Macro Digest: I have three important words for you: Cost of Capital!

Dear All,

 

Today's macro digest with focus on Cost of Capital and capitalism – attached our new format of Stress Indicators, which is now called Macro-Chartmania (It will be possible to subscribe to daily report later this month!) – Enjoy:

 

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Conclusion

 

Strong US dollar into Q1 based on marginal cost of money rising, plus Fed action, plus safe haven….. It means retest and MASSIVE channel in long term US rates….recession by Q3 2017

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This morning I was asked by a journalist if we are experiencing the end of capitalim – which is almost funny but here is my reply which I think is an important must understand explanation:

 

"We are living the opposite – this is the end of interventionism or planned economy – anyone arguing this is the end of capitalism needs to check the definition of capitalism – capitalism is about the market distributing money and goods, what we have is the opposite: An almost desperate desire by politicians to keep the hiding from the issue at hand: too much debt, too little productivity and too much government.

 

It is true though, but not due to capitalism, that social inequality can't continue as if, but do remember the whole concept of QE or easy money is predicated on a "trickle down effect" – in other words to make the rich richer and through that increase economic activity – OF course, and I have written about this and the broken Social Contract many times, this doesn't work because of…. too much planned economics and too much intervention in the market place…

 

What is even more interesting is that we have seen "the future'" – My basic premise is that Japan leads the world in economic policies. A few weeks ago Bank of Japan, finally, acknowledged that easy money, QE, will not save the economy – this is major decision – what they will replace easy money with though is interesting.

 

First they will target their 10Y Government yield to be zero percent at all times – (from negative earlier this month) – this means de facto that they are preparing "helicopter money".

 

Although this is only indirect, think about what a fixed 10 Y does to discipline of politicians. The Bank of Japan have basically told the lawmakers in Tokyo: You can now expand the fiscal deficit at no extra cost!  This endless ability to produce larger and larger deficit is not impacting market rates – hence more intervention is what's coming.

 

When, and I think its only matter of time, the US goes into recession in 2017 and takes emerging market and Europe with it, the policy makers will follow Japan.

 

The true recipe for growth and less inequality of course remains the same I have written about for the last seven years: The mandate for change based on investment into education, infrastructure, productivity and more market based economies.

 

The world is slowing in growth, inflation, equality, trade flow and in hope. The change is coming but not due to failure of capitalism but like in 1989 due to planned economies can't create our future growth"

 

End

 

Yes, this is all about cost of capital – Not allowing it to flow according to principle of marginal cost of capital, distorts markets and society, what is now happening is that one regime: Too easy money, ZIRP and QE will be phased out and replaced by….Helicopter money!

 

This is NOT the solution but the wheels are in motion:

 

This means:

 

Strong US dollar into Q1 based on marginal cost of money rising, plus Fed action, plus safe haven….. It means retest and MASSIVE channel in long term US rates….

 

 

 

 

 

 

Bank of Japan is preparing "Helicopter money" through guaranteeing 0% yield in 10Y JGB's (so cost of fiscal deficit expansion is….. ZERO!)

 

Germany yield rising faster than Japan – ECB next move when recession hits in 2017? Well, they always do like the Japanese with massive lag!

 

 

Yield curve continues to steepen in both US and Japan- reasons?  Higher oil prices but also much higher inflation expectations:

 

5Y5Y US Inflation swap.

 

 

Volatility also coming back:

 

 

And global stock market valuations broken below 100 SMA

 

 

 

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

 

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