Last week's meeting was about divergence. Divergence in the political situation in Germany and in the market place where the easy money trade was confronted by the lack of support from the hard data, as well as from waning momentum.
This week's headline: From divergence to disbelief
This week had us discussing for the first time the idea that Bernanke might have to actually pause his monetary experiment due to the much improved labor market data and his in-house hawks. The Fed seems to have leaked this idea through their mouthpiece Mr Jon Hilsenrath of the Wall Street Journal over the week-end in a piece called: Fed takes break to weigh outlook
This Friday's US employment report is interesting for two reasons: One, if poor it will confirm our bias for "worse than expected" data that we have seen over the last few weeks, and if good it will fuel the idea that the Bernanke Fed will find it hard to argue in favor of continuing to inflate through QE and Operation Twist II.
The market better hope for a 'worse than' expected number, otherwise the Fed middle-ground governors like Sandra Pianalto will want more time and information before acting. Ironically, bad is good and good is bad, but that's the trading paradigm of 2011/12 - nothing is as it is supposed to be. For the record the consensus is +213K new jobs. (Source: Bloomberg LLP)
Where China goes, so goes the world
The People's National Congress in Beijing saw Premier Wen Jiabao indicate that a lower growth target of 7.5% (relative to the last two five-year plans at 8%) will be favoured and there will be increased focus on "social harmony", effectively social welfare. Importantly, the Premier said that:
- The government will boost spending on social services and raise incomes for middle- and low-income groups, as well as expand consumer credit.
- Subsidies for agriculture will be boosted. Just under 50 percent of China’s 1.3 billion people live in rural areas that are dependent on agriculture' (Source: China Digital Times)
This has further implications than most people really are willing to acknowledge, Credit Suisse analyst Dong Tao sees this as the end of:
- The golden age of infrastructure investment
- The golden age of the export boom
- The golden age of the housing boom
His report was out yesterday (link: Credit Suisse, Dong Tang.)
The World Bank touched on a similar need in their February report on China called: China 2030: Building a Modern, Harmonious, and Creative High-Income Society.
- THe World Bank's recommendation includes the following (and seem to have been approved by China's elite):
- Implementing structural reforms to strengthen the foundations for a market-based economy...
- Accelerating the pace of innovation and creating an open innovation system.
- Seizing the opportunity to "Go Green"
- Expanding opportunities and promote social security for all
- Strengthening the fiscal system
- Seeking mutually beneficial relations with the world
This is not far away from my own reservations and thoughts from February 20th: Made in China
What we have to realise, again, is that China leads us in growth, fiscal stimulus, and markets. We may not like it, but in a world where the spender is at the mercy of the savers, there is a price to be paid - a kind of slavery to easy money and dependence on nations far from our shores.
China was 50% of all new global growth from the low of the financial crisis in 2007/08 into 2010, and their hikes of RRR last year did major damage to EMG risk overall but also to stock market returns.
This year, the market is betting China will ease, but their inflation remains stubborn (despite the calls for sub-4% this year), so does their real estate bubble. On my recent trip to China, I met secretaries with two or three speculative apartments in Beijing.
It makes no sense and I think the increased focus on harmony will lead to less growth recycled into the world economy through less commodity demand (excluding energy) and dissaving by China in general - this dissaving (investment in education, health care) again will mean a worse balance of trade and a focus on a weaker, not stronger RMB.
Additional investment meeting comments
Israel vs. Iran. We are concerned. Clearly the Obama Doctrine (wait-and-see) is not the policy Israel wants and Obama's credibility with Israel is at best strained. The less than 2% excess capacity in the oil system is a concern. We note the >5 $ move when there was rumor of oil supply line down last week.
Merkel vs. IMF and Merkel vs. Club Med. Things are getting nasty. The Dutch parliamentarian Wilder's report from Lombard made ugly reading for everyone who dislike the EU. An IIF staff report claiming 1 trillion EUR default losses does not improve the Berlin feeling. I have again and again pointed out Merkel is running out of time.....
Greek PSI. Two key numbers. If participipation is less than 66% Greece will default directly, if between 66% and 75% it will lead to CAC-based enforcement (with ISDA continuing to make a mockery of the idea of a CDS....), above 75% will be spun as a "great success". To us, only below 66% matters, and it is very unlikely considering the political pressure and dependence on the ECB from the involved parties.
US employment report. Strong number is bad. Bad number is good. Sad, but true
Yields. Whether to love or hate Bunds? 1. Why long Bunds? It's still the cheapest option on the stock market down-side. 2. Europe is the new Japan. Deflation and protracted slower than slow growth. Welcome to Tokyo, Ms. Merkel. Why short Bunds? Germany is on the hook for the ultimate Euro Zone bail-out and it's getting expensive.
Equities: Divergence is getting even more pronounced..
Strategy
Equity: Short Stoxx50 vs. long stance from our generic models.
FX: Short AUD vs. USD (China + overleverage), Long US dollar index. Gold @ 1688/75 key close if closes below cycle top in place.
Fixed Income: Neutral across the board. Still like credit funds and credit plays as it is biggest risk dislocation in the market place.
Economics: Continue to play mean-reversion in economic data. Believe better-than period is being replaced with worse-than numbers. Europe is free-fall in hard data, US improved from low level and may be hitting headwinds, China and Japan turning worse.