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:
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$, under-weight EM and commodities overall. Everyone now talks about "structural issues in the fixed income market" – in this case, both market and Fed agrees.
Action
None for my part.
Got 20% in gold
Initiated first long AUDUSD (Australia – the opportunity of the decade?) Around 0.7000 gone neutral to long market.
I think both VW and Glencore is big stories, but not as big as market fears. Expect seasonal strength to play out post October 10th and I stick with my S&P projection from August, which means low, is in pretty soon and here is why:
· World has just moved one step closer to global deflation making "easier monetary policy" the response in world of no ability to fiscally expand
· China data will surprise on upside for balance of 2015.
· Every time in history when the market has been more than 10% down, with falling commodity prices and a strong US$ 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
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