onsdag den 26. november 2014

MACRO update: ''A great deal of intelligence can be invested in ignorance when the need for illusion is deep” - Sam Bellow

Just back from four cruel weeks of travelling: Bucharest, London, Sydney, Melbourne, Lisboa, Porto, Madrid, and Zürich . Housing bubbles everywhere to be seen and all denied by local policy makers and economists. The big sell-off in 2015 will come from housing and housing related investments as marginal cost of capital rises through regulation and "margin calls" on banks as their profit to GDP too high for the economy to function properly. The dividend society is here and true manifestation of Japanisation is not a future event but a thing we are living and right now….

 

From tactical point of view I live in a very simple world:

 

 

Core trading view:

 

10Y Bond yields(US) will continue lower into Q2-2015.  I see acceleration to down-side and mainly in the US where 10 Y could hit 2.00% and bottom out at 1.5% by Q2 as GDP comes off relative to "lift off" consensus.

 

 

·        European factors:  Lower than anticipated growth in Germany (China rebalancing, lower US current account deficit and EZ overall) – Impact from Russia crisis only beginning to impact real economy and of course the deflation which ECB promised us would never happen…….

 

·        US factors:  Energy sector moving towards default and closing down capacity – subtracting 0.3-0.5% from GDP plus lackluster housing market despite record low mortgage rates plus contraction in monetary aggregates……

 

·        China – Despite RRR cut the economy is already at 5.0% in real terms and without reform in health care(why people save money), competition (anti-corruption) and deeper capital markets (sort of happening) the marginal change will continue to be negative.

 

·        Emerging Market – Strong US Dollar is the last thing the EM market needs. It's a de facto tightening of monetary policy at a time where "export markets" continue to weaken.

 

The world is barely surviving at an average yield of 1.5/2.0%  - Market forget that we have two drivers of growth: US and Emerging markets (EM). EM is under pressure as we end 2014 forced into the defensive by lack of reforms, but also a much stronger US Dollar, which means the "mean-reversion" trade is for 2015 is for WEAKER US dollar to rebalance towards EM growth as the path of least resistance.

 

I have no doubt EM becomes major buy sometimes in Q2 when world is off the concept of ever stronger US dollar based on a growth lift-off which is never coming..

 

EEM (iShares MSCI EMG) vs. S&P 500 ----  S&P lead by 11%+ (reversal in 2015?)

 

 

The never ending illusion of "lift off" for the US economy

 

Again the revision data for US GDP shows Real Personal Consumption expenditures increased 2.2 percent in the third quarter – A much better (the only reliable) indicator of growth as inventories, investment and trade generally adds up to zero over a full year…. In other words where RPCE goes US economy. Too see why this is please see composition of GDP in the US here:

 

 

US growth has been 2% plus or minus since the financial crisis started, this year it will be 2%- next year? 2% nowhere close to the 3-4% expected by the markets  building on "surveys" and feel good factors. Trust me as someone who spend too much time travelling this year, the world is worse off, not better.

 

I meet frustration, lack of access to credit and almost desperation when the question is on asset allocation, but….2015 looks like a year of change… FOMC will definitely continue to sell the "pipe dream" of normalization, BOJ is done and toast. That anyone believe printing money will leave Japan better off is a mystery to me. Compare the FX policy of Switzerland and Japan. One has ever rising currency, Switzerland, which forces its "Mittelstand" (SME's*) to be fleible, productive and acquisitive, the other Japan, have tried to intervene in its currency in order to avoid changes and reforms.

 

No, if there is any reality left in the world the market will realize by its mistaken support for long USDJPY positions that productivity gains, competitive edges is driven by the "need" to change not from isolation from cause and effect, but that's also a 2015 story.

 

In closing I have very little positions – the stock market is on a mission to kill the shorts, which will probably succeed, the FX market believe in Santa Japan, and ECB continues to do nothing but talk, but for now it's enough to sell the product which is risk on at all costs.

 

The correction will be deeper and deeper as market is dislocated through zero interest rates and an investor crowd which is rewarded for throwing all conservative risk rules overboard in a year where we again have double digit gains on….. low interest rates.

 

Let's hope ECB plays ball for the market to buy some more time, for now we play musical chairs, and when the music stops more than one chair will be missing……

 

Positions:

 

75% of risk is long FI (mainly US Fixed income)

10% risk in equities, mainly mining plays (Alcoa & Fortescue) – looking to add VALE and others in sector on inflation expectations hitting rock bottom in Q1….

5%  long Silver… bought on sell-off…

5%  Natural Gas – preparing for long and cold winter…..

5% Upside optionality in EUR c USD p

 

How bad is things? Well, let me give you my starting slide from the presentations done in November:

 

 

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

 

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

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