VACACIONES MAYO 2018

Queridos amigos,


Les escribo estas líneas con motivo de mi próximo viaje, por lo que estaré ausente de la oficina y de nuestras lecturas cotidianas, desde el lunes 7 hasta el martes 22 de mayo próximo, que estaré nuevamente a su gentil disposición.

Durante estos días no tendré acceso regular al Internet ni a mis correos.     


Además de lo ya explicado en mi carta de octubre pasado y las anteriores, cuyo link les incluyo para no pecar de repetitivo, la situación de la economía global, a pesar de las apariencias, solo se ha seguido deteriorando, la volatilidad de los mercados se ha duplicado y esta volatilidad “in crescendo”, será el signo de los mercados financieros de los tiempos por venir.

El ajuste global está aún pendiente 10 años después del inicio de la Gran Recesión. Muchos analistas especulan que, en la próxima recesión, se pagaran todos los pecados de la manipulación de los mercados por la banca central global, especialmente desde que se inició la última crisis, desde el 2007/2009. Pero también, los efectos distorsionadores de la manipulación de los mismos bancos centrales, durante los últimos 30 años o más, haciendo el ajuste mucho mayor. Un cambio de ciclo.

El endeudamiento global ha seguido creciendo hasta alcanzar nuevos niveles record.  

El Fondo Monetario Internacional nos ha advertido reciente y muy firmemente, de los peligrosos niveles de la deuda global alcanzados, que llegan a un 269% del PBI global. Solo en los Estados Unidos de Norteamérica, la deuda pública es de US$21 trillones (110% del PBI) y la deuda total norteamericana (incluyendo los déficits de los fondos de pensiones y el seguro social) se estima alrededor de unos US$69 trillones (368% del PBI). Una cifra nada despreciable y probablemente impagable, salvo una gran devaluación de la moneda. Sin embargo, en contraste, el crecimiento económico es cada vez más exiguo. Algunos analistas sostienen que se ha entrado a la ley de los rendimientos decrecientes.

Recientemente el dólar norteamericano se ha fortalecido ligeramente y ya algunos analistas piensan que lo seguirá haciendo en los próximos meses. Según el WSJ Dollar Index, que mide la moneda contra 16 de sus socios comerciales, ya llevamos una devaluación del dólar de 4.8% durante las últimas 52 semanas. Durante ese tiempo, el euro ha subido en 11% y la libra inglesa esta 10% más arriba. Esta situación se ha revertido ligeramente en los últimos días, siendo al momento de escribir estas líneas, de 4.5%. 

Se están en proyectando en USA déficits de más de un trillón de dólares anuales para los próximos tres años (5% del PBI), los cuales obviamente tendrán que ser cubiertos con nueva emisión de deuda. ¿Habrá compradores a los precios actuales?

Todo ello, por otro lado, crea una disyuntiva difícil y muy complicada para la política monetaria de la FED y los otros bancos centrales, en los próximos meses. Especialmente con el reciente y sostenido aumento de la tasa de interés del bono del Tesoro Norteamericano a 10 años, que acaba de cruzar el limite crítico del 3%. Con ello, en teoría, se acerca a la próxima reversión de ciclo de la curva de la tasa de interés (“inverted yield curve”), lo que en el pasado ha sido siempre el anuncio de una próxima recesión en los próximos meses.  

Ahora además se agrega a la precaria situación global (alta deuda y bajo crecimiento), la nueva política comercial norteamericana de proteccionismo impuesta por el presidente Donald Trump y la defensa de sus mercados de producción y de consumo. Esta historia está en pleno desarrollo. Especialmente con su principal socio y competidor, la China. Pero también con el resto del mundo.

¿Estamos al inicio de una nueva era económica?  

Para una mayor profundización y actualización de la situación de la economía norteamericana y la posibilidad de una próxima recesión, les sugiero leer el excelente artículo de John Mauldin aquí. También, los recientes artículos seleccionados del blog, aquí, aquí y aquí  

La China juega obviamente un papel muy importante en el esquema global. Pero ahora enfrentará una serie de problemas derivados de su desarrollo centralmente planificado y alejado de un mercado libre y eficiente, hasta ahora con bastante éxito aparente, pero ha creado una serie de distorsiones que habrá que resolver o se resolverán solas irremediablemente. A ello se debe la reciente consolidación del poder autoritario en manos de Xi Jinping, que intentara “encaminar” los resultados y evitar un aterrizaje forzoso y cruento.

No podemos dejar de mencionar los problemas por lo que está pasando la Unión Europea, tanto política como económicamente, con temas aun irresueltos y con perspectivas de difícil resolución, como la inmigración descontrolada, la unión impositiva, presupuestal y/o bancaria, Brexit, etc. Recientemente, el ECB mantuvo sus tasas de interés en sus niveles mínimos y ha reafirmado una política monetaria "flexible" para el futuro cercano, muestra inequívoca de la debilidad que aun afrontan. Para mayor información ver aquí y aquí.

Finalmente, hay que mencionar la reciente reducción de las tensiones entre Corea del Norte y los Estados Unidos de Norteamérica, que parecen haber tomado un nuevo curso últimamente, aunque aún es difícil dar una prognosis de la dirección futura de la nueva situación geopolítica y su efecto sobre los mercados financieros. Obviamente el acercamiento con los norteamericanos, por parte de Corea del Norte, produce nerviosismo por el lado chino y sus otros vecinos, que temen una Corea unida pro occidental en su frontera y no se quedaran con las manos cruzadas. Habrá una nueva problemática en la península coreana.

En cambio, los acontecimientos en el Medio Oriente, especialmente desde el caso del supuesto ataque con armas químicas en Siria, la situación se ha agravado notablemente. Como respuesta a esta situación, entre otras razones, el precio del petróleo se encuentra en niveles record de los últimos dos años, a un precio de US$ 67.37(al escribir estas líneas), lo que representa un aumento de 63% desde su nivel más bajo, en enero del 2016. Un breve análisis actualizado sobre la situación del petróleo, y la energía en general, puede verse aquí.

Por último, para un brillante resumen sobre la situación global y su perspectiva, les recomiendo leer el interesantísimo articulo US VS. THEM del Dr. Ian Bremmer.

Esperando que mis comentarios y los artículos incluidos les sean de utilidad y provecho, me despido hasta mi regreso, Dios mediante,

Muy cordialmente, 
Gonzalo 


PD. Para leer y seguir leyendo los artículos diariamente, los invito a entrar directamente al blog:  
www.gonzaloraffoinfonews.com donde ya contamos con casi 3 millones de entradas desde su inicio hace 9 años, según las estadísticas de Google.


The 800-pound gorilla effect

Donald Trump is sending shockwaves through global commodities markets

Possible sanctions on Iran and Venezuela are the next big threat



THE notion that the gentle flap of a butterfly’s wings can cause chaos on the other side of the world is well known. But commodity markets have been tested in recent weeks by what could be called the 800-pound-gorilla effect: the idea that chest-beating in the White House can unleash turmoil in global metals, agricultural and energy markets.

President Donald Trump has slapped sanctions on Russia’s biggest aluminium producer, Rusal, intensified a trade tiff with China and tweeted a gibe against OPEC, the oil-producing cartel. His actions have shaken commodity markets at a time when speculation in futures is near the record heights of 2012, making markets even more volatile (see chart). Aluminium, nickel and palladium prices have soared and then plummeted. Soyabean markets are under threat. Oil prices are at their highest levels for more than three years.


Physical trade has been affected too, with some shipments to Rusal of bauxite and alumina, the raw materials of aluminium, suspended for fear of sanctions-busting, and cargoes of American sorghum to China diverted in mid-ocean because of Chinese trade restrictions. Pushing oil prices yet higher is the possibility that Mr Trump could impose sanctions on oil shipped from Iran and Venezuela next month, tightening the global supply of crude just as America’s summer driving season starts. Geopolitics has often upset global trade in commodities. But rarely has America’s government been such a source of upheaval across so many markets.

Metals have suffered most directly. From April 6th, when America’s Treasury prohibited Americans from dealing with Rusal and its boss, Oleg Deripaska, and threatened sanctions against non-citizens who traded with them, aluminium prices rose by more than 30% as buyers scrambled for non-Russian metals. Then on April 23rd, when the Treasury temporarily softened the proposed sanctions to spare “the hardworking people” of Rusal and its subsidiaries, and said it might lift them on Rusal if Mr Deripaska ceded control, they gave up around half of those gains.

Nickel prices also soared until April 19th on expectations the sanctions could extend to Norilsk Nickel, a Russian producer. José Cogolludo, global head of commodities at Citi, notes bashfully that shortly before the sanctions-related rally, the bank had been telling investors that nickel prices would hit $16,000 a tonne by 2020. They reached $17,000 in days—before falling back when the sanctions were eased.

Mr Cogolludo says that hedging of metals reached unprecedented levels as corporate clients sought to protect themselves during the price moves and speculators tried to cover short positions. He adds that computer-driven models, which account for most speculative activity in metals markets, respond quickly to market signals but are rarely good at deciphering geopolitical risk. This may have led to overshooting.

Agricultural commodities have suffered collateral damage from trade tensions between America and China. After the Trump administration imposed tariffs on steel and aluminium imports in March, in mid-April China announced a 179% preliminary anti-dumping duty on imports of American sorghum, a niche animal feed. This stopped American exports, which account for almost all sorghum entering China, in their tracks.

More significantly, China responded to an American proposal in April to slap 25% tariffs on 1,300 goods from China by threatening similar levies on 106 American imports, including soyabeans and cotton. According to Stefan Vogel of Rabobank, 35% of China’s 97m tonnes of soyabean imports come from America, which are not easily replaceable. So the market is betting that China will not carry out its threats. But if traders are wrong, and a tariff war breaks out in earnest this summer, the disruption could be severe. He says prices of soyabeans in America would plummet. Those of soyabeans in South America, spared the Chinese tariffs, could soar.

Some say that Mr Trump is showing a pattern of making threats and then backtracking, which creates noise but does little lasting damage. That view may be tested in the oil markets on May 12th. The president has threatened to reintroduce sanctions on Iran unless Britain, France and Germany agree to renegotiate the Iranian nuclear deal by then.

Some oil bulls say Mr Trump’s nomination of Mike Pompeo as secretary of state and his appointment of John Bolton as national security adviser—both Iran hawks—have made sanctions likelier. These could remove at least 500,000 barrels a day of Iranian oil from a market that is already looking tighter because OPEC and non-OPEC producers have restrained output. Abhishek Deshpande, head of oil research at J.P. Morgan, says such sanctions could raise average annual oil prices by about $10 a barrel (Brent crude has been trading near $75). Additional measures threatened against Venezuela if elections on May 20th are not free and fair could squeeze the market yet more.

But Bob McNally of Rapidan Energy Group, a consultancy, argues that the impact of higher petrol prices on American drivers may persuade Mr Trump to accept compromises on Iran and Venezuela. Nerves ahead of mid-term elections, he reckons, explain the president’s first tweet aimed at OPEC. On April 20th Mr Trump blamed the cartel for “artificially very high” prices—although high prices are also a windfall for American shale producers.

OPEC ministers, disturbed by the tweet while at a birthday party in Jeddah for the organisation’s secretary-general, Muhammad Barkindo, were not conciliatory. They claimed, however implausibly, that they were not trying to rig oil prices. But they should beware taking Mr Trump’s ability to mess with the markets too lightly. With bullish bets on oil prices near record highs, it would not take much to trigger a sharp reversal. Just ask metals traders: the 800-pound gorilla can trash prices as well as push them up.


The Real US Trade War With China

By Phillip Orchard


During a meeting with farm-state lawmakers last week, U.S. President Donald Trump ordered his economic team to look into rejoining the Trans-Pacific Partnership. Trump withdrew the U.S. from the 12-nation trade pact on his first day in office, leaving it for dead as signatories wondered how to offset the loss of the ultimate trade carrot: unfettered access to the world’s largest economy.

Improbably, the remaining 11 members found a way, signing a slightly slimmed down pact in March. And now Trump, just as improbably, is rethinking the value of the deal he repeatedly lambasted on the campaign trail.

Let’s be clear: For numerous political and technical reasons, the U.S. won’t rejoin the TPP anytime soon. But even Trump’s notional interest in the pact tells us two things about U.S. trade strategy. First, the political obstacles driving the U.S. away from its historical role as architect of the global trading system are by no means permanent. Second, the real trade war isn’t about the deficit – and this fight can’t be won without friends.

Politics by Other Means

When forecasting a trade war, as with a shooting war, it’s not enough to look merely at who can inflict the most pain, but also differing thresholds of pain. Even though the Chinese economy is far more dependent on the U.S. than vice versa, variables like political will also matter.

Though China is evolving into a dictatorship, it has a searing fear of unemployment sowing mass discontent. However, China has an immensely powerful president who doesn’t have to ask his legislature for permission to pass social measures to ease the pain of a trade war (nor for forgiveness if he deems it necessary to crush any sign of backlash). He also has an immense propaganda arm. It won’t be hard for Beijing to rally the nation around the flag and amplify the narrative that the government is merely doing what it must to stand up to the bullying Americans and take China to the promised land. The U.S., by comparison, has an embattled president grappling with a divided public, powerful lobbies and a slow-moving congress whose attention is fixed firmly on the upcoming midterm elections. Even in the best of circumstances, the fractiousness inherent to most democracies can make the politics of trade exceedingly tricky. This is why trade pacts require years of tortuous negotiations – even when broader strategic concerns compel leaders to commit political capital to seeing them through.

China is proving adept at the U.S. political game. According to Brookings, 82 percent of the counties expected to see job losses from Chinese retaliatory measures were won by Trump.

Farmers, in particular, are squarely in Beijing’s crosshairs, with heavily exported U.S. crops like soybeans, wheat and corn facing 25 percent tariffs. This explains why farm-state leaders have been pushing Trump to reconsider TPP. The benefits of rejoining the pact likely wouldn’t be felt for years, but it would likely pry open tightly protected markets such as Japan’s to U.S. agriculture over time.

The difficulty of finding enough carrots to please an array of cantankerous constituencies in pursuit of the broader national interest is why much-maligned multilateral deals often end up making sense – and why presidents often flip-flop on trade. Barack Obama campaigned on overhauling NAFTA before concluding that TPP – which Canada and Mexico both signed, partly to offset U.S. demands on NAFTA – was the best way to update it. It’s why, at least in part, Trump is evidently warming to the trade pact. And it’s why the remaining 11 TPP members designed the revived pact to make a U.S. return as easy as possible. Whether or not the Trump administration moves in this direction, the world expects the U.S. to eventually re-embrace the notion that others have a role to play in making America great again.

It’s a Tech War, and the U.S. Needs Allies

The trade deficit with China is a sideshow, and so too are measures ostensibly meant to decrease it.

The U.S. isn’t a major importer of Chinese steel and aluminum, for example, and the U.S. metals sectors – which already enjoyed strong protections – won’t be restored to their past glory by the U.S. tariffs that kicked in on March 23. Meanwhile, as Chinese consumer power has grown, so too have U.S. exports to the Middle Kingdom – by some 500 percent since 2001, with China accounting for 8 percent of all U.S. exports by 2016. General Motors sold nearly a million more cars in China last year than in the U.S. According to a study by Oxford Economics, the combination of U.S. exports of goods and services to China and bilateral foreign direct investment flows contributed to the creation of some 2.6 million jobs in the U.S. in 2015.

The same study said cheap Chinese goods such as washing machines and solar panels (both of which were targeted with tariffs in January) have saved the average American household some $850 annually.

All this speaks to the broader issue at hand. The United States’ comparative advantage over lower-cost manufacturers like China is in high-tech goods and services. And the real Chinese threat to U.S. economic and strategic interests is that China eats into this advantage – and then uses its newfound economic heft to try to unravel the U.S.-led postwar order in the Indo-Pacific.

As part of its attempt to address enormous socio-economic challenges today – ones that may well make all this moot – China is laying the groundwork for its much longer-term goals.

Underpinning the country’s economic rise over the past half-century has been low-cost manufacturing. But this has made China intolerably vulnerable to rising competition from its lower-cost neighbors, productivity declines as its workforce ages, and downturns in Western economies. This was exposed in 2008-09, when Chinese exports contracted sharply.

Thus, China needs to make a mad dash up the manufacturing value chain. Its blueprint is its “Made in China 2025” initiative, which outlines steps to leapfrog the U.S. as a technological innovator in the industries that will matter most over the coming century (for both commercial and military applications), such as semiconductors, robotics, aerospace, artificial intelligence, green energy and biotech.

The U.S. isn’t opposing China’s development goals reflexively – after all, there is ample money to be made for Western firms – but rather how Beijing is pursuing them. China’s systematic use of four practices, in particular, were cited by the U.S. as rationale for the punitive tariffs announced on April 4: pressure on foreign firms in China to enter into joint ventures with their Chinese counterparts and, in many cases, hand over invaluable intellectual property; laws that require foreign firms to license technology to Chinese companies on unfavorable terms; state support for Chinese acquisitions of overseas competitors in high-tech sectors; and state-sanctioned commercial hacking.

The U.S. is attempting to address the second issue – unfair licensing practices – through the World Trade Organization, and it’s increasingly using the Committee on Foreign Investment in the United States to block Chinese acquisitions in sensitive sectors. But deterring forced technology transfers is more complicated, since such preconditions are typically made informally (to avoid running afoul of WTO regulations), and private Western firms are free to strike whatever deals they think best suit their bottom lines anyway, with little regard for the national interest. Meanwhile, Beijing will never admit to supporting cyberespionage, and even if it did, such activities are exceedingly difficult to detect. Thus, the U.S. is stuck hoping that indirect measures, punitive tariffs in particular, will cause China to behave – and discourage other states from adopting China’s mercantilist tools.

The problem is that punitive measures are a rather ham-fisted means of recourse. This is, in part, because the U.S. does not have a monopsony on Chinese exports, nor a monopoly on the technology and industrial inputs China craves most. Though a trade war would be disruptive in the short term, over time, market adjustments would offset some of the loss of the U.S. consumer base for some Chinese goods. Commodities are fungible, meaning China won’t end up paying much more for inputs such as soybeans. And what China loses in access to technology from U.S. firms like Boeing, for example, it may still be able to get from Airbus.

Finally, given the sprawling nature of supply chains today – with China often contributing to only a small percentage of the value of a finished good made with components manufactured elsewhere – tariffs are likely to end up hurting, perhaps as much as China, U.S. allies and partners that are central to broader U.S. strategic aims. Taiwan’s central bank, for example, estimated that a full-blown trade war between the U.S. and China would cut the self-ruled island’s gross domestic product by 1.8 percent.

To gain overwhelming leverage over China, the U.S. would need to limit Beijing’s ability to find substitute imports and markets, incentivize broader participation in the rules-based trading system, and shield U.S. consumers and allied economies from the fallout. In other words, the U.S. needs a multilateral framework that supports these aims – like TPP. Trump’s new chief economic adviser unwittingly made this case in February, when he called for a “trade coalition of the willing” to counter Chinese flaunting of international trade rules.

Cobbling together another TPP-like coalition wouldn’t solve these challenges overnight, particularly if it didn’t attract more economic heavyweights. But it would deepen adoption of the sorts of intellectual property protections that are key to the “knowledge-based” industries of the future, while making it harder for China to distort markets and tilt the playing field in its favor through alternative, Beijing-led trade pacts. Ultimately, it would pull countries more firmly into the U.S. economic and security orbit and assuage their doubts about long-term U.S. commitments, while weakening their vulnerability to Chinese economic coercion. Hence why South China Sea littoral states like Malaysia, Brunei and Vietnam were so eager to join TPP in the first place.

China is playing a long game here – and one that will demand more than tit-for-tat tariffs in response. Unless tariffs push China to the brink of mass economic and political instability – or unless China’s colossal financial risks do the trick on their own – Beijing won’t sacrifice its core national development goals for short-term relief. More likely, tariffs will merely reinforce Beijing’s view that dependence on foreign technology is a potentially crippling risk to national security. The White House’s nascent turn toward multilateralism, however half-hearted, is in recognition of this long-term strategic reality.


Thoughts On The Fed Statement And Wednesday's Late Selloff

by: The Heisenberg


- What did you take away from the May Fed statement? If the answer is "nothing," well then think a little harder.

- This wasn't a complete non-event and I've got your full guide right here.

- Importantly, there's a discussion herein about the Powell "put" and how today's curve dynamics play into that discussion.
 
- If you were looking for something definitive from the May Fed statement, you didn't get it on Wednesday and that's probably just as well.
 
 
I'm not sure there was much utility in tipping their hand any further ahead of a fully priced June hike and amid an ongoing dollar (UUP) rally that's fueled in large part by rising rates and the assumption that as price pressures continue to build in a late-cycle environment, the Fed will be inclined to lean aggressively against inflation especially considering the possibility that fiscal stimulus will increase the odds of overheating.
 
There was no avoiding a tweak to the inflation language in the statement. The Fed's preferred gauge is back to target and last week's above-consensus ECI print is further evidence to support the contention that wage pressures are building. But while the inflation outlook was upgraded, the growth outlook was more muted and the language around inflation was perhaps less inspiring (read: less hawkish) than markets were anticipating. Here's the red line:
 
(Heisenberg)
 
 
As usual, interpretations varied with regard to the post-Fed market reaction, but the initial move lower in the dollar, the knee-jerk bid for bonds (TLT), and the quick spike in equities (SPY) and gold (GLD) all tipped a dovish interpretation, if not by humans, then at least by algos. Those reactions were ultimately faded and/or completely reversed. Stocks were ugly into the close:
(Heisenberg)
 
 
Here's Bloomberg's Vincent Cignarella with the "algos" explanation:
Investors initial reaction to the FOMC statement was to buy up stocks, bonds and sell the dollar, based partly on what algos read as a Fed that was dovish on growth while maintaining its view on inflation. The omission of a reference in the March statement suggesting that the economic outlook had “strengthened in recent months” was taken as Fed second-guessing economic growth prospects. A closer examination by human eyes has revealed quite the opposite, the Fed is confident it's on the right path, prepared to hike two more times in 2018 and potentially one more time. The statement was indeed the "hawkish hold" markets were looking for.
And look, I'm not big on the whole "once the algos figured it out, things reversed course" meme.
 
There were plenty of reasons why human beings might have taken the statement as dovish compared to expectations.
 
As I wrote in the traditional daily wrapover on my site, the tweaks to the statement could plausibly be interpreted as dovish by humans and machines alike and more than a few folks agree.
 
“This doesn’t seem like an overtly hawkish shift in language overall,” and “it wasn’t as hawkish as markets had expected” Wells Fargo’s Erik Nelson noted.
 
“[The Fed] did little to forewarn that a rate hike was imminent in June and while PCE may run hotter than 2% this year, policymakers appear to be trying to tamp down expectations that such a run would warrant a materially faster pace of rate hikes,” CIBC said, chiming in.
 
“They also said — and I think what the market is reacting to — that market-based measures of inflation expectations remain low”, SocGen’s (OTCPK:SCGLY) Subadra Rajappa told Bloomberg in an interview, adding that “part of our expectation was that if the Fed were going to guide the market to expect a total of four hikes this year, we might start getting a hint of that in the May statement, I didn’t see it in the statement."

There's another possible read. If you look at the red line, the reference to the economic outlook having "strengthened in recent months" was omitted, and if you really wanted to, you could make an argument that while the inflation outlook was not as hawkish as some were anticipating, it still amounted to an admission that we're moving in the direction of a sustained rise to target, and when taken with the slightly less enthusiastic read on growth, there's a stagflation narrative in there somewhere. I think that's a stretch, but it's worth noting.
 
A more straightforward read comes from Goldman (NYSE:GS), whose Jan Hatzius simply notes the obvious, which is that the "downgrade" to the growth outlook wasn't really a "downgrade" (as such) and the inflation outlook is firming. Here are some excerpts from Goldman's post-Fed take:

The key change in the post-meeting statement was the recognition that headline and core inflation have “moved close to 2 percent,” an upgrade that was widely expected but important nonetheless. We left our subjective odds of a June hike unchanged at 90%. 
In addition to the upgrade to the statement, another significant change has taken place since the March meeting: most participants who have recently been on the dovish end have made comments hinting at a shift toward the center. The stronger degree of consensus on the FOMC behind continued gradual hikes adds to our confidence that the FOMC will hike three more times in 2018, for a total of four hikes this year. We also expect four hikes in 2019.
 
One interesting thing to note: the 5s30s bull steepened, bouncing off a multi-year tight below 32bp on Tuesday and steepening by more than 2bp in the 10 minutes following the Fed statement.
 
That brings me neatly to a discussion about whether steepeners of one kind or another are a real tail risk for the market. Last week, I talked a bit about the prospects for vicious steepening later on down the road in the event a downturn forces the Fed to cut rates, undermining the dollar against a fiscal backdrop that will, by that time, have deteriorated meaningfully. At that point, there would be very real questions as to who would sponsor the U.S. long end.

Well, last Friday, Deutsche Bank's (NYSE:DB) Aleksandar Kocic was out with his latest note and in it, he suggests that for the time being, "the long end is getting stabilized [and] the tail risk is shifting from bear steepeners to bull steepeners." As noted above, bull steepening is exactly what we got on Wednesday following the Fed.
 
In his latest note, Kocic lists the myriad factors that support the U.S. long end. I've been over those before (specifically, in the steepening post linked above), but the idea is as follows (and I'm quoting myself here, from a post published last weekend):
Last week’s selloff through 3% on 10s notwithstanding, the long end could continue to find sponsorship for a variety of reasons including, most obviously, a safe haven bid associated with acute risk-off episodes but also the assumption of a stable currency thanks in no small part to the Fed and expectations that Fed hikes (and the accompanying USD strength) will ultimately serve to cap inflation expectations.
The idea here is that as the Fed continues to hike, risk assets will get more nervous and although "everything wants to selloff" (to quote Kocic) in an environment where central banks are pulling back from markets, equities are perhaps the least desirable asset to hold simply because that's where volatility has manifested itself in 2018.
 
Meanwhile, volatility has been pushed away from rates. The relative stability of long end bonds only makes them more appealing, thus ensuring they remain bid, especially at times when risk-off is the dominant market mode. The problem there is that the more well-anchored long rates are, the more ineffective Fed hikes appear and that, in turn, prompts the FOMC to continue to hike, destabilizing equities further. Here's Kocic:
Restriking of the Fed put is a withdrawal of convexity from equities. It is effectively a removal of a put spread from the market. However, in the environment where everything is bound to sell off (a market mode that is a mirror image of QE), volatility is one of the key decision variables. More volatile equities are less desirable than less volatile duration. In that environment, convexity withdrawal creates a reinforcing loop where more turbulence in risk assets tends to cause stability in fixed income. The figure shows the convexity flows across the two markets.
 
 
This continues until equities sell off enough to meaningfully tighten financial conditions, at which point the market begins to reprice the Fed path or, more simply, take some of the additional hikes out. That represents the restriking of the Fed "put" and it would entail bull steepening - like what we saw on Wednesday.
 
Clearly, we're not anywhere near the type of equities selloff we would need for this to occur and indeed, June hike odds stuck at ~95% following the May statement.
 
Ultimately, the Fed "fireworks" (as it were) will come next month, but in the meantime, look for evidence that stocks are attempting to make their way down to a level that would force a repricing of the Fed path.
 
If you start to see that, you'll know the Powell "put" is in play.


The “Next Eleven” and the World Economy

 Jim O'Neill

A man walks with his bicycle in the Con Market in the central Vietnamese city of Danang


LONDON – On a recent holiday in Vietnam, Cambodia, and Laos, I couldn’t resist thinking about these countries’ economic potential and ongoing policy challenges. After all, in 2005, my Goldman Sachs colleagues and I had listed Vietnam as one of the Next Eleven (N-11) – all countries with the potential to become important economies during this century.

Vietnam reported that its real (inflation-adjusted) GDP growth was 7.4% in the latest quarter, outpacing China. And, according to the World Bank’s forecast, Vietnam, along with Cambodia and Laos, is on track to maintain a similar level of growth for the year.

The N-11 never acquired the cachet of the BRIC acronym, which I coined in 2001 to describe a bloc of emerging economies (Brazil, Russia, India, and China) that stood to have a significant impact on the world economy in the future. The N-11 countries weren’t at the level of the BRICs, but nor was either acronym intended to be an investment theme. Rather, N-11 was simply a label we applied to the next 11 most populous, highest-potential emerging economies after the BRICs.

Around the time that we published the 2005 paper “How Solid are the BRICs?”, in which we first identified the N-11, I often joked that we chose 11 simply because it was the number of players on a soccer team. When others would point out that we had excluded more populous countries such as Congo and Ethiopia, I would muse that Ethiopia could be the N-11’s Ole Gunnar Solskjaer, in reference to Manchester United’s brilliant sub-in scorer during the 1990s.

Then as now, the N-11 comprised a mixed bag: South Korea, Mexico, Indonesia, Turkey, Iran, Egypt, Nigeria, the Philippines, Pakistan, Bangladesh, and Vietnam. These countries have extremely diverse economic and social conditions, and very different levels of wealth. For example, South Koreans now enjoy a standard of living similar to that in the European Union, which makes many analysts’ persistent categorization of South Korea as an “emerging economy” all the more baffling.

Meanwhile, Mexico’s and Turkey’s levels of wealth haven’t come anywhere near that of South Korea, and yet they are considerably wealthier than the rest of the N-11, some of which remain among the poorest countries in the world. At the same time, Asian N-11 countries such as the Philippines and Vietnam have grown significantly since 2005, while Mexico’s performance has been somewhat disappointing, and Egypt’s even more so.

Collectively, the N-11 comprises some 1.5 billion people, and its current nominal GDP is around $6.5 trillion. In other words, while its population is slightly larger than that of China or India, its economy is about half the size of China’s, but larger than Japan’s and more than twice the size of India’s.

These divergences help to explain why a number of new acronymic groupings have since been carved out of the N-11, including the MINT (Mexico, Indonesia, Nigeria, Turkey) and the MIST (swapping in South Korea for Nigeria). I didn’t devise these groupings, but I have come to be associated with them, having produced a BBC radio documentary on the MINT countries in 2014. At any rate, they were in keeping with earlier points I had raised; namely, that by 2010, Mexico, Indonesia, South Korea, and Turkey would each account for more than 1% of global GDP.

Eight years later, the MIST economies still have a chance to account for around 2-3% of world GDP in the future. None is likely to reach the size of any of the BRIC economies, except, perhaps, Russia. Owing to its current problems, Russia’s GDP is now around the same size as South Korea’s. If it doesn’t sort itself out soon, its GDP could fall below that of Mexico, or even Indonesia.

Of the other seven N-11 economies, Nigeria, Vietnam, and perhaps Iran stand out for having the most potential. Still, each faces serious obstacles to becoming a $1 trillion economy, never mind accounting for 2-3% of world GDP.

Looking beyond each of these countries’ individual prospects, what is important for economic observers and investment professionals to understand is that the N-11 as a bloc has grown by around 4.5% so far this decade, after growing by almost 4% in the previous decade. Given the size of its output, the N-11’s growth is contributing significantly to the world economy, alongside the primary drivers of China and India.

I kept reminding myself of this fact while traveling around Vietnam, where my tranquility was repeatedly interrupted by blaring headlines about US President Donald Trump’s tweets and escalating violence in the Middle East.

Before heading to Vietnam, I had the privilege of writing a review for Nature of Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think, a brilliant book by the late physician Hans Rosling, which his daughter published posthumously this year. Factfulness is one of just a few recent works to focus on the remarkably positive things happening in the world. Rosling, along with Harvard University’s Steven Pinker, was right to be optimistic. An unblinkered view of the world reveals many promising signs, especially for the global economy.


Jim O'Neill, a former chairman of Goldman Sachs Asset Management and former Commercial Secretary to the UK Treasury, is Honorary Professor of Economics at Manchester University and former Chairman of the Review on Antimicrobial Resistance.


Global Debt Hits 225% Of GDP

By Tom Kool

Oil                   



The world is now 12 percent of GDP deeper in debt than it was at a peak debt cycle during the financial crisis in 2009, hitting a whopping $164 trillion, according to the International Monetary Fund (IMF).

Global debt is at a historic high reaching the equivalent of 225 percent of GDP, the IMF said in its newly released Fiscal Monitor, describing China as a “driving force”.

China owns the lion’s share, sucking up almost three-quarters of the increase in private debt since the financial crisis.

But it’s not alone. Two other countries—Japan and U.S.—account for more than half of that global debt, according to the IMF.


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And the reason for the alarming debt cycle is the economic collapse during the global financial crisis and the policy response to that; but the IMF also blames the effects of the commodities price crash in 2014, as well as rapid spending growth in emerging markets and low-income developing countries.

In the U.S. case, says the IMF, “fiscal stimulus is happening when the economy is close to full employment, keeping overall deficits above $1 trillion (5 percent of GDP) over the next three years”.

The U.S. is the only advanced economy that is expected to see a further increase in debt-to-GDP ratio over the next five years—a situation the IMF attributes to Trump’s tax cuts and simultaneous increase in spending.

The debt clock is ticking frantically:


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 The international body calls on the U.S. to recalibrate fiscal policy to ensure that the government debt-to-GDP ratio declines over the medium term. 
 
On Wednesday, Carl Tannenbaum, chief economist at Chicago-based Northern Trust and former risk specialist at the Fed bank of Chicago, warned that while growth looks good at present, it isn’t going to be enough to control the budget deficit.

"An honest accounting finds U.S. debt headed to shockingly high levels," Tannenbaum said in a weekly note to clients published by CNBC.


Tax cuts the Jobs Act of December will boost immediate-term growth but come together with increased government spending. Echoing IMF sentiments, Tannenbaum said this stimulation of a well-performing economy “changed the nation’s fiscal course in a potentially dangerous way”.


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And if financial crisis-level debt isn’t scary enough, the IMF’s debt ceiling levels are:


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Some 19 countries have either reached or far surpassed their debt ceilings already.

Last year, more than a third of advanced economies had debt above 85 percent of GDP. In 2000, the number of advanced economics that had reached this level of debt was three times lower.

For emerging market and middle-income economies, one-fifth had debt above 70 percent of GDP in 2017—again, mirroring the 2000s and the aftermath of the Asian financial crisis. One-fifth of low-income countries had debt above 60 percent of GDP, and a handful are facing default or restructuring, according to the IMF.