JUNE 2016: GLOBAL MACRO TIPPING POINT - (Subscription Plan III)

THE SENDAI DISCHORD - SHANGHAI ACCORD CRUMBLES WITH G-7 SENDAI DISCHORD

Last month we saw that Risk overall and Geo-Political Risk in particular was rising significantly. This was also evident in this month’s Macro Economic Update areas.

CHINA’S HARD LANDING
There is little doubt China is facing a hard landing. An export led economy driven by capital inflows this strategy has come to a halt as the global economy slows and Chinese exports are crimped with Capital outflows increasing. This has resulted in Chinese FX Reserves being drawn down as China is forced to sell US Treasuries as well as creating pressures to devalue the Yuan in an attempt to attract foreign Capital Investment and stop capital flight. As a consequence we have witnessed four Yuan devaluation efforts in May by China, despite the Shanghai Accord in late February. There is simply too much non performing debt in China for this not to continue to result in a steady draw down of FX reserves which will place tremendous secular pressures on US government debt financing and global liquidity. 

The question that must be answered (which the chart below illustrates) is who will absorb the excess surplus (Production less Consumption) being created by China within the current global economic environment? An economic environment that can best be described as looming stagflation?

BREXIT
We highlighted the June UK BREXIT referendum in this month’s Geo-Economic Themes. Though the polls are close it is likely to be a NO vote but nevertheless the uncertainty will still be disruptive to the fragile global markets.

TTIP
We additionally highlighted the TTIP – Trans-Atlantic Trade and Investment Partnership agreement being quietly slipped through EU legislation. The secrecy of the document and its content are extremely alarming. This “corporate grab” also has the potential to be extremely disruptive as confidence continues to erode in the developed economies with regard to political governance. The US primaries are only the beginning of what we can expect in the developed economies as their entitlement programs are more widely seen to be unfundable and unsustainable.

WHO WILL ABSORB CHINA'S SURPLUS (PRODUCTION – CONSUMPTION)?

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JUNE 2016: MONTHLY MARKET COMMENTARY (Subscription Plan II)

THE G-7 SENDAI DISCHORD - Shanghai Accord Crumbles with G-7 Sendai Discord

We have discussed the Shanghai Accord in a number of previous reports. The results have left us with little doubt that whether implicitly or explicitly, some sort of understanding was reached at the G-20 Shanghai meeting in late February between country finance ministers and central bankers. Like any agreement there is give and take with the expectations that all are better served with the accord. What is obvious is that the agreement was not a winner for Chairperson Janet Yellen. Her body language was obvious. She had been forced to accept something very painful. Like a student being handed a paper with an “F” on it her demeanor spoke volumes without someone actually knowing the results.

What Janet had to deliver was a weakened US dollar which meant no rate increases, least of all the four she had been signaling since assuming full control of the reigns of the Federal Reserve.

So Yellen really had no choice but to play this game. China however is far from stupid and can be counted on to have played a new card at the special U.S.-China Strategic & Economic Dialogue just held June 6-7. We will have to wait to see what the real outcome was?

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MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

JUNE 2016 : MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)

US Treasury Bonds and a flattening Yield Curve clearly suggests that the Credit Market sees something more concerning ahead than does the US Equity markets? It  has been my experience that credit markets seldom get it wrong and the equity markets seldom get it right!

The gap we are seeing between the 10Y UST and the annualized US nominal growth has been a harbinger of major market drawdowns in the past. The 2 standard deviation measure on the 10Y UST is consistent with what we saw in 2000 and 2008 before major market corrections. Will it be different this time?

One way of answering that question is to look at margin debt being used to fund equity purchases. It isn’t just the elevated levels that must be examined but rather what happens after peaks. When credit cycles turn we often see margin debt fall off. The chart below is a classic telltale currently being ignored, though the smart money according to BoAML (we have shown this in previous reports) has been exiting the markets for 12 consecutuve weeks.

It isn't often that long term Moving Averages like the 12Mo and 24 Mo cross. They are something to be watched closely as they have been consistently accurate indicators of problems ahead for equities. Earnings are expected to fall in Q2 which will be the 5th consecutive quarter. Revenues are expected to fall for the sixth consecutive quarter. How does a market rise on consistently falling earnings and revenue?

We have talked previously about falling corporate cash flows and EBITDA. Corporations are being forced to shore up earnings to even falling levels by once again cutting labor costs….… and something many corporation are dearth to do – cut dividends!!

Expanding PE’s have been the savior todate but they are now at 81%above their long term regression. What do the equity markets see ahead that merit these PEs? They don’t see the Recession the debt markets see. Rather they see more money printing and cheap rates. Unfortunately those leanding the money don’t see that! Someone is terribly wrong!

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