FED comment link & classic FED

Fed followed the expected action of my pre-FED note……but BNP Paribas did better job than me in getting a concise analysis:

 

 

 

WSJ blog links – excellent overview:

 

http://blogs.wsj.com/economics/2015/10/28/economists-react-to-the-feds-october-interest-rate-decision-december-is-in-play/

 

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

 

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

Please visit our website at www.saxobank.com

 

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Quick note on Monetary easing hysteria ...

We came very long and hard into Q4 long EM and risk, but now things how run its course. This week we had the main move on ECB's further easing and now also a China RRR cut.

 

Remember the majority(80%) of impact from QE and QE like changes comes on "announcement" – this according to staff paper from Bank of England.

 

Furthermore the market is hysterically on "how positive…" this is for the market – many of the same voices calling more pain on downside t- minus two month …..

 

But…. The main point: QE, negative yield, RRR cut will do ZERO difference to a market stuck in a permanent down-ward spiral of more debt, more printing of money, and less and less growth and productivity.

 

The theory in simple terms for central banks at zero bound and zero forever growth is to make sure is that the stock market goes up in order to balance out the massive debt. Yes it's that simple…

 

The last two days action have made US Dollar 2% dearer in DXY terms – and the one thing we do know is a stronger USD is the last things this market needs – furthermore any directional change in US dollar – will work opposite for asset risk on/off inside one week…in other words… caution and neutral market stance is my view from here…even into Q4 manipulation "always higher" markets.

 

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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Macro Digest: Canada election: Change, positive campaign and infrastructure - the new political and economic paradigm?

What does words like: Positive, change, growth and infrastructure tell you? To me its manna from economic heaven and finally we have had an election reflecting the needed "mandate for change" and this from a country known for being….. "boring"  (Sorry Canada – good boring to my mind)

 

Justin Trudeau's come-back from third position is nothing but spectacular and again the polls failed (more on this later….) to even get close to the final result:

 

Source: Globe and Mail – Canada

 

An absolute majority comes from 170 seats so not only did Trudeau come from behind but he "smashed" all talk of coalition government. Let hope the Manna from Heaven mirrors the Old Testament as an "exodus" from standard policy of trying to look most experienced – the road pursued by PM Harper and NDP leader M Thomas Mulcair. (and the rest of the world "lost" politicians)

 

The Liberal's ran an election platform on Real change to Canada – imagine: Change? Not buying more time? Not having your central bank print more money?  A new direction for the economy – is certainly Anti-austerity, but it's also more: An alternative!

 

Infrastructure investments

 

The Liberals introduced another darling of mine: Infrastructure investments and bonds. In a traditional economy there is a 20%/80% split between big business and SME's. The 20% (big business) is supported by lower bound rates; 95% of credit and 100% of political capital goes to 20% big companies and 5% of credit and 0% of political goes to the SME's – so effectively monetary policy and buying time stabilizes the economy at a permanent lower level of growth as close to 100% of productivity and 85% of all jobs comes from…. The 80% getting nothing! This breeds buy-back programs for big business of their stocks and recession for small business and middle income Canadians!

 

The change in a world of limited fiscal expansion and low rates is of course a serious infrastructure program. The Liberals will establish a Canadian Infrastructure Bank and have made significant promises (and hopefully commitments) to ramp up the investments in a combined private sector, pension funds and government guaranteed scheme.

 

Of course this immediately raises the alarm from "fiscal conservatives" but….. there is nothing wrong with, economically, to expand investments as long as the "marginal return" on investment is higher than the cost. In other words infrastructure is long-term but almost always positive: reduced travel time, better roads, airports, harbor, digitalization and other "re-novation's" of old worn down infrastructure.

 

This has even had former US Treasury Secretary Larry Summers approve the scheme with a US angle:

 

 

Interesting conceptual difference between the US and Canada – The US is locked in almost ridiculous budget fight version 3.0, while at the same we read of a New York Metro system where most of the backbone of technology is 100 years old! I rarely agree with Mr. Summers on anything, actually, I think its first time ever, but he is right – this is exactly not only what US needs but all of developed markets.

 

 

More to the point here in Denmark, yes another boring country, the pension funds is voluntarily taken over more and more infrastructure financing – seeing not only profit but also actually being "productive" in the world of time wasters and pretend-and-extend. Nice when "markets" and ideas works together.

 

Is this for real? Is there not a risk this is empty rhetoric? Absolutely, we are dealing with politicians for crying out loud, but the combination of a positive message campaign, a real mandate for change given (a true majority and a "younger" incoming PM, plus infrastructure gives an idea of what should and could happen globally. Canada (and Denmark) are small societies with an open social structure which gives advantages over money dependent, financed political agenda's (no one mentioned no one forgotten!)  but Canada and Denmark is also some of the richest countries in the world per capita and we need to start realizing this wealth is based on three basic principles:

 

Access to education (and hence high average education/skills), superior infrastructure (public transport, internet, harbors, roads) and finally social coherent (relatively at least) fabric. The later probably less important than one and two, but the signal value here is not to be ignored and any politicians should sit-up and take notes from this Canadian election.

 

At a bare minimum the first real majority this year in any election came from an electoral need for change, the mandate for change I always mention, a positive tone and an openness on what's needed is investment in people and infrastructure. A best this is a new modus operandi which embraces the three key principles of wealth: education, frame-work and incentives.

 

They have all but been forgotten, at least we now can "hope" Canada is the beginning of something new the Canadian voters seems to be willing to take the chance.

 

Investment outlook Canada:

 

FX:

 

·        My  momentum model sells USD vs. CAD @ 1.2858 w. 2 ATR stop loss (210 pips)

·        I sold USD vs. CAD @ 1.3010 on fundamentals same ATR stop – Growth will surprise, oil stabilized, and a weaker US dollar into year-end

 

Equity:

 

·        Momentum: S&P/SSX: Buying 14.502 (spot: 13.758) & Selling 13.004 (I.e.: Not present position)

·        Spread vs: SPX. Like long TSX vs SPX – YTD: TSX trails by 4% of course with heavy reliance on energy but like mean-reversion on more spending and growth outlook for Canada.

 

MACRO Outlook

 

Canada hit recession in H1 but should see pick up in H2 from stabilized energy, lower FX rate and increase in government spending from new government. I also expect significant improvement in PMI despite the "loose gun" of Federal Reserve of US interest rate hike still on horizon.

 

Canada is priced to recession, should see a return to normal growth over H2 and overall Canada's new government will lead growth and productivity. Long Canada is again a good alternative certainly in FX and if government delivers on promises also as an overweight in equity.

 

 

Source: Toronto Dominion Bank, Economic Outlook.

 

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

 

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

Please visit our website at www.saxobank.com

 

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Steen's Chronicle: Tyrkey: Lost or found?

Dear All,

Just back from third visit from Turkey and I wrote this report on the visit. Michael McKenna did a great job editing this!

Online version (best): Turkey: Lost or found?

• Turkish election risk premium currently priced too high
• China investing heavily in Turkey as Silk Road ramps up
• Fed rate hike delay boosting emerging markets

 

Turkish assets may be cheap at present, but investing isn't about following 

the crowd – it's about getting ahead of it. Photo: iStock

 

By Steen Jakobsen

 

As I write this, I am heading back to Denmark after my third trip to Turkey this year. En route, I find myself wondering: why are Turkish assets so cheap?

 

In a world of depressed yields and expensive equity valuations, Turkey offers plenty of opportunities. Reading international analyses of Turkey, they all mention political risk as the key negative factor and of course the November 1 election is set to be a "critical test"...

 

Isn't the lesson to be drawn from elections in 2015, however, that the risk premium added on their behalf is too high?

 

Life goes on

 

The common denominator for the elections held so far in 2015 seems to be that when the voting is over, life continues unchanged. Even the populist parties seem to fall in line, either directly in a weak coalition or indirectly as supporters of same.

 

The other lesson, of course, is that incumbent governments tend to weaken but remain in power, not because voters condone their policies or results but because of a lack of real alternatives.

 

In other words my basic theorem that politics have (and should have) close to no impact on economics while in a low growth, hope and inflation environment seems to have been validated so far. If this premise is true – if elections rarely change the dynamics of business and the economy – we should expect a substantail relief trade after the November 1 vote in Turkey.

 

Let me stress that at the time of this writing, the polls in Turkey points to a "hung Parliament" which is probably the best result investors can hope for.

 

Turkey and the Silk Road

 

Another macro theme that could improve Turkish economic conditions remains the Chinese Silk Road. Turkey will be a big beneficiary of this ambitious programme and as we get deeper into 2016 it should start to show up as investment in railroads, ports and infrastructure ramps up. 

 

The Chinese, of course, do not put premiums on politics and as such are already investing heavily in Turkey while the rest of the world is "thinking about it".

 

Source: Pippa Malmgren (@DrPippaM)

 

The tactical investment case

 

The key to any improvement in Turkey will have to be external factors improving mainly through a slightly weaker USD and the "delay" of the feared-by-emerging-markets Federal Reserve interest rate hike. 

 

Surveys show that the majority of analysts now see the second half of 2016 as the starting point for Fed hikes. The Fed's pause has created a clean technical setup for a tactical long play into year-end.

 

USDTRY peaked at 3.05/3.06 during the dramatic selloff in August/September:

Create your own charts with Saxo Trader click here to learn more.

Source: Saxo Bank 

 

Long TRY versus USD with a stop loss of 3.0700 is the catalyst/stop loss for an opportunistic play here.

 

(Another thing to look at here is the real effective TRY rate as measured by the central bank using 2003 as a base; this supports the premise that TRY is cheap when looked at through an inflation-neutral lens.)

 

 Source: The Central Bank of the Republic of Turkey

 

The more risk-tolerant investor could go for the two-year government bond or even venture into the banking sector where major player Garanti Bankasi just retested its long-term price and valuation low.

 

Garanti Bankasi five-year chart (in USD):

Source: Bloomberg

 

The Turkish bond market is paying 11% for two-year government bonds with an inflation rate just shy of 8%, leaving a rich "real rate" of 300 basis points.

 

 

Domestic factors still pose some risk

 

Turkey's domestic factors will remain unchanged to slightly worse in the rest of 2015. The inflation rate spillover/transmission from the weaker TRY should peak in October/November making a 8.2/8.3% inflation print likely before it comes back down. 

 

Overall, I see 7.5% inflation for 2015 and 6.0% for 2016.

 

Gross domestic product growth should come down after the surprise Q2 print as the Turkish economy is running in a sub-par fashion around 3.0% (versus a 5% potential GDP growth rate).

 

With no reforms and no new mandate expected from the upcoming election, I expect Turkey to grow by 4.0% in 2016.

 

Let me end by comparing Brazil and Turkey, two countries which came "online" in emerging markets and have experienced similar development...

 

Brazilian, Turkish indicators:

Source: Professor Steve Hanke (@steve_hanke) 

 

This table shows how Turkey is leading in GDP per capita but also in unemployment and relative poverty while both nations remains low debt-to-GDP nations.

 

(One notable difference is that Brazil is, a net commodity exporter while Turkey is a net importer...)

 

Countries like Brazil and Turkey remain important for the future of global growth due to their demographics, their rising middle classes and their ability to catch up on wealth.

 

For now, Turkey is certainly not lost and it has been found – at least by me – but I hasten to add that it's so far a "tactical" rather than a long-term position.

 

I remain optimistic, however, that in the long term Turkey could join the "Champions League of economies" where it belongs. As in sport, however, first it needs to get in shape.

 

Trade recommendations

 

• Short USDTRY at 2.9100 with a stop loss at 3.07*.
• Long two-year Turkish government bonds at 11.0%.
• Long Garanti Bankasi at 7.60 with a stop loss at 5.00.

(*All trades should be closed if USDTRY trades above 3.07)

 

The Turkish economy is not in top form quite yet, but a bit of training (and some much-needed reforms) could see it rise to the top of the EM pile. Photo: iStock  

 

— Edited by Michael McKenna

Steen Jakobsen is chief economist and CIO at Saxo Bank

 

 

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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Steen's Chronicle: Macro travel notes from the US this week: Meet Mr. and Mrs. Consensus

Just back from the US and from attending major macro conference. Dare I say I met Mr and Mrs Consensus! A quiet unattractive couple.

 

 

US managers and the industry overall is stuck in second gear and cannot shift from there!

 

Maybe a revisit to the late Baroness Thatcher's definition of consensus is in order:

 

"…To me, consensus seems to be the process of abandoning all beliefs, principles, values and policies. So it is something in which no one believes and to which no one objects.

I have so many observations that it flowing over but let me shoot from the hip:

 

China

 

Everyone thinks everyone else is getting China wrong. Amazingly, everyone own the "right" analysis on China and in the case of US based investors it is always: "…it's only a matter of time before China caves in…"

 

No one – and let me stress NO ONE even mentioned the Silk Road during my 2 ½ day stay – not a single a word? Somewhat remarkable considering that its biggest investment/supply program since the Marshall plan.

 

For the record my view remains: No one fully understand China but to ignore a 55% saving rate and the Silk Road is utter nonsense, furthermore China's monetary easing has a long way to go should they want to pursue that and the "net impact" of already in place RRR cuts is about to kick in….

 

CNY will not 'devalue' before SDR inclusion is in place, but will move +10% weaker post – a natural consequence of more open capital accounts and domestic pressure to do so.

In other words not doom but certainly not gloom either, maybe Michael Pettis comment comes close: China is not going to see a soft or hard landing, but a long landing!

 

Fed

 

Two former Fed officials attended the conference: Chairman Bernanke and Dallas Fed's Fisher.

 

Bernanke stuck to the company line of monetary policy being invalidated by lack of fiscal support and a line of argument which at best was incoherent at worst was downright admission of Fed guidance being similar to the old art of tea leave reading..

 

A performance, which was as "entertaining" as a lukewarm glass of water.

 

Dallas Fed's Fisher was true to form was more clear and outspoken:

 

"Fed should have hiked in September"… Speeches since by Yellen and Dudley was showing "remorse" in his opinion. Again, fiscal policy was needed, but now with the disclaimer that it was extremely unlikely to happen in 2016 or 2017.

 

The right equilibrium rate for US interest rates was impossible to gauge, but it was most certainly higher.

 

The overall combined take away from the two Fed officials was to me: They had little grasp of the present situation, the low productivity was a conundrum for them and overall they both believed in the theory of rather going late than early (Yes, inconsequently in the case of the former Fed governor)

 

There is a firm believe among Fed and former Fed officials that a 2016 hike is still on the table, but it's also clear that Fed and its staff is lost, totally lost in where the economy is going, what the strong US$ means medium term and a considerable concern on the "structure of the fixed income market". In other words Fed is not going to come forward in a clear and concise way from here but will be swayed by whatever headline is on driving consensus.

 

Emerging markets

 

There was no love for EM; most people had negative EM as their number one trade and with expectations of considerable underperformance still in store. The one comment which stood out was that if you exclude energy + commodities from EM then it's getting cheap but not yet deeply discounted. However excluding energy and commodities of course is futile considering the big cap companies' main business' in EM!

 

EM is cheap on all metrics in my book, but I do agree that you need a catalyst: "…a weaker US$ in my theory"… to kick start it...

 

The same negative EM crowd was heavily long US$ arguing that less liquidity was driving investors to the US as safe haven. Only one attendee briefly mentioned the "global recycling trend" – pointing out that the fall in global reserves has so far in 2016 offset the net impact from ECB and BOJ's QE!

 

Of course, you know my US$ theory: "The end of recycling" and by definition the "path of least resistance would be a lower US$ for growth and a restart of positive news"

Short EM and long US$ was easily the most crowded trade I took away from this week visit to the US.

 

Hedge funds and market liquidity

 

Several managers I talked to was increasingly frustrated with their long-short equity/bottom up analysis and I sensed and got confirmed that long-short mandates increasingly really was being long Amazon, Google and Apple!

 

Yes, there is considerable style drift in the equity space, which can be seen in the lack of breadth in the stock market. The 2% and 20% model is under attack as the QE infinite created a heavily domestic focus for both equity and macro managers. You really only needed to be Fed and US market focused to get return. Now as volatility is increasing, as "noise" increases on direction of Fed they need to revisit global macro after seven years of neglect. Not an easy job to catch up with and telling by the quality of international analysis I listened to on this conference they need some more time to get it right.

 

 

Conclusion

 

The visit confirmed what I feared:

 

·        FED is lost and the "guidance failure" is really upsetting the financial markets. Fed is still looking for hikes, and 100% of people I met in the market is looking for no change

·        China- everyone thinks they got the right analysis on China. I doubt it – China is an enigma but if they all ignore Silk Road and 55% saving rates to GDP in their negative view surely they need more time?

·        VaR – managers – extremely crowded trades: Long US$, under-weight EM and commodities overall. Everyone now talks about "structural issues in the fixed income market" – in this case, both market and Fed agrees.

 

Action

 

None for my part.

 

Got 20% in gold

 

Initiated first long AUDUSD (Australia – the opportunity of the decade?) Around 0.7000 gone neutral to long market.

 

I think both VW and Glencore is big stories, but not as big as market fears. Expect seasonal strength to play out post October 10^th and I stick with my S&P projection from August, which means low, is in pretty soon and here is why:

 

 

·        World has just moved one step closer to global deflation making "easier monetary policy" the response in world of no ability to fiscally expand

·        China data will surprise on upside for balance of 2015.

·        Every time in history when the market has been more than 10% down, with falling commodity prices and a strong US$ FED would be looking to ease not hike!

·        Global easing or pretend-and-extend version 4.0 is close – Central bankers simply don't believe a bloated balance sheet and debt financing is an issue or worse they seems to think economy theory offers no alternatives.

Market is maximum confused here – they doubt Fed, guidance, top line growth, bottom up analysis and worst of all the doubt themselves.

 

World is about to wake up to a new dose of medicine – the final straw before we move to the real agenda of taking loss' in debt and creating reforms?

 

Let's hope so,

Steen Jakobsen

 

 

 

 

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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