Ahead of the Swiss team’s technical briefing some of my own thoughts here..
We are in a very difficult area of the trading chart here. Technically we remain massively oversold but with the bounces being very poorly supported long attempts have been beaten back and you are lucky to score positively on playing the “bounce”. Its a tricky area therefore. Shorts, targeting a collapse are very dangerous (especially with policy makers discussing monetary easing moves). Longs have been reversed many times, even at this oversold level which suggests yet more weakness to come. In summary a chopping block for traders which is always very painful. Equally for inflationists that are running long portfolios hedging here is very tricky, indeed. A dead zone in effect for all sorts of different participants in asset markets. We are looking for a lead from policy makers in truth here.
So, we have the g7 teleconference event. We should expect swap lines and god knows what else. As policy makers appear to still be ‘behind the curve’ measures will, probably be, more “fire fighting” in nature until the main event meetings later this month. Hopefully it will be enough to spur a mini bounce of some kind or at least lead to some short covering.
On the macro front the data continues to roll over across the world. Particularly world manufacturing. Euro pmi fell to 45 at the end of last week, China providing a reading of 48 and the US at 53 is in decline, though still positive. Even, the recently positive, US housing data has started to roll over once again. US factory orders suggest the US PMI reading wont stay positive for much longer.
Euro confusion still reigns, as it has done for the last three years.
Here the Markit composite euro pmi and report pdf.I quote, they recorded:
“the steepest rate of decline in manufacturing and services output in the single currency area since June 2009”.
Even Germany is now starting to feel the global slow down in manufacturing with her PMI today falling to 51 and below market consensus.
Her services sector continues her slow down.
The great problem in Europe has been the great polarization between growth levels across the euro zone holding up growth strategies. Germany has been growing strongly as others have declined, unit now.
And we also now have China, India etc starting to roll over themselves. (Although there are bright stops on the Chinese story as detailed here. Today data was released showing the domestic Chinese services sector is expanding as the export sectors of materials and manufacturing struggle to grow. According to the HSBC services survey, China’s services industry expanded at its fastest pace for 19 months in May, with new business and optimism about the future robust published today. The HSBC China Services Purchasing Managers Index (PMI) rose to 54.7 in May, extending from April’s six-month peak of 54.1. The survey’s compiler, Markit, cited new business growth as the key driver of the index).
The HSBC China manufacturing PMI, tracking smaller private-sector firms, retreated to 48.4 from 49.3 in April – its seventh straight month below 50. The employment sub-index fell to 48.1, its lowest level since March 2009. The Chinese economy does appear to be shifting gradually toward local consumption as its manufacturing and industrial infrastructure sectors continue their slow down.
Here WF providing a more bullish world economic view, Europe aside.
In spite of the bright spots, many are asking, this the perfect storm?
Here WF on Brazilian GDP nos which are demonstrating this view of a global weakening.
Some indicators suggest it might be, inc the “super bubble” in “core” sovereign bond prices. Negative short term rates are becoming common place as participants increasingly distrust the private financial system. Many listed financial players are seeing their equity valuations fall below their 2009 lows. Low equity valuations are affecting banks, Insurance companies, property companies and brokers alike. The stresses on these sectors is immense right now and is not reflected in the wider equity indexes levels.
Here below the wider index of European Financial Services companies.
But the story is far worse for many individual companies. There is a huge amount of pain being experienced in the commercial property world. In fact all companies whose business model depends on leverage are close to insolvency here. And the ‘runway’ for relief is close to expiring as roll over dates for their debt comes ever closer. This is made worse by the fact that loan to value ratios are stressed and negative in many cases as well as debt covenant values are again close to their limits. As an example Invista (listed on the ftse) owns property to the value of half a billion pounds. She carries quarter of billion in debt owed to the Royal Bank of Scotland. She is close to breaching her finance covenants as the private sector continues to weaken and asset values continue to fall. Here a chart of Invista.
And here some details of the euro commercial property scene.
Euro Commercial Property Round up..
http://www.propertywire.com/news/europe/european-commercial-property-markets-201205106513.html
Below more details on the UK’s commercial property funding problem. Specifically, 100bn pounds exposure where LTV (loan to value) ratio is over 70%. That’s very serious. Either prices rise via monetary debasement or the government steps into bail out the banking sector once again or nationalize it entirely.
http://www.propertywire.com/news/europe/commercial-property-finance-challenge-201205246565.html
The situation across Europe is the most acute. The euro banks exposure is immense. 600bn is maturing by dec 2013. Total exposure is estimated to be over 3trn euros. And much of this is over 90% LTV (even if there was liquidity – which there isn’t).
http://www.bloomberg.com/news/2012-02-24/european-property-woes-grow-with-loans-overhang-of-779-billion-mortgages.html
As indicators of the perfect storm we can see its a coming disaster. No growth debt deleveraging and nominal decline in a world of unimaginable balance sheet size would inevitably lead to total gdp destruction, on an unimaginable scale.
Simply put we have a fiat monetary system based on an ever increasing supply of money which bears an interest. In such a system money supply must continue to grow. It can suffer some years without growth especially when interest rates are lowered to zero but extend that period for too long and the contagion from stalling growth in money supply will eat the system alive. We have plenty of evidence for this from Japan. (But we must also recall Japan went into their debt deflationary period where savings where high, world growth was strong and their government’s debt was low. None of these factors are true for the west today).
At this moment in time nominal decline and money supply contraction will literally implode the entire western system. Democracy itself would inevitably be threatened and unemployment would hit unimaginable levels.
On the brighter side we would do well to recall a few other indicators or rather to look at indicators from another way around.
Many core government bond rates are through their multi hundred year lows. Capital is totally avoiding risk and is either in money market funds off shore or cash or the safest sovereign bonds. Cash volumes for equities and other risk assets has fallen to very low levels. This off shore capital, likely in excess of 2 trillion dollars needs to reenter the economy. The onshore capital currently sitting in similar assets also needs to reenter the ‘growth’ economy. The question for policy makers is how to get the holders of this capital to rejoin the growth agenda. We can see at present that policy makers (especially Germany) are providing clear incentives to capital holders not to reenter growth assets. The story is one of austerity and budget cutting, deleveraging and restraint. In this environment capital holders will logically accept even extremely negative rates year on year (as they did in Japan, due to the likely negative gdp consequences of such a set of policies.
And so we come full circle to the inflation deflation debate and the moral debate of money printing.
Firstly inflation deflation. The policy makers one and only tool here is money printing. If asset prices are allowed to fall or even stagnate here at these current levels the world’s financial system will collapse with in the next year. Unemployment will surge. Capital will continue to disengage from the economy. Far from inflation we will have massive deflation. Interestingly, if financial institutions become insolvent who will fund the governments surging deficits as tax revenues collapse? Is any asset class (aside from gold) safe in this environment? I suggest not. Given where capital resides at present the risks of short term inflation from monetizing debt is tiny. Therefore its inevitable that policy makers reach for this tool. And reach, imo, on a massive scale. Inflation must come but not when capital holders are avoiding any assets that have anything to do with growth.
On this basis, on a macro level, not a near term technical call, far from the indicators suggesting a global rout they suggest a buying opportunity. A buying opportunity for growth related assets. So many balance sheet exposed stocks are so close to their failure levels and global capital is so uniformly pointing away from risk that this makes policy makers response to promoting risk and nominal growth via the printing presses guaranteed!
I’m sticking to my guns that this summer provides the final inflection point for the inflation deflation story. Policy makers will ensure the system does not collapse here. Or rather that the decision to press the button on a global monetization of debt is the easy call to make here. Politcal leaders like to make ‘easy’ calls so its inevitable. Inflation will be the consequence. The rush out of cash and ‘off risk’ assets will be immense and rapid. Equity cash volumes are low so the ‘door’ is narrow or small and the capital immense. This all suggests to me that order books will easily be overwhelmed by those seeking to reverse their stance towards “risk on off”.
If the inflation trade was the consensus trade of 2010 it is the contrarian trade of 2012. The opportunity is immense but i accept you will need to have a strong stomach over the next month or two as finding the exact bottom during this period will be no easy call.
All the best
Rich
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