In this series of articles, we include important or interesting
videoclips with our comments. This is an article that expresses our
personal opinions about comments made on Television and in Print. It is
NOT intended to provide any investment advice of any type whatsoever.
No one should base any investing decisions or conclusions based on
anything written in or inferred from this article. Investing is a
serious matter and all investment decisions should only be taken after a
detailed discussion with your investment advisor and should be subject
to your objectives, suitability requirements and risk tolerances.
1. U.S. & Global Economy.
The first quarter GDP came in at 2.5%, a disappointment vs. expectations of 2.9-3.2%. Even that weaker number seemed deceptively strong. As David Rosenberg said to BTV’s Betty Liu on Friday:
- reality is economy remains very soft, considering everything we have going for us, all the expectations for a 3%+ … 2/3rds of economic indicators last month have come in below consensus, coming into Q2 with very little momentum & it looks as though whatever we had in Q1 is going to be significantly slower than Q2…overriding story is…there is no acceleration, we are basically just stagnating at around trend growth of about 1.5%…
Nouriel Roubini gravitated to the same figure in his conversation on Monday with BTV’s Sara Eisen (see clip 4 below):
underestimated how much the increase in taxes, payroll, and now the
sequester would affect the economy… my view was that would imply a
fiscal drag of 1.6-1.7% this year and so the economy is not going to
grow much more than 1.6% given this significant fiscal drag…so US this year is going to have a subpar growth below trend and unemployment is going to remain high…”
So what about Europe? Roubini added:
- “trouble is
Eurozone recession is deepening, getting worse and spreading from the
periphery of the Eurozone even to the core…everyone is doing austerity
and there is no plan for economic growth…”
Surely China will help with their new leadership & the charisma of Xi Jinping. Not according to Jim Chanos who said (see clip 2 below):
- “I actually think it’s gotten worse….you have credit actually accelerating in China. but GDP growth still slowing…total new credit
globally went up by $1.5 trillion in the first quarter. China is $1
trillion of that, yet only 10% of the world economy. So there is a
credit bubble that’s actually not only huge, but getting bigger“
So are we looking at a synchronized slowdown in the world? Roubini of course argues yes (see clip 4 below):
- “there is a slowdown in the USA, there is now outright recession in the Eurozone that is getting worse.. and even the data coming from China and rest of BRICS suggest economic growth is going to be weak; actually forward looking global economic growth is becoming weaker than becoming stronger ..”
If the above were even close to being correct, then shouldn’t yields of Treasuries & Bunds be falling to YTD lows? But wait they are as of Friday. And as Rick Santelli pointed out, the yield spread between Treasuries and Bunds has also been falling since mid-March.
But not all hope is lost. The S&P 500 rallied 1.7% this week while Nasdaq 100 rallied 2.2%. The only thing S&P failed to do this week is make a new closing high. Will it do so next week when the Bernanke Fed speaks?
2. U.S. Equities
We have seen a pattern in our weekly survey of guru opinions. A down week throws up bearish opinions which are followed by a rally the following week and sometimes conversely. Is that a fault with our selections or is it simply a buy the dips tendency at work? We will now consciously seek to remove the pro-cyclical bias in our selections.
So after this week’s rally, we will have to focus on bearish opinions today. Fortunately CNBC Fast Money Friday edition made it easy with virtually every trader on their desk sounding bearish:
- Brian Kelly – It’s uncanny, this rally. Everything I thought would happen, as economy weakens, you get bad earnings and the stock market hasn’t gone down. So clearly there is another dynamic going on – individuals are putting money in the stock market to get that yield, to get some kind of return because there is no other alternative. To me those are very weak hands and a very scary trade.
- Josh Brown – I have no idea why we are rooting against a correction; it is utterly absurd. This is only the 3rd time in history that we have gone from January into May 1st without a 5% correction; the other two times you didn’t get a good result afterward…Looks like we are correcting through time of these weeks where it gets choppy, everybody starts pointing out these divergences,… and they resolve these divergences to the upside. I have no idea how long that can continue.
- Dan Nathan – this week we saw names like BMY, Amgen. PG, T defensive with yields, pretty crowded trades… they all got nailed…. if we do get that 3-5-7% selloff in the next couple of months… this could be the canary in the coalmine..
- Guy Adami – I‘m quasi-apocalyptic in my views. No indication now that the market wants to sell off. The problem is, I do think if you see a selloff, it’s not going to be that 5% that people want. My level remains 1520 on the down side and things can get messy. But as we stand here, the money flows are such that it’s going to continue to probably grind higher. I mean, news that central banks around the world, obviously not happening in the U.S., but now buying equities is flabbergasting. It works until it doesn’t and when it ends, it ends badly. But the problem is trying to put a timetable on that.
Guy Adami discussed the possibility of a triple top on CNBC FM on Monday, April 22. He didn’t make a prediction but said:
- “the S&P is not staying here. Either it is going to make a dramatic move higher, we are going to push through 1,600 and have that move, a lot of people are looking for, to 1,700 or it is going to fail here. And if the S&P 500 closes below 1,520,… you have to ask whether we have actually put in a triple top.”
John Taylor of FX Concepts disagrees with this triple top scenario. Because, in clip 3 below, he argues for a correction in S&P to 1,430 followed by a rally to 1,700. Tony Dwyer, one of the most consistently bullish strategists also has a 1,700 target.
Tony Dwyer (of Cannacord Genuity) on BTV Lunch Money on Tuesday, April 23
- “I still think stocks [need to take that coffee break].. my target doesn’t matter… I would buy them here, I would buy them higher, I would buy them lower.. I don’t think it will matter at the end of the year. I think the backdrop is that good for equities. But they should take a little bit of a break…even the healthy need to rest…more than 50% of stocks are already below their 50-day sma. so you have already been correcting for awhile… we are already in a correction.. it should be to between 1500-1520 on the S&P…. and you begin buying at 1530.”
- “as long as fundamental backdrop remains in place of low core inflation, easy monetary policy, improved money availability, positive economic activity, positive slope of earnings, and cheap valuations – that is the sweet spot of for investing.”
- “we will get a nice lift off the coming low – bigger & more important trade coming off the coming low will be IT, Financials & Industrials.”
Lawrence McMillan of Option Strategist on Friday, April 26
- “$SPX has now returned to the area of its recent highs (just below 1600), and although it was turned back from there today, it will likely give it another try soon. A move above 1600 will leave 1575 as the nearest support area.”
- “In summary, the picture is bullish as long as $SPX is above 1575; neutral as long as it’s above 1540, and bearish if it falls below 1540“
3. U.S. Treasuries
On Friday, the 10-year Treasury yield closed at 1.67%, its lowest close since approximately mid-December 2012. The price action and the steadily weakening economic data has now led a number of new adherents to the bullish camp. One of
them is John Taylor of FX Concepts who said this week (see clip 3 below):
- “I’m buying far out
the curve. I look at the market and our signals are telling us we have
one more leg down. only one more. this is it. We’re looking for the
ten-year below 1.40%. I think that will happen.”
This week, we saw an interesting bear on Treasuries in Darren Wolfberg, Director of Energy Trading at BNP Paribas. He said on CNBC Futures Now on Thursday, April 25:
- “I actually think are starting to see them crack as we speak. You put in this low around 1.65% on yields and it kinda sets up for a reverse head & shoulders where I do think the market on yields is going to continue to grind higher as we have seen for the last few days… I actually think that we have seen a lot of QE get priced into the bond market. So as we are starting to see better jobless claims data, as you are starting to see better auto sales data, better home sales data, all those factors are contributing to a bit of a healthier economy and I think the 10-year got a little ahead of itself and now it is trying to correct a little bit. Longer term, when you look back to the middle of 2012, there has been a good uptrend in place and I do think it can continue and we are just at the bottom of that uptrend as we speak.”
Jeff Kilburg, a CNBC Futures Now trader, disagreed with the above and with one of his colleagues and said:
- “There is a range in Treasury yields here…. we are seeing multi-year highs in the equities. We are seeing Gold essentially losing its glitter as a safe haven. What happens when this market does correct? There is only one game in town. It is U.S. Treasuries. So, Rich can dance between the range before this correction happens, but at the end of the day, I think they buy Treasuries. I think the yield is going lower due to the fact there is no other option. I don’t know the exact timing on this 10-year but… at the end of day, we are going to see a move to 1.50% on the 10-year. “
The best rally of the week was in Gold which rallied almost 4%. The bullish short term case was made by John Taylor of FX Concepts (see clip 3 below):
- “I believe you
should own gold now. Basically there were two targets for gold on the
down side and the quantitative technical gain sense. One was 1400, the
other was 1250. The 1400 level has held. Now we are headed up. I would
argue this is either a big bottom and we are going for a long time or
it’s a seven-week sort of two-month, one and a half months up move which
is good for 1500.
Against that you have an emphatic Sell Gold here call by Carter Braxton Worth, resident technician of CNBC Options Action who said on Friday:
- “Anything stock, currency, commodity index that breaks from well defined level and throws back to said level, …that’s an excellent short. Look at the long term chart, it shows the same line in the sand. The reason why it’s an excellent reshort is because once something plunges, you have all these people that are trap and they don’t want to dump it at the low but they want to get out. when it rallies back, they become interesting sellers. You are into overhead supply, sell gold.”
5. Fund Flows
After fears of a Great Rotation from Bonds to Stocks, flows turned this week with the first weekly outflows from equities since November 2012. Below are the details from the Flow Show of Michael Hartnett of BAC-Merrill Lynch:
Equities – $3.7bn outflows (first weekly redemptions since Nov’12)
- $2.1bn outflows from EM equity funds (largest weekly outflows since May’12)
- $3.4bn outflows from US equity funds (snaps 7-week inflow streak)
- $1.9bn inflows to Japan equity funds (14 straight weeks)
- Tiny $78mn outflows from European equity funds (8 straight weeks)
Precious metals – $2.3bn outflows (11 straight weeks and longest on record)
Bonds – Large $7.6bn inflows (18 straight weeks and largest since Nov’12)
- $1.1bn inflows to Govt/Treasury funds (largest since Nov’12)
- $2.9bn into IG bonds (largest since Nov’12)
- $1.5bn inflows to HY bonds
- 46 straight weeks of EM debt inflows ($0.6bn)
- 44 straight weeks of floating-rate debt inflows ($1.2bn); YTD inflows = staggering 24% of AUM
6. Bond Closed-End Funds (CEFs) & Stock Market Liquidity
On April 6, we featured an article by Tom McClellan titled Bond CEFs now saying Liquidity Is In Trouble. In that article, Tom McClellan made the point that Bond CEFs are the least deserving of liquidity and most sensitive to it. He wrote then:
- It is
hard to get one’s mind around the idea that the stock market could be
facing a liquidity problem when the Fed is throwing $85 billion a month
at the banking system. But that is the message here, from examining the actual behavior of those issues who are most sensitive to it.”
In this week’s article titled Bond Funds Now Say Liquidity Restored, he writes:
We did see the fulfillment of that prophecy with a halfway decent selloff for the major averages in mid-April. But now the message from high-yield bonds and closed end bond funds is that liquidity has been restored, at least for the moment. While the SP500 has made a pattern of lower lows and (thus far) lower highs, high-yield bond funds are defying that pattern and showing strength.
Whereas it was showing trouble for the market a month ago, now it is conveying a big “Never mind”. The higher high says that the previous liquidity problems have been resolved, at least for the moment. This is a message which can change back again at any time, but for now the weaklings who are very liquidity-sensitive say that liquidity has been restored. .
The charts in McClellan’s article do show that the Advance-Decline line of Bond CEFs has surged ahead to a higher high. He does not offer a reason for this restoration of liquidity. But we do notice that the A-D line made a local bottom and began its ascent around mid-March.
Is it a coincidence that Treasury yields made a top on March 14 and have been falling since? After all, Bond CEFs are essentially spread products and they should respond bullishly to fall in Treasury yields, right?
We realize it is not that simple because market’s perception of credit risk is a large factor in Bond CEF performance. But April has been a benign month for both High Yield funds & Treasuries. TLT is up 4.77% in April while JNK & HYG are up 1.14% & 82bps resp. This is consistent with High Yield fund inflows reported by Michael Hartnett of Merrill Lynch.
With yields falling and inflows into credit funds, shouldn’t we expect Bond CEFs to rally and so expect the Bond CEF A-D line to break out regardless of what happens to stocks?
- Jim O’Neill on CNBC SOTS on Thursday, April 25
- Jim Chanos on CNBC Fast Money Half Time on Wednesday, April 24
- John Taylor on CNBC Fast Money Half Time on Tuesday, April 23
- Nouriel Roubini on BTV Market Makers on Monday, April 22.
1. I thought Japanese QE was going to be big and its surprising me – Jim O’Neill on CNBC SOTS – Thursday, April 25
Mr. O’Neill is about to retire shortly from Goldman Sachs and we would like to wish him the very best of success in his post-GS career.
- China is going through a transition phase. It’s going to look very different in a few years from now. It’s all about the quality of growth as opposed the to quantity. So China has been getting as much growth as it could and not really bothered about some aspects of quality. And it was greatly export based and state directed.
- To me it’s already showing signs of being quite successful in adjusting and given how important China is for everybody in the world, it’s fantastically important. But it could also play to the advantage of the United States… more and more companies are benefiting from the growth of the consumers. China, if the studies are accurate, has already cracked the No. 3 spot and if China carries on the pace it is on, it’s going to be No. 2 and overtaking Mexico.
- we also have to talk about Japan. That’s another market getting so much buzz because of the stimulus. I was just there a week ago today…. We also forget Japan is still the third largest economy in the world. But there’s a major shift going on and very forced on the mentality but I was there for a day first time since November and I thought it was going to big, and it’s surprising me. All the people who didn’t expect it to be big, this is huge.
Equities still a good value?
- to me it makes everybody fearful. partly because of what we went to four or five years ago. so sort of the excess return is still high. and in many different parts of the world where i think that’s still the case.
Central Banks buying equities
- I’m guessing what it probably shows is the bank of japan is embarking on more and more equities as part of its own QE. But away from that, I don’t think people should worry about it. The sort of welfare part of some central banks, some countries, is being done within the central bank in a separate area and a number have started to make that adjustment a few yrs ago.
- Frankly it makes a huge amount of sense in a world of floating exchange rates, why should central banks keep so much money in very short-term liquid things when they’re not going to ever need it? So to help their future returns for their citizens, which at the end of the day is partly what life is all about, why would they not invest in that?
After quoting Jim O’Neill on China, surely we need to quote Jim Chanos on China for a fair and balanced treatment, right?
2. China has gotten worse – Jim Chanos on CNBC FM 1/2 – Wednesday, April 24
Funds managed by Jim Chanos
- We have two pools of capital. our short-only capital, which is predominant part of our business and then a hedge fund, more traditional, like a lot of other managers. we try not to worry about the markets. We’re trying to fix stocks that are going to underperform the markets. and, in fact, that’s how we get paid. My call on markets is probably pretty worthless. I started my short fund in 1985, the Dow was at 1300. So timing is not my forte.
Views on Market
- I think the U.S. has probably been the best place to be, probably still the best place to be. If you had to pin me down. I’m a little bit more negative on a couple other places in the world.
- I actually think it’s gotten worse. What’s happened more recently after the new party leaders took in, was another burst of investment. but more important
ly, another burst of credit expansion. and what really has us concerned now, you have credit actually accelerating in china. but GDP growth still slowing. In the last quarter, China pronounced some staggering numbers a couple weeks ago – new credit outstanding jumped by $1 trillion; now this is an $8 trillion u.s. economy. So on an annualized rate, that’s 50% GDP of new credit creation. And to put that also in perspective, total new credit globally went up by $1.5 trillion in the first quarter. China is $1 trillion of that, yet only 10% of the world economy. So there is a credit bubble that’s actually not only huge, but getting bigger.
- well, one of the things we have talked about historically is being short booms that go bust. And I’ve always defined that very strictly in that you look for asset inflation where the asset being inflated by credit does not generate cash to service the debt. So you get the so-called ponzi finance moment and that would be almost anything related to real estate or construction in china. so property companies, cement companies, steel. And then, of course, companies selling into that, that bubble. iron ore and mining.
- So inexorably you can’t keep growing your credit at 50% of GDP. Something is going to give. When, I don’t know. but it has been a pretty good place to be short as we were talking about before the show.
State-Directed Capitalist model
- I think that one of the things we keep pointing out to people, to just understand what you’re dealing with. the sort of state-directed capitalist model that everyone is enamored with. keep in mind, the Chinese economy has gone up four-fold in the last years, and the stock market has gone nowhere. I dare say if the U.S. economy quadrupled it’s growth in ten years, we would have a pretty good stock market. And the fact that they haven’t tells you that, you know, the insiders, the party members, are taking their cut and you are last in line. and I think that may still generate growth for the country and for the economy. But certainly not fort capitalists providing the capital.
- I think people are kind of expecting smoking ruins to appear, you know, imminently. and that’s just not going to happen. It’s a credit bubble. And so what is happening is that you’re seeing just slow erosion in share prices and profitability. Last year, economic growth was just about 8% in china and profits collapsed. And that’s using their accounting. So with 8% growth. so it is happening, if you look over the last three years, I mean, despite some really hair-raising rallies along the way, investing in china has been really not a very good place to be.
- In China, keep in mind, the Chinese are still building capacity internally in places they don’t need more capacity. … steel and cement, yeah. steel, they keep building and is building. And what’s interesting it is that last year one of their top five initiatives was that the government was to cut back steel production. Instead they have grown steel production.
- the expectation is just that endless stimulus is going to come to keep GDP to the level the Chinese want. We call it the GDP tail wags the economic dog. And I think that is important, because of the obsession with GDP and not missing targets, and also keep in mind that the party cadres at the local level and at the regional level are all judged and promoted on GDP. Really means it’s sort of back to the old dot com takes ten years ago when you had to beat numbers by a penny. That was important and how you did it became sort of secondary and for many companies very telling on a negative basis. The whole country is structured that way in China.
Art of short Selling
- one of the things that is important to understand about an institutional short seller as opposed to individual or trader, in our global fund, we have 100 positions. So, you know, any position — in and of itself is not huge. so one of the things we’re doing, is always constantly reevaluating daily. Where we’re allocating capital. and if a stock or group has gone down, maybe just because of sentiment or whatever, we might actually cover a little bit and add positions like iron ore if they have gone up or the PC sector, I think, that have rallied and we’re constantly redeploying capital and that’s part of the game.
- There is a tendency to discreetly look at short positions but on the long side more on a portfolio process. People tend to on a behavioral basis look at the short side differently. And i think that that can be a mistake. because for us, it’s part of a large portfolio that’s institutional. and, you know, we’re always going to have 100 names, 10 or 20 driving us crazy; 10 or 20 probably working, and, you know, 60 to 80 monkeying around with the market and I think that allocating capital is much my job as staying on top of the names.
- And it also underscores a concern i would raise for your viewers, when it comes to hedge fund investors, be very, very careful about following them into trades based on their disclosures, because you don’t necessarily see the other side of the trade and that is you may not see the short position against that. So the hedge fund manager may not have a view on an industry by being in Deere but in our case, we’re short construction machineries elsewhere.
3. S&P to drop to 1430 & then rally to 1700 – John Taylor on CNBC FM Half Time – Tuesday, April 23
We remind readers that John Taylor proved to be terribly wrong with his predictions made during his appearance on CNBC Half Time on Thursday, February 14 (see clip 2 of our Videoclips of Feb 9 – Feb 15, 2013 article). At that time, he predicted:
- Our stuff says March is going to be an ugly month and we thought the peak would come around Valentine’s day and we’ve been riding that for a while and I don’t know what’s coming around the bend.
- I think that [short yen] trade is done for a couple of months….I think the fundamentals are great for this move but it’s gone too fast and I can get it cheaper in a month
But Mr. Taylor runs one of the largest FX hedge funds in the world and his views are always worth consideration.
US Market – first drop to 1430 & then rally to 1700
- the U.S. looks great. Europe, Asia look weak. I believe [the selloff] – that’s not going to happen until July or so. Then I would expect the S&P to make significant new highs, 1700 and above by the end of the year.
- the problem is we are beginning to see the sequestration stuff, comments about the airlines. the problem is this will drive the second quarter GDP down. At the same time we’ve got Europe falling apart.
- I’m an international guy. I look at that and don’t know the internals in the U.S. The international moves are basically going to be Europe and China, both of whom will have to come out in the second half and stimulate. Europe especially. European numbers are god awful.
Europe & Euro
- we will get dragged down by Europe and we are looking at Draghi. He has a chance on May 2 to cut rates. That will make everybody excited for half an hour. Does he do it? yeah. 50? He’ll do 25. More than that it will drive everybody nuts. That means the deposit side has to go below zero. It’s liquidity driven market move, a bull market, right? Draghi needs to get more in line, not so much only from a verbal standpoint. He’s talked the talk. At some point he has to walk the walk. He’s got to bring the Euro down 10% from where it is valued currently to keep pace with the United States and Japan.
- I’m buying far out the curve. I look at the market and our signals are telling us we have one more leg down. Only one more. this is it. We’re looking for the ten-year below 1.40%. I think that will happen.
- I believe you should own gold now. Basically there were two targets for gold on the down side and the quantitative technical gain sense. One was 1400, the other was 1250. The 1400 level has held. now we are headed up. I would argue this is either a big bottom and we are going for a long time or it’s a seven-week sort of two-month, one and a half months up move which is good for 1500.
- I don’t think you have to be bearish on the dollar for gold. You have to be bearish on the world economy. The fact of the matter is what you’re bearish on isn’t on the economy, but you are becoming bullish that they will step on the gas and go out the other side for a lot of liquidity. Gold leads it by a lot. Silver does better than gold.
4. Synchronized austerity; global economy getting weaker – Nouriel Roubini on BTV MarketMakers – Monday, April 22
Nouriel Roubini needs no introduction of course. This is a detailed conversation.
- I am quite concerned about the US economy..certainly people underestimated how much the increase in taxes, payroll, and now the sequester would affect the economy… my view was that would imply a fiscal drag of 1.6-1.7% this year and so the economy is not going to grow much more than 1.6% given this significant fiscal drag…there are some positives of course, shale gas, recovery of housing,,, some reshoring of manufacturing…but there is a huge amount of political uncertainty, there is gridlock in Congress. We are doing the wrong kind of fiscal consolidation; is way too front loaded… and significant increase in taxes, especially payroll and income taxes having a drag on consumption.. and on economic growth… so US this year is going to have a subpar- growth below trend and unemployment is going to remain high…
Is Fed doing enough to alleviate the pressure from fiscal side?
- The Fed is doing easing and given the fiscal drag, the Fed is probably doing the right thing for the time being… my concern about the Fed is that while this policy is correct right now another year of QE, another year after that of keeping zero policy rates until that employment rate is 6.5%, and then exiting from zero policy very slowly as slowly as we did in 2004-2006, when it took us about 2 years of measured pace of 25 basis points every six weeks means we are going to have easy monetary policy for the next 3-4 years. And there is already froth in credit markets, the real economy requires more QE and low policy rates but the froth in credit asset markets could lead to another significant bubble in U.S. economy… we could end up making the same mistake we did in 2004-2006, exiting too slowly, creating a huge bubble and then followed by a bust and a crash…I think that’s a big worry down the line. So you will have a big party in asset prices for next couple of years but we could have a big crash, even bigger than before following that…
Risks starting to outweigh the rewards?
- it is a dilemma because economic growth is anemic if not outright recession like in Europe, UK. Even Japan has to be aggressive… so economic condition, high employment, weak economic growth suggest more QE, more low policy rates, more guidance for keeping those rates for long time.. the BoJ is doing it, the Fed is doing it.. EU will be doing it, the Swiss National Bank is doing it.. even the ECB is going to do a cut in rates, credit easing, something down the line, sooner than later…and the real economies require that liquidity but liquidity is not going into credit, into real economy, consumption and investment and it growing now in credit markets.. into financial leverage and it goes into froth… eventually becomes dangerous, not yet but 2-03 years … big bubble followed by big bust and crash.. that;s the big risk…
Crumbling case for economic austerity right now?
- we are in a world in which until last year, austerity was concentrated in periphery of the euro zone. & UK but now we have a massive fiscal drag in the US, we will have a significant fiscal drag in the core of the Eurozone because of the fiscal compact also applies to Germany.
- IMF is correct in saying when everybody is doing austerity at the same time…then it is synchronized and the fiscal multiplier is negative on economic activity because raising taxes, reducing disposable income, reducing government spending has a negative effect on economic growth…so the austerity is too front loaded through out the world, core Europe, even Australia & Canada, there is synchronized austerity and that’s bad for global economic growth which is already shaky..
Europeans touting their progress?
- Trouble is Eu
rozone recession is deepening, getting worse and spreading from the periphery of the Eurozone even to the core…everyone is doing austerity and there is no plan for economic growth.. you have to boost aggregate demand and all you are doing this structural stuff to boost aggregate supply. Therefore you need:
- monetary easing by ECB,
- credit easing by the ECB to provide landing to the SMEs,
- you need a weaker Euro,
- you need less front loaded austerity in the periphery of the Eurozone,
- you need fiscal stimulus including in the core of the Eurozone starting with Germany..
- you need these 5 things…these are not happening right now… that implies the recession in the Eurozone is going to get worse rather than better
Need for a new thinker at Fed?
- In my view, regardless of who is chosen to replace Ben Bernanke, the Fed for the time being does not have much choice but continuing the QE with keeping zero policy rates because the economy is still weak and unemployment is still very high and is falling for the wrong reason because of labor force participation rates…
- we have the same dilemma we had in 2004-2006 – the real economy justifies, with low & falling inflation and high unemployment rate low growth, maintaining zero policy rates and more QE.. the real economy justifies it but then all this excess liquidity is not to generate credit for the real economy; it is going now in financial markets..
- look what is happening in junk bonds with issuance, covenant-lite, PIKs and others .. this is the beginning of a credit bubble and even the frothiness is now going into commodities, going into emerging markets… going into global equities… we are not yet in a bubble but think of another 3-4 years of more QE, more zero policy rates and a very slow exit from this QE; 2-3 years from now it will be a real bubble and risk is we will get a bust..
Are commodities signalling something right now with the sell off in Gold?
- the commodities right now are signalling that actually there is some softness in global growth, there is a slowdown in the USA, there is now outright recession in the Eurozone that is getting worse.. and even the data coming from China and rest of BRICS suggest economic growth is going to be weak.. therefore the selloff in commodities excluding gold is signalling that actually forward looking global economic growth is becoming weaker than becoming stronger..
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