I did have some plans to do a series of posts to give a brief overview of my main macro and trade themes for 2011, but time has, not surprisingly, caught up with me. As such, you will have to make due with a special version of random shots.
Risky Assets to fly in 2011? – This one is a bit too general to answer in full of course, but one interesting discourse that has emerged lately is that as bond vigilantes are feasting on the Eurozone (and even going for an alltogether larger prey in the US), investors are being pushed into equities.
Following a well worn cliché in the world of finance, equities is the least ugly alternative.
Now, this may only be a working explanation on the surface since the underlying move into equities is also part of a more structural consequence of QE2 since the Fed is not only trying to move investors around on the yield curve, they are also trying to move them out of the curve alltogether and into more risky alternatives. In this sense, what appears to be a melt up in equities might just be a slow but steady excess liquidity driven grind. Surely, Bernanke is in no rush to raise interest rates in 2011 and if the US economy continues to slowly heal, there will be only speedbumps ahead of a general trend upwards. One interesting thing here will be how the market reacts to even the slightest hawkish tone from the Fed or perhaps even a downtoning of the dovish stance. I think; not all too well but precisely because of this assumption (which I think many share with me), the Fed will remain uber dovish as far ahead as the eye can see.
Technically, I think the melt up towards the end year is in for a rude stop in the beginning of the year and I have the SP500 declining to about 1180-1190 in January. This would then provide a potentially tasty entry point for a 2011 rally. Other than a veritable cataclysm in the Eurozone (which appears the main source of systemic risk at the moment) and China suddenly slamming on the breaks in an unduly harsh manner, I see little resistance for risky assets in 2011. This is especially the case as the BOJ and the ECB will likely add their interpretation of “QE2″ to the table to respond to the ongoing sluggishness of their respective economies.
We have already gotten a barrage of 2011 predictions and outlooks from research houses, banks and other financial sages and quite frankly it is quite difficult to get a bearing on it all. I did find the Barclay Macro survey quite interesting though as it shows that about 70% of all investors see risky assets in the form of commodities and equities to outperform in 2011 while US treasuries will underperform. The underlying rationale is again quite simple I think. Given the severity of the crisis, monetary policy will tend to apply the brakes with a considerable lag and if 2010 saw the first signs of the effect of such a lag, 2011 could give us the full force. Again, this is especially important to note as the ECB and the BOJ might just be about to join the party.
On the other hand, “underperforming treasuries” will also present Bernanke with a dilemma in the sense that the extent to which the infamous bond vigilantes fancy more than a pot shot on US bonds he may be forced to apply even more pressure to keep yields low.
Low Growth in the OECD – This one is hardly news and hardly one exclusively for 2011 either. However, I still think there is a lack of recognition of just how low growth in the OECD is likely to come in for the coming years. In this way and just as investors have their focus set on outperformance in Asia and Latin America, I think that the ultimate growth outcome in the OECD will be worse than the market currently expects.
The point I am basically getting at is that we need to think about the fact that the Eurozone periphery essentially are going to be hampered by negative trend growth rates and that the rest of the OECD will be dependent on exports to grow (think mainly Germany, Japan and now also the US). Apart from any productivity miracle or some other exogenous source of growth, the growth engines in the OECD are simply tapped out. Indeed, this is probably the most important structural macro theme for me at the moment.
Now as for 2011, a lot of this will also depend on whether economies really intend to walk the walk in terms of fiscal tightening or whether they are simply talking. Clearly, countries under the spotlight in the form of the Eurozone periphery will see their growth rates severely dented by the need to consolidate public finances. In the US on the other hand, I think the latest estimate for the 2011 budget deficit is 10% of GDP which is hardly tight.
According to the IMF’s latest forecasts “Advanced Economies” will be running a deficit on the structural balance to the tune of 5% in 2011 and the G7 as a whole one of 5.88%.
But all this only goes to accentuate the issue since if there is one thing we have learned by now it is that one cannot borrow ad infinitum and especially not as you are essentially borrowing against a depreciating asset in the form of future growth held down by population ageing. So the big (as in biig!) question is; if you substract the 5% government spending induced deficit from the equation what kind of trend growth rate is left in the OECD as a whole?
Clearly, we know that some economies are now basically saddled with negative trend growth rates, but I think that even the aggregate number in advanced economies would be scary reading. We could call this decoupling in reverse and thus how vulnerable we now are to the continuing growth spurt of Asia and other so called emerging economies. But in the end, it is a basic question of not having any more components of the national identity to lever up as it is obviously clear that governments are only going to find it increasingly difficult to borrow (even in the case of very generous central banks).
Indeed, as we move forward I see this low growth environment for the OECD (and actual negative trend growth in some economies) as one of the main components in my call that we are going to see some spectacular and costly sovereign defaults in the OECD edifice going forward. On this, I think the current mess in the Eurozone is only the beginning.
The Euro and the Eurozone - Actually, I have not followed FX a lot lately so I am a bit out of form here, but I still use my Old Maid metaphor when thinking about big global currency movements and intra G3 movements especially. Interestingly, 2010 saw the JPY as a loser and thus holder of Old Maid in the sense that it appreciated significantly against the USD and Euro. In essence, the USD was being held down by the Fed’s policies and the Euro actually acted as a nice buffer against the crisis in the Eurozone as it fell strongly throughout the spurts of Eurozone tension in turn providing a much needed boost to external competitiveness when it was needed the most.
In principal, these trends do not stop at year end and will continue to dominate at least part of the intra G3 movements in 2011. The main question is what kind of bazooka, if any, the BOJ will pull out to revive the ailing Japanese economy. If it becomes the kind of shock and awe many are expecting we could be into a nasty long squeeze in the JPY. This also goes for the Euro in the context of the ECB being forced, kicking and screaming, into supporting Eurozone bond markets. I hold this to be almost given since the current setup simply does not work.
Today, Trichet called for more bold action on the fiscal front and in terms of capitalising the stability front (didn’t he just tell them to tighten their belts?). This is no doubt part of a futile attempt to preempt any defacto query, to the ECB, by part of the EU on taking an active and open role in the bailout. Trichet and his compadres are not going to like it, but the alternative of asking Italy and Greece to pay for the bailout of Spain who in turn helped finance Greece and Ireland is simply hogwash.
As I have noted on several occasions; should the issue turn out to be contained with Greece, Ireland and Portugal the fiscal solution/stability fund would suffice, but evidently we are looking at a much more structurally problematic issue and Spain is surely next in line and even yields on German and Belgium bonds have begun to break loose. As such, it is becoming increasingly clear that the ECB will have to take a more active part beyond “simply” supplying liquidity to the banking system and buying bonds on the drip (or covertly).
I tend to have little opinion on the EUR/USD in general, but I will timidly forward the idea that we can expect the ECB to surprise with some of open support to the periphery, it should provide some pressure on the single currency. Yet, it is also fair to assume that the extent to which risky assets fly in a bath of excess liquidity the USD will depreciate and the Eurozone will gain on carry flows as interest rates are still higher in the Eurozone (especially, if things get so calm that the ECB starts turning hawkish again, but this may be selfdefeating in itself of course).
Emerging Markets – Well, the EM story is important enough to merit its own section even if it is intimately tied to the risky asset story. Yet, there is no need to re-invent the wheel and in this sense I think that Morgan Stanley’s Manoj Pradhan’s recent note on the 2011 EM outlook is pretty much accurate in all the important areas.
Especially his first point is important on structural outperformance by the EM relative to the developed world whereas 2011 should see EM growth cooling and, hopefully, growth in the developed world nudging up. As such, 2011 will see relative outperformance by developed markets. This is a bold, but also astute, call. It is bold because I think the link between the EM and DM is still too strong to see DM growth decouple entirely for a relative slowdown in emerging markets. In this sense, how far and how fast monetary policy in emerging markets are tightened in response to fears of overheating will be key. It is astute because, all things point in the direction of a slowdown in the emerging world after a breakneck 2009 and 2010 and in this sense, on the margin, perhaps the developed world is the place to be in 2011 on a tactical basis.
I also like that he spends some time on the inevitable, but important, process of rebalancing away from a reliance of an overlevered Anglo-Saxon consumer in the OECD (and of course, a now cracked Eurozone periphery). Reverse decoupling and rebalancing towards the emerging markets are two of the main global discourses and real economic drivers at the moment.
Finally, I think it is also important to re-emphazise the basic problems emerging markets face as they try to cool their economies through higher interest rates only to allow more hot money flowing in. The policy mixture is obviously being developed as we move along with some form of capital controls being implemented across the board. In a world of structural excess liquidity this policy dilemma becomes an additional issue on top of the more traditionally discussed trilemma.
As such, I am large cautious on the emerging markets going into 2011 as I think they are overloved, but the long term bull call stands uncontested. In addition, there appears to be general acceptance and expectation that key emerging economies (China most notably) will react strongly to any lingering signs of overheating and just as Bernanke might not care that his low interest rates will fuel asset bubbles far from the shores of the US, so may Chinese policy makers care very little if they have to slam on the brakes to the detriment of global growth and OECD’s recovery.
Originally published at Claus Vistesen’s Blog and reproduced here with permission.
42 Responses to “Random Shots – 2011 Musings Edition”
4716031 beers on the wall.
I’m really impressed with your composing skills as well as using the layout on your weblog. Is this a paid theme or did you customize it yourself? Anyway keep up the nice good quality creating, it’s rare to see a great blog similar to this an individual today..
An intriguing discussion is worth comment. I believe that you need to write more on this topic, it might not be a taboo subject but typically men and women aren’t enough to speak on such topics. To the next. Cheers
Full Moon Party Thailand…
[...]below you’ll find the link to some sites that we think you should visit[...]…
היי חשבתי ךהודיע על דף אינטרנט בתחום קידום אתרים בגוגל. באתר האינטרנט ניתןלצפות באינפורמציה העוסק קידום אתרים בגוגל.
Cheap Thailand Holidays…
[...]the time to read or visit the content or sites we have linked to below the[...]…
Fashion Courses Online…
[...]we like to honor other sites on the web, even if they aren’t related to us, by linking to them. Below are some sites worth checking out[...]…
Excellent browse, I merely passed this onto a colleague who was doing a trifle research on that. And hubby really bought me lunch as a result of I found it for him smile therefore well then , ill rephrase that: thanks for lunch!
I’ve been absent for some time, but now I remember why I used to love this blog. Thanks , I will try and check back more often. How frequently you update your site?
I’m curious to find out what blog system you’re utilizing? I’m experiencing some minor security problems with my latest website and I would like to find something more safeguarded. Do you have any suggestions?
you’ve an amazing weblog here! would you prefer to make some invite posts on my blog?
I don’t know whether it’s just me or if perhaps everyone else encountering problems with your blog. It seems like some of the written text on your content are running off the screen. Can somebody else please provide feedback and let me know if this is happening to them too? This may be a issue with my browser because I’ve had this happen before. Cheers
Congratulations for posting such a useful blog. Your blog isn’t only informative but also extremely artistic too. There usually are extremely couple of individuals who can write not so easy articles that creatively. Keep up the good writing !!
It is a remarkably amazing powerful resource that you’re offering and you just provide it away cost-free!! I comparable to discovering websites of which understand the particular valuation on offering you an excellent learning resource for zero cost. We truly dearly loved examining these pages. Love!
You’re the best, are you looking for real estate in Casselberry, FL? Learn where the deals are, get foreclosure lists and find houses for sale in Winter Park.
היי אני רוצה להמליץ לכם על חברה בתחום מכירת רכבים המתמחה בשרותי טרייד אין לסוכנויות רכב ולקוחות פרטיים . באתר, מידע רב המלווה בתמונות מכירת הרכבים ורשימה המתעדכנת באופן שוטף עם הרכבים הנמצאים במקום ומיועדים למכירה.
Hi there! I know this is kinda off topic but I was wondering if you knew where I could locate a captcha plugin for my comment form? I’m using the same blog platform as yours and I’m having difficulty finding one? Thanks a lot!
A person consists of the nature associated with money back guarantee and the alternative involves Online world hoaxes.
I really appreciate articles on your site. You’re doing a fine job! Thanks a lot. :)
Hiya clever points.. now why did not i consider these? Off topic slightly, is that this web page pattern merely from an bizarre installation or else do you utilize a personalized template. I exploit a webpage i’m looking for to enhance and effectively the visuals is likely one of the key issues to complete on my list.
I’m not sure exactly why but this blog is loading very slow for me. Is anyone else having this problem or is it a issue on my end? I’ll check back later and see if the problem still exists.
I’ve not too long ago started a weblog, the information you provide on this web site has helped me tremendously. Thank you for all of your time & work.
I picture this could be diverse upon the written content? having said that I nonetheless believe that it could be suitable for just about any form of matter subject matter, as a result of it would steadily be gratifying to resolve a heat and pleasant face or perhaps pay attention a voice while initial landing.
Great post, I just stumbled your weblog and wanted to say that I’ve truly enjoyed browsing your blog posts. I have subscribed to your feed and I hope you write again very soon!
Hey there just wanted to give you a quick heads up and let you know a few of the pictures aren’t loading properly. I’m not sure why but I think its a linking issue. I’ve tried it in two different web browsers and both show the same outcome.
Can’t wait for your next post. Thank you!
I enjoyed your article.Great Topic. http://bailbondsdoc.com/
Many thanks for creating the effort to talk about this, I feel strongly about this and enjoy studying a great deal more on this matter. If possible, as you gain knowledge, would you mind updating your weblog with a great deal more details? It’s really helpful for me.
The tips you provided here i will discuss extremely precious. It turned out this type of pleasurable surprise to possess that looking forward to me after i awoke today. They’re constantly to the issue and easy to comprehend. Thanks a bunch for the valuable ideas you’ve got shared listed here.
Thanks for making the sincere attempt to talk about this. I feel very strong approximately it and want to read more. If it’s OK, as you achieve extra intensive knowledge, might you thoughts including more articles similar to this one with additional info? It would be extraordinarily useful and useful for me and my friends.
Many thanks for sharing this great post. Very interesting ideas! (as always, btw)
Great article, I’ve bookmarked this page and have a feeling I’ll be returning to it frequently.
Fuck, my food was over-cooking, u have to be dead not to smell it…..0_0 GMA!!!!!|Riah90|
Great post, It’s posts like this that keep me coming back and checking this weblog regularly, thanks for the info!
I like this A New style boy Thank you very much . Good bye friend
Hello, I just hopped over for your site by means of StumbleUpon. No longer something I’d usually learn, however I preferred your emotions none the less. Thanks for making something price reading.
Whoah this weblog is excellent i like studying your articles. Keep up the good paintings! You understand, lots of people are hunting round for this info, you can aid them greatly.
There are several interesting points in this posting but I don’t know if I agree with every one of them. There is some credibility but I am going to hold my thoughts and opinions until I investigate it in depth. Fine piece, thanks and i want more! Added to FeedBurner as well
I really like your blog.. very nice colors & theme. Did you make this website yourself or did you hire someone to do it for you? Plz answer back as I’m looking to construct my own blog and would like to find out where u got this from. thanks
Thanks, beautiful weblog with great informational content. This is a really interesting and informative content.
Can’t wait for your next post. Thank you!
I’m not sure exactly how I discovered your blog because I had been researching information on Real Estate in Lake Mary, FL, but anyway, I have thoroughly enjoyed reading it, keep it up!