Nordic Region 2013 Economic Projections – “Growth Continues But Dark Clouds On Horizon”

Here below a fundamental economic report providing an economic outlook on the Nordic region care of Nordea.

The report makes clear the lower growth projections for Sweden and Denmark for 2013. Norway is set to expand more rapidly than 2012 and Sweden more slowly. Both events will each create interesting dilemmas for their central banks especially as both their housing markets are in bubble territory now. Sweden needs lower rates for her economy but higher rates for her housing market and the reverse is true for Norway.

Nordic equities have suffered in the last quarter of this year as growth projections have on aggregate declined. This is producing some cheap valuations relative to international comparisons which i’ve recently picked up on in the forum pages. Nordic public finances remain very strong and structurally their economies are in decent shape with generally balanced budgets and balanced or surplus trade conditions given the oil and nat gas revenues.The evidence suggests any housing related shock to the Nordic area will be met by increased government spending so corporate suppliers to the public sectors should be relatively protected.

If the public sector finances are strong the opposite can be found for the Nordic consumer. Consumer debt to income ratios across the Nordic region are worryingly high and continue to increase. Debt to income levels driven by a house price boom and lose lending by Nordic banks continue to reach new nominal world wide historic highs.

 

Higher interest rates are needed to tempter the Nordic house price bubble but the currency inflow implications of this are too dire for Nordic central banks to implement. (The same phenomena can be seen in Canada which is starting to suffer from the same bubble in consumer debt to income ratios driven by her central bank artificially keep rates too low). Protectionism or implementation of the Swiss model, pegging their currencies to a blend of the US$ and Euro becomes more likely as the dilema between growth, bubbles and currency inflows continue.

These sorts of ratios above are only sustainable in Norway due to their natural resource income streams (and sovereign wealth fund). Unemployment benefits and mortgage relief in Norway are large and so shocks to the Norwegian housing market have always been muted. For as long as oil and gas revenues remain strong the Norwegian bubble in consumer debt and house prices looks likely to sustain.(Note, less than 10% of Norway’s mortgages are fixed rate).

Sweden is not much better though and lacks Norway’s natural resource and sovereign wealth reserves. Household debt to disposable income levels for Sweden are at 173%. Interestingly this debt is concentrated in Sweden’s richest 20% of the population who hold over 60% of the consumer debt burden.

Here Reuters on Sweden’s dilemma.

http://www.reuters.com/article/2012/11/05/sweden-centralbank-idUSL5E8M1CML20121105

And here Nordea’s 2013 Economic report.

NordicRegionOutlook2013

My own view.

Like all investments its about balancing relative strength, upside & risk. World monetary stimulus is likely to debase most developed world currencies vs real assets. Central banks continue to be focused on debasing their currencies collectively vs real assets. The inflationary deflation route to purging debt from their systems. If you accept this theme, the Nordic block can sustain their high debt consumer debt levels so long as interest rates remain at low levels. The NOK continues to look very strong and yield compression should be seen in local currency equities. Remember rates on yielding nok and sek assets are extremely low. Bond are at negative real rates. Commercial and residential property assets also offer negative real rates of return. Only equities in the region offer positive returns. Relatively, on this basis, they offer value. Importantly, central banks in the region are unlikely to lift rates any time soon and will instead try and control their runaway housing markets by raising bank capital ratios etc.

The OMX30 Swedish index has done nothing since mid Feb 2012. The index peaked in April 2011 along with the commodity index and since has been struggling to regain this prior level. (The correlation to the commodity complex is high for much of the components of the Nordic exchanges). This current up draft is the third attempt at this level and is therefore bullish for a breakout in the seasonally strong new year period to March April 2013.

 

Timing is everything of course. When the rate cycle turns the downside risks are clear for the Nordic area given the household debt ratios. Given most mortgages are on variable rates any rise in interest rates would badly crimp consumer demand. Savings rates are high across the Nordic region (unlike the US and UK by example). This suggests a deleveraging shock  is unlikely in the short term but  a prolonged rise in interest rates beyond rises in incomes would inevitably eventually lead to debt leveraging across the region.  This would have severe implications for the region’s banks and built asset markets.

In summary my own book  is maintaining a small allocation to the Nordic region’s yielding corporates holding the equities long with local currency cash. This allocation plays the local currency appreciation as well as yield compression in the region. Both themes are likely to remain and strengthen for 2013, in my view.

 

Weekly Bullion Technical Comments – “Gold Above 1672/1661 Short & Medium Term Remains Bullish”

The German team have been chopped up in this difficult short term trading range but they are sticking to their short and medium term call ie bullish both Silver and Gold. Key levels gold to hold (and trade off for the bargain hunters) is 1672 down to 1661 at an extreme.

BullionWeeklyTech-181212

I would agree with their basic technical view and add that the bullion, as an asset class, is displaying a massive short term under performance from her usual correlation pairs. This makes me extremely short term bullish as well as a medium and long term bull here, at this stage in the chart.

I don’t have time to display the charts now but check gold’s performance in the last month to Oil – a usually good correlated instrument. Then check her to copper. Another good correlation instrument. Then check her to her inverse correlations like the US$. Then check her to the macro fundamental news flow. Also check her to “risk on” instruments like the miners and ‘risk on’ equities. The bullion is oversold and significantly under performing.  I love the bullion here and now. I’m not advocating an expansion of balance sheets here and now due to the over bough ‘risk on’ conditions but i would advocate careful additions to bullion positions and over weight the asset class vs risk on equities due to her under performance. Its all probabilities and here and now the probabilities are running in your favor on the bullion.

Whether bear or bull, the bullion appears to be reaching key technical levels. This makes it ‘interesting’ both sides of the fence.

I therefore include this near term tech analysis by INTC FC Stone. (One of the industries largest commercial commodities trading houses). A good report, in my view.

INTL-tech-19-12-12

Macro wise the BOJ announcement on Friday with obvious fund flow implications.

http://www.mining.com/japanese-pension-funds-break-with-tradition-by-turning-to-gold-74800/

All the best Rich

 

 

 

Weekly Technical Comments – “Momentum Work Toppish, Watch Gold, EMs Bullish”

Another great and final macro technical report for 2012 from the Swiss team. I’m in the process of my annual migration to the mountains so i’ll simply post up the report for now.

Weekly18-12

I’ll comment more meaningfully tomorrow but quickly I believe the rotation is in full motion against a back drop of multi asset class yield compression and more meaningful asset allocation away from fixed income towards equities. If these early fund flow indications are correct and follow through historic algorithms on over bought will break as will rotation correlations and prior inverse correlations etc.

The recent past is used by technicians to determine the future but this dangerous in a world of  vast capital migrations and endless liquidity injections by central banks. I would rather miss short term moves so long as i get the big moves correct.  Please re-read and consider this issue when determining your own allocations. This is a very important point that we can discuss on the forum. There is no excuse to be surprised when this occurs it is mathematically inevitable in fact. (Happy to explain, discuss the logic and maths).

The very best to all. If you are also embarking on a journey safe travels to you and your family.

Rich

Seymour’s Equity Research – “Inflationary Deflation” Report

Seymour Equity have produced an outstanding report here. The attached document cuts to the core of the macro and cyclical issues facing the various asset classes. Its makes extensive use of the Kondratieff long wave theories and explains these for us. This is useful for those new to these theories.

(Its worthy of note that Dr Marc Faber is an advocate of this long wave explanation of economic cycles. Although he also makes very clear that he has never seen an effective method of timing these cycles accurately and therefore they are very dangerous to use to determine market timing issues).

For regular contributors to this site there is little truly new here but the report sums up very nicely and clearly some of the major themes and provides some Seymour in house recommendations to hedge the coming “inflationary deflation” storm.

To pay compliment to the report its concisely written.  By definition, concise writing communicates in as few words as necessary and the author achieves this perfectly here.

I would highlight their view, reconfirming my own comments, that the approaching wave of inflation is far from a consensus view, at present. We can see evidence of this from fund flow data as well as the yield compression to negative nominal rates (let alone real rates) on fixed income securities.

Note, bullion particularly, continues to be shunned by many mainstream investors who are “heavily under weight” the asset class.

The report makes a compelling case, in my opinion and is a ‘must read’ document if you value my opinion.

I would only add, the report underplays this, that this is the first time in economic history that debt monetization has taken on a world wide flavor. Excess capital (mostly still in US$s) is in money market and or liquid fixed income securities. The inflationary deflation is being expressed in the fixed income markets at present as negative yields can be seen across the entire yield curve of these assets. Inevitably, as the report suggests, the “crunch” will be the ratcheting up of these negative yields. Capital returns will (and already have gone neutral) whilst yields are negative. In the medium term this will produce the said ‘crunch’. Holders of these securities will be squeezed as inflation increases. The fund flow reversals upon this occurring will be unimaginable. There are simply not enough listed equities to absorb those fund flows. Prices, in this scenario, will explode upwards.

I had been expecting this ‘crunch’ to come sooner but this matters not. Mathematically this moment has to occur. The variable determining the inception point are the vagaries of  human actions which, given this is a global phenomena, makes this timing issue more complex and less predictable.

I maintain, get paid to wait if you, like me, are “risk” allocated. Be nimble with your leverage and asset allocations using price as your signal. An inflationary wave is coming at us quickly now as the squeeze is in motion.  Japanese elections resulted in an LDP landslide win (which is hugely inflationary:http://www.bloomberg.com/news/2012-12-17/ldp-landslide-win-clears-pipes-for-japan-fiscal-spigot-economy.html) and the BOJ announcement follows Friday.

Onwards

Rich

Here the report: SP-Dec-2012

p.s. here today’s fund flow report from Wells high lighting the latest data point.

US$fundflows-17-12-12

Foreigners are fleeing US fixed income securities. Price wise its less obvious as the Fed is a significant buyer via QE of course. This holds up price allowing foreigner holders of US treasuries to exist their positions. This creates excess liquidity in non US$ cash and therefore further yield compression across the world. It also significantly debases the US$ which is what the Fed desires as part of its reflationary and structural re-balancing global trade strategies. The game appears to be underway.

 

 

 

WF Securities 2013 Fundamental Economic Forecast – “The New Normal”

Wells provide us the first 2013 fundamental projection report. Many more will follow of course and I’ll try and post up as many of these as I can to see what themes emerge. The Wells report is a US centric report, to my mind.

I pick this single chart out from the report. This is a thought provoking chart worthy of highlighting and comment:

Its clear that in 75% consumption economies, as many developed economies now are, the engine of growth, over the last 40 years or so, has been the accumulation of debt by consumer and governments alike as well as a collapse in savings rates. With consumer debt burdens at high ratio levels to income overall debt accumulation has stalled (in spite of government efforts) and therefore growth has been constrained. The solution to this growth problem is to monetize debt and lower interest rates so that the interest costs of this debt fall to such a level as can stimulate more debt accumulation and consumption. The Fed fund rate is currently 0.17% p.a. 15yr fixed rate mortgages in the US can be found at 2.5% p.a. interest rates. 30yr treasury bonds yield a little over 2.5% p.a. As the chart above illustrates debt servicing costs are now back to 1981 and 1993 levels. Such low costs of debt servicing for consumers might well encourage another wave of debt accumulation, consumption and another cyclical fall in consumer savings rates. Structurally, over the medium and longer term, this is likely to be disastrous for western economies but for world growth and asset prices this suggests a wave of asset price inflation may be around the corner.

Yesterday the Fed increased its attempts to lower interest rates still further by monetizing yet more debt declaring it will do so on an unlimited basis until unemployment falls to 6.5%. Bill Gross manager of the world’s largest bond fund at Pimco today declared “The Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury. It means the Treasury is issuing debt for free”.

The problem here is that you can only take interest rates down to zero. And then what?

Of course rates can go negative and indeed they are negative right now if you can get inflation in the system. And the way to get inflation in the system to create negative rates is via debt monetization or the debasement of your currency. WF sort of hint at these measures rather than spelling them out. In my opinion it is worth spelling them out as it will effect many investment decisions by capital holders in the coming years. Be aware that nominal GDP growth is quite strong in many economies at present. Nominal growth can remain very strong even if inflation adjusted growth stagnates or goes negative. This is the phenomena of inflation which distorts the pricing of assets and debt considerably.

Well here the report.

WF_2013_Economic_Outlook

Its the first of many 2013 projection views and i would read it on this basis. As one single perspective on the story ahead for 2013. I personally look forward to some emerging market commentary and projections as these economies now make up over 50% of the world’s GDP. And I’m particularly interested in commentary on the unfolding Japanese monetary story.

All the best

Rich

 

 

 

 

Weekly Bullion Technical Comments – “Gold & Silver Bullish Short and Medium Term”

The German team have worked themselves to a bullish technical view over the last few months. For them the price supports have proven themselves again and again. So long as supports continue to hold, they predict higher prices and an attempt at key resistances shortly.

For my own book, I’m continuing to run my own cash and leveraged positions in the bullion including the bullion miners via equities and equity call options. Its all eyes to the Fed and Dc Ben to see if he is ready to sprinkle some more of his alchemy magic money on the markets. For my bullion positions i hope he doesn’t disappoint. The market is starting to price in action. This is dangerous if he disappoints as we have enjoyed a good run up though with yield compression as it is and dm world FX as undesirable as it is the bullion asset class could move much much further if he doesn’t disappoint.

Without further delay here the report:

Bullion-wk-tech-11-12-12

At 12.30 (US EST) Ben Bernanke announced yet more money printing. This time he is buying T-bonds again monetizing the US debt some more and expanding his balance sheet care of the electronic printing presses.

With the Japanese elections next week, the monetary issues around the globe at present could not be more bullish for the bullion. Its a matter of time before the prior highs are passed. In my own view, this time will be soon.

Regards Rich

 

Weekly Technical Comments – “S&P500 Capped Near Term 1430 to 1440, Shanghai Based & Watch Silver”

Another great macro technical report from the Swiss team. There is a lot of detail in the report from regional index comment to sector comment to commodity comments. Its a full report which i find hard to disagree with. The cyclical story is unfolding. Fundamentally it remains unproven for the moment but technically there is increasing evidence that we could be at the start of a significant up wave here. Due to unbelievably lose monetary conditions i would forget the weak fundamental story and stick like glue to the technical price flows and patterns.

All eyes to the Fed’s comments, forward looking and hopefully action tomorrow evening. Next week we have the Japanese elections and then the BOJ at the end of the week. Markets have been choppy and rotational in much of 2012. A steady flow of capital into risk markets would produce some decent trends that we market participants are eager to see. All to play for.

Here the report: Weekly11-12

Rich

p.s. Not to confuse matters but here some fundamental analysis from Wells on today’s US trade nos. For economists and followers of the “big picture” debt monetizations to fund consumption can lead to a falling currency as well as a worsening trade balance. Such a combination is disastrous in the  long term as effectively you are consuming your wealth to fund consumption of imported products and services redistributing wealth in this process. The US and UK are both following this path at present. But these are long term issues that can take many years or even decades before the consequences are crystallized.

Here the report:US-Trade-11-12-12

 

Weekly Market Roundup – “Over Weight High Yield Equities, Under Weight Cash”

SC stick to the same themes they have held for the last year now. Namely over weight high yield equities and FI and under weight cash, money market funds. They like oil and gold for the geo political hedges they provide. I also include their fx round up and forward looking which is released today. For my own book I’m sticking a similar approach as SC’s though i remain very interested in what is occurring to the cyclical indicators and instruments and ever a watchful eye to increasing weightings to this sector due to the monetary conditions we have all around us.

Asia inc Japan and China are increasingly becoming important drivers for this next monetary wave either from stimulus in china’s case or debt monetization in Japan’s case. The xmas rally thus far muted and some key levels yet to be beaten. Momentum remains subdued which reflects the fund flows which remain disappointingly risk adverse. Get paid to weight with high yield equity and stay in the game. For day traders and position leveraged traders, the big pay days, care of cheap debt, are still in front of us. Patience may be a moral virtue but is also good for your wallet!

All the best Rich

Weekly market round up here:

SC-Weeklymkt-07-12-12

FX report here:

FX-sc-10-12-12

P.S. On FX for a moment. Volatility and volumes falling in the fx markets. Central banks alongside the imf are acting as volatility policemen in these markets. Again it is Asia where things are starting to look more interesting with the BOJ threatening to print yen and purchase non yen denominated assets loading their balance sheet with these assets. This would inevitably lead to some very interesting moves in the fx markets assuming the BOJ walk the talk. (As they haven’t done in the last decade, remember)!

 

 

 

Weekly Technical Bullion Comments – ‘Gold Still Bullish Above 1672’

Here the German team stick to their medium term bullish call on the bullion so long as the November lows are not beaten.

BullionWeeklyTechnicals04122012

Their short term view on gold has gone neutral but not on silver where they remain bullish on both timescales. I increased allocations to both metals though more so on silver than gold. Both entries started well  but are now under water. I’m holding for now but the entries are looking uncertain, lets say. Goldman have come out bearish on the bullion. Last week saw one participant dump 24 tons or $1.24bn in one trade. Volatility is falling in the bullion and its inverse correlation to the $US is wavering a little. The general correlation remains in force and technically a pivotal price chart formation looks under way. No conclusions as yet but the strong ten year bull trend remains in force for now and dictates dips should be bought and or that long position stops be wide.

 

Weekly Technical Comments – Near Term Overbought But New Highs For Q1 2013.

The Swiss team remain bullish and pro risk. Near term they forecast these overbought conditions to be worked off a little before new highs are achieved. They remain true to their buy their cyclical forecasts though admit that these themes have disappointed thus far. They pick out the Shanghai and the gold miners are being particularly disappointing but reaffirm their buy the weakness recommendation whilst acknowledging lower prices for both may come first, in the very near term. The dollar index has formed a new pivotal top, according to the team, which forms a key plank of their cyclical case. Given how far we have recently moved up it seems very reasonable to not expect new highs by the dax ftse etc in the near term but it does bode well for an end Dec attempt. The cyclical case remains potential for now. The Shanhai producing a large bounce last night but from new four year lows. There are some glimmers of life from the cyclical sectors but it remains weak price action for now.

Here the report.

Weekly04-12

 

 

 

Weekly Technical Bullion Comments – “Another Test of 1800 Highly Likely”

The German team have turned decidedly bullish on the bullion. And are also forecasting a lower gold silver ratio ie relatively more bullish silver than gold. Both instruments are stretching their ratios to their industrial peers of copper and oil. This isn’t necessarily bearish but it is something to keep a watch on as an indicator of risk and volatility. Out performance by one asset class or pair of asset classes usually has a habit of being short lived unless the other group join the party. Something to watch.

On the very short term. silver looks a little stretched here to me. A minor pull back to 33 or so would be healthy as would a bounce in correlating instruments.

Here the report: BullionWeeklyTechnicals27112012

Rich