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Financial Markets in 2018: The Times They Are A Changing

Thanks to a subscriber for this article by Pamela Rosenau for Forbes which may be of interest. Here is a section: 

As correlations among stocks and other assets classes break down, there will be a significant divergence in the performance of “quality” assets versus “junk” assets.  A prudent money manager should be prepared for this market shift by focusing on shorter duration assets, which goes for both credit and equities.  I expect longer duration equities, such as growth stocks with lower near-term earnings to underperform more value oriented stocks such as consumer staples, telecom, and energy sectors, on which I have focused.  Today’s market appears to be the inverse image to the early 1980s.  Back then, investors were misled into hiding out in cash as stocks were perceived as too expensive in a high interest rate environment.  Today, very few hold cash as stocks appear cheap relative to low bond yields.  This is a backward looking strategy derived from a relative value argument that is no longer operable.  I suggest more than a little risk aversion, as I have maintained, would be prudent in times like this.  As I have often said -- preserving capital is paramount, not winning friends. 



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ECB's Weidmann Predicts Wage Gains as He Seeks QE End-Date

This article by Jana Randow and Paul Gordon for Bloomberg may be of interest to subscribers. Here is a section:

European Central Bank policy maker Jens Weidmann reiterated his call for a definite end-date for the institution’s bond-buying program, a refrain that looks likely to gain traction among his colleagues next year.

Saying that domestic price pressures should strengthen as wage growth improves, he said they are “therefore on track toward our definition of price stability.”

While policy makers meeting last week reaffirmed their commitment to buy debt until September “or beyond,” officials including at least half the six-member Executive Board have signaled they’re willing to rein in expectations for another extension. The euro area is currently undergoing the broadest economic expansion in its history, and the ECB this month upgraded its growth forecasts for the bloc.

“A faster conclusion of net asset purchases and a clearly communicated end date would have been reasonable,” Weidmann, who also heads Germany’s Bundesbank, told reporters in Frankfurt late Monday.

Despite the upturn, the ECB remains well short of its inflation goal of just under 2 percent -- and Germany is a prime example of the conundrum. There, record-low unemployment and economic growth above its long-term potential has still failed to generate much in the way of wage growth. Weidmann said he’s confident that will soon change.

“We don’t get involved in wage bargaining and respect the independence of bargaining partners. But we expect that the increased capacity utilization and regionally appearing bottlenecks in some labor markets will lead to somewhat higher wage pressure,” he said. “That’s a projection, not a recommendation.’’



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China's Banks Need More Capital After Credit Boom, IMF Says

Thanks to a subscriber for this article from Bloomberg News which may be of interest to subscribers. Here is a section:

President Xi Jinping has highlighted financial stability as a top priority. People’s Bank of China Governor Zhou Xiaochuan warned in October about the risk of a ‘Minsky moment,’ or a sudden collapse of asset values. Financial watchdogs last month promised to overhaul regulation of asset-management products, which hold about $15 trillion and are seen as a key threat to stability.

Speaking to media on Thursday on a video call, the IMF’s deputy director of monetary and capital markets, Ratna Sahay, said China’s financial system held three main risks. She pointed to an increase in credit that in other countries has been linked to financial distress. An increasingly complex and opaque financial system makes it hard to identify risks, and implicit guarantees encourage excessive risk-taking, she said.

Credit growth needs to slow, guarantees should be gradually removed, and banks need more capital during that process, Sahay said. “Banks need to have some buffers in order to protect against any possible distress that might happen,’’ she said.

 



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How the Flynn Charges Box In Trump

This article by Noah Feldman for Bloomberg may be of interest to subscribers. Here is a section: 

The content of the Flynn-Kislyak conversations deepens the narrative that special counsel Robert Mueller has been building: Earlier guilty pleas revealed Russian efforts to connect with the Trump campaign; this one reveals official contacts between the Trump team and Russia after the election -- contact significant enough for Flynn to lie to the FBI about.

The fact that the lies concern Russia makes it politically harder for Trump to fire Mueller or to pardon Flynn than if the charge had involved Flynn's other legal woes over his unreported lobbying for Turkey.

 



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U.S. Stocks Gain on Tax Outlook as Treasuries Drop: Markets Wrap

This article by Brendan Walsh for Bloomberg may be of interest to subscribers. Here is a section:



An up-or-down vote on the Senate’s tax bill could happen before the end of this week. While McCain’s support helped bring the measure one step closer to passing, Republican Senator Susan Collins of Maine said it “would be very difficult” for her to support the proposal in its current form. The party can only afford to lose two of its 52 members to pass the bill without Democratic support. Bob Corker of Tennessee, Jeff Flake of Arizona, James Lankford of Oklahoma and Ron Johnson of Wisconsin are all seen as potential “no” votes.

Data showed U.S. consumer spending settled back in October to a still-decent pace after the biggest increase since 2009, as a post-storm surge in auto sales cooled. Incomes remained robust and inflation showed progress toward the Federal Reserve’s goal. Treasuries sank, driving the benchmark 10-year yield to the highest in a month.



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Masters in Business

Thanks to a subscriber for this podcast where Barry Ritholtz interviews Felix Zulauf which may be of interest. 



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After Sudden Rout, China Stock Traders Question Beijing Put

This article from Bloomberg News may be of interest to subscribers. Here is a section:

For Sun Jianbo, president of China Vision Capital Management Co. in Beijing, valuations among large-cap shares are too expensive for state-backed funds to intervene.

The CSI 300 traded at its highest level relative to the broader Shanghai Composite Index in at least 12 years at the start of this week as investors flocked to large caps such as Moutai and Ping An Insurance (Group) Co.

"There’s no need to prop up the market yet," Sun said. "A lot of big caps are still expensive and it would do more harm than good to state-backed funds if they buy now."

The divergence between large-cap shares and the rest of the market may be one reason why the government took aim at Moutai. Before Xinhua warned last week that gains in the liquor maker were excessive, the stock had more than doubled this year.



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Email of the day on the next crash

Dear Eoin, could you comment on Niall Ferguson's market prediction in the Sunday Times: 



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Goldman Sachs Sees Four 2018 Fed Rate Hikes as U.S. Growth Gains

This article by Brendan Murray for Bloomberg may be of interest to subscribers. Here is a section:

The U.S. jobless rate, which was 4.1 percent in October, may reach 3.5 percent in late 2019, Goldman predicted. That would be the lowest level since the late-1960s.

“Our projections would imply an evolution over the current cycle from the weakest labor market in postwar U.S. history to one of the tightest,” the economists said in a summary of their report. “We expect that a tight labor market and a more normal inflation picture will lead the Fed to deliver four hikes next year.”

That’s one more rate increase than the median forecast of Fed officials, and more than financial markets are currently pricing in. One of the reasons why Goldman Sachs economists said they disagree with market expectations is “we see little evidence that soft inflation is structural in nature.”



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Russell Napier: Debt Deflation Worries Are Starting to Rise Again

Thanks to a subscriber for this article from Financial Sense which may be of interest to subscribers. Here is a section on the Velocity of Money: 

Though there is an overall tendency for velocity of money to fall over time, Napier noted, the accelerated decline we’ve seen in recent years is due to the nature of the money that is being created. This money primarily takes the form of bank reserves, which are not inherently fungible and are now stuck in the banking system.

Banks have chosen not to increase the size of their balance sheets and create deposits, which is the money that circulates in the actual economy, as opposed to the asset economy. This is why Napier thinks the velocity of money has fallen.
“There’s a form of money there that is stuck in the ‘asset ghetto,’ if you like, and not yet spreading out to normal GDP,” he said.

This plays in part into the assumption most people make that the world is awash in money. While there is a lot of money in the asset markets, the reality is that M2 growth in the United States is 5 percent, which is one of the lowest levels recorded in the past 30 years, Napier noted. Apart from the 2008 to 2009 crisis, we’re back to very low levels of total money creation.
This is true of other countries, as well. China is close to a new record low in the growth of its money supply. India is also showing levels of growth in its money supply not seen since 1963.

 



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