Wednesday, February 20, 2013

What wil 2013 bring us? I'm not happy.

Quick note. Wrote this last night. Updated today after mkt closed.

Right now, I think this year's main drivers are:

- Chinese policy makers using stimulus to 'buy dips' in economic activity: they won't do anything to speed up growth, but enough to keep wage growth going/unemployment from rising, in order to keep social stability, rebalance economy and reduce share of (unproductive) investments in the economy, therefore reducing the demand for credit growth. There's simply TOO MUCH credit growth for too little nominal and real growth. They're scared. They still can’t cope with 1/ inflation and 2/ real estate prices too high. Commodities will suffer. Read: Australia, Canada, Brazil, some others. 

- The impact of a much weaker JPY on East Asian (regional trade is more intense than long-range trade) and countries with high export similarity index with Japan [Germany (machinery, auto industry), South Korea (tech, autos) and perhaps Mexico (US-linked, but auto is just getting new investments, etc)]. Read: South Korea, Germany, other East Asian

- I've written about this already: the US fiscal drag hurting the economy much more than expected due to the ongoing balance sheet recession/deleveraging (Koo’s theory, exemples of Japan 1997, UK now, EZ to some extent). 

- EM underperformance: I just believe the world has relied too much on Chinese/EM/Commodities-based growth, expectations are too high both for growth and returns. Assets are being priced against ‘averages’ from periods of booming growth (read productivity and macro stabilization, flood of capital), secular drop in inflation and interest rates, and, after a round of monetary easing since 2011, and too much of macro-prudential measures, these economies are saturated by external capital flows away from USD, EUR, GBP, JPY and others. They’re not the saviors. They don't have enough cheap labor anymore. (Good piece by CLSA's Russell Napier on this, another good piece by Michael Gomez from PIMCO).

And the positives would be: Policy Makers maintaining their feet on the monetary and fiscal pedals until one of the two happens first.
1/ Growth really picks up
2/ Markets give up on monetary policy... and suffer.

I don't believe in (1) if the Fed, or the BoE, or the ECB, or the BOJ, or the SNB, or the PBoC etc, etc, etc, start talking about retracting from monetary expansion. There's too much addiction to low nominal and/or negative real rates. Dangerous. 

Seth Klarman isn't a Macro investor. He runs a very bottom-up, value, margin-of-safety shop, but he has been on the street for a long time and I think talks to many people in order to formulate his ideas of where we are in the world. He can't find cheap securities. Why will I? I'll end up saying that the marginal utility of global debt has reached its limits in my humble opinion. (chart from Hayman's letter).

Seth Klarman, the hedge-fund manager who runs Boston-based Baupost Group LLC, said risks to financial markets today are in some ways greater than they were before the 2008 crisis once governments around the world halt their aggressive stimulus. 
“The real downside scenario -- which concerns us greatly - - involves the end of the ‘free lunch’ of large deficits, zero interest rates, and relentless quantitative easing,” Klarman wrote in a 19-page year-end letter to Baupost investors obtained by Bloomberg News. “This story line would take the form of a currency, sovereign, or economic crisis inciting panic throughout the financial markets.”

I'd like to also leave a link to Jeremy Stein's speech from Feb 7th. And perhaps everyone should read the latest Howard Marks' piece when he mentions that credit is already expensive too in the US.


Chart from excellent piece by Niels Jensen from Absolute Return Partners Dec12 - "In Search for the Holy Grail".


*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

No comments:

Post a Comment