General Macro Observations

[qldfrog]

an article I like:
http://www.brisbanetimes.com.au/business/markets/alarm-over-return-of-pregfc-conditions-20140603-39fcl.html
about the absence of risk premium and a comment I share on the equities/bond trends...how can they go in tandem...
anyway, hope it helps

 

[sydboy007]

an article I like:
http://www.brisbanetimes.com.au/business/markets/alarm-over-return-of-pregfc-conditions-20140603-39fcl.html
about the absence of risk premium and a comment I share on the equities/bond trends...how can they go in tandem...
anyway, hope it helps

Desperation for income. With negative real rates in a large chunk of the world, it's either starve or take on more risk that you should for a lot of savers.

Possibly the best one can hope for is the not fall and get crushed in the rush for the exits when it eventually occurs??

problem with the macro view is when the fundamentals take a back seat to central bank manipulation, we're best off not betting against the FED / BOJ / ECB / BOE.

Now if only I could put my hand up for some from QE to appear in my bank account. 5 to 6 zeros is all I'm after. Barely a merchant bankers bonus, so not terribly greedy at all

 

[DeepState]

With negative real rates in a large chunk of the world, it's either starve or take on more risk that you should for a lot of savers.

Possibly the best one can hope for is the not fall and get crushed in the rush for the exits when it eventually occurs??

problem with the macro view is when the fundamentals take a back seat to central bank manipulation, we're best off not betting against the FED / BOJ / ECB / BOE.

"Volatility in many financial prices is unusually low."
- Glen Stevens (RBA) in today's Statement.

VIX vs three month volatility in SP500:



With Central Banks either committed to normalizing (BoE, Fed) or at max stimulus (Japan), or heading into more crap (ECB)...does it seem reasonable for risk to be saying:

"Don't worry, about a thing..because every little thing is gonna be alright"
- Bob Marley



And yet equity markets march upward virtually unbroken as yields continue to fall. This is a violation of historical relationships. It is a symptom of risk bearing and excess liquidity. The usual relationship broke down at the end of the recession.

"One of these things is not like the other."
- Sesame Street




Let's decompose the march of the S&P into multiple expansion and earnings. EPS is actually lower than where it was in 2007. Yet the multiple attached is about 30% higher. The EPS growth heading into 2007 was also much higher than can reasonably be expected from this point. In other words, the PE premium in 2007 was already rich.



With the decline in long bond yields, it is possible to conclude that the valuation now is sort of similar to the one at the peak of 2007. But, it's a stretch because EPS growth cannot be sustainably produced by financial engineering and the GDP outlook is modest at 3% per annum (real) and expected to decline. Credit growth is not like the post tech-wreck/Iraq 2 period and bargaining power of labor should increase as unemployment lowers, although much spare capacity exists. EPS growth is typically high after an acute crisis. We are not in that phase any more. Basically, you'd want to be doing well and for bonds to stay at really low rates just to justify current super rich premiums at current bond yields.



...and long bond yields are incredibly tight in real terms.



"How low can you go"
- Ludacris


The other thing that CBs now know is that inflation targeting needs to consider asset price inflation as well. As per QldFrog's link, the BoE is taking steps to cool the housing market. Further, the Fed has moved to a checklist approach as opposed to strict targeting. Systemic risk is now more of an issue given the lessons of the GFC.

"There was a flaw in my ideology."
- Alan Greenspan

 

[DeepState]

This just in from Europe:

Every item of inflation except for energy is down for the annual period ended May 2014 compared to the same figure in May 2013.



ECB Meeting tomorrow...

- Negative rate on excess reserves is thought to be largely baked in
- LTRO in exchange for commitment to lend is possible
- Limited QE is currently an outside chance

More hanging on this than usual. Watch out if you are in Euro Zone related positions.

 

[sydboy007]

ECB Meeting tomorrow...

- Negative rate on excess reserves is thought to be largely baked in
- LTRO in exchange for commitment to lend is possible
- Limited QE is currently an outside chance

More hanging on this than usual. Watch out if you are in Euro Zone related positions.

I'm trying to work out how it will impact AUD / EUR. Heading over in a few months and it's killing me whether to buy now or wait till I get there.

 

[sydboy007]

http://www.macrobusiness.com.au/2014/06/gdp-euphoria-needs-a-reality-check/

From the below it's not boding well for the retail sector. Hate to think what the next qtr figures will look like after the no surprise budget tanked consumer sentiment.

While headline “real” GDP recorded quarterly seasonally-adjusted growth of 1.1% and annual growth of 3.5% – the best outcome since March 2012 – actual spending in the economy fell.

That’s right, real gross national expenditure (GNE), defined as the sum of all expenditure within the economy, both public and private (including on imports), fell by 0.3% in seasonally-adjusted terms in March and was up by only 0.9% over the year – the fifth consecutive quarter where annual growth in GNE was below 1%.

In trend terms, GNE was flat over the March quarter, and up by only 0.7% over the year – also the fifth consecutive quarter where annual growth in GNE was below 1%.

 

[sydboy007]

not looking too good for the resource states.

State final demand is a better representation of the actual economic activity within a state.

Can't bode well for house prices, unless NSW VIC investors decide the gras in greener over there

 

[DeepState]

I'm trying to work out how it will impact AUD / EUR. Heading over in a few months and it's killing me whether to buy now or wait till I get there.

With inflation so low, there are real concerns that appreciation will be even more detrimental. But the EUR rose from 1.28 to 1.39 during the year to April which obviously drains HICP. Since then the Draghi USD call scenario seems to be priced in with the EUZ GDP contribution from net exports declining as well (From the Q1 2nd release). This should all help with keeping a lid on the exchange rate.

July 2014 EURUSD Options are pricing a bias to EUR weakening vs USD.

July 2014 AUDUSD Options are pricing a bias to AUD strength vs USD, although there are wide wings of expectations on each side of the forward curve.

All in all, the options market is saying hang on to your AUD for now and convert later. The risk of regret is somewhat limited by the implicit Draghi EURUSD call which he has sold to the market. Your risk of regret could be reduced further by converting some now and a larger slice later. Currency is currency. Who the heck knows? I'm just the messenger for the data and market pricing.

Hope you have a blast.

 

[sydboy007]

All in all, the options market is saying hang on to your AUD for now and convert later. The risk of regret is somewhat limited by the implicit Draghi EURUSD call which he has sold to the market. Your risk of regret could be reduced further by converting some now and a larger slice later. Currency is currency. Who the heck knows? I'm just the messenger for the data and market pricing.

Hope you have a blast.

Considering I've pretty much prepaid fro everything I'm only looking at converting spending money, so yeah I might as well hold on for a bit longer as the cost of regret, and being right, is not really that much in the grand scheme of things.

 

[sydboy007]

http://www.zerohedge.com/news/2014-06-03/welcome-new-yield-hunger-games


The sale of complex debt products popular in the pre-crisis boom years has soared in 2014 as investors have embraced riskier assets in exchange for higher returns.

Issuance of US-marketed payment-in-kind notes - which give a company the option to pay lenders with more debt rather than cash in times of crisis - has almost doubled so far this year to reach $4.2bn, according to Dealogic. That is the highest amount since the same period of 2007, when a record $5.6bn in PIK notes were sold.

...

“We call it the yield-hunger games,” said Matt Toms, head of US public fixed income for Voya Investment Management. “In this environment of very low yields and very low volatility, any extra yield that products such as these may offer already helps.”

On average, PIK notes yield 50 basis points more than comparable high-yield bonds. Average yields on junk-rated bonds stood at 4.99 per cent on Tuesday, according to Barclays indices.

“I’m glad regulators are trying to instil some discipline in the market,” said Michael Collins, a senior investment officer at Prudential Fixed Income.

“I have no doubt that the resurgence of PIKs and other risky debt deals is a sign that we are setting the stage for the next down cycle. It is still a couple of years away, but some of these deals will be very high on the list of defaults.”

 

[DeepState]

The sale of complex debt products popular in the pre-crisis boom years has soared in 2014...

Issuance of US-marketed payment-in-kind notes - which give a company the option to pay lenders with more debt rather than cash in times of crisis - has almost doubled so far this year to reach $4.2bn...

“I have no doubt that the resurgence of PIKs and other risky debt deals is a sign that we are setting the stage for the next down cycle. It is still a couple of years away, but some of these deals will be very high on the list of defaults.”

Whilst I think this development increases risk to financial stability, particularly if still held on bank balance sheets and unhedged by a sound counterparty, I found the following interesting:

 

[sydboy007]

Whilst I think this development increases risk to financial stability, particularly if still held on bank balance sheets and unhedged by a sound counterparty, I found the following interesting:

WOW. Amazing if true. Maybe some massaging of the figures? Not sure if covenant lite loans are junk or get an investment grade rating???

This from a couple of years ago:

Default rates have been quite low in the corporate bond market over time, averaging 1.47% of all outstanding issues in the 32-year period measured. Investment grade bonds defaulted at a rate of just 0.10% per year, while the default rate for below-investment grade (high yield) bonds was 4.22%.

The vast majority of defaults have occurred among the lowest-rated issuers. The 31-year average for securities rated AAA (the highest rating) and AA were 0.0% and 0.2%, respectively. Comparatively, the default rate among B-rated issuers (the second lowest) was 4.28%, but for the lowest tier, CCC/C, the default rate was 26.85%.

By a wide margin, the majority of defaults are preceded by downgrades to the issuer’s credit rating. As a result, most defaults are likely to be preceded by a warning.

 

[DeepState]

WOW. Amazing if true. Maybe some massaging of the figures? Not sure if covenant lite loans are junk or get an investment grade rating???

This from a couple of years ago:

Default rates have been quite low in the corporate bond market over time, averaging 1.47% of all outstanding issues in the 32-year period measured. Investment grade bonds defaulted at a rate of just 0.10% per year, while the default rate for below-investment grade (high yield) bonds was 4.22%.

The vast majority of defaults have occurred among the lowest-rated issuers. The 31-year average for securities rated AAA (the highest rating) and AA were 0.0% and 0.2%, respectively. Comparatively, the default rate among B-rated issuers (the second lowest) was 4.28%, but for the lowest tier, CCC/C, the default rate was 26.85%.

By a wide margin, the majority of defaults are preceded by downgrades to the issuer’s credit rating. As a result, most defaults are likely to be preceded by a warning.

Cov-Lite are usually sub-investment grade. Here's something interesting as well. Cov-Lite default rates are lower than cov-heavy. Why? Apparently you only give cov-lite loans to the more credit worthy borrowers (yet they are sub-investment grade?) That sort of makes sense, I guess. It seems that the rating agencies do not make allowance for this which is why a cov-lite B credit does better than a cov-heavy B credit etc.

 

[sptrawler]

I'm trying to work out how it will impact AUD / EUR. Heading over in a few months and it's killing me whether to buy now or wait till I get there.

Try to find out the local exchange rates, I found in Italy the exchange rates were day light robbery. In U.K they were fine.

 

[DeepState]

Meanwhile, over on the Continent....we have NIRP on the deposit facility at -0.1% and the Main Refi has been brought to 0.15%. This is about the weakest end of expectations in terms of stimulus from economist surveys. The weakest was, of course, no change. Yet, the STOXX is having a modest up day, popping on announcement, and the EUR is marginally down. In addition the long end curves are steady with periphery tightening to core, albeit by bips. Gold is steady.

The size of the moves suggest a very very mild positive surprise net. Nothing to see here. Move along. If anything, there might have been a little doubt that the ECB would move. The debt and currency markets are acting as if this result was in line with expectations. Given rates have compressed so much, they (to personalize a bond) might be thinking that NIRP is just the prelude to something more energetic.

In any case, get ready for a flood of stuff about negative interest rates...however, it's not a big deal for Europe.

 

[burglar]

Try to find out the local exchange rates, I found in Italy the exchange rates were day light robbery. In U.K they were fine.

Stay out of Milan and Capri, if you want your spending money to last!!

 

[sydboy007]

http://www.metal.com/newscontent/61...eel-production-was-sold-in-export-market-meps

The first coupe of paragraphs. Doesn't bode well for the Iron ore juniors in Australia. I can feel some massive write downs coming from BHP and RIO next year,

Chinese steel demand growth is slowing down. This is partly due to high inventories throughout the supply chain but also a decrease in government investment. Despite this, output in the first four months of 2014 increased by 2.7 percent compared with the same period last year. By historic standards, this is a modest rate of growth, said MEPS International in a research note.

However, it is worth noting that approximately 50 percent of China's increased, year-on-year, steel production in the first quarter of 2014 was exported. Moreover, imports of steel into China in the first quarter of this year are little changed from the figure in 2013.

 

[DeepState]

So, like, this is kind of important from a few perspectives:

 

[DeepState]

From Niall Ferguson, The American Interest, 9 June 2014. I thought this was an interesting and insightful observation about the growing similarities between the US and China:

 

[DeepState]

Another anecdote for clipping into the "this is nuts" file: