SLJ Macro Partners - And China now inflates the world away

Stephen Jen and his partner Fatih Yilmaz comments on China not being able to supply as much cheap labor as in the previous years therefore exporting inflation instead of deflation now: higher wages and pushing raw materials prices up too.

They also touch the matter of China being one of the important drivers of "the Great Moderation" seen in the world in the last 30 years of slowing inflation in developed markets. Interesting.

Things are about to change?

This was what prompted the talk about buying long-term bonds in local currency in Brazil that I posted previously.

Will higher inflation corrode even the ridiculously high yields of brazilian sovereign bonds?


Stephen Jen's latest thoughts... on China going past its Lewis' Point and its consequences

 

*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

Stephen Jen's thoughts on the ongoing slowdown

Stephen Jen goes on with his call of slowdown and a more negative stance in risky-assets.

There's not a lot for me to comment since I would rather have said what Mr. Jen said.

Some interesting excerpts:

The European policy makers continue to refuse to recognise the fundamental flaws of the EMU, but they will have to eventually have a ‘stop loss’ on the GIPS countries: no country can have unlimited tolerance for open-ended bailouts.  While it is likely Greece will get another bailout package, despite having missed most of their quarterly IMF program targets, an unpleasant end game seems certain to me.   

         (...)

The second derivatives of global growth to turn negative in H2. I am not surprised by the latest string of macro data that point to a slowdown in global growth.  The ‘soft landing’ that may be happening in China is still not much of a landing at all, as the latest GDP print showed that China expanded by 10% in the most recent quarter.  China needs to slow down more to keep inflation in check.  The slowdown in the developed countries may reflect the delayed impact of high oil and commodity prices, and cutbacks in fiscal stimulus around the world.

 (...)

I should recall that in the mid-1990s, the dollar was weak (that was when USDJPY plummeted to 78; inflation-adjusted, that was a super-weak level, much weaker than the level today).  The weak dollar propelled capital into Asia, helping to fuel a credit cycle that was not stopped until the Asian Currency Crisis of 1997.  In other words, there are striking similarities between now and then.  The trend in the dollar itself is helping to push the credit cycle in Asia, but if and when this trend turns, the implications for EM could be devastating.  Many EM currencies are either expensive or very expensive.  With the possible exception of the KRW, virtually all EM currencies are either fairly priced or very overvalued.  The costs of visiting Russia, China, Brazil, and India already rival those in the major developed countries.  This does not sound right, and it is not right.  In my view, the levels of interest rates in EM need to be raised even further, and quantitative credit restrictions need to be put in place.  Until these steps are taken, inflation will remain a symptom of major imbalances building in EM, with consequences over the medium-term.  A reversal in the trend in the dollar poses a serious risk for not just the EM currencies but also their credit cycles. 

SLJ Macro Partners - 2011 06 02 - Stephen Jen - My Thoughts on Currencies

*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

Stephen Jen believes markets have topped.

Stephen Jen has left BlueGold Capital to open his own shop with another former BG quantitative research guy and is hiring! If you guys are interested... get in touch with him. It is a London-based HF.

Today he issued a nice and interesting commentary which I wish I would have written, but I guess his years of studying and experience are way ahead.


Very interesting insights which I agree with.

Bottom line: Had it not been for the news about DSK, the financial markets would have been so very boring in the past two weeks. The current risk-off phase makes sense to me.  In fact, I think risks are biased to the downside in the weeks ahead, as the second derivatives of global growth turn more negative, even if the first derivatives remain positive.  Furthermore, the nature of how QEII has helped buoyed risk assets since last September is likely to be fleeting - and certainly untrustworthy, in my own view.  As the Fed approaches the end of QEII, there will likely be an increase in the volatility of asset prices.  (1) The Okun’s Law not having worked (GDP growth without job growth) for much of the recovery in the past eight quarters has been used by the Fed as a key justification for QEII.  But as the labour market improves, despite the deceleration in headline GDP growth, QEIII would be a bit tricky to justify, even for the proactive Fed.  (2) It is my opinion that a meaningful portion of the rally in risk assets since Q4 2010 was liquidity-fuelled.  The Fed explicitly announced last fall that it would use QEII to ignite risk asset prices.  On this narrow measure, they have ‘succeeded.’  But as they complete this operation in the coming weeks, risk assets will likely remain very volatile.  (3) The European Debt Crisis is ‘cancer’ for Europe.  The idea of a currency union in Europe is not economically sensible, even if it is still politically attractive.  I continue to believe that there will not only be defaults by the insolvent member countries such as Greece and Portugal, the EMU itself is unlikely to survive in its current form over the medium term.  (4) I continue to suspect that, unless there is QEIII, it is likely that risk asset prices will peak in Q2; in fact, they may already have peaked.  A more stagflationary accent to the global economy will not be constructive for risk assets.    

Speaking about the European Debt Issue... to fuel some thoughts on my long German 5y CDS call this week Jen writes:

Why Europe’s policy choices are so difficult.  The situation in Europe is not good, and will get more complicated.  (1) The globalised economy is hyper-competitive; even once mighty nations like the US are struggling to keep up with Asia.  Portugal and Greece are not only uncompetitive within Europe, they do not have the institutional set-up, the necessary mind-set among the people, or the multinational companies to keep up with the rest of the world.  The indicator that best summarises the legacy debt and the inability to compete is (r-g), i.e., the interest rate to the GDP growth rate gap.  The weighted average cost of borrowing for the GIPS countries is more than three times higher than the expected economic growth rate for the next five years.  This gap will likely expand further, as economic growth is de-rated and interest rates rise further.

SLJ Macro Partners - 2011 05 26 - Stephen Jen - My Thoughts on Currencies


*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