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General Macro Observations

Discussion in 'Business, Investment and Economics' started by DeepState, May 31, 2014.

  1. CanOz

    CanOz Home runs feel good, but base hits pay bills!

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    This is a great chart Syd, can you re-post in the International Markets thread? Also can you give the source and / post the update every a Qtr?
     
  2. sydboy007

    sydboy007

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    http://blogs.telegraph.co.uk/financ...-debt-ratios-poised-to-breeze-past-us-levels/

    The ratio has risen by 100 percentage points of GDP over the last five years. As Fitch has argued out in the past, this is more than double the rise seen in Japan over the five years before the Nikkei bubble burst in 1990, or in the US before subprime blew up in 2007, or in Korea before the Asian financial crisis.

    It is the speed of the rise that worries credit rating agencies and regulators – including many at the Chinese central bank – as much as the volume itself. Though China is scary on both fronts. It has pushed debt to $26 trillion, more than the entire commercial banking systems of the US and Japan combined. The scale obviously has global ramifications.
     
  3. DeepState

    DeepState Multi-Strategy, Quant and Fundamental

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    A view from FT on the above:

    2014-07-23 10_24_46-FT China Credit.png
     
  4. sydboy007

    sydboy007

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    Yeah, I don't see the crisis as being similar to the GFC, more it's just going to cause their rate of growth to stagnate for a very long time. Zombie loans will eventually crowd out productive loans. How fast that occurs depends on how much can kicking the Govt undertakes. japan seems to paint a likely future for China unless they undertake fundamental reforms, and write off large licks of debt (unlikely).

    The fact the central bank is continuing to loose a lot of money on it's FOREX reserves - assets mainly in USD and liabilities in CNY - that supposed strength is actually slowly turning into part of the problem. If their CNY convertibility deals with other BRICS helps to see the USD lower then it's as much a boone as bust for them too.

    We do live in interesting times.
     
  5. sydboy007

    sydboy007

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    I find Gail Tverberg to be an interesting, though worrying, writer to read

    http://ourfiniteworld.com/2014/07/23/world-oil-production-at-3312014-where-are-we-headed/

    Thus, we cannot expect decline to follow a bell curve. The real model of future energy consumption crosses many disciplines at once, making the situation difficult to model. The Reserves / Current Production model gives a vastly too high indication of future production, for a variety of reasons–rising cost of extraction because of diminishing returns, need for high prices and taxes to support the operations of exporters, and failure to consider interest rates.

    The Energy Return on Energy Invested model looks at a narrowly defined ratio–usable energy acquired at the “well-head,” compared to energy expended at the “well-head” disregarding many things–including taxes, labor costs, cost of borrowing money, and required dividends to stockholders to keep the system going. All of these other items also represent an allocation of available energy. A multiplier can theoretically adjust for all of these needs, but this multiplier tends to change over time, and it tends to differ from energy source to energy source.
     
  6. sydboy007

    sydboy007

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    If the below is enacted by the Eu and USA it will have a major impact on the Russian economy. I'd nearly call it economic war in terms of the potential impact.

    http://blogs.telegraph.co.uk/financ...to-shut-russia-out-of-world-financial-system/

    Here are a few extracts.

    Russian companies and financial institutions are heavily dependent on EU capital markets:
    Between 2004 and 2012 a total of USD 48.4bn was raised through lPOs in the EU by companies incorporated in Russia. Out of those, USD 15.4bn was issued by state-owned financial institutions.
    ln 2013, 47% of the bonds issued by Russian public financial institutions were issued in the EU's financial markets (€7.5bn out of a total of €15.8bn).

    Restricting access to capital markets for Russian state-owned financial institutions would increase their cost of raising funds and constrain their ability to finance the Russian economy, unless the Russian public authorities provide them with substitute financing. lt would also foster a climate of market uncertainty that is likely to affect the business environment in Russia and accelerate capital outflows.

    With regard to the scope of the restriction, the measure would consist in prohibiting any EU persons from investing in debt, equity and similar financial instruments with a maturity higher than 90 days, issued by state-owned Russian financial institutions after the entry into force of the restrictive measure anywhere in the world. lt would also be prohibited to provide investment services and any service in relation to the admission to trading on a regulated market or trading on a multilateral trading facility with regard to the same financial instruments.
    With regard to the entities targeted, the measure would target Russian state-owned credit institutions (banks with over 50% public ownership), as well as development finance institutions.

    The prohibition would extend both to primary markets (first issue) and secondary (subsequent trading) market of the newly issued Russian securities. Existing shares and bonds would not be covered. Transactions other than those mentioned before with the targeted entities would remain possible, Russian companies and financial institutions are heavily dependent on EU capital markets:

    lmpact on Russian investors would consist in sharply increased costs of issuance, even if eventually alternative financing sources in third markets could be found.

    Substitution would not be easy in the short term. Even if not caught by EU sanctions, third-country investors will likely be unwilling to participate in new issuances by targeted entities or demand significantly higher yields. This would push companies to seek State financing as a stopgap, further straining the government's budget.

    The efficiency of the measure strongly depends on co-ordination with the US. EU and US investors constitute the major portion of market participants investing or assisting the investment in these financial instruments and their venues are the major hubs for issuance.

    Other jurisdictions such as Switzerland, Singapore, Hong Kong or Tokyo would only provide significant substitution capacity over time, but they could not fully compensate for the loss of EU and US investors.
     
  7. DeepState

    DeepState Multi-Strategy, Quant and Fundamental

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    This has tones of the formation of the Eurodollar market. Regulatory arbitrage is a specialty of markets and a cottage/city industry exists. EU and US investors, possibly via hedge funds and other secretive intermediaries which are established outside of US and EU jurisdiction, would suddenly find the interest rates offered on wholesale deposits in third nations offers very nice opportunities for Euro and USD denominated investments. What happens after that is plausibly denied. If desired, the paperwork to achieve this kind of outcome can be drafted and signed in days. The infrastructure already exists. I suspect that Russia will get its hands on plenty of hard currency. The lawyers and bankers will already have met to discuss contingencies. The volume involved is a drop in the world financial ocean.

    For every measure there is a countermeasure. It is an interesting escalation nonetheless.
     
  8. sydboy007

    sydboy007

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    Could be part of the reason why the department stores and harvey norman are having such a hard time.
     

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  9. sydboy007

    sydboy007

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    not sure if this is a repeat of pre GFC??

    http://www.zerohedge.com/news/2014-08-01/suddenly-wall-street-bailing-housing

    Among this week's most notable moves was the decompression of high-yield credit spreads to near 9 month wides (and continued outflows). What went notably-under-reported by the mainstream media, however, was an even bigger selloff in US mortgage bonds. While JPMorgan is unable to see "any fundamental reason" for the plunge in prices, the worrying indication from the magnitude of the drop relative to volumes is that liquidity has evaporated. As

    Bloomberg notes, with dealer inventories sold down (due to new regulations that make repo and agency securities unpalatable), they have no way to 'smooth' the selling when investors want to exit positions. Weakness of this magnitude when the 10Y gained only 2bps on the week is a big wake-up call that traders are looking for the exits from housing debt and the door is very narrow.
     
  10. sydboy007

    sydboy007

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    how long can the household debt binge and bank profit chow down continue?
     

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  11. DeepState

    DeepState Multi-Strategy, Quant and Fundamental

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    Bank share prices have more or less moved in line with EPS, with PE contributing little to the variation of the stock price over recent years.

    The chart you have shown in relation to household debt to income is interesting. The more recent divergence reflects more favourable wholesale funding availability and, maybe, growth in lending outside of that through households. I'd need to check. Yes. Credit growth has increased for Non-Financial corps from shrinking in the period mid-2009-mid 2011 to slightly above the growth rate of households since early 2012.

    It would appear that debt to income has hit a ceiling. That's with debt interest burdens at low levels of interest. Further, it is clear that banks are yield plays also. As non-mining growth picks up, there will be a balance between who get the benefit - capital or labour. If labour gets a big chunk, incomes will grow and as will borrowing capacity. If successful, corporate lending should also expand. Both of these are constrained by the interest rates actually payable.

    It is likely that interest rates will stay subdued with forward curves not indicating anything revolutionary on that front. I guess that means that this show still has a bit to run without requiring PE expansion to support the story.

    Risk factors:

    + inflation breaks to the upside due to inflexibility at key junctures and rates rise before growth in non-mining takes hold...downside
    + AUD falls, inflation rises but it washes through, not requiring a policy response...upside
    + ECB TLTRO outcome..impacting funding costs...depends.

    plenty more...
     
  12. sydboy007

    sydboy007

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    http://pensionpartners.com/blog/?p=602

    We are now over seven months into the year and while investors remain highly bullish the average U.S. stock is down on the year. You read that word correctly: down. The cap-weighted S&P 500 has been masking underlying weakness for the entire year. The median total return of stocks in the Russell 3000 is actually -1.7% in 2014.

    In addition, in spite of the “rising rate environment” talk, we’ve actually seen a persistent decline in interest rates for the entire year, with the 30-year Treasury Bond yield moving from 3.9% to 3.2%.


    The second graph shows the importance of rebalancing your portfolio. Last years dogs can make a tasty new years breakfast /sic
     

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  13. sydboy007

    sydboy007

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    US centric, but I'm sure others are like myself with some exposure to the US market.

    Quite a few interesting graphs

    http://www.businessinsider.com.au/stock-buybacks-and-stock-prices-2014-8

    One big source of demand for stocks in recent years has come from companies buying back their own shares. These buybacks have not just provided extra demand ”” they have decreased the total supply of shares available. So the buybacks have shifted the supply-demand balance and helped drive stock prices higher.

    All these buybacks, which have ranged between $US75 billion and $US159 billion a quarter for the past four years, have provided a steady flow of demand for shares. As the chart below shows, the buybacks have not been offset by new share issuance, so they have modestly reduced the total supply of shares available for S&P 500 companies. The number of shares outstanding is now lower than it was back in 2005, almost 10 years ago.

    One important point in the charts above is that corporations usually make the same mistake in buying back their own stocks that many investors make: They buy most aggressively late in bull markets when stocks are about to fall. And then they stop buying when prices plunge and their shares are actually cheap. In so doing, in other words, they squander shareholder capital.

    So now the question is… How long will corporations keep buying back stock at current or ever-increasing levels? Will this source of demand continue?

    One way to begin to answer that question is note where the money to buy back stocks is coming from.

    Some of it is coming from the companies’ operating cash flow. .., American companies have had high cash flows over the past several years. (It’s worth noting, though, that these cash flows have not increased for the past few years).

    Another big source of cash for buybacks, however, has been debt. ..., companies have been borrowing like mad in recent years. And they have been using lots of the cash they borrow to buy back their stock.

    In other words, corporations have borrowed so much money, in part to buy back their own stocks, that they are “levered” to the gills.

    What is the maximum debt load that corporations can carry relative to the size of the economy?

    No one knows. For all we know, we’ve already exceeded it.

    What is clear is that debt capacity depends in large part on interest rates. When rates are very low, as they have been for the past 5 years, corporations (and people) can support much more debt than they can support when interest rates are high.
     
  14. sydboy007

    sydboy007

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    http://gregormacdonald.tumblr.com/post/93965564740/global-oil-production-falters-once-again

    Global oil production ex-US is actually lower now at 68.612 mbpd than it was more than six years ago, when it was tracking at 68.935 mbpd in 2008. US oil production now accounts for 10.6% of total global production. More poignant is that global oil production ex-US is also in short-term decline, compared to its high in 2012. Both annual data (shown here) and the monthly data support this trend: the rest of Non-OPEC and even OPEC remain quite stagnant, and unable to make any further supply response to today’s higher price of oil. | see: Global Oil Production mbpd- Ex-USA (white) | USA (red) 2008-2014.

    As previously discussed in TerraJoule.us, the oil and gas industry as a whole has had a very difficult time achieving profit-growth, even in a time of repriced oil. EIA Washington spoke to this issue just recently, in their Today in Energy: As Cash Flow Flattens, Major Oil Companies Increase Debt, Sell Assets.

    Although US oil production has started to hit 8.5 mbpd on a monthly basis recently, TerraJoule.us in this month’s issue, The New Dependency on US Oil, is forecasting that total US production is not likely to rise past 9.5 mbpd on an annual basis. With better global growth slated for 2015 as the Non-OECD economies start to strengthen, the lower pace of US oil production growth will form a major piece to the next oil repricing cycle. 2015 will bring, therefore, the first phase of this repricing, as oil makes a strong, initial move off the $100 level. Oil should respond to a slowdown in US production late in 2014, and could hit a high of $115 to $120 next year.
     
  15. McLovin

    McLovin

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    Big jump in unemployment from 6% to 6.4%. Victoria has hit 7%.
     
  16. sydboy007

    sydboy007

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    http://www.businessinsider.com.au/mergers-and-tax-inversion-trend-fall-apart-2014-8

    On Tuesday, more than $US100 billion worth of proposed mergers was withdrawn as Fox pulled its bid for Time Warner and reports said Sprint won’t make an offer for T-Mobile.

    Additionally, Walgreen announced that it would acquire the remaining stake in European pharmacy chain Alliance Boots it doesn’t already own, but as part of the deal the company won’t move its tax base overseas in a tax inversion deal.

    On Monday, we highlighted commentary from Jonathan Krinsky of MKM Partners who wrote that for the last year and a half, the market has been effectively “crying wolf” at every small decline by quickly recovering any losses and again moving higher.

    Krinsky said that now, the wolf may finally be coming.

    In an environment where investors seem to be looking for an excuse to sell stocks, the breakdown of two powerful corporate trends might be enough to really spook the market.
     
  17. qldfrog

    qldfrog

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    is anyone surprised?
    And who will now agree that rates will actually fall here?
     
  18. McLovin

    McLovin

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    There's been a change in the definition of looking for work, which probably explains the rise.

    Pp 6-8.

    http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/E90D34FDE03092E5CA257D2C001244E7/$File/62020_jul%202014.pdf
     
  19. CanOz

    CanOz Home runs feel good, but base hits pay bills!

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    A little technical stuff for the macro thread, timing seems right...

    How you’ll know if it’s time for a market crash

     
  20. DeepState

    DeepState Multi-Strategy, Quant and Fundamental

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    1.Agree that the rise in unemployment was partly due to the change in participation rate, but I cannot tell if this would have happened anyway or was driven by change in definition. ABS does not think it had much impact on the participation rate figure, but small variations there impact unemployment. The market reacted adversely to this on the headline, but I am puzzled. Hours worked was up 0.9% sa. and there was a healthy move from part-time to full time employment. So the underlying is alright but it doesn't show through to the employment figure quite yet.

    2.The market was somewhat surprised. The 1 year yield didn't move much because the RBA is expected to hold rates steady for a year. The two and three year bond yields each declined by 7bps. That's a move of some note and more or less implies that the chances of a rate rise in 2 years time has moved from near certainty to unlikely. Looking out three years, rates have moved from implying an additional 25bps rise and the further ~25% of a second tightening to less than a 50% chance of a single rate rise of 25bps. In other words, we are looking at a flat RBA official rate for at least the next three years.
     
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