Our new weekly post – all our comments and views summarized and reviewed on a Monday morning.
Every week we will summarize our thoughts from the previous week, employing the following format; What we thought (going into the week), What happened (during the week) and What changed for us. Enjoy……………………………….
What we thought
Having come out of a forced hibernation, our thoughts could be summarized as follows;
Coming into the week, we felt there was little to worry about apart from the worriers themselves. The ubiquitous “chicken littles” have had more than their day and say – in essence, there are always problems, great mounds of snow upon hillsides or roofs, that could cascade down at any moment, causing death and destruction. However, it seemed to us, that markets had positioned themselves for the worst, and hoped for the best. While far from mega-short risk assets, there were enough shorts to be squeezed on any good news.
The market’s CONCERNS were the usual suspects – so each in turn;
- Fed hawkishness – the fear that above trend growth and firm inflation in the form of rising wages, would combine with direct criticism by POTUS, would force the central bank to accelerate her tightening.
- the US/China trade wars – where we have taken a different stance throughout – seeing them as largely kabuki – a play-fight designed to distract from the main goal of US economic policy – reigning in the multinationals. But never the less, one that serves both counties wider purpose – to make sure China doesn’t collapse. And a fight that already had a choreographed result, that of “opening Chinese markets”
- Brexit and broader EU themes – again we take a very different perspective, seeing these machinations as symptoms of the broader challenges from globalization and tech – the onset of Artificial Intelligence (AI) and robots – “AI-mageddon” – as opposed to the more common “local” complaints. Yes, British (Brits) citizens will never see themselves as Europeans – hey they barely see themselves as Brits, but that misses the broader point. If so many feel so anti-EU, why was the vote 52-48? And regarding Italy, we suspect the problem isn’t so much Germans telling “lazy Italians” what to do and how much to spend. Instead we think the Italian people recognize that theirs is a wealthy society with enormous amounts parked offshore, outside the remit of their own Government, unable to clean their streets adequately. Indeed, that doesn’t sound a particularly Italian problem.
- the debt bubble/overhang. Many fear that one day this will all come crashing down, etc etc. Well again we will offer a different perspective in a forthcoming post, one fashioned in the thoughts of Kalecki, and one that offers a more optimistic outcome. But for now, we acknowledge that when you live on a fault line, you need earthquake insurance. However, no one can predict when in the next 10,000 years it will go off. So, we felt it unlikely to be last week.
Therefore, we were prepared for a return to the highs in stocks and a resumption of concerns about Fed raising rates (we prefer “uneasing” rather than “tightening”, which we’ll explore in a forthcoming post) and a gentle rise in bond yields and curve flattening, with consequent US$ currency strength.
We also remained convinced that emerging markets (EM) would continue to suffer deep into next year. Finally, with higher yields and slightly wider spreads, we’d expect credit markets to calm down and enjoy the higher “carry” from higher interest rates. Even “junk bonds”, caught between the prospects of higher Fed policy rates, and a lower oil price, should find some stability into the New year.
- By the end of the week the Fed had spoken from all four corners of its mouth and few were of any opinion worthy of a position. To our minds the Fed is smart enough to leave the mowing of their lawn to POTUS, knowing that “successful” trade talks should be enough to allow them to plant more seeds of tightening and get away with it. We view this Fed as the most “commercially-minded“ in 40yrs and as such, able to talk without the need for a model or regression to justify their comment. Markets still don’t get that – so expect more lessons to this effect…
- Come Friday night “Trade Sherpa” Lighthizer was already “morse-code-winking” that a deal was coming. As such markets readied for a deal but remained skeptical enough. The deal looks to us to be a classic deal to have a deal. Will China slash all her trade barriers and open her capital account? Nope. But will she offer just enough to allow POTUS to declare victory and tweet happy tweets? Yep. We feel the 90 day “truce” is designed to make sure she follows through with her promises – hence already the fresh market access “trump-eted” by Mnuchin et al has been met with silence from the Chinese. Similarly, the US side avoids a nasty market collapse and can point to a rising stock market to keep their critics “howling at the moon” and worrying about bubbles. To some of us, this had shades of the 1995 trade wars with Japan –
- So today we’re left with Brexit – the elephant in the room. Even there we were pleased to see further moves towards our own long-held (since Sept. 2016) view of a second referendum – #MeRef2 – which buys both the UK and EU time. We see the yellow-jacket movements in France and Belgium, together with the weekend’s political move to the right in Spain, as symptoms of the greater challenges of Globalization and technology (AI-mageddon), rather than any risk of FREXIT etc. We wrote about that here, and will update our thoughts soon.
What changed for us last week
- Nothing – we remain convinced we’ll see further repair in major stock markets – perhaps new highs briefly – into year end, but recognize that even now, major stock markets have gone nowhere this year, on most time-periods of measurement.
- Even the other Central Banks – ECB and BoJ – who are tempted to tinker, remain in “twerk” mode – preferring to shake it entertainingly, rather than actually change policy. This will of course get more difficult for both over time. Next year we will see the “race to replace” Draghi at the ECB, which will obviously require the inevitable verbal macho-talk of being tough and prudent with monetary policy, an attempt to sound more Teutonic than the actual German candidate. Similarly, with the Fed still “uneasing”, the BoJ will be challenged to adjust their yield curve strategy but should find it easiest to just remove the negative policy rate and allow the whole yield curve to shift up 10-15bps, then baton-down the long end yield structure (via purchases on bonds) to prevent crisis.
- Expect next year to be a lot more about non-US themes, as the global multinationals are finally brought under control and policy uncertainty shifts to the ECB and BoJ. Again, a theme we will explore in a forthcoming post.
- Therefore, in our minds, Brexit remains the only serious risk for contagion. But even there, only an accident should prevent the path of least resistance resulting in #MeRef2. So even there we see a far from apocalyptic result. Some worry that the Europeans have to agree to allow the UK to have a “do-over”, facing a decision from the European Court of Justice, but we’re confident that another referendum will suit their pallets as much as the UK.
Until next week.
NB – these are the (inflated) opinions of the author, and are NOT investment advice.