General Macro Observations

[McLovin]

http://blogs.reuters.com/james-saft...ds-cash-individuals-holdings-hit-14-year-low/

Individual investors have been cutting back on cash in portfolios, the exact reverse of what Warren Buffett has been doing at Berkshire Hathaway.

Who do you think has got it right?

Cash at Berkshire Hathaway stood at just over $55 billion as of June 30, an all-time high and two and a half times
the level he’s in the past said he likes to keep on tap to meet extraordinary claims at his insurance businesses. That’s also up more than 50 percent from a year ago.

Buffett’s green pile is in sharp contrast to individual investors, who’ve cut cash in portfolios to 15.8 percent, a
14-year low, according to the July asset allocation survey from the American Association of Individual Investors.

I saw that. I think you need to read it in context. BH is huge these days, so their investment universe is pretty small. Couple that with the fact that BH doesn't pay dividends and there isn't many options but to hoard cash.

Buffett has said for decades that the average investor should be 100% invested all the time. And as for his own estate...

My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. (VFINX)) I believe the trust’s long-term results from this policy will be superior to those attained by most investors ”” whether pension funds, institutions, or individuals ”” who employ high-fee managers.

 

[DeepState]

Thanks. Have reviewed a few other things which corroborate.

Seasonal factors and some technicalities have affected this result. Notable for decline in shadow activity implied by entrusted (in particular) and trust loans. The market is probably right to look through it overall. If another weak result comes along, a lot of the arguments relating to seasonality will have to be scrubbed and this decline takes a different hue. But movements for Aug thus far don't point to it. Activity indicators and surveys do not support any thesis of credit induced reduction in activity over this period. PBoC statements are broadly in alignment.

Interesting about the PSLs. Hadn't heard about that previously. It is changing the source of financing for LGFV. This moves the source of implicit support for LGSVs to a more explicit footing and controls their borrowing more directly. Quite a nice move in terms of centralising command and preventing excess spending. Whether the source of funding for the PSLs results in sterilised or non-sterilised finance will be interesting. QE for China? Conceivable given the contribution from trade becomes more important as fixed asset investment fades, and likely in the event of a banking crisis.

....another weak result is in the consensus for announcement this evening.

 

[DeepState]

Some observations from RBA about why vol in Australian equities has been trending lower:



Similar analysis has been undertaken by BIS for overseas markets.

 

[DeepState]

OECD released the interim economic assessment overnight. Some thoughts/observations:

1. GDP revisions were downwards for major DMs. These would reflect the Q1 final GDP figure in the US, which was a total shocker, not being available in time for the May release. Further, the Japanese figures following the tax hike were much worse than generally anticipated. The EZ is the EZ...fizzle. Interesting that China outlook has not been altered.




2. When the ECB moves to print (it has already shown its willingness to move the Bundesbank opinion/super-vote to one side), the world is likely to have more liquidity flushing over it than at any time up to this point. The US tightening does not involve taking liquidity out of the monetary system, for example.




3. The below shows the bargaining power of capital vs labour. Although there is widespread unemployment in many jurisdictions, skilled labour shortages are showing up. Further, as unemployment generally declines, wage inflation is inevitable. Company profits have been boosted by the weak bargaining position of labour which may be a symptom of the hollowing out of middle class jobs in some cases. This has been a feature in Australia as well. The major CBs including the RBA are watching wage increases as a key measure for the sustainability and level of ongoing inflation. It is arguable that this indicator will be more influential than the headline CPI/PCE in determining monetary policy on a head to head basis at this time. Belief in this suggests that interest rates will likely remain lower for a longer period than might be the case under a repeat of historical relationships.

 

[sydboy007]

http://www.zerohedge.com/news/2014-...eaks-30-coal-miners-unable-pay-employees-time

About 30 per cent of the industry’s miners had not been able to pay their employees on time and a further 20 per cent had cut salaries by more than 10 per cent, the Economic Information Daily, a Xinhua-affiliated newspaper, reported on Monday.

The chart is scary when considering the Chinese debt (non) problem

When is an asset not an asset

 

[Macro Polo]

Hey RY,

Have you got any thoughts on the Fed meeting at the end of this month?

I've been fairly convinced up until now of QE ending on a set course, less convinced by interest rate forecasts (especially from FOMC members), however I'm wondering if falling inflation expectations trumps improving employment conditions for now.

The Fed has a dual mandate and can't really be seen to allow inflation to fall so far below 2%, and if they do it seems to make any talk of rate hikes a little premature.

Are UBS etc crazy to say that the Fed might call off the final taper until the end of December? I would have thought so a month ago, less sure now.

I wonder if the market hasn't gotten ahead of itself a little bit on EUR/USD, given a lot of the ECB's balance sheet expansion is dubious given the opposition from within the Euro and the assets available for purchase outside of sovereign debt. It certainly would be an interesting short squeeze to end the year if the Fed gotcold feet.

Anyway, penny for your thoughts.

 

[DeepState]

Hey RY,

Have you got any thoughts on the Fed meeting at the end of this month?

I've been fairly convinced up until now of QE ending on a set course, less convinced by interest rate forecasts (especially from FOMC members), however I'm wondering if falling inflation expectations trumps improving employment conditions for now.

The Fed has a dual mandate and can't really be seen to allow inflation to fall so far below 2%, and if they do it seems to make any talk of rate hikes a little premature.

Are UBS etc crazy to say that the Fed might call off the final taper until the end of December? I would have thought so a month ago, less sure now.

I wonder if the market hasn't gotten ahead of itself a little bit on EUR/USD, given a lot of the ECB's balance sheet expansion is dubious given the opposition from within the Euro and the assets available for purchase outside of sovereign debt. It certainly would be an interesting short squeeze to end the year if the Fed gotcold feet.

Anyway, penny for your thoughts.

Hi MP, sorry for the delay in this response. I missed your question.

This is a meaty question. Here goes. I think Fed will end QE in October. Reasons include:

+ maintaining consistency between prior statements and their actions (predictability is very important). Further, they gave more guidance about how the balance sheet would be managed and updated their forecasts from the June figures. No change to employment or PCE, but dropped GDP (how on earth the markets rallied on release is beyond me. Took them a day to figure it out. Is Bullard quite that influential?);
+ The value of ABS being purchased is at a $5bn run rate and the value of Treasury is $10bn run rate. The outstanding debt of the US Federal Government is $1.7tr. Delaying QE ending for a month will do a essentially nothing to the yield curve of each.
+ A review of each of the major economic releases does not reveal a break to the comments made in the Sept 16/17 and expectations in there. Employment continues to improve rapidly and inflation remains within a reasonable bound. Qualitative comments from the Beige Book are also consistent with a solid growth picture emerging.
+ The Fed can keep the Fed Funds rate (not so relevant at this time given the zero bound has essentially been hit) and other relevant rates lower for longer if they need to. They will reinvest coupons until lift-off.
+ Downside risks are strong USD holds inflation down. The USD strength coincided with market-based inflation expectations for 5yrs dropping. One-off shifts in currency have inflationary impacts but they wash out unless there is en-masse offshoring of domestic import substitutes that can continue to become more efficient. Possible, but uncommon. The market based inflation estimates remain above the Fed target over the next five years. This implies as accelerating rate of inflation in the coming period to achieve these levels and a period of overshoot as per Fed statements. It's OK. USD will not go to the moon.
+ The more concerning one is residential construction is not very strong. However, this operates at a lag and can be expected to grow more strongly as unemployment decreases and confidence returns. Underlying data suggests this is in place. Job openings have really boomed lately. Wage tension must be around the corner although lack of wages growth has been a question mark and may suggest a few different things. Overall, retail confidence will recover.
+ ISMs, transportation bottlenecks, Q2 GDP underlying all point to a moderate and accelerating recovery.

Interest rates all fell in recent weeks as drama unfolded in EZ and continued to unfold in Japan. Capital flowed from these into a major carry trade into the US. The liquidity additions envisaged in the ECB and BoJ will actually accelerate print into the market place even as the Fed ceases. Accelerate. As a result, the curve will be held down in the US as other central banks are essentially maintaining QE in the US.

There are minor financial stability concerns in the US, so they can tolerate a rising yield curve arising from end of QE. Further, search for yield is obviously leading to credit allocation distortions. This is what happens in QE and is intended, but cannot be allowed to go on indefinitely.

BoJ will have no possibility of easing up on their incredible print. The swing factor is ECB. The world is hanging on to whether it will move to print and all the herding of feral cats that needs to happen to achieve balance sheet growth and restore or exceed the size it had previously reached. QE is possible indirectly via programs of the type that have already been put in place previously. Nonetheless, the detail of this stuff does highlight desperation from the ECB. With a poor uptake from tranche one of TLTRO, we'll have to see what's next. However, LTRO, TLTRO, CBPP3, ABSPP were all done without the need to gain unanimous agreement. Further, any recalcitrant voters get periodically rotated off the Council so impasses have a chance. Europe acts when the walls are falling upon it. With the release of the AQR results recently, credit growth might also kick off, some of which will leak offshore to add to the carry trade, holding down USD yields a bit and adding some pressure to USD to the upside.

So, overall, whilst anything is possible, I think the Fed will end QE in a few days.

 

[DeepState]

Anyone out there have a take on the AQR results published on the weekend?

 

[burglar]

Anyone out there have a take on the AQR results published on the weekend?

Change of Registered Office, announced 19/09/2014, has had a stupendous effect on AQR Share Price.

My experience would suggest that "something bad" (odifferous) has been published in one of those boutique (buttock) magazines.

 

[DeepState]

Change of Registered Office, announced 19/09/2014, has had a stupendous effect on AQR Share Price.

My experience would suggest that "something bad" (odifferous) has been published in one of those boutique (buttock) magazines.

Hi Burgs

Thanks. I should have been clearer. AQR: Asset Quality Review. Results just published by the ECB on the weekend. Interested in:

- Will this catalyze resumption of credit growth for mid-small companies?
- Will this result in easier and actual capital raising to facilitate additional lending?
- Will this help reduce and/or limit the extent of fragmentation in the EZ?
- Other stuff

Cheers

RY

 

[burglar]

... I should have been clearer ...

Whata mistaka I maka!
Did a 5 second assessment of AU:AQR.
Thought it was, perhaps, a heads up for a company severely oversold.

The company had announced "more stuff" at greater depth.
One would assume the Share Price Action would be positive!

Sorry to have interjected!!
You obviously have bigger fish to fry - given the thread title!

 

[Macro Polo]

Hi MP, sorry for the delay in this response. I missed your question.

This is a meaty question. Here goes. I think Fed will end QE in October. Reasons include...

So, overall, whilst anything is possible, I think the Fed will end QE in a few days.

Hey RY,

Thanks for the detailed reply.

It looks like pretty much every research piece I've read seems to agree - QE ends, no major change to the statement until the meeting with a press conference in December. The data is definitely supportive of this, so I tend to agree - though I'm wondering how much more bullish people can get on USD before something shocks this in to a short squeeze such as a change in wording on rates. The Fed probably wants to be rid of QE and the stigma attached though.

Nothing to do but wait now - I'll definitely be waking up early to listen/trade.

Good luck to everyone else

 

[DeepState]

Hey RY,

Thanks for the detailed reply.

Any time.

I'm wondering how much more bullish people can get on USD before something shocks this into a short squeeze such as a change in wording on rates

The USD rise is partly an unwind of a massive carry trade. That carry unwind...how big, when, if, where, does carry extend...is probably the defining macro issue of global markets right now. The risks are strongly tilted towards USD strength (actually, I'll have to check what is priced, but the qualitative stuff suggests upside tail risk to the USD).

Pls let me know if you have thoughts/insights on this.

 

[Macro Polo]

The USD rise is partly an unwind of a massive carry trade. That carry unwind...how big, when, if, where, does carry extend...is probably the defining macro issue of global markets right now. The risks are strongly tilted towards USD strength (actually, I'll have to check what is priced, but the qualitative stuff suggests upside tail risk to the USD).

Pls let me know if you have thoughts/insights on this.

Sure, I actually agree with this (USD strength) but I'm currently suffering from "Oh, is this really it?" at the end of QE. It suddenly feels like - after all that build up and anticipation - a bit of a fizzle as it's winding down gradually and I'm trying to see where the surprise comes from - causing me to look at everything very sceptically.

But, aside from these thoughts it's hard to see any other country with such good prospects/trajectory as the US; they went through a painful restructuring quite efficiently which Europe is still struggling through, and for which China et. al have yet to really pay the piper; policy has been quite easy and is likely to trend tighter over time; Treasuries and US Dollars will remain the reserve assets of choice because where else is there ample liquidity, stability and well defined property rights (let alone without zero/negative yields)?

If I was to try and quantify the carry trade unwind I would be looking at about 10 years’ worth/back to the early 2000's - but that is a purely 'discretionary' guess, based on nothing but gut feeling. I'll leave the quant work to you clever ones.

I think the SP500 will correct back to 1400-1500 in the next year or two (if QE ends) but after that it really comes down to whether an inflationary shock arrives or not and forces sustained tightening. I don't neccessarily think a recession accompanies a correction here. My best guess is this might be associated with the peaking of US light tight oil, which is forecast for somewhere between 2016-2020.

Or, more intangibly, the removal of the trade imbalances could end the oversupply/under consumption paradigm in place - by this I mean countries like China overproduce because it is a side product of their economic model, while western developed nations are currently not consuming like they used to due to over indebtedness/trauma from the previous consumption boom. When I go to the shops I am amazed at how cheap I can buy manufactured goods - it's crazy - and with the internet it’s hard not to be entertained all day for free (legally or through pirating).

I feel the same way about long bond yields as equities (directionally) - they have further to run (falling yields/rising prices) in the next year or two, but after that wage pressures might finally start to evoke something resembling inflation - especially if combined with some form of oil supply shift (US LTO Boom shifting into decline).

Anyway, that's how I'm feeling right now but lets see what the Fed brings!

 

[DeepState]

Should continue to explore that issue MP.

Reaction to FOMC outcome was in line. Change to wording in relation to employment is also in-line although any change is worthy of printing something out, it seems. Kocherlakota dissents. Ultra dove. Ultimately the crazy bit was to sustain asset purchases at current levels. The other bits about inflation outlook over coming one to two years is reasonable and likely to be the effect of what the Fed does anyway, although their current wording and approach allows broader considerations. It could go either way in terms of argument but the current approach by Yellen is less preferred in terms of providing clarity to the market and is generally seen to be less successful for monetary policy. I think he has a point there. These are unusual times, though.

Greenspan says buy gold.

Been looking into the AQR. It is credible. This is a step up on the other junk from before. I am amazed that the banks have fared so well. They still need to raise a lot of capital to meet the capital adequacy requriements in the years ahead, but solvency looks well dealt with. The shock test is truly a shock test.

The key question then moves to whether there is demand for lending not being supplied, or excess supply because there is no demand, whether the banks start to trust each other to cross-collateralize again and also undertake cross-border lending. If this works, a lot of pressure comes off. The banking system is revived. Need to check out what happened in the US in 2009 (success) and why the Japanese experience a decade earlier failed. I have never actually looked into it. Anyone?

The initial read on the ECB Bank Lending Survey suggests that demand is not being satisfied. The brakes are also being lifted with the result that very tight standards are being relaxed resulting in lending for the purposes of working capital and inventory...where you'd expect it to start. If it flows to fixed capital investment...the clouds begin to part.

One thing to watch is how much money is just flowing offshore.

Haven't looked at USD risk shape yet. Need to figure out some stuff I used to do a few years ago. I can't remember the method I used. If I come up with anything, I'll pass it along.

 

[Trembling Hand]

Need to check out what happened in the US in 2009 (success) and why the Japanese experience a decade earlier failed. I have never actually looked into it. Anyone?

The Japanese economy is structurally very very different. What they didn't do, where the US is the leader, is promote good fast entrepreneurship and give up on protecting big slow inefficient companies and ease of employment and immigration (they never will!!) and ease employment law, move away from top down industrial policy and fix their demographics and and and.

 

[DeepState]

The Japanese economy is structurally very very different. What they didn't do, where the US is the leader, is promote good fast entrepreneurship and give up on protecting big slow inefficient companies and ease of employment and immigration (they never will!!) and ease employment law, move away from top down industrial policy and fix their demographics and and and.

Thanks. Taking a deeper look now.

Shall dig in on a few of the things you mentioned. The demographics side and work practices were always an issue, yet credit expansion occurred (albeit spent badly). Why did they prevent a resumption of credit and decent growth in the domestic economy (exporters were different)? Now, a lot of the workforce is flexible, with some being uber-flexible. Keitretsu is uniquely Japanese, unless you translate it to Chaebol where Sth Korea is doing alright.... pls let me know if you have the answers to hand, or even a strong suspicion. Perhaps the balance sheets of the borrowers were totally trashed as well and still haven't recovered? Except they don't receive direct bail-outs...although they are being provided very cheap long term finance now and still aren't really biting?



I'm curious to understand what stopped the flow of finance to productive uses or what permitted it. Europe is unique and we won't be able to template it directly from historical precedents. Still...

 

[Trembling Hand]

Perhaps the balance sheets of the borrowers were totally trashed as well and still haven't recovered?

http://qz.com/198458/zombies-once-destroyed-japans-economy-now-theyre-infecting-chinas/

 

[DeepState]

http://qz.com/198458/zombies-once-destroyed-japans-economy-now-theyre-infecting-chinas/

What goes on in Roppongi stays in Roppongi. Oh my !!...

Thanks for the article. Have done more work. Very interesting indeed. What a mess. They are pushing on a string. If they generate inflation, it's probably not going to be of the type that generates sustained demand.

Two major themes. The Americans stuffed the Japanese economy in the 1980s after setting the scene for the post war recovery and seeing Japan emerge as an economic force. Japan does not help itself by denying reality over amd over again. Now included. The issue is not bank solvency directly.

 

[DeepState]

RBA Minutes lament the fact that AUD remains high on an historical basis and also relative to fair value on most models. Many of these models include terms of trade. This keeps getting mentioned. Yet value of trade is what matters. Despite a very substantive fall in the price of Iron Ore, Australia's export performance has held up well due to capacity expansions in producers. This concept gets tricky if capacity closures take out some of the domestic producers as their breakeven points are passed.