What is next for the Global Capital Markets: (monday morning musings by JJP) The global financial
markets have always been doing interesting and often surprising things.... we have experienced a wild
array of market conditions over the past 50 years in the USA and all around the world
And when you think about how adverse the economy and the living of life itself is itself in Syria, the south
Sudan, the hyperinflation and corruption in Venezuela.. the complete and total devastation that is Puerto Rico it is really tragic and horrific at the same time. As Famed author Charles Dickens started his "A tale of two cities" It was the best of times, it was the worst of times.
We have a most interesting dynamic with the Global Central Bankers having created 17 Trillion dollars and counting of Global Credit expansion via, Quantitative easing programs,Twist Operations by the FED, The whole sale purchase of Sovereign debt, and the BOJ, ECB, the Riksbank the BOE, and other central
banks have purchased Trillions of dollars of bonds, corporate debt and other debt obligations, equities , real estate in some cases ( I believe) and the CB's multi year campaign to create zero short rates in the US and Negative interest rates not only in the short end of the yield curve but also the long end of the curve in Japan, Euroland, Switzerland, Sweden,Denmark....etc. (oh and one aspect not talked about much is that the 4.6 trillion in US Government securities on the FED's balance sheet are throwing off cash flow payments, as is the price appreciation of the equities and debt instruments in the Bank of Japan's portfolio as well as in the EuropeanCentral Bank, thus the numbers on the global CB balance sheets are increasing..... possibly quicker than they can be rolled off.... unless for some reason the global CB got very aggressive in balance sheet reduction.
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the above link is where I noted and posted on 08/08/2016 a chart that the BOJ had changed direction from lower and lower Negative interest rates and had gotten religion on moving out of debt negative territory for JGB's
Since the early July global Central Bank summit of 2016 where the CB decided to shift course and proceed
with an interest rate normalization program, we have been living in a most interesting world. The
Great Financial Crisis of 2007- 2009 was completely unprecedented by the scope, breadth and severity of
the coordinated Global Liquidity Crash -- GLC (with the possible exclusion of China)
(Missives from July and August of 2016 when Negative long bond rates were the norm....(some really great
material on this links... these are articles that you should print out and put in a binder and save for
your grandchildren!!)
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(Institutional Investors in Japan this year have seen there 30 year JGBbonds appreciate 40 to 50% in 5 months as prices have zoomed higher even as rates are negative...part of the post from below)
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(20 year returns over the past 20 years the S&P 30 year bond return has been 319% and it has outperformed the SPX total return of S&P 500 index by 85%...... the total return has been 219% and when the Sharpe ratio and the much greater beta and draw downs over the last 2 years increases the outperformance of bonds by a doubling of the percentage price outperformance. of course this is looking in the rear view mirror
The SPX has not been able to make a new high in real terms (inflation adjusted) since 2000. There has been no upside since the secular bull market in equities that ran from 1976 to march of 2000 basis the SPX and from 1982 to March 2000 basis the DJIA. great graphs by Carter Braxton Worth from 7/12/2016
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Fiction, Meet Facts: The Unintended Consequences Of Central Bankers Gone Mad
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(the leverage on Deutsche Bank is around 40:1, but was "only" 31:1 for Lehman Brothers
Deusche Bank is twenty times larger and more Critical to the Global Fiancial system than Lehman Brothers was.
Deusche Bank is the Worlds Largest Foreign Exchange Dealer in the World with a market share of 21 %. Foreign Exchange is the Worlds Largest Financial Market with over 5 Trillion dollars traded every day. The Derivative products the DB, JPM, GS Barclay's BAC, C, WFC are many more Trillion. The CDS, CDO, CLO's and other huger derivative products.)
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The Sub-Zero Club: Getting Used to the Upside-Down World Economy
In the new reality of negative rates, borrowers get paid and savers get penalized
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Bond Market’s Big Illusion Revealed as U.S. Yields Turn Negative
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The vast ocean of uncollectable capital gains in the global bond markets.....
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The unprecedented magnitude and nature can be amply be demonstrated by the deepest and most
interconnected degree of global central bank coordination in Human history. This is self evident by the
extent that the global CB's created ZIRP, QE programs and the driving of the entire yield cure including the
long end of the yield curve into negative yield in so many major countries.
We now have an equally unprecedented event transpiring with the Central banks now all attempting to
normalize their yield curves and normalized interest rates. It is completely unknown and unknowable
exactly how well or how poorly the various countries and central banks which have wildly dissimilar economic conditions, values of their currencies, demographics, Debt to GDP levels, levels of economic
growth, wildly differing increases and potential bubbles in residential and commercial real
estate in their major hub cities. Think Vancouver, Sydney, Auckland Hong Kong even Swenden.
I am fairly certain that the Foreign Exchange relationships in the global currencies markets are going to be the hardest aspect that the Central Banks and the governments of the world will have to deal with as this
multiyear interest rate normalization transpires. The Interest rate differentials between the various key
currencies in the world especially the big 5, EUR, JPY, USD, GBP, YUAN.
The $64,000 question....... is how well will these central banks be able to be able to work in unison to
raise global interest rates and normalize the interest rate and structures of the yield curves around
the world.
Jeffrey Saut of Raymond James who is one of the more savvy market participants I know outlined a
distinctly bullish secular case for US and global equity prices. He stated, that bull markets have 3 stages.
The first leg of the long term multi year secular bull driven by supremely low interest rates started on 03/09/2007 and then topped in June 2015 again.... driven by super low interest rates..... into the February Crude oil Crash lows where The Royal Bank of Scotland was saying to sell everything.
He now feels that we are in the early innings of the second stage of a idealized 21 year secular bull market
which will be driven by earnings growth....... the third Stage (in his scenario) will be another very speculative mania ala 1928-29 in the US, the late 1980's in Japan, and the .com and B2B Bubble Market of the late 1990s which peaked in March of 2000. after the FED had Y2K concerns ameliorated. (the very last flourish of the Y2K concern was that February 29th of 2000 was a leap year... there was some slight concern that it being a leap year in the new millennium might mess with the legacy COBOL computer.systems.
Jeff Saut has no idea when this second phase of the multiyear secular bull market will end and let us remember that this is one viewpoint.
The Future is always playing out so radically different than even the most prescient of our thought leaders envision, it is wize to tend to our knitting and adapt to market developments as they unfold
We shall let the Market Tell us WHAT THE MARKET WANTS TO DO.
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FOOD FOR THOUGHT: the crosscurrents are as strong as ever between the deflationary nature of automation technological / machine learning / Deep Learning / AI autonomous driving, medical innovation etc on the one hand and the tremendous liquidity generation by the global CB's and the ever expanding ocean of cryptocurrencies now approaching 1000 in number. However the global market capitalization of the cryptocurrencies is still quite small... 137 Billion or so.
The 2% growth rate has been underwhelming. the numbers on Inflation in the US are still pretty tame as we
can see below.
And yet commodity prices particularly industrial commodities have risen this past year, the Baltic shipping rate national index is up substantially over the past number of months, the embedded inflation expectation
in 10 year US Treasury TIPS has increased significantly.
The out-performance of material stocks, energy stocks, small cap and industrial stocks all can be attributed
to sector rotation, however it also suggests that a sense that inflation is in the process of picking up. The
central statement that can be said is that GDP growth and these other inflationary signs have been
so far underwhelming.
As Jim Paulsen has pointed out though in the same interview as Jeffrey Saut on CNBC. We have an
entire generation of people who are now conditioned to expect extremely low interest rates and they are used to long term rates of 2% or so. This generation will be extremely shocked and amazed if long term interest rates were to revert to a 3.5 to 4% level, let alone the historical norm of possibly 5%.
The United States1. Unlike the Labor Department’s CPI report, the Department of Commerce data (PCE inflation) continues to show slower price increases. Both the headline and the core PCE inflation figures missed projections.
Moreover, the rising cost of rent is holding the core inflation above 1.25%. Outside of housing expenses, the core PCE is at the lowest level in years.
Source: Capital Economics
Here are a few other inflation trends worth mentioning.
• The Trimmed Mean PCE (from the Dallas Fed) has also moved lower.
• The Price Pressures index is at the lowest level since 2015.
And the probability of inflation being stuck between 0 and 1.5% over the next year is back at 75%.
• The U. Michigan long-term consumer inflation expectations are still depressed relative to historical averages.
• Prescription drug price increases have been slowing quickly but remain significantly above the overall inflation trend.
Source: WSJ.com, h/t Paul Menestrier; Read full article
• Finally, here is a chart of the US CPI going back to 1914. Inflation volatility now is much lower than it was decades ago.
Source: Credit Suisse
JJP |
