“Let no such man be trusted.”
According to John Meacham (author of Thomas Jefferson: The Art of Power), that was one of Jefferson’s favorite passages from Shakespeare’s Merchant of Venice – the tragic comedy about a man (Shylock) lending to another man (Antonio) for a pound of his flesh.
Thank goodness for Portia – in the end, she reminded Shylock that he must remove Antonio’s “flesh” (not the blood) and warned him that if he went a hair beyond a pound, “Thou diest and all thy goods are confiscate."
Written at the end of the 16th century (between 1596 and 1598), these were some pretty serious times of debate about debt and default. But looking at today’s consensus fear-mongering about Cyprus screwing its depositors, what has changed? Is the world about to end, again?
Back to the Global Macro Grind…
I realize that’s maybe a little too philosophical for the monkey getting whipped around by the futures this morning. As Meacham himself points out, “Plenty of philosophical men live in abstract regions, debating types and shadows.”
But, my friends, behold! “The rarer sort is the reader and thinker who can see the world whole.” (Jefferson: The Art of Power, pg 47) And our risk management duty this morning is not to freak-out Italian Election style; it’s to see the world for what it is, not what Fear-Dwellers who have been getting run-over shorting US stocks for all of 2013 want it to be.
“To be, or not to be”, scared out of your mind this morning - remains the question. Todd Jordan and I took our wives to see Paul Giamatti in Hamlet this weekend so, admittedly, I have the Shakes; please bear with me as you read the Top 3 Most Read on Bloomberg this morning:
- “CYPRIOT OUTRAGE COULD DERAIL EURO-AREA BAILOUT”
- “ASIA STOCKS DROP ON CYPRUS BANK LEVY”
- “GOLD, GERMAN BONDS RALLY ON CYPRUS”
I know, I know – this is some scary stuff. If you’d like to freak-out alongside Old Media (must have crisis for ratings to stop crashing), I have a new hash-tag for you: #EOW (End Of World).
All of this comes after the US Dollar had its 1st down week in the last 6 (one week does not a new intermediate-term TREND make) – so what is a man or woman to do this morning but look at everything else that’s born out of the horror that is Cyprus:
- German and British stocks (after hitting new highs last wk) are down a whole -1% and -0.7%, respectively
- The Euro is actually now up on the session (versus the USD) at $1.29
- Irish stocks are up on the day too
Irish stocks? Yes me friends – ‘twas Saint Patty’s day yesterday. So, if the world is going to end today, have another pint, and smile about it will ya!
To be sure, at some point we will actually see the end of the world (and that day I will not be writing an Early Look), so I don’t want to be too complacent here. But I don’t want you freaking-out at another lower-high for the VIX and higher-low in the US stock market either.
Contextualizing where people are freaking-out from is usually more important than the why (their storytelling) after the correction (it’s called mean reversion, and yes it happens after stocks are up for 10 of the last 11 weeks).
First, here’s the context of Cyprus’ stock market:
- Down -8% in the last month
- Down -16% in the last 3 months
- Down -62% in the last year
Evidently, aside from some Russian money launderers (who don’t do Macro) getting smoked this morning, someone down there in the Socialized South of Europe knew something was going on, for a while now.
Then, there’s the US stock market’s context:
- Immediate-term TRADE overbought line = 1567
- Immediate-term TRADE support line = 1535
- Intermediate-term TREND support = 1486
In other words, with US Equity Volatility (VIX) down another -10.2% last week to a fresh 5-yr weekly closing low of 11.30, the Fear-Dwelling (front-month VIX) is down -41% from the last day you could have freaked right out and sold low (February 25th, Italian Election Day). So you might not want to do that again today. After selling some on green last week, we’ll be covering shorts and getting longer again, on red.
Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000 and the SP500 are now $1, $107.27-110.17, $81.94-83.04, 93.64-97.39, 1.91-2.01%, 10.72-14.47, 938-958, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
- It has been a combination of Credit Standards and Consumer & Business loan demand that have dampened credit creation over the last 5 years.
- Bank Credit policy is reactive and credit availability pro-cyclical as banks will ease credit standards on a lag as demand rises. Demand is rising, credit standards continue to ease and accelerating labor market trends should support further improvement.
- The 1Q13 Senior Loan Officer survey suggests loan growth should begin to accelerate as Commercial & Industrial loan demand picked up sharply, prime residential loan standards continued to ease, and auto & other consumer loan demand accelerated sequentially.
- The confluence of a wealth effect (equity and/or housing), sustained improvement in labor market trends, and accelerating credit creation should continue to support domestic #GrowthStabilization
The chart below shows the velocity of money versus the monetary base and bank excess reserves held at the fed. Policy makers hate that chart as it’s a singularly expressive reminder of a five year exercise in monetary policy string pushing in the face of credit tightening and private sector deleveraging.
Post-Crisis Economic & Policy Redux:
To briefly review the economic dynamics underpinning the above chart: The Fed, through policy initiatives and open market operations, can effectively control the base money supply (ie. Fed prints money --> buys bonds from the banks --> bank reserves increase). What it can’t control is consumer demand for credit or banks willingness to lend.
So, while the Fed can print as much money as it wants in hopes of moderating both an acute shock and a protracted deleveraging, if that money simply sits at the Fed as excess bank reserves, it can’t work to drive credit creation, money turnover (M1 Velocity) or end demand growth. In effect, the Central Banks’ normal monetary policy transmission channel becomes ineffectual and the Fed is largely impotent to counter this dynamic, regardless of the magnitude of easing initiatives – thus, policy string pushing.
The prevailing dynamic characterizing the post-recession period can, perhaps, be most simply understood in the context of the GDP componentry:
GDP = Consumption (C) + Investment (I) + Government (G) + Net Exports (E)
Consumption (C) remains depressed for a protracted period due to employment loss and a secular private sector deleveraging, Investment (I) fails to accelerate because businesses don’t want to ramp spending in the face of slowing/stagnated topline growth, the government (G) faces structural debt/deficit issues and has largely exhausted its stimulus bullets, and Exports (E) can’t get traction because 1. We’re no longer an export economy and 2. because Bernanke’s explicit attempts at currency debauchery have been repeatedly trumped by the safe haven and relative value plays driven by the EU, Arab Spring, and other global economic and geopolitical crises.
With the typical, and most efficient policy transmission channel blocked at two junctures, the implicit, singular policy objectives became to continue to support housing while daring investors, via financial repression and negative real interest rates, to chase risk assets in hopes of re-flating financial assets and inducing the some measure of wealth effect. More or less, this remains the current policy playbook.
If the Fed’s policy initiatives are ultimately successful in jumpstarting consumption and business investment, the trajectory of bank excess reserves should begin to reverse and M1 velocity inflect upwards as aggregate demand and economic activity accelerate. The Fed’s Senior Loan Officer Survey is one measure offering some insight into the directional trend in investment and consumption.
TRENDS IN CREDIT DEMAND & AVAILABILITY:
Anecdotally, the explanations offered for the lack of demand via loan and credit growth in the post-crisis epoch tend to take a binary, mutually exclusive view on credit availability and consumer demand. Many argue that credit growth is bottlenecked exclusively by tighter credit standards and banks unwillingness to lend in the face of existing/rising private sector demand, while others argue the reverse.
In reality, understanding the prevailing trends in Commercial/Industrial, Real Estate, and Consumer Loan activity requires taking a composite view of Bank Credit Standards and Consumer & Commercial Loan Demand. It’s a combination of and interplay between the two that have defined the trajectory of loan growth over the last five years, and both are currently trending favorably.
Generally, Bank Credit policy is reactive and credit availability pro-cyclical as banks will ease credit standards on a lag as demand rises. The combination of Improving economic/labor market trends and easing credit standards feedback on one another and benefit credit growth from both ends during an upswing. Higher employment helps drive organic credit demand while easing credit standards expands the pool of available borrowers. Similarly, improving economic and consumption trends drive both a decrease in corporate credit risk and marginal demand for C&I and commercial real estate loans.
In the context of our view of housing as a Giffen good, the pro-cyclical nature of credit sets up a positive feedback cycle whereby rising demand drives home prices higher which, in turn, drives easing credit standards for residential real estate and a further increase in demand in a virtuous cycle.
Measures of Credit Availability and Demand from the Fed’s Senior Loan Officer survey can provide some insight into trends in consumer and business consumption expenditures. The latest 1Q13 data suggests loan growth should begin to accelerate as Commercial & Industrial loan demand picked up sharply, prime residential loan standards continued to ease, and auto & other consumer loan demand accelerated sequentially.
While trends have been showing positive improvement over the last 4 quarters or so, an acceleration in employment alongside a sustained (& accelerating) housing recovery and some fiscal policy clarity on the other side of the Fiscal Cliff/debt Ceiling/Budget/HealthLaw issues, would serve to further increase consumer and business loan demand and support ongoing credit standard easing. The confluence of a wealth effect (equity and/or housing), sustained improvement in labor market trends, and accelerating credit creation is a factor cocktail capable of perpetuating virtuous economic reflexivity.
The trends are certainly encouraging, but we’d like to see a deceleration in the decline of M1 velocity in print and current credit trends confirm a bit further. We’ll get our next update to the Senior Loan officer survey in April.
Christian B. Drake
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On Friday, the parties to the Department of Justice’s lawsuit seeking to block the merger between Anheuser-Busch InBev and Grupo Modelo requested a stay of the proceedings until April 9th, suggesting to us that the additional three weeks will be sufficient for the ongoing discussions to be completed.
Recall that a stay was originally granted until March 19th – the companies and the DOJ appear to be progressing toward an agreement, but simply needed more time than the original petition to the court allowed.
We suggested an extension of the stay was a likely occurrence in our prior note (“Talks Between the DOJ and Anheuser-Busch InBev ‘Progressing Smoothly’" – March 9th) and view the news on Friday as being entirely consistent with a process that is moving toward a consent judgment.
Both STZ and BUD should react favorably to the likely eventual news that the transaction has garnered regulatory approval, but at this point we see more upside over the medium duration in shares of BUD (ABI BB ordinary).
Have a great week,
HEDGEYE RISK MANAGEMENT, LLC
Takeaway: The latest confirmations of governor and deputy governors of the BOJ is structurally bearish for the yen.
This note was originally published March 15, 2013 at 16:20 in Macro
- The confirmation of Haruhiko Kuroda, Hiroshi Nakaso and Kikuo Iwata as governor and deputy governors of the Bank of Japan (BOJ)is structurally bearish for the Japanese yen. Much like consensus had become numb to high inflation and economic volatility in the US during the 1970s, consensus has become equally as numb to deflation and no growth in Japan over the past approximately 20 years. Former Fed chief Paul Volcker’s aggressive hawkishness changed the US’s circumstances in the early 80s; we expect Kuroda & Co. to attempt to do the same in Japan (only via aggressive dovishness) in the months and quarters to come.
- All told, we remain the bears on the Japanese yen vis-à-vis the US dollar and expect further material depreciation over the intermediate-term TREND and long-term TAIL. Much like the Chavez’s Venezuela and the Weimar Republic before it, we also expect Japan’s currency-debasing Policies To Inflate to continue inflating the Japanese equity market as well.
- And if the dollar-yen trade has indeed run its course (the dollar-yen cross is up nearly 24% since we authored this thesis on September 27 of last year) and we’re just totally wrong on the yen from here because the BOJ likely disappoints what are admittedly elevated market expectations, then there’s over -31% downside from today’s closing price to the November lows in both the Nikkei 225 and TOPIX indices – markets that have become stapled to ski lifts on int’l flows and policy hopium. It should be duly noted that the broad balance of Japanese high-frequency economic data and growth expectations remain squarely in the dog house.
After weeks of media speculation, parliamentary deliberation and general consternation, the candidacies of Haruhiko Kuroda (Governor), Hiroshi Nakaso (Deputy Governor) and Kikuo Iwata (Deputy Governor) were approved by Japanese parliament and are poised to officially take over the BOJ on March 20. NOTE: Kuroda will have to reappear in front of the Diet again in early APR to secure “official” approval for his five-year term as a result of Shirakawa’s early exit; he’s got the highest parliamentary approval rating of all three, so we expect little-to-no hiccups there.
JAPAN’S “INVERSE VOLCKER MOMENT”
As long as the LDP has its heart set on taking the Upper House via election in late July and “5% monetary math” (+2% inflation and +3% nominal growth) at the core of the Abe administration’s economic agenda, it would be a fool’s folly to sit here and expect that BOJ isn’t poised to “do whatever it takes” (per Draghi and, now, Kuroda) to achieve those goals – at least the latter of the two.
Much like consensus had become numb to high inflation and economic volatility in the US during the 1970s, consensus has become equally as numb to deflation and no growth in Japan over the past ~20 years. Paul Volcker’s aggressive hawkishness changed the US’s circumstances in the early 80s; we expect Kuroda & Co. to attempt to do the same in Japan (only via aggressive dovishness) in the months and quarters to come.
The following chart shows just how much of an economic phase change the Abe administration is trying to perpetuate in Japan. He’ll need – or, more importantly, he thinks he’ll need – a lot of “CTRL+P” from the BOJ to get there.
To the extent they do not make material progress in working towards those targets, however, we expect to see a marked acceleration of both external and self-imposed political pressure upon the holdovers on BOJ board to step up and embrace change – with the threat of a reduction in the central bank’s autonomy currently imposed by the 1998 BOJ Act always hanging in the background.
CONSENSUS STILL DOESN’T GET IT
In a research note on Monday, we detailed exactly why we think consensus among the buy side, the sell side and Japanese corporations is not even in the area code of being bearish enough on the Japanese yen. In that vein, this morning, former MOF official Eisuke Sakakibara (known as "Mr. Yen" during his tenure) was out making the case that the USD/JPY cross won’t breach 100 – despite the aforementioned phase change in Japanese monetary policy.
What people like Mr. Sakakibara are missing is that the BOJ now has the baton as it relates to being the most aggressive DM central bank. Currencies crosses are inherently relative, so as Japan accelerates its easing measures, keep in mind that the US will be doing the exact opposite – both fiscally and monetarily – as #GrowthStabilizes in the good ol’ U-S-of-A.
And if the dollar-yen trade has indeed run its course and we’re just totally wrong on the yen from here because the BOJ likely disappoints what are admittedly elevated market expectations, then there’s over -31% downside from today’s closing price to the NOV lows in both the Nikkei 225 and TOPIX indices – markets that have become stapled to ski lifts on int’l flows and policy hopium. It should be duly noted that the broad balance of Japanese high-frequency economic data and growth expectations remain squarely in the dog house.
All told, we remain the bears on the Japanese yen vis-à-vis the USD and expect further material depreciation over the intermediate-term TREND and long-term TAIL. Much like the Chavez’s Venezuela and the Weimar Republic before it, we also expect Japan’s currency-debasing Policies To Inflate to continue inflating the Japanese equity market as well.
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