“The New Great Game” Thunder Road Dec2013

I very pleased to bring you the latest, hugely insightful, multi market macro report, namely, the Thunder Road Report. During this festive holiday period its a perfect time for some reflection on the macro and how this feed into our macro and micro allocations for the coming year. A very timely release therefore.

Thunder Road’s latest report, “The New Great Game” is clear and II agree. The game is certainly in motion here and now.

For asset holders of all persuasion this is a meaningful and thought provoking report.

The cyclical gold bear market is approaching the end of its trend. 2014 is likely to allow some mean reversion therefore of the bullion’s secular rise vs paper to resume.

2013 has seen an important wealth transference of physical bullion from West to East and a paper gain from West vs East.  Which of the gains will sustain? History is on the side of the physical.

Without delay the report here:

ThunderRoadReport-12-2013

Wishing you all a healthy and prosperous 2014!

Rich

Macro Outlook “The Pain in Spain” – IMF, ML, CapSyn – Dec13

Spain continues her economic struggle with another negative year for growth in 2013.

The clear problem for Spain continues to be a lack of credit for the private sector, households and corporates alike. Year on year, since the onset of the 2008 global financial crisis loans to the private sector have fallen sharply.  The Spanish central bank has been unable to perform liquidity injections in a similar way to other central banks e.g. the FED, BOE, etc, as Spain’s currency is the euro whose liquidity is controlled by the ECB. A credit crisis in a fiat currency system has a very slow resolution unless capital is restored to the commercial banking sector and lending restored to productive businesses and credit worthy consumers.

Part of the problem in addition to the weak, capital light Spanish banks is the Spanish public sector borrowing needs.

In spite of the rhetoric of de-leveraging in the Spanish economy Spanish bank total assets are approximately 20% higher than in early 2008 yet loans to the private sector are 20% lower than in the early 2008. The difference has been the massive expansion in public sector debt by approximately 650bn euros over the same period funded by balance sheet expansion of banking and non banking Spanish financial institutions.

In Austrian economic terms, this is the worst possible scenario for any economy. The productive private sector contracts year over year whilst the economically unproductive government sector continues to expand its debts.  The private sector is being squeezed out by government borrowing needs.

Here ML taking a relatively optimistic line on Spain given the structural issues.

ML-Spanishbanks&Macro-oct13

Here the IMF’s Nov13 Forth Progress report on Spain.

imf-spain-nov13

Of all the detail in the report i would like to alert you to the projections they make for the Spanish economy and particularly for the Spanish financial sector.

As one example, they project that in 2018 loans to the private sector will be no greater than in Dec 2013! Its very much the sort Greek model of progress. A real term perpetual multi year decline as government funding requirements roll onwards.

Of course residential housing is the main beneficiary of consumer credit availability. Without private sector and particularly consumer credit expansion the Spanish housing market will continue to fall as it has done relentlessly since the start of the crisis mid 2008.

Credit contracting in real terms to the private sector is likely to lead to a continuation of this trend and the wage price decline that continues unabated.

The picture would not be complete without a consideration of Spain’s demographics here:

Demographically speaking, as above, Spain faces serious demographic challenges which will mean rising social security costs to the state whilst those with assets to sell will increasingly become net sellers of these assets, including houses. Bank deposits are likely to decline as pensioners use accumulated savings to provide for their retirement. The mix of issues helps to create a super bearish Spanish domestic (rather than holiday focused) residential property market should these IMF projections attempt to be followed by Spanish authorities.

These are all long term macro secular issues. Without the means of currency debasement and bank re-capitalizations Spain faces a perpetuation of her painful economic depression.  The EU, IMF and ECB offer no respite and advocate hard currency strategies to emerge from her depression. Short term equity issues (particularly exporters and international Spanish corporates with access to international debt markets) can rise. Some regional housing markets can bounce especially if appealing to foreign buyers with cash or access to credit in their own countries.

But the real wild card here for a turn around ending of her depression remains whether Spain remains inside the euro currency. Domestic social and political pressures will intensify for Spain as her economic depression continues. The wage deflation, credit contraction route to restore competitiveness has  seldom been followed by a nation. The inflationary currency debasement route is normally preferred by policy makers. Its only denied to Spain due to participation in the euro currency so this is the key variable and will determine long term nominal asset price deflation or inflation accordingly.

All the best

Rich

 

2014 Outlooks – CS, SC, ML..

Macro wise, very high correlation in allocations and perspectives across the majors which represents a high risk to asset markets. If we do hit unexpected problems, volatility could spike up in 2014 due to this herding phenomena, be warned. There is little or no downside risks priced into this market on a macro level.

CS-GlobalEquity-2014

SC-Outlook-2014

Here an ML pitch against the macro bear case. They make their case for ye 2014 target of 2000 SP500.

Yes, i agree its a distinct possibility this 2000 target being achieved but at what risk to the downside and how selective will this new index high be?

Even if the sp500 hits the 2000 level many will fail to participate in this wave of the rally as selectivity is likely to increase not decrease from here.

ML-Bullcase-Outlook2014-dec13

And here a 2013 earnings retrospective.

FS-2013Earningsreview

To be continued.

Rich

 

 

“Deleveraging? CapSyn Outlook & “MM” Weekly Reports – 21st Dec13

Here below some final 2013 weekly reports from the majors sticking to the themes we have seen before. Inevitably they are forward looking into 2014.

Its clear on a macro market level (ie on major themes) the institutional teams are uniformly sticking to the over weight equities and under weight bonds but long junk. Under weight EMs and commodities. We have very little divergence now. Consensus has become the entire market which is, in itself, a risk event.

The ‘all in’ macro consensus is that the recovery will broadening and gather pace into 2014. Almost all participants are very unwilling to divert from this outlook as, simply put, those that did had a disastrous 2013. Few are now pricing in any other than this scenario that this Goldilocks recovery.  It doesn’t mean this scenario can’t happen its simply that we should recognize that this is an exceptionally crowded trade now against a back drop of perpetually disappointing earnings in 2013.

On a micro level there are many unloved sectors that would benefit greatly from the recovery gathering pace. The UK retail sector is one of the cheapest developed cyclical market sectors as one micro example.

But its the macro and technical where the problems lie for 2014 and I’d like here to take a step back and throw up a few charts on the macro banking issues.

If the professionals are all in on record levels of leverage where will the new buyers come from is a good question to ask and here I’d like to look briefly at US Commercial bank balance sheets. (Accepting that they remain very opaque).

It is unlikely leverage and institutional balance sheets can grow much larger but do they don’t need to? In theory, the central banks multiple QE programs are forcing the banks to liquidate their bond holdings for new cash. But as we see below this has not occurred as yet due to new issuance from the treasury. As we step forward into 2014 there are some tail winds here as the Treasury is expected to issue relatively little new debt for 2014. As the Fed sustain its purchases (MBS inc T-bonds) at 75bn a month the US banks can become more aggressive net sellers. Its worth recalling here that the US Fed now owns 40% of all US government debt over 5yr maturity.

(Note, by the end of the Fed’s liquidity programs you have to wonder what number this ratio will be up to and what systemic risks this presents to all!)

Here Yardini’s latest look at Central Bank balance sheets

centralbankbalancesheet-27-12-13

Considering the macro and issues of deflation and inflation has the US Commercial banking system de-levered or not in recent years, ex the FED?

Some argue that banks have not de-levered and in fact equities and junk bonds have been the primary benefactors pushing up prices as supply of equity has not kept up with banking demand for non treasury assets.  Have the banks delevered or simply sustained balance sheets and speculated by adding more risky assets? These are the trillion dollar macro questions we as investors if not speculators need to take a view on.

Since 2008 central banks have injected around 10trn into the banking system. When you consider global equity markets total capitalization is a mere 50 to 60 trn this represents a colossal liquidity injection if the bulk is channeled into equity markets.

A good question to ask here on the macro level is whether commercial banks have really de-levered? In double entry book keeping assets less liabilities should equal equity. So what do we see.

No question assets are booming in value. Ie the banks hold more assets than ever in fact. Not a usual sign of de-leveraging their balance sheets. But if liabilities have reduced perhaps they are holding more as reverses as therefore net equity in the business. If so we would expect to see equity in US commercial banks rising rapidly.

Equity is barely increasing at all. Therefore the data suggests US banks are barely de-leveraging at all. They are in stead increasing assets and liabilities. Assets slightly more rapidly than liabilities and therefore equity is rising but its at a much lower marginal rate than the assets they are buying. The Fed’s QE programs are simply shifting the commercial bank’s asset mix and weighting them towards risk away from treasuries, as the Fed purchases this supply, and towards more risky assets. An interesting trend in the age of austerity, de-leveraging and fiscal prudence? The data does perfectly contradicts the rhetoric in fact.

This chart above illustrates neatly that although the Fed has increased its balance sheet by 3.5trn in the last few years this has mainly be used to mop up new treasury issuance of debt as the public debt requirements have been so great in recent years. The banks have been net sellers but its represented a small decrease in their balance sheets due to the continual new issuance from the treasury.

Consumer lending remains weak and in real terms has declined in recent years.

Commercial loans have barely turned positive from the 2008/09 peak.

Together we can see the assets held increases by the banks has not occurred due to either consumer or commercial lending practices. Assets that have increased must be listed securities almost exclusively. This explains the positive flow of funds into global equity markets. What’s worse if equity has increased so little this indicates that liabilities have increased ie credit (and therefore balance sheet expansion) is funding these large asset purchases by the commercial banks.

On a global basis the expansion in assets by the commercial banks is even more impressive.

Its not exactly the deleveraging story we hear from Washington and across the financial media.

And we must recall here that lending and share of financial assets held by NBFIs (non banking financial institutions) is on the rise again according to many (official) sources inc the FSB. Nominally assets held by this shadow banking have increased considerably since the 2008 credit bust. Relative to GDP they have also started rising again. Even in developed countries, UK central bank as one example, is providing incentives to this sector to increase share of financial assets and lending. (The sector has a history of poor financial regulation). According to the FSB its asset size is larger than the banking sector itself.

Looking ahead can this growth in assets sustain by financial institutions? If regulators are prepared to turn a blind eye to balance sheet expansion then yes this can sustain.

According to Basel III definitions of core tier 1 capital most UK banks, as reported in march of 2013,  had, on average, around 3% tier 1 capital to assets. Ie their risk asset exposures were 33 times tier 1 capital. And tier 1 capital includes government bonds, note, even of longer duration.  Talk of balance sheet repair, on this data appears a little over stated.

Beyond this bond fund flows have turned negative as have returns for 2013. As rates step higher the great bond rotation is one area of potential positive fund flows for equities. Private investor participation rates continue to fall but as a group they are usually the last ones to enter the trend so fund flows could turn positive here also to provide the realization of the paper profit for the institutions in 2014.

This lull in market action over the Christmas and New Year holidays are a good opportunity to consider these macro issues. I will explore a few more of these themes over the coming holiday extension period. Soon enough the normal market noise and price action will be back with us and technical perspectives will dominate again.

Here a selection of some recent final week reports.

Barcap-wealth-20-12-13

CS-Wealth-21-12-13

JP-Asiawkly-21-12-13

JP-USequity-19-12-13

I have a number of 2014 “mm” multi market outlook reports to follow for the end of the day.

All the best

Rich

 

Xmas Weekly Technical Update – “Santa’s Rally Sustains” 24th Dec13

A very brief Christmas technical update as the US markets soar to new all time record highs capping a wonderful year for speculators and investors alike.

2013 has conformed perfectly to second half of December strong positive seasonal period. Some call it ‘window dressing’ and some call it Santa’s Rally. For whatever reason we have new all time highs across US indexes and so Santa’s Rally sustains with 1850 in line of sight now for the sp500.

According to Stock Trader’s Almanac the equities market has gone up in December about 80 percent of the time for the past 20 years. Today I closed out most of my year end leveraged short term trades to take the winnings off the table. We are paid on price but price in itself can be a poor indicator when volume are light. Broad index levels and even sector index levels can be easily manipulated when volumes are low.  Even market breadth measures of 52week highs may not be enough to provide a true picture of market health when market volumes and participant rates are low.  Here an article from market watch on the issue of low volumes from Sept. Nothing has changed in respect of low market volumes.

http://blogs.marketwatch.com/thetell/2013/09/03/sp-500-trading-volume-lightest-in-15-years/

These low volumes are even more surprising when you consider market leverage is at all time highs and private participation is at multi decade lows. Ie few large institutions have massive leverage on their market bets. But even this huge leverage isn’t enough to support increased volumes. This is a clear indication of a very unhealthy (and risky) market structure.

From Reuters yesterday.

“Data from the NYSE shows that margin debt hit another all time record high of $423.7 billion in November 2013. This already hit a new high of $412.459 billion in October, and it puts the streak for higher borrowings at five consecutive months. After going further back on the NYSE margin tables, it turns out that margin debt has been more than $400 billion for three straight months, and that same margin debt at the NYSE has not been less than $300 billion since August of 2012”.

And looking inside the market breadth issues although the number of stocks making 52 wk highs has improved across most US indexes. Even the broader NYSE has improved her breadth. A higher high from the prior breakout level high but not a wholly convincing score. It is better however and therefore notable.
But given the volume lets question this a little and look at other measures of market breadth like the number of stocks over their 200 dma, as one example. Here is a chart here of the sp500 and her number of stocks over their 200 dma. This continues to tell the very selective story we have here of this market strength. And increasing selectivity is usually a good indicator of an approaching market top.

Another indicator of a near term market top of the put call ratio.

Here you can see the dow index price and the sp500 overall put call ratio. The ratio is a contrarian indicator and scored a new year low today. Ie the number of market participants holding option puts rather than calls is at all time year long record lows. According to this option market sentiment indicator participants are super bullish at new all time levels. Very few participants have any downside protection or speculation in the options market. Alongside leverage being at all time record highs and market breadth continuing to show great selectivity as the indexes make new all time consecutive highs in thin trade. Its a horribly risky cocktail this mix.

Here the Yardeni report issued just now.

yardeni-24-12-13

Yes this market can move higher but the risks are clearly growing here as the ten year treasury pushes on through the 3% yield market. I’ve taken profits on leverage trades on this basis.

Much more to come for VIP members but for non members i wish you a wonderful holiday season.

All the best

Rich

Economic & Fixed Income Analysis Inc Country Focus – ML,Danske,BNP,CS,WF,JP – Dec13

At present i post up these numerous economic and country focused reports without any commentary.

The holiday seasons is a time for reflection and analysis of this data so lets come back and comment more meaningfully on some of the major macro themes behind and in front of us over the holiday period.

Here some recent reports.

Barcap-euroecon-dec13

BNP-Inflationdeflation-13-12-13

cs-asia-10-12-13

cs-china-dec13

cs-euroecon-12-12-13

cs-globalecon-12-12-13

CS-Focusuk-dec13

cs-japan-dec13

ML-econ-dec14

And on to rates & credit markets.

Danske-rates-13-12-13

cs-eurocredit-dec13

JP-fi-13-12-13

ML-credit-dec13

ML-rates-dec13

WeeklyEconomicFinancialCommentary_12132013

& the WF 2014 econ forecasts..

{a292ec62-177f-4614-a6e4-ce5531b379cb}_2014-Economic-Outlook-report

Weekly Technical Analysis – “Mid Dec Buying Setup” 17th Dec13

Its that time of the week for the usual technical update across the major asset markets.

The Swiss team stick to their bullish theme of forecasting a likely near term bottom for the US indexes and a buying opportunity therefore. They also stick to their medium term view that a deeper Q1 2014 7 to 10% correction is a likely event.

Here the report:

UB-wklytech-17-12-13

Near term they expect the financials to make a new high in the next few weeks with the energy sector failing to score a new high. (Assuming the usual seasonal strength holds I would tend to agree with them on this sector issue. The energy vs sp500 chart is painful chart to look at for someone over weight energy. I would say however that inc dividends the annual return has been nearly double digit over the period on aggregate so I’m not complaining too much). This weakness is a theme they repeat on the European indexes. They sight the Ftse and Swiss indexes as oversold and having a trading entry point. I would add IBEX and MIB to this pair. But echoing an observation i made a few sessions ago a higher high now pre a correction seems a stretch for many European index. (The MIB intra day moving beyond her -10% level indicating an official correction had already started). For these beaten up Euro indexes to score new highs from these deep corrections seems unlikely. They are also badly under performing the US indexes now so some mean reversion seems likely on the downside and upside. Therefore they make a good trading entry in terms of ratios.

The sentiment works needs no comment. The copper issue is interesting but no levels broken here and it could still be a dead cat bounce for now, especially if we see the taper soon rather than latter. The UST is falling and has fallen, just, into the danger zone above the 2.83% yield area.  We need to watch this price action like hawks as credit and especially the UST defines prices globally. (The latest inflation data weak yet again and below consensus).

And I want to pick again a line they have repeated this week once again:

“No bull market ends with a high momentum top”.

This could be true but this isn’t the market we have right now.  My understanding of the technicals at present is that we indeed have falling momentum not rising momentum. We also see falling volume, higher margin, weaker and weaker breadth and internals, contrarian level sentiment and volatility. To add to this, the spread to many economic fundamental indicators as provided by Yardeni are at extreme divergences. Meanwhile the Fed talks taper and world wide rates rise as inflation falls. Its true earnings per share look ok on a historic basis but this is only as corporates are buying back their own shares. They are buying back rather than capex investment as the real economy and regulatory environment is so poor. They can borrow cheaply and get a better return on this capital by buying their own stock. This is yet another non sustainable enterprise and when rates rise this will be yet another knock to equity volumes that are already at multi year lows. And this is occurring as participation rates amongst consumers in the US stock market hits no multi decade lows. (Participation in housing looks very similar by the way).

 

You put it all together and I have to reach one conclusion. We are in a seasonal sweet spot now and only this (and fear of central bank dilution of cash) is holding these equity valuations where they are. So many different indicators are flashing amber and red here I feel I must act on my allocations. It would illogical for me not to for to ignore this evidence would render their usefulness as worthless. Unless the indicators change I am a seller into a year end bounce. I am driven by the technical and economic indicators I see all around me. I am no super bear at all. Ive been long equities from 2009 and with leverage from 2011 on the Sept lows. Its been a hell of beautiful ride but at this junction I have to shift allocations and become a net seller and de-lever. At least until the technical and economic situation changes.

To which point lets skip to Yardeni’s latest reports.

yardeni-mktindicators-16-12-13

yardeni-earnings-17-12-13

We all hopefully know how to read this rich content reports from Yardeni. They don’t need my comment.

I do want to briefly update the market breadth issues. They are weakest or rather provide the strongest sell signal in the middle and smaller cap stocks. The dow displays the strongest market breadth.  The Sp500 and Nas100 show great weakness and a conventional sell signal but the nyse composite shows a complete disaster a alarm bell sell signal.

Here the charts.

SP500

Nas100


NYSE

We might wonder the logic of this as world wide demand is weak whereas domestic US demand seems relatively stronger. Its just my assertion but, i suggest, the combination of large cap access to listed credit bond markets for cheap issuance and therefore their ability to perform large buybacks of their own stock with cheap credit is leading to out performance of the mega caps.  It is sustained by a relative improvement in their earnings per share due to these buybacks. Many NYSE stocks are not in this position to access credit markets in this way hence the relative struggle to sustain earnings growth vs the mega caps. 17 out of the dow 30 have buy back programs in 2013 underway. Cisco announced a few weeks ago that it was joining the buy back bonanza with a $15bn buy back program.  $15bn is 21 / 2 times what Cisco spent on R&D last year and it comes alongside a 5% lay off of its workforce, or 4,000 employees. Its also a usual phenomena to see revenue decline amongst US companies as earnings per share increases.  Capex to GDP declined again on the most recent data point and as a share of GDP is at multi decade lows.

And finally here on the macro front Europe continues her struggle to find a strategy that can work. The ECB is torn between the hard money requirement of Germany and a fiat monetary system that must expand money supply to survive year on year. The ECB’s hands are tied re QE and the European banking system cannot expand money supply as their balance sheets are so weak not helped by perpetual investigation and discussion of this issue by the ECB itself.

One chart here defines the problem, without ECB performing her own QE program.


Near term I hold long trading entries on cyclical stocks and indexes given the likely seasonal end year ‘window dressing’ rally. But beyond this I am in the departure lounge in respect of equity allocations. The case against holding is to great for me to ignore any longer. If price stretches further i may likely trade any ‘stretch’ with option puts and even futures given the right mix of signals. I don’t expect more than a 10% correction but given the leverage and sentiment in this market a deeper correction and ‘shock’ to the system could easily occur. (Of course central bank and policy action can extend even the most bearish of scenarios). I would also say, if the data and technicals change I’ll be very happy to re-enter this bull market.

As an additional report please find the brief UB 2014 view on the bullion markets.

UB-bullion-2014

In my considered opinion, not shared by UB and or any other major institution i should add, 2014 is likely to see the return of the bullion bull market. This recent bullion bear market has only produced a 37% correction to the gold price from her highs. The 1975 to 1976 bear market gold lost 45% of value so it may still have a little longer to run. But its worth recalling that in the following 30 months post her 75 bear market she recorded an 800% increase in value or a monthly compounding return of 7.5% as her bull market resumed. With sentiment a wash out and no major interested or forecasting a 2014 resurgent bullion bull market the stage is perfectly set now. In my view.

As this is a last weekly technical analysis, pre Xmas, I wish all non VIP members a happy holiday season.

For VIP and Forum members many new reports to follow in the next few days.

The very best to all

Rich

Weekly “MM” Reports – Barcap,MS,CS,DanskeB 13 Dec13

Here below some of the latest multi market “mm” reports issued late last week and some from close of business Friday.

barcap-mmwklytech-12-12-13

cs-macrostrat-11-12-13

CSwealth-mmwkly-13-12-13

cs-wklymm-11-12-13

CS-mmwkly-13-12-13

Danske-mmwkly-13-12-13

MSwealth-dec13

I stated last week that i would be more bearish than i am at present in terms of allocations and weightings if it wasn’t for the positive seasonals here.  Its hard to believe the Fed will want to play scrooge so close to Christmas but all things are possible. If they do the markets will take a move down as the technical indicators are not promising as we have said over the last month or so.

Another issue I want to come back to this week are the S&P earnings. Follow these links. I’m out of time now but I want to return to this prickly issue in the next few days.

http://www.reuters.com/article/2013/11/20/us-usa-stocks-buybacks-analysis-idUSBRE9AJ0VS20131120

https://janjig.com/2013/12/the-rally-will-end-when-share-buybacks-slow-down/

http://advisorperspectives.com/dshort/guest/Michael-Lombardi-131119-Corporate-Earnings.php

http://www.zerohedge.com/news/2013-05-28/presenting-full-impact-stock-buybacks-sp-500-earnings

More to come tomorrow.

All the best

Rich

JP-Equity, FX & Fixed Income 2014

Here three outstanding reports from JP running the continued theme of forward looking 2014 view.No tech in specifically but don’t let that stop you from reading these two from the UK teams first and the third from the US equities team, which is a bit more of a cheer leading review, i believe.

Both these first two reports deserve a decent read. They make some excellent points with the equity report being a bit more ‘controversial’ in my mind than the FI and FX.

Equity wise first.

JP make a strong case for European and Uk out performance of the US in 2014.

They try and present a fundamental case first and i must say its weak in my view. There is nothing on the credit front other than to say that credit data lags the real turn around. OK i accept the point but then show me something else JP to convince me on the case. They don’t have an explanation other than a domestic reversal of themes like less austerity, credit growth, consumer confidence improvement ie reduce savings and spend more & capex growth.

One by one.

1) Less austerity. Yes, feeds 1% into growth.

2)  credit growth. No or rather show me something to give me some evidence. The euro bank stress tests and regulatory environment appears to be toughening not lightening.  I can’t see how credit can grow other than Germany. Or unless the ECB steps in with a game changing news announcement. (Watch the German courts on the OMT ruling Q1 2014).

3)Consumer confidence. Yes possibly a little. Though without credit growth unlikely to result in much spending.

4) Capex growth. Ie corporates to invest. Really? Why? Why would they invest and increase capex. Yes capex as share of gdp globally is at historic lows but this alone is not enough to suggest a dead cat bounce. Evidence. Note they are also bearish EMs. So it would be an unusual time for the euro exporters to be suddenly reversing their capex trends and investing unless the ems pick up. Which JP suggest they wont for 2014.

So overall the economic case they present is uber weak, in my view.

But where they score goals is in the equity price valuations. Normal pe means vs the US and recent under performance, etc. On the nuts and bolts issues they score, in my view. There are some good picks as well but they need a detailed look and comment. Some usual names appear.  Forum to discuss this detail.

Here the report. There is a lot of detail here and many comments re 2014 strat for miners, energy and value vs cyclical, Ems etc.

JPCAZ-equitystrat-dec13

If the equity team’s report was a bit lite on the economics JPM securities team (US Co – UK Desk) more than makes up for it in their 2014 FX and fixed income report here below.

Its a good report. What i like is that they make clear that the structural issues are immense and unresolved in say the UK as one example but this matters not in terms of trading and values for eurgbp etc for 2014. Why has growth been so strong in Norway, Sweden and Switzerland. Not because of any ‘real’ demand issues, clearly. Not for many years has domestic economic performance been driven by productivity and intrinsic demand issues. What i like here is that the team understand this perfectly and make no attempt to pretend otherwise. One small point to make, the UK’s house price indexes are very difficult to read. There is a wide regional divergence and this hides the real issues. Statistics only on England are much more interesting and bench marking English house prices to English salaries and English debt to English incomes etc is a much more fascinating and worrying set of stats!

This an article from Oct13.

http://www.heraldscotland.com/news/home-news/house-prices-2012-13-scotland-falls-07-while-england-grows-41-.1381833445

And within England itself the statistics vary hugely by region. Also debt to gdp on aggregate in the Uk is high but not higher than some. But we must recall that the UK has 1m buy to let landlords. She has a high concentration of debt in one segment and class of society. The UK unlike almost all other countries operates a variable interest rate model on most of her household debt. This is quite unique and makes the transmission speed of rates on consumption one of the highest it the world. Ie as world rates fall uk consumption offers offers a positive beta on world consumption.  As rates rise she offers a negative beta. She is an consumer cyclical (alpha type) economy. (In our financial vernacular). That’s all fine but part of our game is to understand what is what in terms of instruments and asset classes. We must be clear when to hold UK assets and when to hit the sell button.

Here without more delay the JP FX and FI 2014 forecast.

JP-rates&fx-2014

Here below the US equities team review and forecasts. They advocate a strong 6trh year for this bull market and more pe compression. The argument rests on earnings improvement and positive fund flows as relatively the spread to bonds is too high. Note within this bullish case is the assumption that bond yields compress further in spite of the taper.  Well, that will take some doing but lets see what the Fed has up its sleeve.

Here their report.

JP-USequity2014 

Much more to come.

Rich