Macro Digest: A repat of Lehman ? Personal comment......& Tsipras Says European Leaders Won’t Dare Kick Greece Out of

There is EXACTLY the same feeling into the air as before the Lehman default. I remember being almost alone in thinking Lehman would fail to secure their life, but market and Fed kept seeing solutions last minute.

The decision is similar. Lehman was perceived too 'difficult' to save, actually very few people wanted to help them and don't forget Lehman paid significant overprice for funding +100/200 bps in one week deposits way before 2008...

Lehman was leveraged 30/35 x on BALANCE shee -Greece was in debt similarly exposed.

The 'morale' risk also similar and it comes from the MACRO Prudential Framework of always trying to buy more time..... which never works.... Fed's (re Lehman) plan was to buy more time... as Plan A, Plan B was "carrot and stick".....which blew up and Plan C was panic... and no plan. Lehman didn't have a plan, neither does Greece. Having no plan is not a plan.... as we are wittenessing...

We have difficulty dealing with non linear movements in markets... Hence the hope and believe... But again.. Let me stress the biggest risk is bloated VaR... (Value at Risk and correlations going to !) The unintended consequences like Bulgaria and Romanian bond routes yday, Puerto Rico likely default, and higher euro.

Market is chasing 'good hedges... Which doesn't exist.. Trust me as someone who ran risk and trading through 1992/1997-1998/2000,2008 and 2010/14....there isn't any good hedges only not having the bad positions in the first place... when everything is goes to correlation of one

Failure to secure last minute deal should see Dax down another 3-5%, explode credit risk to NEW European members like Hungary, Croatia, Bulgaria, and Romania even Poland should feel headwind.

My advice of taking six month holiday from markets unfortunately looks like good advice...

Also being in Shanghai market here is nervous ahead of opening... We are down 22% from peak...!!

Meanwhile as seen below Syriza keeps playing games......in a situation where are on the brink of civil unrest, shortage of petrol, EURO's, and food..... Beginning to understand why I disapprove of macro and politicians?

Safe travels

Steen Jakobsen




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Tsipras Says European Leaders Won't Dare Kick Greece Out of Euro
2015-06-29 20:24:35.131 GMT


By Marcus Bensasson and Christos Ziotis
(Bloomberg) -- Greek Prime Minister Alexis Tsipras said European leaders don't have the nerve to throw his country out of the euro, striking a defiant tone just hours after imposing capital controls on a country in economic freefall.
As Greeks come to terms with a new reality that's trapped their money inside the country's banks, 12,000 people gathered in the central Syntagma Square with banners that read "Our lives do not belong to the creditors." Tsipras, who passed by them en route to a televised interview, said the cost to the 19-nation bloc of Greece leaving would be "enormous."
After blindsiding negotiators with the announcement of a July 5 referendum on the European Union's aid proposal, Tsipras has plunged Greece into political uncertainty and economic turmoil with a series of emergency steps to prevent Greece's financial system from unraveling.
"The referendum will give us a stronger negotiating position when the talks resume," he said on Twitter. "The higher the participation & numbers of people voting ''NO'' the stronger our position will be."
With Greece in lockdown mode and banks closed, Tsipras blamed everyone but his government for bringing the country to the brink of financial paralysis.
On Monday, European equities sank, with the Stoxx Europe
600 Index down 4.2 percent while bond yields jumped in Italy, Spain and Portugal.
"The institutions were not interested in finding common ground, but rather to impose extreme measures," Tsipras said on this Twitter account, citing passages from his television interview with ERT TV.
Neither German Chancellor Angela Merkel nor French President Francois Hollande, the heads of the two biggest economies in the euro, have given any inkling of concessions.
European Commission head Jean-Claude Juncker said the "whole planet" would view a "no" vote as Greece turning its back on Europe.
"The Greek government's behavior has been beyond belief,"
German Finance Minister Wolfgang Schaeuble said in ARD television interview. "It won't be able to destroy Europe.
Europe is stable and Europe is standing together."

--With assistance from Paul Tugwell and Nikos Chrysoloras in Athens, Patrick Donahue and Arne Delfs in Berlin, Jeffrey Vögeli in Zurich, Celeste Perri in Amsterdam, James G. Neuger and Thomas Penny in Brussels, Justin Sink in Washington, Esteban Duarte in Madrid and Mark Deen in Paris.

To contact the reporters on this story:
Christos Ziotis in Athens at +30-2109296504 or cziotis@bloomberg.net; Marcus Bensasson in Athens at +30-210-741-9077 or mbensasson@bloomberg.net To contact the editors responsible for this story:
Alan Crawford at +49-30-70010-6237 or
acrawford6@bloomberg.net
Flavia Krause-Jackson, Scott Lanman
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Steen's Chronicle: Marginal cost of everything

There is little use of studying economics to be honest but one thing I did learn which continues to help me is this: Capital should always be allocated to the "marginal cost of capital".

 

What's interesting in this context is that the stock market in its most simple form is really an Input-Output black box: In goes "cost of capital" – out comes "profit". I don't think anyone will disagree that long- and medium term it's the profit which both explains and drives stocks best.

 

The most profitable companies get the best stock returns:  Philip Can Dorn, MarketWatch: (See the listed companies in link left)

 

The conclusion reads

 

 

 

 

 

This brings me to the "dilemma" of today's market: The marginal cost of capital is significantly higher. My own Marginal Cost of Capital chart (50% US, 25% Germany & Japan 10Y yields) is up from -3.0 Z-score to +1.0 since low in late January – a significant move by any standard.

 

The average cost of capital has risen 55 bps and 65 bps earlier this month!

 

Of course there is a delay in time from rising rates to profit – the "black box" takes 6-9 month to process the changes in input prices (cost of capital) but it increasingly clear that should the stock market continues up, and the consensus is more positive than any time before, it will entirely be driven by increase in multiples.

 

The credit cycle peaked in March/April last year and now the cost of capital has been rising since January (six month) which means by September/October the full impact will be felt on profit. There is also some good reasons to expect buy-back programs to lose some steam as the continued aggressive buy backs are mostly funded not from free cash flow created but new net lending meaning we are getting "worse" quality earnings on top of rising input costs.

 

I note that several people love to comment that I am always "negative" on stocks, that may be the case when journalists quote me, but in terms of money managed I am neutral – not long, not short – I have not done a stock index deal in more than six months and I maintain my equity exposure at the required 25% mainly through mining and commodities now.

 

Here is my "official" view on S&P-500 dating back from February 2015:

 

 

Far from "bearish" I guess…..

 

The credit cycle also peaked a while back:

 

The real peak was in April 2013, with a new "lower" peak in April 2014 – The above chart shows US high Yield (HYG) vs. YoY return in the S&P500. The correlation seems reasonable…..

 

But let's look a more charts and marginal cost of capital:

 

 

Leveraged loans – high risk credit lending is also coming off.. again peak was April 2014-ish….

 

In more liquid assets – the 10 and 30Y generic US yield and the 30 Y average Mortgage rates looks like this:

 

You can ignore these rises in capital cost at your peril but I would warn that this is NOT going away – we can discuss Fed next move in 3D, 50 colors and with conviction but the cost of capital is rising already even before Fed is starting its "normalization". Fed is now priced to go most likely in December, but I remain with September as December becomes political with Primaries and US elections. The data should be "good enough" – not great but trend will be rising (from very low)

 

The strategy for most assets remains one of wait-and-see to me: I keep recommending the few people who wants advise to bring back their stock portfolios to January 2013 level – keep the profit in "slush fund" to be used later. There are too many unknowns to proceed full steam ahead – the tax of "volatility" in now again increasing:

 

 

The "catalyst" for change is the first Fed move-  It will be full blown "margin call" – if you add my models plus FED consensus together with the "prediction" made in February all of the sudden looks interesting…..What is clear is that the market "expected return remains zero over 3, 5,and 7 years… have you play that soon becomes a an exercise in capital preservations.

 

Safe travels,

 

Steen

 

 

PS: Greece- to be honest I don't see Greece going away – everyone is losing now, the whole debate is being defined by emotions not long term solutions. Greece will fail again, only because they have no interest in changing their ways. They are in economic and political Catch-22.

 

 

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

 

MACRO DIGEST: FED: One-and-done? / Stress Indicators / Credit cycle peaked in June 2014

First the analysis of FOMC: There remains only one question of relevance for the future cost of capital: Will Fed do one-and-be-done (or max two) or will they start traditional rate hike cycle?

 

Yesterday FOMC gave us a clear indication: They believe they will hike twice this year. (September /December) – and then go slower at 100 bps per year.

 

In the chart below yellow represents the slower hike cycle now in place – It's of course still above the "consensus of Wall Street" but even Wall Street is beginning to understand that FED hikes will not be based on economic data alone but an almost desperate need to normalize the monetary policy.

 

 

I personally think both are wrong – to me the higher and more aggressive Fed in balance of 2015 will "kill" the nascent growth pulling US and Europe back towards zero growth which will give us one more look at all-time low interest rates before we start new secular change.

 

Of course, the more direct play is to wait for Fed to hike twice and then go short "cost of capital" as in short equity and bond vs. long commodities and EM with a weaker US Dollar….but I still see total move of +100 bps from low in Germany and US yields to top in 2015 – then a sell off / recession, then the REAL START on a new cycle based on the true improvements coming into the micro economy:  Better lending demand, monetary aggregates rising, Silk Road closer to being online, big and improved current account balance, lower average price of energy… The move of money from non-productive "paper money" in Wall Street, to Main Street. The reversal of the 80/20 rule I so often have mentioned.

 

The reason this recent move higher in yield is "false" is that it's only  the "term premium" which is going up or in plain English: It's the inflation compensation in the bonds market which is rising without economic growth to support it….Interest going up on higher demand and growth is fine, interest going up as monetary derivative is often dangerous, please remember we come from zero inflation, zero growth and zero reform. The move out from zero bound will be full of false starts and disappointments.

 

The consensus and Fed position is now roughly like this:

 

Fed: Two hikes in 2015 – then 100 bps per year from there onward.

Wall Street Consensus:  One hike this year and then 125/150 bps next year and then 100 bps onwards. (Why is it sell side always sees next year as the time to "change" – never this year?)

 

Part of the difference in future path is based on your premise/assumption of long term growth potential. The US used to be 3.0-3.5% but now it's more likely 2.0-2.5% - this has big implication on FED and the analysis of it: Of course if "new lower growth" is accepted to be 2.0-2.5% the threshold for hiking is also equivalently lower! The study supporting this claim was the following:

 

Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy by the FED economist': Dave Reifschneider,William L. Wascher and David Wilcox

 

 

 

 

The more pertinent question however – and the major risk to Fed expected slow and gradual rate hike cycle is lack of trading liquidity. Citibank did excellent job this morning of putting it into context and graphs in a report called:  US Economic Views: FOMC Edition:

 

 

This chart shows how the biggest eight market makers VaR has gone from 1.4 Billion US$ before the crisis to less than 400 million. This is one of the "quantative" charts I have seen on this illusive "risk capital". This VaR is the grease which keeps the trading engines humming. We are basically playing the game of musical chairs – not in its traditional version with one chair missing when the music stops, but…… four chairs missing. This makes for more volatility and excessive moves when investors moves their money across asset class'. Trust me – there is simply too small a market to cater to a world of finance where every mom and pop have major portfolio in ETF and Mutual funds and where everyone like in 2000 is either major real estate developer or "major trader/investor" – a good example being that in the last three month in China more than 5.000 Hedge Fund has been started. 5.000! There is just about 8.000 hedge fund active at any time in the rest of the world!

 

 

 

 

 

 

 

Comment: Test of 50 support line – we had nice bounce today, but "marginal cost of capital" is rising…

 

 

Comment: As expected we see sign of classic seasonal mean-reversion in US data…….

 

 

Comment: Citigroup's Surprise Index supports the mean-reversion theory-  Nice bounce and timely for FED September hike

 

Comment: New chart – Merrill Lynch Option Volatility Index – Note and reference – the 2013 spike was the Taper-tantrum – keep an eye on this one for "Musical chairs in bonds"

 

 

Comment: Financial stocks didn't like the slightly higher probability of September hike…

 

 

Comments: Reflection of credit cycle? Peak was in June 2014---- A year go!

 

Closing with my latest bigger macro calls:

 

Here's a reminder of the main points of my major strategy change as detailed in an article on May 18:

 

The headlines for the next 6-7 months say:

• US, German and EU core government bonds will be 100 bps higher by and in Q4 before making its final new low in H1 2016. US 10-year yield will trade above 3.0% and bunds above 1.25% 
• Energy: WTI crude will hit US $70-80/barrel, setting up excellent energy returns. 
• US dollar will weaken to EUR1.18/1.20 before retest of lows and then start multi-year weakness. 
• Gold will be the best performer in commodity-led rally. We see 1425/35 by year-end. 

 

 

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

 

 

 

Macro Digest: Chart FEST...The marginal cost of capital is rising, rising, and rising....

OVERALL:

 

Our major allocation shift is working on fixed income, but commodities and Gold still needs the all clear from the Fed hike….

 

This is the "headlines" for my strategy change and link to May 18^th article:

 

MAJOR macro change May 2015

 

 

We need to stop talking deflation and using 1930s comparison on FED hike:

 

 

REAL rates finally coming off in the US: Positive Gold and negative US$?

 

 

 

Wow – inflation expectations is rising and fast….

 

European "cost advantage" is disappearing fast and furious – enjoy the summer of growth – behind comes: zero growth, zero reform and higher inflation "expectations"…..

 

 

Excuse me? Didn't ECB start QE – in world of madness hard even to see change in ECB balance sheet…. Japan is just not real, for that matter nothing is!

 

 

 

Poorly constructed chart… but clearly… CREDIT cycle has peaked……

 

 

Compare this to COMMODITY cycle:

 

 

 

AND just to remind you… WHEN FED hikes it's a MARGIN CALL – there are NO basis in their mandate to do so, but their need to normalize will have data support over summer as CESI (Citi Surprise Index will mean revert)

 

 

I have been travelling like a mad man: France, UK, Croatia, Slovenia, Slovakia, Kazakhstan, Singapore, Hong Kong, Slovenia, Hungary, Czech and Netherland…. And next few weeks: London (CNBC guest hosting Friday), Switzerland, China and Japan… but I got PLENTY to report….. teasers:

 

CEE is the canary in the coal mine for QE, mining is underowned and underpriced, inflation is coming back, Silk Road is for real, autocratic government in for hard time across Europe…and still unfortunately: NO REFORMS anywhere, but great clients, risk takers and media……

 

Safe travels….

 

 

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