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Thurs.September 5th , 2013
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THE SECRET US GEO-ECONOMIC STRATEGY
Part I: The Petro$$ Imperative Part II: The Social Engineering of US Complacency w/F. WILLIAM ENDAHL, Author and Freelance Researcher and JOHN RUBINO What Are Tipping Poinits?
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SEPTEMBER 2013 - A Problematic MACRO Month! |
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SEPTEMBER 2013 - A Mother of a Macro Month Mapping The 7 "Risk" Horsemen Of The Sept-ocalypse 09-04-13 Deutsche Bank via ZH Ahead of September, historically the worst month for stocks, Deutsche Bank notes that volatility has picked up and corporate bond issuance has slowed. There are several possible risks over the next few weeks that could trigger a further escalation in market volatility...
Via Deutsche Bank, 1. Emerging markets could become more vulnerable as the Fed tapers QE and capital outflows from EM intensify 2. Central banks forward guidance may fail to keep rates low for an extended period 3. US consumers could come under pressure from higher energy costs and rising mortgage rates 4. Political deadlock amid US budget talks and the mid-October debt ceiling could rattle markets 5. The next Fed chair will soon be nominated and the main candidates differ in style and policy. The markets may take note 6. While Chancellor Merkel is on track for re-election on September 22, the governing coalition may change 7. The crisis in the Middle East may escalate, impacting oil prices, inflation and growth But Deutsche's Base Case is that none of these risks pose a systemic threat... and yields will 'normalize' higher gradually... Or so they hope... Source: Deutsche Bank |
09-05-13 | MATA STUDY
GMTP GROUP SEPTEMBER |
1 - Risk Reversal | MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - September 1st - September 7th | |||||||||||||||||||||
RISK REVERSAL | 1 | ||||||||||||||||||||||||
SEPTEMBER 2013 - A Mother Month "Explosive" September Straight Ahead 09-02-13 Zero Hedge If you thought August had more than enough events to crush the best laid vacation plans of Wall Streeters and men, you ain't seen nothing yet. Presenting "explosive" September. Here is a compendium recap, courtesy of Bloomberg, of the key events that may shake global markets in the next 30 days: Global event risks this month including
Natixis
Goldman Sachs
Credit Suisse
Societe Generale
Barclays
UBS
A summary calendar via RanSquawk: And as a reminder, from Bespoke... |
09-03-13 | MATA STUDY | 1 - Risk Reversal | ||||||||||||||||||||||
CANARIES - Mauldin a Cassandra How Do I Hate Thee? Let Me Count the Ways… The market is down about 3½% since early August, with trading rooms short-staffed the last few weeks. Will the senior traders come back from vacation rested and looking for value? Or will they survey the gains they have banked so far this year and decide to lock them in to assure their year-end bonuses? Finding value these days is tough. It won’t be hard for them to find reasons to head for the sidelines.
I was writing at the time that there was a recession coming, so I was saying pretty much the opposite. Perhaps the more appropriate lesson is to not fight the Fed unless there is a recession coming. Here is a graph from a webinar (see below) that I will be doing in a few days. The last two times the Fed has ended a period of quantitative easing, the air has come out of the market balloon. Has this coming move been so telegraphed that the reaction will be different than in the past, or will we see the same result? Want to bet your bonus on it? Or your retirement?
This has the makings of a grave policy error: a repeat of the dramatic events in the autumn of 1998 at best; a full-blown debacle and a slide into a second leg of the Long Slump at worst. Emerging markets are now big enough to drag down the global economy. As Indonesia, India, Ukraine, Brazil, Turkey, Venezuela, South Africa, Russia, Thailand and Kazakhstan try to shore up their currencies, the effect is ricocheting back into the advanced world in higher borrowing costs. Even China felt compelled to sell $20bn of US Treasuries in July. Back in 1998 the developed world was twice as big as the developing world. Today that ratio is about even. We all know what a crisis for the markets 1998 was. And now, more than a few emerging markets have clear debt problems denominated in currencies other than their own. Evans-Pritchard goes on to say:
The price of oil in Indian rupees has gone from 1100 to 7800 in the space of 10 years. Think about what a move like that would do to the US economy. (Chart courtesy of Dennis Gartman) The next chart shows the recent price spike in the Chinese SHIBOR (their short-term interbank rate, more or less equivalent to LIBOR). It is difficult to trust any of the economic data (positive or negative) coming out of China, so we really do not know whether China’s growth story is simply moderating or whether we are seeing a hard landing in progress; but the sudden shock in interbank lending rates is an important sign that all is not well in the Middle Kingdom. The big question: is the recent SHIBOR spike a harbinger of a banking crisis, or does it presage an RMB devaluation? Interbank rates do not spike from 3% to 13% (in about 2.5 weeks) in a healthy economy, and a big event along these lines in China would have enormous implications for global growth. And while we are on the subject of emerging markets, I have to give you the lead paragraph of the latest note from my good friend and uber-bear Albert Edwards of Societe Generale. It is just too delicious.
The table below shows the revision of second-quarter GDP released Thursday. We should all be happy that growth was revised upward by 85 basis points — 2.5% annualized growth is about as good as we could expect. In fact, this result would argue that tapering should begin sooner rather than later and should proceed faster than most market observers expect. If the economy has recovered that much, it is time to take the foot off the gas pedal. The problem I want to point out is highlighted in bold, and that is the implicit inflation deflator used by the Fed. Notice that it did not move at all with the revision, even though the economy was seen to grow almost 50% faster. That’s a tad unusual though certainly within the realm of possibility. But if after the massive quantitative easing we have seen, all you can get is 0.7% inflation, that simply illustrates one of my main contentions: we are in an overall deflationary environment. What happens if you then suck the juice from the markets? Will we see a further fall in inflation?
Just for fun, the next table gives us the numbers on CPI inflation for the last eight years. Notice that the number moves around a lot.
The Fed prefers to use Personal Consumer Expenditures (PCE) as its measure of inflation. For the last 12 months, inflation has been only 1.2% as measured by PCE. Even if you use core CPI, inflation is still rather tame. Couple tame inflation with the velocity of money’s continuing to fall and you get a deflationary environment. What will happen when the Fed removes QE?
The Silver Lining Yesterday after the markets closed I was invited to a local watering hole here in Dallas to meet with some younger but generally successful hedge fund managers (although younger for me is becoming a relative term). They were all interested in the macro environment, and they were all nervous. What interested me most, though, was not what they wanted to sell; it was what they wanted to buy. They were starting to find value in Saudi Arabia and Turkey and India and Indonesia — stocks of serious companies in those countries had fallen to very low levels. Some were getting on planes to go check things out. And here and there some of the longer-term investors were teasing out opportunities in the US market. For these young Turks, market corrections were not a problem but simply an opportunity to find value. And I picked up one other key thought from them. You would think, given their view of the world (which I generally share), that they were short a great deal of their book. That is not the case. Today’s environment is a very, very difficult short, because the carry costs are so high. (Definition: Costs incurred as a result of an investment position. These costs can include financial costs, such as the interest costs on bonds, interest expenses on margin accounts, interest on loans used to purchase a security, and economic costs, such as the opportunity costs associated with taking the initial position.) The Fed has distorted the interest-rate environments both in the US and internationally, and it is simply too costly to put on a short position for very long and be wrong. If you short something, you need to be right fairly quickly, or you will watch your portfolio begin to bleed. For young managers, their track record is critical, so they become quite sensitive to making longer-term macro calls that can go against them for a period of time. They have even more ways to hate the market than I do. Investing in a Market to Hate In my August 3rd newsletter (“Can It Get Any Better Than This?“) I shared research supporting our forward-looking prospects for the markets. There was no way to sugar-coat our conclusions: if history is any indication, we are looking at the potential for a significant peak-to-trough drawdown and negative annual returns in equity markets for an extended period of time. We pointed out that where there is danger, there is also opportunity. Investors have a lot to gain from diversifying as broadly as possible and reducing their |
09-03-13 | CANARIIES
GMTP MACRO CHARTS GROWTH
EM CHART INDIA CHINA CHART SHIBOR
MATA VAL PE
US MONETARY CHARTS DEFLATOR VELOCITY OF MONEY
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ASIAN CRISIS II - "TAPER" Shock Waves Across Asia Are Emerging Markets Submerging? 09-02-13 Prof Kenneth Rogoff, Project Syndicate
A Bumpy Ride for Emerging Markets 08-31-13 Lauara Tyson, Project Syndicate
Emerging-Market Party 08-30-13 Ricardo Hausmann, Project Syndicate
The three phenomena that boost nominal GDP – increases in real output, a rise in the relative price of exports, and real exchange-rate appreciation – do not operate independently of one another. Countries that grow faster tend to experience real exchange-rate appreciation, a phenomenon known as the Balassa-Samuelson effect. Countries whose terms of trade improve also tend to grow faster and undergo real exchange-rate appreciation as domestic spending of their increased export earnings expands the economy and makes dollars relatively more abundant (and thus cheaper). Real exchange rates may also appreciate because of increases in capital inflows, which reflect foreign investors’ enthusiasm for the prospects of the country in question. For example, from 2003 to 2011, Turkey’s inflows increased by almost 8% of GDP, which partly explains the 70% increase in prices measured in dollars. Real appreciation could also be caused by inconsistent macroeconomic policies that put the country in a perilous position, as in Argentina and Venezuela. Distinguishing between these disparate and inter-related phenomena is important, because some are clearly unsustainable. In general, terms-of-trade improvements and capital inflows do not continue permanently: they either stabilize or eventually reverse direction. Indeed, terms of trade do not have much of a long-term trend and show very pronounced reversion to the mean. While prices of oil, metals, and food rose very significantly after 2003, reaching historic highs sometime between 2008 and 2011, nobody expects similar price increases in the future. The debate is whether prices will remain more or less where they are or decline, as food, metals, and coal prices have already done. The same can be said of capital inflows and the upward pressure that they place on the real exchange rate. After all, foreign investors are putting their money in the country because they expect to be able to take even more money out in the future; when this occurs, growth tends to slow, if not collapse, as happened in Spain, Portugal, Greece, and Ireland. Atlas of Economic Complexity, these economies began producing more complex products, a harbinger of sustainable growth. Angola, Ethiopia, Ghana, and Nigeria also had very significant real growth, but nominal GDP was boosted by very large terms-of-trade effects and real appreciation. In some countries, such as China, Thailand, South Korea, and Vietnam, nominal GDP growth was driven to a large extent by real growth. Moreover, according to the soon-to-be-publishedFor most emerging-market countries, however, nominal GDP growth in the 2003-2011 period was caused by terms-of-trade improvements, capital inflows, and real appreciation. These mean-reverting processes are, well, reverting, implying that the buoyant performance of the recent past is unlikely to return any time soon. In most countries, the US dollar value of GDP growth handsomely exceeded what would be expected from real growth and a reasonable allowance for the accompanying Balassa-Samuelson effect. The same dynamics that inflated the dollar value of GDP growth in the good years for these countries will now work in the opposite direction: stable or lower export prices will reduce real growth and cause their currencies to stop appreciating or even weaken in real terms. No wonder the party is over. During the last few years, a lot of hype has been heaped on the BRICS (Brazil, Russia, India, China, and South Africa). With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world – and, in the case of China, the largest of all by as early as 2020. But the BRICS, as well as many other emerging-market economies – have recently experienced a sharp economic slowdown. So, is the honeymoon over?
Trouble in Emerging-Market Paradise 07-22-13 Nouriel Roubini, Project Syndicate Brazil’s GDP grew by only 1% last year, and may not grow by more than 2% this year, with its potential growth barely above 3%. Russia’s economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. China’s economy grew by 10% per year for the last three decades, but slowed to 7.8% last year and risks a hard landing. And South Africa grew by only 2.5% last year and may not grow faster than 2% this year. Many other previously fast-growing emerging-market economies – for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe – are experiencing a similar slowdown. So, what is ailing the BRICS and other emerging markets?
These factors explain why growth in most BRICS and many other emerging markets has slowed sharply. Some factors are cyclical, but others – state capitalism, the risk of a hard landing in China, the end of the commodity super-cycle – are more structural. Thus, many emerging markets’ growth rates in the next decade may be lower than in the last – as may the outsize returns that investors realized from these economies’ financial assets (currencies, equities, bonds, and commodities). Of course, some of the better-managed emerging-market economies will continue to experience rapid growth and asset outperformance. But many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating
The Global Implications of Falling Commodity Prices José Antonio Ocampo, former United Nations Under-Secretary-General, Project Syndicate The decade-long commodity-price boom has come to an end, with serious implications for global GDP growth. And, although economic patterns do not reproduce themselves exactly, the end of the upward phase of the commodity super-cycle that the world has experienced since the early 2000’s dims developing countries’ prospects for continued rapid catch-up to advanced-country income levels. Over the year ending in July, The Economist’s commodity-price index fell by 16.5% in dollar terms (22.4% in euros) with metal prices falling for more than two years since peaking in early 2011. While food prices initially showed greater resilience, they have fallen more sharply than those of other commodities over the past year. Only oil prices remain high (though volatile), no doubt influenced by the complex political events in the Middle East. our research into commodity super-cycles shows. Since the late nineteenth century, commodity prices have undergone three long-term cycles and the upward phase of a fourth, driven primarily by changes in global demand. The first two cycles were relatively long (almost four decades), but the third was shorter (28 years). In historical terms, this is not surprising, asThe upward phases of all four super-cycles were led by major increases in demand, each from a different source. During the current cycle, China’s rapid economic growth provided this impetus, exemplified by the country’s rising share of global metals consumption. While these cycles reached similar peaks, the downswings’ intensity has varied according to global economic growth. The downswings following World War I and in the 1980’s and 1990’s were strong; in contrast, the dip after the Korean War, when the world economy was booming, was relatively weak. After World War II, the super-cycles of different commodity groups became more closely synchronized (including oil, which had previously shown a different pattern). Just as China’s economic boom drove commodity-price growth in the current cycle, so the recent weakening of prices has largely been a result of its decelerating GDP growth, from double-digit annual rates in 2003-2007, and again in 2010, to roughly 7.5% this year. While projections of China’s future growth vary, all predict weaker economic performance in the short term – and even lower growth rates in the long term. The fundamental short-term issue is the limited policy space to repeat the massive economic stimulus adopted after the collapse of Lehman Brothers in 2008. China’s investment-led strategy to counter the crisis left a legacy of debt, and the continued deterioration of the demand structure – now characterized by an extremely high share of investment (close to half of GDP) and a low share of private consumption (about 35%) – further constrains policymakers’ options. There is a consensus that these abnormal demand patterns must change in the long term, as China moves to a consumption-led growth model. But, to accomplish this transition, China’s leaders must implement deep and comprehensive structural reforms that reverse a policy approach that continues to encourage investment and exports while explicitly and implicitly taxing consumption. Michael Pettis, for example, regards 3-4% growth as consistent with continuous rapid consumption growth and the targeted increase in consumption’s share of GDP. The uncertainty surrounding China’s impending economic transformation muddies the growth outlook somewhat. Some forecasters predict a soft landing, but differ on the growth rate. Official estimates put annual GDP growth at 6.5% in 2018-2022, while Peking University’sWhile hard-landing scenarios, associated with a potential debt crisis, are also possible, the authorities have enough policy space to manage them. In any case, downside risks are high, and room on the upside is essentially non-existent. The main engine of the post-crisis global economy is therefore slowing, which has serious implications for one of the last decade’s most positive economic trends: the convergence of developed and developing countries’ per capita income levels. Just as China’s economic boom benefited commodity-dependent economies, primarily in the developing world, its slowdown is reflected in these economies’ declining growth rates. (In fact, while several South American countries have been among the hardest hit, even developed countries like Australia have not been immune.) If weak global demand causes the current commodity super-cycle’s downswing to be as sharp as those of the post-1918 period and the late twentieth century, the world should be prepared for sluggish economic growth and a significant slowdown – or even the end – of income convergence worldwide |
09-04-13 | GMTP GLOBAL RISK REGIONAL EM CRISIS |
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