retail-sales growth cooled more than estimated in January and February, signaling an economic slowdown that makes the government's 2014 expansion target harder to reach.

     Factory production rose 8.6 percent in the two-month period from a year earlier, the National Bureau of Statistics said today in Beijing, compared with the 9.5 percent median projection of analysts surveyed by Bloomberg News. Retail sales advanced 11.8 percent, while fixed-asset investment excluding rural households increased 17.9 percent.

     Premier Li Keqiang today said there's some flexibility around the nation's 7.5 percent growth goal this year and that the government's key concerns are jobs and livelihoods. Even so, the slowdown may add to chances of stimulus and test the Communist Party's commitment to give market forces a bigger role in the world's second-largest economy while clamping down on overcapacity, debt and pollution.

     "The fairly dramatic slowdown is unusual in Chinese economic history of the last decade" and today's figures are "shockingly weak," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said in a note.

"It points to a major deceleration of momentum in the beginning of 2014."

 

The below chart shows how even the weak PMI underestimates the weakness of the Chinese economy:

 

 

The data confirm our long standing view that China (& Asia) is in cyclical restructuring which will mean lower growth in both China and the world.

 

What's even more interesting is that President Li seems to accept the growth target of 7.5% will not be met: http://www.bloomberg.com/news/2014-03-13/china-s-growth-target-flexible-li-says.html

 

 

 

After today's number a number of my esteemed colleague is calling for 50 bps cut in RRR, however looking through "official China's" commentary I found this one:¨

 

+------------------------------------------------------------------------------+

BN 03/12 23:04 *TIME ISN'T RIPE FOR CHINA TO CUT RRR: SEC. JOURNAL COMMENTAR

+------------------------------------------------------------------------------+

 

Time Isn't Ripe for China to Cut RRR: Sec. Journal Commentary

2014-03-12 23:35:11.745 GMT

 

By Bloomberg News

     March 13 (Bloomberg) -- Time isn't ripe to cut reserve requirement ratio because economy doesn't need large scale stimulus at the moment and yuan won't see depreciation trend, China Securities Journal says in front-page commentary today written by reporter Ren Xiao.

  * PBOC has enough tools to boost economy and a RRR cut after a

    period of pause will signal of change in policy direction,

    which is unfavorable for expectation management, the

    commentary says

  * Link to commentary: http://tinyurl.com/kxyyyqb

 

 

 

Meanwhile USDCNY continues to edge higher… and market is looking for a doubling of the band relatively short to encourage two-days trading.

 

 

OVERALL:

 

The data confirms a strong trend towards disappointment on growth – this will eventually H2-2014 lead to dramatic slow-down in export orders from Europe (read: Germany) – I still see Q4 Germany flirting with negative growth rates as this dramatic and for many unexpected slow-down work itself through to the providers of cars, luxury good and investment capital.

 

It will also have deflationary implications as China now clearly is once again pursuing a mercantile strategy of regaining lost ground to JPY and KRW. Expect more fireworks on CNY than consensus.

 

Safe travels,

 

Steen

 

 

 

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

 

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Macro Alert: Crude to test 85/88 $ WTI?

It's not my role to run Saxo's official view on Crude. That job I leave to my expert Ole S. Hansen, who by the way is doing an excellent job – if interested he keeps his commodity client very smartly informed on: http://www.tradingfloor.com/traders/ole-hansen

 

…but….as part of our JABA model – our predictive economics model, energy is key component. This is how we see the rest of 2014 using our data:

 

 

This is "brave" call but when you consider the speculative size of the market – you get the "potential" on the downside. Furthermore as our model have said all along:

 

 

·         Asia is driving global growth down led by China (see our Q1 Quarterlook) – due to the desperate need for rebalancing away from topline growth

·         Q1 and Q2 will be disappointing on growth. No, it's not the weather – it's the economy stupid! – this will drive demand down..

·         Deflation will be fought – wrongly- but policy makers over the summer, exactly at a time, where our JABA models shows us its turning up again. Fed and policy makers despite their 1000s of PhD's remains focus on linear analysis in real time, despite the fact that the economy LEADS by three month – or put differently. The weaker data right now will create policy response in three months… deny facts, deny facts and deny facts are the first three rule of central banking…

 

The one risk remains escalation of geopolitical risk but supply from LatAM, Africa and US/Canada/Mexico will flow more richly, Ole S Hansen even tells me that the supply/demand function should dictate lower oil prices.

 

We are long APR-16, 95.00 strike puts (0.55 cents vs. price of 1.25 now)

 

Safe travels,

 

Steen

 

 

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

 

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MUST READ: Gundlach: Interest rates will rise slowly, then quickly...

Jeff Gundlach always good to read: Direct, opinionated and never afraid of taking stand.

 

http://www.businessinsider.com/jeffrey-gundlach-mar-11-webcast-2014-3

 

 

AND two of the major points – which both bodes poorly for Fed meeting its inflation target mandate;

 

 

 

 

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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Dr. Copper has ruled: Lower growth is inbound..

 

Steen Jakobsen saw this and thought of you!             Steen Jakobsen @Steen_Jakobsen     Copper known as the only market with a PhD in Economics broken big long term support. This is GROWTH warning pic.twitter.com/x6lakucBwf         04:11 PM - 07 Mar 14                 Join in!     If you believe Steen Jakobsen is engaging in abusive behavior on Twitter, you may report Steen Jakobsen for spam. Forgot your Twitter password? Get instructions on how to reset it. You can also unsubscribe from these emails or change your notification settings. Need help? If you received this message in error and did not sign up for Twitter, click not my account. Twitter, Inc. 1355 Market St., Suite 900 San Francisco, CA 94103

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