Sunday 27 October 2013

Credit - Bread and Circuses

"Bread and circuses" (or bread and games) (from Latin: panem et circenses) is a metaphor for a superficial means of appeasement." - source Wikipedia

Given the continuation of the "Cantillon Effects" in risky assets thanks to the generosity of our "omnipotent" central bankers and the "tapering" withdrawal syndrome which has affected many central banks, we thought using this week our chosen title would be appropriate. It is a reference to the old Roman practice of providing "free wheat" to Roman citizens (plenty of abundant liquidity for the 1%) as well as costly circus games (the US shutdown and debt ceiling stand-off) as a means this time around of maintaining power we think. Bearing in mind that in ancient Rome, Roman citizenship was a privileged political and legal status afforded to freeborn individuals with respect to laws, property, and governance. A true Roman citizen could not be tortured or whipped, nor could he receive the death penalty, unless he was found guilty of treason. Are Bankers the new Roman citizens? We wonder and ramble again.

But as we have argued in numerous previous conversations, our central theme is around the desperate struggle of central banks to bend the velocity curve in this deflationary environment. We described back in April 2013 in our conversation the "The Night of The Yield Hunter" the epic struggle between "inflation" and "deflation":
"In the 1955 movie classic "The Night of the Hunter Reverend Harry Powell, a serial killer and self-appointed preacher has tattooed across the knuckles of his right and left hands two words "LOVE" and "HATE" so that he can use them in a sermon about the eternal struggle between good and evil. As investors, we think you should have two words tattooed across your hands: "INFLATION" and "DEFLATION" so that you can use them in assessing the eternal struggle between inflation and deflation in this current environment."

Shipping for us has always been the illustration of this on-going struggle as well as an indicator of the reflationary "Cantillon Effect" played by central banks in providing cheap credit, leading to yet again mis-allocation of capital on a global scale. For instance, Bulk vessels and Container ships have seen a steady number of ships being broken up due to weak rates and  tied up to the weakness in global economic activity - source Bloomberg:

What of course if of interest is the growing divergence in the number of bulk vessels on order and where the order book stands as a percentage of capacity - graph source Bloomberg:
Either, there is indeed a true growing global growth recovery at play, or this only yet another manifestation of "Cantillon Effects" in the shipping space leading to a surge of vessels on order thanks to cheap credit and high expectations, or put it simply what Keynes called the manifestation of the "animal spirits" leading to damaging speculation.

So, in this week conversation, we will look at where we stand in terms of complacency in risky assets prices and the jump in flows, as we think we move into the last inning of the reflation game put on in 2009.

The "Cantillon Effects" at play, the rise of the Fed's Balance sheet, the rise of the S&P 500, the rise of buybacks and of course the fall in the US labor participation rate (inversely plotted) - source Bloomberg:
In red: the Fed's balance sheet
In dark blue: the S&P 500
In light blue: S&P 500 buybacks
In purple: NYSE Margin debt
In green: inverse US labor participation rate.

Of course the recent tempering stance of many central banks relating to a potential tapering has led to renewed significant appetite for risky assets, as indicated by Bank of America Merrill Lynch recent note from the 24th of October 2013 entitled "SPX 2014 by 2014?":
"Fed goes AWOL...investors go All-In. Big, frothy inflows to stocks, European equities (record inflows -see Chart 1), 
high-yield bonds and floating-rate notes. BofAML Bull & Bear Index rises to 7.0, i.e. closing in on 8.0, the "greed" threshold and "sell" signal for risk assets (Chart 3 - note B&B index gave "buy" signal July 3rd when SPX 1615).
Since June $83bn into equity funds versus $80bn out of bond funds (Chart 2); 
investors beginning to worry about a repeat of Q4'99 when the Fed left the liquidity gates wide open because of “Y2K” fears with tech bubble outcome." - source Bank of America Merrill Lynch

And with some much "Greed" and no "Fear" which has been removed with the postponement of "tapering" in the near future, no wonder risky assets have rallied hard on the back of it, as displayed in the rally seen in High Yield and the continuous rally in the S and P 500 - graph source Bloomberg:
The correlation between the US, High Yield and equities (S&P 500) is back thanks to "no tapering". US investment grade ETF LQD is more sensitive to interest rate risk than its High Yield ETF counterpart HYG.

This surge in risky assets is of course entirely linked to the fall in volatility as a whole in various asset classes as displayed in the below Bloomberg graph:
MOVE index = ML Yield curve weighted index of the normalized implied volatility on 1 month Treasury options.
CVIX index = DB currency implied volatility index: 3 month implied volatility of 9 major currency pairs.
EM VYX index = JP Morgan EM-VXY tracks volatility in emerging market currencies. The index is based on three-month at-the-money forward options, weighted by market turnover.

Similar pattern has been observed in the European space where European equities have benefited from the outflows from Emerging Markets as investors have repositioned themselves accordingly as displayed by the rally in the Eurostoxx 50, the diminishing spread risk premium in the Itraxx Financial Senior 5 year CDS index and the relief rally in the 10 year German yield - graph source Bloomberg:

Looking at the current "complacency" one may rightly ask if  "Something is rotten in the state of markets" in true Marcellus fashion (no it is not Hamlet).

What we care about, in similar fashion to our good friends at Rcube Global Macro Asset Management, is the consequences of a US Budget Balance Improvement as recently discussed. But another point we would like to highlight as well is the consequences of an improvement of the US current account. 

When you get both a fast improving current account for the US as well as an improving budget balance in the US, this will lead to fewer dollars available to the rest of the world in the next few years. Currently the US dollar is undervalued. As of late, thanks to the "Debt ceiling" stand-off, the Dollar Index fell to around 79 with Gold rising slightly in the process as indicated in the below graph displaying the Dollar Index versus Gold since June 2011:

The two points above always lead to international liquidity crisis over a long time. Liquidity crisis always lead to financial crisis. Why? The US Current account is the primary source of liquidity for other countries given the US doesn't have a foreign trade constraint.

On that matter it is interesting to note that the Fed taper fears did induce another stall in global FX reserve accumulation as indicated by JP Morgan in their Economic Research Note from the 25th of October entitled "Another pause in global FX reserve accumulation":
"The trembles sent through global financial markets at the prospect of an earlier-than-anticipated end to the Fed’s easy money campaign put a hold on the accumulation of foreign exchange reserves over the past few months. Global FX reserves stood at an estimated US$11.3 trillion as of August, down a touch from their April high. With global activity expected to accelerate and pull trade up with it, the pace of FX reserve accumulation is likely to rise with the level possibly breaching the US$12 trillion mark by the end of next year. However, this rate of increase would be modest compared to the breakneck pace seen during the last expansion.
The seemingly endless rapid increase in central bank holdings that took place last decade through to the middle of 2008 has been interrupted three times over the past five years. The first pause came during the global financial crisis, when a sudden stop in global trade and financial market flows led to a massive US$416 billion decline in reserves as numerous EM central banks moved to protect their currencies and their economies. The second pause occurred from mid-2011 to mid-2012, when downshifting economic growth across the EM and an intensification of the Euro area crisis generated a rare non-recessionary contraction in global trade. Over this period, FX reserves slipped US$21 billion. In contrast to the global financial crisis, when EM Europe (and Russia in particular) comprised the bulk of the reserve losses, the 2011-12 decline was focused more in EM Asia, with China experiencing a very rare US$56 billion decline.
Despite the deceleration in global trade flows as a result of the Euro area recession and continued disappointing growth across much of the EM over the past year, the pace of reserve accumulation actually picked up considerably in the year through April 2013, with the level of reserves expanding by US$802 billion (8.3%). Indeed, the expansion of reserves is somewhat puzzling given the aforementioned weakness of trade flows. This puzzle has been partly rectified in recent months, however, as reserves have once again contracted outright, declining US$17 billion in the four months through August. Excluding China, which saw a US$57 billion increase over this period, reserves of EM central banks tumbled US$68 billion from April to August. 
The largest declines in reserves over the past few months have been in EM Asia excluding China, although EM Europe has also experienced a sizable drop. As a group, reserves of EM Asian central banks outside China dropped US$46 billion, or 6.3%.
The declines have been broadly based, with large drops seen in India, Indonesia, and Thailand. In percentage terms, Indonesia has experienced the largest fall, at 13% of its total holdings. India’s decline of nearly US$16 billion amounts to a 6% contraction, while Thailand’s US$9 billion decline is a 5.5% drop. Outside Asia, Hungary experienced a very large US$6 billion decline (over 13% of its total holdings), but half of this reflected an early repayment of its IMF loan. Relatively sizable declines in reserves were seen in Argentina,Turkey, South Africa, Russia, and Brazil." - source JP Morgan

The key question of course is the level of imbalances, on that point JP Morgan makes the following remarks in their recent note:
"The obverse of the surge in official exchange reserves over the past 15 years has been the rise in global imbalances as viewed through the balance of payments accounts around the world. The rise of global current account imbalances is often cited as either a contributing factor to the global financial crisis or, at minimum, a symptom of the factors underlying the crisis. The word “imbalance” is in itself a loaded concept, implying a fundamental tension that can reach a tipping point that results in a rapid unwind. Of course, this need not be the case, as the flip side to the current account is the financial/current account whereby trade imbalances are offset through a transfer of assets from borrowers (current account deficit countries) to creditors (current account surplus countries), leading to a reshuffling in the net international investment position of countries.
So long as both parties are accepting and there are sufficient assets “for sale,” current account imbalances can continue. However, the rapid acceleration in current account positions over the last decade pushed the flow of goods and capital to an unsustainable point. Between 1999 and 2007, the trade deficit of the major deficit economies more than doubled as share of global GDP from a reasonable 1% in 1999 to a more concerning 2.3% as of 2007. The 1.3%-pt rise owed only 0.3%-pt to the US, where a declining USD helped keep a check on trade even as rising oil prices fueled a sharp rise in the energy deficit. A larger 0.6%-pt rise in the global trade deficit owed to rising deficits in Europe (excluding Germany). Mirroring the rise in these deficits was an equally strong ramp up in trade surpluses from Germany, Japan, China, and large commodity exporting countries (including OPEC)." - source JP Morgan.

But as far as the markets are concerned, for the moment only "greed" prevails, "bread" abounds and political "circuses" have been kept to a minimal.

On a final note, it is going to fathom a continuation of the "Cantillon Effects" in 2014 if history is any guide as displayed by Bloomberg's recent Chart of the Day indicative of the hurdles face by the S and P 500 in 2014:
"Investors in funds that track the Standard & Poor’s 500 Index may have to reacquaint themselves with year-to-date losses in 2014, if history is any guide.
As the CHART OF THE DAY shows, the S&P 500 has been higher than last year’s close throughout 2013. The index, which showed a 23 percent gain for the year through yesterday, accomplished the same feat in 2012. This hasn’t taken place in consecutive years since 1975-1976, according to data compiled by Bloomberg.
The earlier streak effectively ended on the first trading day of 1977, as the S&P 500 dropped that day and stayed lower the rest of the year. At year-end, the index posted a loss of 11.5 percent, as the chart depicts.
More restrictive monetary policy, increased sales of new stock or falling earnings might trigger a reversal this time, according to Michael Shaoul, chairman and chief executive officer of Marketfield Asset Management LLC. “Eventually circumstances will change sufficiently to make the equity market a treacherous place to invest,” Shaoul wrote yesterday in a report. The New York-based money manager cited the S&P 500 performance comparison in his research. “We would allow for an increase in volatility and the potential for some violent bull-market corrections,” he wrote. On the other hand, he added: “It is easier to see the market move higher than lower overall in the months ahead.”" - source Bloomberg.

"Optimism is the opium of the people." - Milan Kundera 

Stay tuned!

Thursday 24 October 2013

Guest post - Consequences of a US Budget Balance Improvement

"Logical consequences are the scarecrows of fools and the beacons of wise men." - Thomas Huxley 

Please find below a great guest post from our good friends at Rcube Global Macro Asset Management. In this post our friends go through the consequences of a US Budget Balance Improvement.

The US budget deficit which has already shrunk at a pace never seen over the last 50 years is likely to shrink even more going forward given the ongoing republican fight for more spending cuts. This trend is likely to have some consequences on financial markets. We have selected 4 investment themes that we think, should materialize as a consequence.
  • Rising volatility
  • Consumer discretionary stocks underperformance
  • EM assets underperformance
  • Widening US long end swap spreads

The dollar is the reserve currency of the world, hence when the US runs a budget deficit it increases the amount of dollars in circulation, and provides the world with liquidity. When its financing needs shrink like it has been the case since 2010, global liquidity is reduced. This has ALWAYS created or exacerbated some kind of crisis around the world when it happened (Lat Am in the mid 80s, Asia in the late 90s followed by the tech bubble in 2000, the great recession in 2007).

Will it be different this time? QE has provided a necessary buffer to the liquidity shock that the sharp budget balance improvement has created. When QE ends, and if in the meantime spending cuts have intensified (budget ceiling debate) the pain will start being felt.

  • Equity volatility has probably bottomed.

The pace of the deficit reduction is historical. it has shrunk by more than 6% of GDP over the last 3 years. In the past, this has pushed equity volatility upward systematically. Less liquidity means higher volatility, it is as simple as that as the chart below shows.

In previous cycles the trigger for the volatility to spike was bank lending behavior. So far no signs of the cycle being less supportive but there are hints that banks could become less accommodative going forward. Nevertheless this time, the trigger should be around the time investors will price the end of QE.

Another way to look at it is through the strong historical link between the fiscal cycle and corporate profit margins. As the chart below shows, corporate profits have followed the budget deficit momentum closely (with a lag) over the last 40 years. Fiscal gifts have in a way subsidized non]financial corporate profits. It is thus illusory and naive to believe that the ongoing war in Washington over spending cuts wonft have any impact on profits over time.

Earnings growth has also logically been correlated to the budget balance cycle.

The IMF just released global financial stability report highlights the recent rise in corporate leverage which on many counts now exceeds 2007 extremes.

As a result, the IMF baseline scenario for US HY default is to rise to about 10% by 2015. Clearly not priced in by investors at the moment...

Thus it will be particularly interesting to watch the Senior Loan Officer Survey Q3 results early November for clues about bank lending behavior. Both the rise in the financing gap and corporate leverage hint that banks could become slightly less accommodative going forward.

Our US Lending Standard model based on both the financing gap and non-financial corporate leverage suggests so.

  • Consumer discretionary stocks should underperform.

The sector has been the main beneficiary of the fiscal cycle. Now that it has clearly turn, and that republicans will fight for more fiscal austerity, headwinds for the sector are clearly rising. Fiscal largeness or austerity impacts logically ones propensity to spend on discretionary items. As a consequence the relative performance of the sector can be explained by the fiscal cycle.

The urgency of its implementation came from another explanatory driver: interest rates. The spike in
mortgages and short term forward rates, creates further headwinds to an over loved, over owned, and overpriced sector.

Interestingly the same story holds in Europe. The luxury sector has underperformed its benchmark recently by more than 12%. LVMH earnings miss is we think another clear signal that developed markets consumer discretionary equities are set to underperform going forward. Fiscal tightening in developed countries combined with lower growth in Emerging markets are strong headwinds.

  • Emerging market assets will underperform.

Emerging market assets have shown a remarkable negative correlation with the US financing needs. Since proper data began for EM equities, their relative performance versus developed markets has been strongly explained by the US budget balance.

The US budget went from 0 in early 1980 down to a deficit of 5% of GDP in the early 1990s, EM equities enjoyed simultaneously a powerful relative bull market. During the Clinton years, and the US boom, the deficit turned into a surplus of 2.6% in 2000, EM stocks crashed on a relative basis. From 2000 until early 2010 the budget balance nose-dived, and turned into a deficit of 10% of GDP. EM equities which were in the early 2000s extremely cheap on top, outperformed DM equities by close to 300%. Since then, the 6% shrinkage of the deficit has left EM equities underperforming by 35%. During that phase the underperformance was realized with a flat equity market. The MSCI EM is at the same level it was trading at in late 2009. We fear the next phase will see EM equities underperforming in a bear market.

Additionally, as we have mentioned more recently, we believe that China’s massive investment and property bubble is also at risk of rolling over. Private sector credit can’t rise at 40% of GDP every year for ever.

So, emerging markets could be hit from both sides. First by the liquidity withdrawal that the budget deficit reduction and the end of QE imply, second by the coming weakening investment cycle in China. Countries running a budget and current account deficit, together with a large export (to China) GDP ratio are at a particular risk here.

IBM results were we think very interesting; their sales in China were down 20% yoy. 20% is a big number. LVMH painted a similar message the day before. Caterpillar earnings next week will be another interesting read.

  • US Long end swap spreads will widen

Long end swap spreads are a function of relative financing needs between the private and the public 
sector. At this time, the private sector is re-leveraging through increased shares buybacks, dividend 
payments and Capex spendings, while the public sector deleverages. This classic inverse relationship 
implies just like it did in the late 1990s that long end US swap spreads will widen from current levels.

"The consequences of an act affect the probability of its occurring again." -
B. F. Skinner 

Stay tuned!

Sunday 20 October 2013

Credit - The return of the Gibson paradox

"Take away paradox from the thinker and you have a professor." - Soren Kierkegaard 

While looking at the continuation in the rally for risky assets, credit included, thanks to the "Cantillon Effects" coming from the continuous generosity of our "omnipotent" central bankers, and lackluster performance of gold since the threat of the tapering, we reminded ourselves of an economic theory which was put forward in 1923 by British economist Alfred Herbert Gibson about the negative correlation between gold prices and real interest rates and decided to use it as our title. This theory was coined Gibson's paradox by John Maynard Keynes. 

What of course has been of interest is the return of Gibson's paradox. Given Gold price and real interest rates are highly negatively correlated - when rates go down, gold goes up. When real interest rates are below 2%, then you get bull market in gold, but when you get positive real interest rates, which has been the case with the rally we saw in the 10 year US government bond getting close to 3% before receding, then of course, gold prices went down as a consequence of the interest rate impact.

As of late, thanks to the "Debt ceiling" stand-off, the Dollar Index fell to around 79 with Gold rising slightly in the process as indicated in the below graph displaying the Dollar Index versus Gold since June 2011:
In our previous conversation "The Rebel Yell" we argued the following:
"This leads us not to believe the Fed will "taper" in 2013. For 2014, we are not too sure either...That's our own "Rebel Yell"."

Therefore in this week's conversation we will again look at the deflationary risks at play which represent significant headwinds for the Fed's willingness in "tapering". Of course this will add more trouble ahead when it comes to the inflationary aspect of the risky assets bubble which continues to feed on loose monetary policy. Flooding the economy with cheap credit like under Alan Greenspan and now Ben Bernanke, in true "Cantillon effect" is fueling asset-price inflation like it did it 1992, and like it did in the 1920s under Fed Chairman Benjamin Strong.

Why our no tapering stance? 

As we argued in our Chart of the Day from the 19th of September:
"No bank Fed tightening", and we agreed with Bank of America Merrill Lynch takes on the subject at the time:
"The Fed may taper once housing sustainably picks up. But in our view it is very unlikely to tighten until banking sectors around the world start lending again."
- source Bank of America Merrill Lynch

.We also agree with their latest take on the subject of the liquidity induced rally from their note from the 16th of October entitled "Red, White & BOOM":
"The Final Melt-up for the “One Percenters”
We believe the opiate of investors for the moment remains central bank liquidity. The degree of stimulus since 2007 has been unprecedented: $13 trillion of FX reserve accumulation and financial asset purchases by central banks and 560 central bank rate cuts. And the “bulls” appear to remain driven by “liquidity”: only 13% of the 235 investors polled in our Fund Manager Survey believe the global economy will grow "above-trend" in 2014 versus 84% who believe it will be "below-trend". We think “Bernanke-care” may have truly cured all known investor concerns." - source Bank of America Merrill Lynch

And when it comes to lending growth, while the US seems to have had a positive impact in improving lending in the United States as displayed by the below graph from Bank of America Merrill Lynch's note:
 - source Bank of America Merrill Lynch

It is definitely not the case in Europe and particularly in peripheral countries as displayed by this graph coming from Bank of America Merrill Lynch's note on European banks entitled "Going round the corner on two wheels" from the 14th of October and displaying loan growth or lack thereof in Europe:
 - source Bank of America Merrill Lynch

We also agree with Bank of America Merrill Lynch that a "VLTRO" is on the card, while it amounted to "Money for Nothing" in the first instance given it did not provide loan growth for economic growth but enabled banks to set up carry trades and soak up most of European government bonds issuance in the process:
"Each time the ECB extends term funding to the banks, it encourages peripheral banks to add more sovereign debt. Since LTRO1 in 2009, Italian and Spanish bank holdings of their own sovereign are up by €360 billion. Each LTRO therefore becomes harder to step back – unless growth recovers and government deficits fall. It is perhaps in the expectation of these that the ECB will be positioning the next wave of term funding."
 - source Bank of America Merrill Lynch

As we have argued the painful deflationary bust in Europe is being merely "delayed", as indicated by the strength of the Euro versus the US dollar. The FED's swap lines and its January 2012 FOMC decision of keeping rate low until at least late 2014 are indeed delaying the occurrence of a painful adjustment in Europe.

We mentioned the problem of stocks and flows and the difference between the ECB and the Fed in our conversation "The European issue of circularity": "Given that while the Fed has been financing "stocks" (mortgages), while the ECB is financing "flows" (deficits). We do not know when European deficits will end, until a clear reduction of the deficits is seen, therefore the ECB liabilities will have to depreciate."

Last year, on the 25th of January 2012 we did make the following forecast in relation to the European recession and the EUR/USD following the FOMC decision to maintain US rates in our conversation - The law of unintended consequences:
"Unintended Consequences according to Martin Sibileau:
"With the Fed swaps, as we pointed out on September 12th, the Euro is still artificially stronger than without the swaps, which makes the EU less competitive. Finally, the institutional uncertainty of the EU zone remains unaddressed. All these factors only contribute to prolong the recession and a high unemployment rate."Given today's decision of the FOMC to maintain US rates low until late 2014, it seems to us that the European recession can only be prolonged."

The deflationary forces at play in Europe cannot be ignored and can be seen clearly in the euro inflation market where 5 year 0% inflation floor prices are close to their lows as displayed in the below graph from Bank of America Merrill Lynch from their note from the 16th of October 2013 entitled "EUR inflation floors are floored but should be through the roof":
"IMF appreciates the euro zone deflation risk
“Deflation risks remain elevated in Japan, despite the new inflation target, and in the euro area, particularly in the periphery,” according to the IMF World Economic Outlook, October 2013.
"Few things make a strategist happier than a two-line chart where the lines track each other for a long period of time and then diverge sharply in the recent past; it means there’s a story to tell. Today’s Chart of the Day is a classic example – the best we’ve seen in a long time. It shows how the price of 5y EUR deflation floors have fallen close to the lows of recent years while at the same time 5y inflation swap rates have also fallen close to their lows over the same period. In short, implied inflation volatility has collapsed.
We do not want to create the impression that EZ deflation is our central case but there are several roads that could take us there. Nobody expects the US debt ceiling issue to give as another “Lehman moment”, but nobody completely rules out that remote tail risk. More tangible perhaps is the US economic “relapse risk”, under the circumstances. With the EZ experiencing low and falling actual inflation, a large and growing output gap and a strengthening currency, adding a US relapse into the mix would likely push up deflation risk materially.
So the collapse in floor premiums is a puzzle to us. Or maybe it’s a paradox. At low inflation rates, interest in inflation structures (requiring floors) dwindles, while negative real yields can further hamper the economics of building such structures."- source Bank of America Merrill Lynch

For us it is simply the manifestation of the Gibson paradox, because, while the manifestation of "Cantillon effects" in asset prices come from negative interest rates, the suppression of the rate of interest under ZIRP, intensifies gold hoarding as clearly explained by Antal Fekete in his 2006 article "When Atlas Shrugged...Part Two: Gibson's Paradox and the Gold Price":
"The validity of Gibson's Paradox clearly extends to the regime of the irredeemable dollar with a variable gold price. It varies directly with the price level. In particular, as the irredeemable dollar loses purchasing power, the price of gold will rise for the stronger reason. In terms of Gibson's Paradox, the price level rises less if the rate of interest is suppressed; otherwise it rises more.

Properly interpreted, there has never been an episode in history when Gibson's paradox failed to operate. It is the empirical description of the apodictic truth that suppression of the rate of interest brings about increased gold hoarding, subject to leads or lags. Every ounce of hoarded gold is a testimony to the fact that somebody, somewhere, has found the quality of savings instruments, and their yield, inadequate. By making the regime of irredeemable dollar non-negotiable, the U.S. government has foolishly deprived itself of the possibility to channel people's savings into "socially more useful" applications. Therefore it is the government, not the people, that is to be blamed for the present negative savings rate in the United States."

Furthermore, we already touched on put-call parity and what it entails, namely going long US Treasuries and long gold:
"If the policy compass is spinning and there’s no way to predict how governments will react, you don’t know whether to hedge for inflation or deflation, so you hedge for both. By put-call parity, if there is huge volatility in the policy responses of governments, the option-value of both gold and bonds goes up." - David Goldman's article about Gold and Treasuries and bonds in general written in August 2011 (the former global head of fixed income research for Bank of America)

So far we have bought the put leg of the put-call parity strategy and we are indeed thinking of adding the call leg shortly."

Professor Antal Fekete also added in his 2006 note:
"In encouraging bull speculation in bonds the government prompts more gold hoarding, making gold scarcer and the gold price more buoyant still. On the other hand in encouraging bear speculation in gold, in so far as it is effective, gold hoarding is reduced pushing interest rates higher. Rather than canceling out, the two effects could ratchet up both the gold price and the rate of interest simultaneously."

By not tapering in September, the Fed has lost more than credibility, it has put at risk the faith and credibility of the US dollar. Dollar weakness and rising real rates in OECD countries with an increase in gold prices are tantamount to a return of the Gibson paradox we think.

We always point out shipping as indicative of the deflationary forces at play, and we keep tracking shipping rates to that effect. The latest rates figures from the Drewry container prices point to slack demand which was evident in the earnings figures coming out from corporate giant such as IBM where Emerging Markets' demand had been impacting the bottom line. The Drewry Hong-Kong-Los Angeles container rate - graph source Bloomberg:
"The Drewry Hong Kong-Los Angeles container rate benchmark fell 2.8% to $1,736 in the week ended Oct. 16, the lowest level since December 2011 ($1,436). This marks the 14th week this year that rates are below $2,000. Rates are about 31% lower than the July 2012 high of $2,519. Even with six increases in 2013, rates are 34.5% lower yoy and down 21.6% ytd, as slack capacity continues to pressure pricing." - source Bloomberg.

The weakness in Emerging Markets exports to Europe can be seen in the latest Asia-to-Europe Container Shipping rates - table source Bloomberg:
"Shipping rates for 40-foot containers (FEU) fell 6% sequentially to $1,476 for the week ending Oct. 17, the sixth straight decline and the largest drop in three weeks, according to World Container Index data. The Shanghai-to-Rotterdam trade lane continues to be weak, with rates falling for the sixth straight week (down 13%), yet Shanghai to Genoa declined the most (15% lower). New York-to-Rotterdam rates rose the most (3.5%), reversing last week's decline."  - source Bloomberg.

As far as "Cantillon effects" are concerned, we expect the huge cash balances sitting idle on major corporate balances sheet to be put at play in M&A in 2014, following the raft of buy-backs we have seen as of late. It is the next evident step that will be taken in this survival of the fittest deflationary contest as displayed in Bloomberg's Chart of the Day:
"Mergers and acquisitions have failed to keep up with a record-setting share rally in the U.S. because many companies are repurchasing stock instead of making deals, according to Erin Lyons, a Citigroup Inc. strategist.
The CHART OF THE DAY compares the 12-month average dollar value of proposed takeovers, as compiled by Bloomberg, with the performance of the Standard & Poor’s 500 Index. Lyons presented
a similar chart in a report two days ago.
Dealmaking in the 12 months ended in September averaged $89.7 billion, up 12 percent from two years earlier. Between September 2011 and last month, the S&P 500 climbed 49 percent and surpassed 1,700 for the first time. “As share prices increase, usually deals follow,” Lyons wrote. This time around, there appears to be too much concern about the pace of economic growth and other issues for chief executives to pursue takeovers, the New York-based credit strategist wrote. 
“Buying back shares is the least risky” way to lift stock prices and has grown in popularity, the report said. The dollar amount of shares that U.S. companies agreed to repurchase jumped 68 percent this year from the same period of 2012, according to data compiled by Birinyi Associates Inc. through last week.
There are four other explanations for why dealmaking has lagged behind stock prices, Lyons wrote: potential increases in the cost of financing, higher valuations for potential targets, reluctance to spend cash on hand for takeovers, and caution about taking on debt as the economic outlook gets cloudier." - source Bloomberg.

For the time being the "Cantillon effects" rule the game, meaning additional spread tightening and additional rise in risky asset prices.

About Gibson's paradox:
“no problem in economics has been more hotly debated”. - Irving Fisher, 1930

Stay tuned!

Tuesday 15 October 2013

Credit versus Equities - a farming analogy

"Italians come to ruin most generally in three ways, women, gambling, and farming. My family chose the slowest one." - Pope John XXIII 

In ancient times for agricultural exploitation, you could distinguish two forms of contracts : tenant farmed land (fixed income) and metayage (shared risk). 

Using this farming analogy we intend to indicate the implications of both systems from their respective "flexibility" in relation to boom/bust credit cycles and "instability" generated by the recourse to "tenant farmed land".

"A tenant farmer is one who resides on and farms land owned by a landlord. Tenant farming is an agricultural production system in which landowners contribute their land and often a measure of operating capital and management; while tenant farmers contribute their labor along with at times varying amounts of capital and management. Depending on the contract, tenants can make payments to the owner either of a fixed portion of the product, in cash or in a combination. The rights the tenant has over the land, the form, and measure of the payment varies across systems (geographically and chronologically). In some systems, the tenant could be evicted at whim (tenancy at will); in others, the landowner and tenant sign a contract for a fixed number of years (tenancy for years or indenture). In most developed countries today, at least some restrictions are placed on the rights of landlords to evict tenants under normal circumstances." - source Wikipedia

"The Metayage system (French: métayage) is the cultivation of land for a proprietor by one who receives a proportion of the produce, as a kind of sharecropping.
In Italy and France, respectively, it was called mezzadria and métayage, or halving - the halving, that is, of the produce of the soil between landowner and land-holder. Halving didn't imply equal amounts of the produce but rather division according to agreement. The produce was divisible in certain definite proportions, which obviously must have varied with the varying fertility of the soil and other circumstances and did in practice vary so much that the landlord's share was sometimes as much as two-thirds, sometimes as little as one-third. Sometimes the landlord supplied all the stock, sometimes only part - the cattle and seed perhaps, while the farmer provided the implements; or perhaps only half the seed and half the cattle, the farmer finding the other halves. Thus the instrumentum fundi of Roman Law was combined within métayage. Taxes were also frequently divided, being paid wholly by one or the other, or jointly by both.
In the 18th Century métayage agreements began to give way to agreements to share profits from the sale of the crops and to straight tenant farming, although the practice in its original form could still be found in isolated communities until the early 20th Century." - source Wikipedia

In the first case, the farmer would pay a fixed rent but would enjoy the ownership of the production of the land. (bonds) and the landlord did not share the risk ineherent to farming (bad crops, drought, etc.).
In the second case the "metayer" would be sharing with the land owner the production of the exploitation of the farmed land and the risks (equities). 

For us, this roughly equates to today's difference between a financial claim or bond and equities.
-Bonds = Tenant farming
-Equities = Metayage

Therefore when ones look at credit volumes, you need to not only include the total of financial claims but as well equities.

When there is a recession or even worse a depression, equities will fall towards zero, in the case of bankruptcy. It is a very painful but it is a very fast adjustment.

The increasing recourse towards bond issuing by companies will be increasing "difficulties" at the end of the on-going credit cycle, when entering a recession or depression.

What has made the resounding success of the US economy throughout many decades was its capitalistic approach and recourse to equities issuance for financing purposes rather than bonds.

We believe the global declines in listings is indicative of growing instability in the financial system and increasing risk as a whole. For instance the latest Chart of the Day from Bloomberg from the 11th of October is clearly indicative of this growing unnerving trend:
"Stock markets worldwide are faced with the same issue of declines in listings that surfaced in the U.S. a decade and a half ago, according to Jason Voss, a content director at the CFA Institute.
 The CHART OF THE DAY shows the number of listings in the U.S., Europe and the Asia-Pacific region each year from 1975 through 2012, which Voss compiled from data supplied by the World Federation of Exchanges and other providers.
The decline in public equities is unquestionable and should be of grave concern to both investors and policy makers alike,” Voss wrote in a blog posting on Sept. 30. Having fewer listings may hamper asset allocation, make stocks too expensive and send improper signals to companies looking to go public, he said yesterday in an interview.
European markets listed the most stocks in 2007, when a bull market ended. The total fell 23 percent during the next five years. Asia-Pacific listings peaked in 2010, and last year’s figure was 4.7 percent lower.
Stock listings in the U.S. reached their highest total in 1997, in the midst of a bull market fueled by demand for shares of Internet companies. Last year’s figure was 47 percent lower than the record.
Increases in the number of companies being acquired, going private or filing for bankruptcy may explain the declines, Voss wrote in the posting. Declines in initial public offerings are another possibility, the New York-based analyst wrote." - source Bloomberg.

The consequent burst of the internet bubble meant that the US economy which had been financed by equities issuance have meant a much faster rebound than the European economy due to the past flexibility of the American economy in equities issuance. In that case "tenant farmed land". The cut in interest rates under Alan Greenspan which lead to cheap credit and more mortgage back debt issuance leading to the housing busts, has no doubt led to outflows from the equities markets towards bonds, which are inherently more destabilizing from a long term perspective. The famous road to serfdom? Probably.

When one looks at the cumulative flows into bonds and equities since 2000 in billion US dollars as displayed by Bank of America Merrill Lynch, in their recent note entitled "The biggest pictures" from the 11th of October, clearly the "road to serfdom" has been the road of "tenant farming":

We can therefore make this over-simplistic yet provocative conclusion that:
Equities = Freedom
Debt = Road to serfdom

And as we argued before, "there is life (and value) after default!", there is freedom as well. 

So we will eagerly wait for "the mother of all equities bull market" after some much needed "debt" defaults...

"It is difficult to free fools from the chains they revere" - Voltaire 

Stay tuned!

Sunday 13 October 2013

Credit - The Rebel Yell

"Those who excel in virtue have the best right of all to rebel, but then they are of all men the least inclined to do so." - Aristotle 

While watching the continuation of the US political stand-off, which as we argued last week, turned out to be more of a "False Alarm" than anything else when one takes into account the rally witnessed at the end of the week in most risky assets, we thought we would play with your mind again using a dual reference in this week's chosen title.

The first reference is a music reference from our beloved musically creative 80s period, namely Billy Idol's famous 1983 hit album Rebel Yell as we believe that, when it comes to the debt ceiling and Billy Idol's lyrics from the famous song, in the end, US politicians "in the midnight hour will cry- 'more, more, more' ", when it comes to raising the debt ceiling and issuing more debt in the process.

The second reference is more historical. The rebel yell was a battle cry used by Confederate soldiers during the American Civil War. Confederate soldiers would use the yell during charges to intimidate the enemy and boost their own morale in similar fashion to today's Republicans stand-off, although the yell had many other uses....but we ramble again. 

Some pundits have recently argued that the US government shutdown was a demonstration that the United States of America had never been more divided. On that point we agree with the recent rant of our old friend and mentor Anthony Peters in his column in IFR entitled "On civil wars". This kind of comments on how the United States of America is divided today is utter nonsense:
"Sometimes I feel like screaming. This morning it was a report on the wireless which quoted a newspaper dubbing the US government shutdown as demonstration that the country has never been more divided. I challenge this piece of nonsense on two counts.

The first count is that, as a keen student of the American Civil War (1861-1865) which over four years ended the life of around one in ten of the nation’s male population and which culminated with the assassination of the President, I find it hard in any way to hold up the events of 150 years ago against the petty posturing on Capitol Hill in 2013 and to see any measurable comparisons.

The second is that it is not the nation which is divided but the politicians who eat and sleep pork barrel politics and who do not seem to give a fig for the wellbeing of any citizen who is not a member of their respective parochial electorate.

In fact, if one takes a disciplined approach to American politics, it is not a polarisation of political opinion which is prevalent but a vicious, no holds barred, cat fight for the middle ground which is the cause of much of the current problem. It brings with it one very important question and one which is taxing the minds of both John Boehner, the Republican Speaker of the House, and of the President which is whether ultimate power should be vested in the legislature or with the executive." - Anthony Peters, SwissInvest Strategist.

Therefore in this week's conversation we will discuss the "Rebel Yell" and the US version of the "Scheduled Chicken" for the US Debt Ceiling but also look more into the implications for the future "tapering" stance of the Fed under the new leadership of "Chairwoman" Janet Yellen. 

While in recent years we have been more accustomed to European politicians playing the game of "Scheduled Chicken" on so many occasions that our head hurts, it is interesting to see the contagion spreading to the US with the senseless fear of impeding default. As the wise Lucius Annaeus Seneca" once said:"Every man prefers belief to the exercise of judgment."

As put it recently by Nomura in their recent special report from the 10th of October entitled "US Debt Ceiling: Countdown to Default?", here comes the US version this time around of the aforementioned "Scheduled Chicken":
"As the US government shutdown drags into a second week, the markets are now starting to take notice of the sobering reality that this impasse will most likely go down to the wire. Complicating the situation is the near-exhaustion of the extraordinary measures being used by the Treasury to avoid crossing over the debt-ceiling limit. Given that there is over a week to go until October 17 – the critical cross-over date at which when Treasury cash-flow management becomes less predictable – key aspects of the funding markets are experiencing a more pronounced move than during the 2011 debt ceiling run-up." - source Nomura

More pronounced? At least not in the CDS space.

It was interesting this week to watch the US 1 year CDS surge to 55 bid on the 10th of October before seeing it tighten by 25 bps the next day when the 5 year CDS level was flat at 34 bps on the bid side. So much for default risk...

When it comes to politicians shenanigans, the move seen as of late on the US sovereign CDS space has indeed been much benign than two years ago as indicated by the recent Bloomberg Chart of the Day:
"Investors appear less concerned about the wrangling over the U.S. government’s budget and debt ceiling than they were two years ago, according to Barry Knapp, Barclays Plc’s chief U.S. equity strategist.
The CHART OF THE DAY tracks one indicator that Knapp used to draw his conclusion, presented in an Oct. 4 report: the cost of credit-default-swap contracts that insure against default on U.S. Treasury securities.
Last week’s closing rate of 45.5 basis points was well below a peak of 64.4 basis points in July 2011, the last time the federal debt limit was almost breached, according to data compiled by McGraw Hill Financial Inc.’s CMA unit. Every basis point is equivalent to $1,000 a year for a contract protecting $10 million of debt." - source Bloomberg.

In continuation to the US CDS signals following the "Rebel Yell", Bank of America Merrill Lynch in their note entitled "The declining duration of fiscal concerns" from the 11th of October added the following in relation to volume in the US CDS sovereign space:
"The weekly DTCC data shows a fair amount of trading supporting the widening of CDS spreads on the US sovereign we have seen recently, as 1-year spreads widened to 60bps from less than 10bps. Specifically the net position in CDS increased by about $250mm during each of the past two weeks to about $3.6bn as of last Friday. That corresponds to about a third of the typical trading volume (not changes in net notional) in the most liquid corporate names. As trading volumes most likely exceed changes in net notional, clearly US sovereign CDS contracts have been fairly liquid over the past two weeks and the widening of spreads reflects real risk taking as opposed to a lack of liquidity. Note that the net notional is still dwarfed by what we saw in 2011, while spreads are similar. 
Assuming a 90% recovery in a CDS auction on the sovereign, at 60bps buyers of protection would need to assess a default probability higher than 6% over the next year to expect a profitable trade." - source Bank of America Merrill Lynch

Arguably the "Rebel Yell" has had more terrifying effect on the 1 month TED and in the T-bill volatility space, as displayed by Nomura in their recent special note:
"Stresses have begun to show across various subsectors of the money markets. One need not look further than the extreme moves in the 1m TED spread which inverted this past week (Figure 3). The pressure sitting on the very front end of the T-bill curve remains a function of fear over owning securities that are in the “default window.” The quick spike higher in the front end after quarters of stability is also showing up in the rolling realized vol of 1m T-bills (Figure 4)." - source Nomura

Of course the consequences of the "Cantillon effects" and the surge in all risky asset prices with dwindling liquidity on banks books, have led to consequently much more risk for heightened volatility as illustrated by not only the violent surge in T-bills volatility but no doubt in the spike in 1 month bill yields as illustrated by Bank of America Merrill Lynch in their note from the 8th of October entitled "From financial to fiscal crisis":
"The more idiosyncratic concerns this time about being repaid by US Treasury was highlighted by the huge jump today in 1-month Treasury yields to 34bps, more than double yesterday’s level of 16bps as Treasury sold $30bn of new 1-month bills (Figure 4). Clearly, given the political circumstances, the likelihood of being repaid a 1-month maturity by the private sector may well exceed the likelihood of being repaid by the public sector (though both probabilities are very high). However, in the unlikely event that it really came to a public sector default we doubt the financial sector would continue to outperform – despite banks having finally recovered from the financial crisis - amid potential systemic concerns. Such concerns include liquidity and haircut requirements of Treasury collateral supporting the short term market. This perhaps explains the small spike in FRA-OIS the past two days (Figure 1)."
- source Bank of America Merrill Lynch

After all, it does seem that, courtesy of Central Banks' generosity we do live in a Bayesian world: "For subjectivists, probability corresponds to a 'personal belief'"- source Wikipedia

Like the wise Seneca, we prefer the exercise of judgment. On that sense we agree with the comments from Bank of America Merrill Lynch from their note from the 10th of October 2013 entitled "No Apocalypse Now":
"While we have recently suggested (see "Get CRASHy") that investor behavior is becoming more exuberant, right now there are two factors that we believe reduce the risk of a major market decline in coming weeks.
First, investors have already taken out substantial protection against a sharp debt-default inspired decline in equities in the form of SPX puts and VIX calls.
Second, in a classic debt default crash, the value of equities, bonds as well as the currency is simultaneously impacted. In our view a US apocalypse trade in October would require lower equities (in particular bank stocks), a lower US dollar and higher bond yields. We believe that combination would suggest investors are questioning the credit-worthiness of the US government and/or expecting inflationary consequences of QE4 (i.e. another liquidity policy response by the Fed) and a devaluation of the US dollar. Should the Fed be forced to "extend" or "magnify" liquidity and bond yields rise, in our view risk assets would likely be severly impacted.
Despite the debt ceiling situation, both inflation expectations and interest rates do not appear to be acting in an apocalyptic manner. Aside from a sharp move higher in the 1-month T-bill, fixed income markets have been very well behaved and volatility in both stocks and currencies has been low. And Washington is now piecing together a plan to extend the debt ceiling for up to 6 weeks." - source Bank of America Merrill Lynch

So if you still want to play the "Bayesian subjectivist" here comes from Bank of America Merrill Lynch note, another bout of  "Scheduled Schedule" for you to peruse:
"-As of Monday, October 7th, the Treasury had $35 billion of cash and $92 billion in debt maneuver capacity, giving the government $127 billion in cash to deal with upcoming liabilities.
-October 17th is the date specified by the US Treasury that debt capacity will run out (BofAML estimates that payment capacity will still be $70bn).
-October 31st a $6bn coupon payment is due (BofAML estimates payment capacity at that date will have fallen to $22bn).
-November 1st the payment capacity completely runs out due to large Social Security, Medicare, defense, & veterans payments of $67bn (BofAML estimates only half payments could be made).
-November 15th a further $31bn coupon payment is due and a potential default could then be announced if the debt ceiling is not raised before this date." - source Bank of America Merrill Lynch

Moving on to the subject of the potential "tapering stance" of the new "Chairwoman" Janet Yellen, back in June 2013 in our conversation "Lucas critique" we argued:
"QE tapering"soon? We do not think so. Markets participants have had much lower inflation expectations in the world, leading to a significantly growing divergence between the S&P 500 and the US 10 year breakeven, indicative of the deflationary forces at play".

The divergence between the S&P 500 and the US 10 year breakeven, graph source Bloomberg:

The correlation between the US, High Yield and equities (S&P 500) since the beginning of the year has weakened dramatically. US investment grade ETF LQD is more sensitive to interest rate risk than its High Yield ETF counterpart HYG  - source Bloomberg:

In addition to inflations expectations, shipping has always been for us, the best significant example of the reflationary attempts of our "omnipotent" central bankers. For instance, containership lines have announced 6 rate increases in 2013, but have failed to maintain the momentum because of the weak global economy and the excess capacity which has yet to be cleared in similar fashion to the housing shadow inventory plaguing US banks balance sheet, graph source Bloomberg:
"The Drewry Hong Kong-Los Angeles container rate benchmark fell 5.3% to $1,786 in the week ended Oct. 9, the lowest level since March 2012 ($1,771). This marks the 13th week in 2013 that rates are below $2,000. Rates are about 29% lower than the July 2012 high of $2,519. Even with six increases in 2013, rates are 34.1% lower yoy and down 19.3% ytd, as slack capacity continues to pressure pricing." - source Bloomberg.

Weak global economy, with weak global demand as illustrated by shipping rates as indicated by data from the World Container Index data - source Bloomberg:
"Shipping rates for 40-foot containers (FEU) fell 3.8% sequentially to $1,601 for the week ending Oct. 3, the fourth straight decline, according to World Container Index data.
Weakness continues to be driven by Asia, as rates from Shanghai to Rotterdam fell 7.3%, followed by Shanghai to Los Angeles (down 4.8%), Shanghai to Genoa (4.7% lower) and Shanghai to New York (down 3.2%) routes. Rates rose for Rotterdam to Shanghai (4.7%) and to New York (1.6%)." - source Bloomberg.

While the recent range break-out in the Baltic Dry Index is supposedly indicative of a strong economic rebound, we think the respite is temporary - graph source Bloomberg:

Some pundits as well have become more upbeat on iron-ore freight and scrapping levels as indicated in the below Chart of the Day from Bloomberg depicting fleet expansion versus ships' scrapping. We remain wary given the deflationary forces at play - graph source Bloomberg:
"The biggest rally in iron-ore freight costs since 2009 is prompting shipowners to end the industry’s biggest scrapping program in at least three decades as older vessels bring in more money.
The CHART OF THE DAY shows how rates, in blue, for Capesize ships hauling 160,000 metric tons of iron ore rose to a 34-month high of $42,211 a day on Sept. 25. Scrapping levels are in red.
Owners have paid off debt used to buy older vessels, making them cheaper to run, so they won’t opt for scrapping as long as the rally allows them to profit from the ships, according to Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo. Chinese investment in rail, buildings and infrastructure will rise 20 percent this year, creating demand for another 135 million tons of steel, Shanghai-based Citic Securities Co. says. That would require 200 million tons of iron ore, used to produce the alloy, enough to fill 180 Capesizes, according to Fearnley Consultants A/S, a research company in Oslo. Capesize fleet capacity is up 75 percent since 2008, says IHS Maritime, a Coulsdon, England-based maritime researcher. “Freight rates are expected to return to profitable levels- even for older tonnage,” said Stavseth, whose recommendations on shipping company shares returned 26 percent in the past year.
“This will potentially lead to higher net fleet growth.” World trade in iron ore will grow 6 percent to 1.17 billion tons this year, with China taking two-thirds, according to Clarkson Plc, the biggest shipbroker. Earnings for Capesize carriers sailing to China from Brazil at a $40,000 daily rate assuming a voyage time of 45 days will equate to $1.8 million, spurring owners to keep trading their ships, Stavseth said." - source Bloomberg

We remain wary because we have yet to see a clear reduction in the number of ships being broken-up - graph source Bloomberg:

We remain wary because we have not seen a confirmed rebound in Chinese Iron Ore imports which are correlated to the Australian dollar - graph source Bloomberg:

As displayed in Deutsche Bank weekly Shipping note from the 7th of October 2013, Chinese Ore Inventory remains well below 2012 levels:
- source Deutsche Bank

But there are some improvements in monthly Chinese Iron Ore Imports as indicated by Deutsche Bank:
"August iron ore imports declined by 5.6% m/m, but is still up 7.2% y/y. Given recent chartering trends, we expect to see improved imports in September." - source Deutsche Bank

We have already touched on "the link between consumer spending, housing, credit growth and shipping":
"If there is a genuine recovery in housing driven by consumer confidence leading to consumer spending, one would expect a significant rebound in the Baltic Dry Index given that containerized traffic is dominated by the shipping of consumer products."

The worry for us as of late is that consumer sentiment in the US has fallen in October to a 9th month low making us questioning the strength of the rebound in shipping, as per Ben Schenkel's article from the 11th of October entitled "Consumer Sentiment in U.S. Fell in October to Nine-Month Low":
"Consumer sentiment in the U.S. fell in October to a nine-month low as the government’s partial shutdown and the debt-ceiling debate caused outlooks to sour.
The Thomson Reuters/University of Michigan preliminary consumer sentiment index of decreased to 75.2 this month from 77.5 in September. Economists in a Bloomberg survey projected a drop to 75.3, according to the median estimate.
Households are becoming pessimistic about the economy as the shutdown heads into a third week and the deadline looms for raising the debt limit and avoiding a default. Nonetheless, improved stock values and home prices have lent support to balance sheets, especially for wealthier Americans.
“Since the shutdown began, consumer sentiment has taken a hit,” Brian Jones, senior U.S. economist for Societe Generale in New York, said before the report. “The average person is sensitive to the headlines about the debt ceiling and the adverse impact of a technical default.” Projections of the 68 economists surveyed by Bloomberg ranged from 65 to 80. The index averaged 89 in the five years leading up to the economic slump that began in December 2007, and 64.2 during the 18-month recession that ensued." - source Bloomberg.

This leads us not to believe the Fed will "taper" in 2013. For 2014, we are not too sure either...That's our own "Rebel Yell".

"What is a rebel? A man who says no." - Albert Camus 

Stay tuned!
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