It's BAD, it's STILL very bad REPRISE thread (13 months on)

It's BAD, it's STILL very bad REPRISE thread (13 months on)

Author
Discussion

Fittster

20,120 posts

213 months

Thursday 16th October 2014
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Thought I'd dust this off.

(Although the predictions of QE leading to hyper inflation don't seem to have come true. Wonder if any gold bugs will come out of the wood work).

jonah35

3,940 posts

157 months

Thursday 16th October 2014
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Certainly a lost decade if not a lost generation.

loafer123

15,440 posts

215 months

Thursday 16th October 2014
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Low inflation, low interest rates and low unemployment...not exactly awful.

I know that the lack of wage growth, high debt levels, deficits etc aren't good, but it is certainly better than it was.

MG-FIDO

448 posts

237 months

Friday 17th October 2014
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loafer123 said:
Low inflation, low interest rates and low unemployment...not exactly awful.

I know that the lack of wage growth, high debt levels, deficits etc aren't good, but it is certainly better than it was.
Fiddled figures (selective reporting), poor returns with a debt mountain and more fiddled figures (zero hour contracts/more people in "education" or "training")... not exactly great.

In what way are things really better than they were?

turbobloke

103,942 posts

260 months

Friday 17th October 2014
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MG-FIDO said:
loafer123 said:
Low inflation, low interest rates and low unemployment...not exactly awful.

I know that the lack of wage growth, high debt levels, deficits etc aren't good, but it is certainly better than it was.
Fiddled figures (selective reporting), poor returns with a debt mountain and more fiddled figures (zero hour contracts/more people in "education" or "training")... not exactly great.

In what way are things really better than they were?
Confidence levels are higher, at least in general smile

RichardD

3,560 posts

245 months

Friday 17th October 2014
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As a linky, this one deserves to be here!

AEPgraph said:
World economy so damaged it may need permanent QE

Markets are realising that the five-and-a-half year recovery since the financial crisis may already be over, says Ambrose Evans-Pritchard
http://www.telegraph.co.uk/finance/economics/11165...

The idea does make sense, as after all the system cannot operate without the numbers getting bigger (growth), and imbalances need to be plugged too.

2013BRM

39,731 posts

284 months

Friday 17th October 2014
quotequote all
turbobloke said:
MG-FIDO said:
loafer123 said:
Low inflation, low interest rates and low unemployment...not exactly awful.

I know that the lack of wage growth, high debt levels, deficits etc aren't good, but it is certainly better than it was.
Fiddled figures (selective reporting), poor returns with a debt mountain and more fiddled figures (zero hour contracts/more people in "education" or "training")... not exactly great.

In what way are things really better than they were?
Confidence levels are higher, at least in general smile
True, I'm confident that I am earning less in general and real terms than I was 5 years ago

turbobloke

103,942 posts

260 months

Friday 17th October 2014
quotequote all
2013BRM said:
turbobloke said:
MG-FIDO said:
loafer123 said:
Low inflation, low interest rates and low unemployment...not exactly awful.

I know that the lack of wage growth, high debt levels, deficits etc aren't good, but it is certainly better than it was.
Fiddled figures (selective reporting), poor returns with a debt mountain and more fiddled figures (zero hour contracts/more people in "education" or "training")... not exactly great.

In what way are things really better than they were?
Confidence levels are higher, at least in general smile
True, I'm confident that I am earning less in general and real terms than I was 5 years ago
hehe or should that be frown

ECHASL smile

turbobloke

103,942 posts

260 months

Friday 17th October 2014
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Just don't look at the markets this week.There's not much left so make that next week...and don't mention debt deflation. After all it's only money.

Digga

40,316 posts

283 months

Friday 17th October 2014
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RichardD said:
The idea does make sense, as after all the system cannot operate without the numbers getting bigger (growth), and imbalances need to be plugged too.
Effectively, this is borrowing more through the means of the denominator effect being manipulated by QE - kind of what Beppo Grillo wants for Italy, by means of returning to the Lira.

Which is why, at some point, commodities like gold - once they stop being manipulated - might not be such a bad bet. Especially now NY is considering it's own version of the pie-a-terre tax on luxury apartments. One less place for all the funny BRIC money going to hide.

markcoznottz

7,155 posts

224 months

Friday 17th October 2014
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Probably not actual QE, more like continual soft default, eg the state running away from its obligations, to the extent the only thing you may get in future is your bins emptied. Every single thing else will cost. £££££££ or you won't get. The general population don't seem tough enough for a dose of real inflation, so partial default it will be, pushing the pension age forward being a favourite.

DSLiverpool

14,741 posts

202 months

Friday 17th October 2014
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markcoznottz said:
the only thing you may get in future is your bins emptied.
We have to pay £200 a year for the brown garden waste bin to be emptied now

turbobloke

103,942 posts

260 months

Saturday 18th October 2014
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Apparently it's so bad that various economically illiterate people who don't like the Conservative Party and want more money for nothing are blocking roads in London. Still, there's rain forecast for later today.

Andy Zarse

10,868 posts

247 months

Saturday 18th October 2014
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turbobloke said:
Apparently it's so bad that various economically illiterate people who don't like the Conservative Party and want more money for nothing are blocking roads in London. Still, there's rain forecast for later today.
Would these various economically illiterate people by any chance be members of unions? If so, in what way do they vary? wink for a start they will all be of a sour demeanour and impervious to reason or logic.

turbobloke

103,942 posts

260 months

Saturday 18th October 2014
quotequote all
Andy Zarse said:
turbobloke said:
Apparently it's so bad that various economically illiterate people who don't like the Conservative Party and want more money for nothing are blocking roads in London. Still, there's rain forecast for later today.
Would these various economically illiterate people by any chance be members of unions? If so, in what way do they vary? wink for a start they will all be of a sour demeanour and impervious to reason or logic.
It reminds me of Monckton interviewing Greenpeas and other activists outside one of the nordic beanfeasts, some could repeat the misguided mantras their high priests had taught them, some simply didn't know anything relevant to say. Rebels without a cause and without a clue. It's probably a different mix in terms of proportions but a similar type of variation. The similarities you suggested may well apply.

AstonZagato

12,700 posts

210 months

Friday 30th January 2015
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Crispin Odey, the hedge fund maven who has made billions in markets, is calling a big bear market.

Crispin Odey said:
Odey Asset Management

Report for Dec 2014

The themes I have been outlining since the second quarter of 2014 are now establishing themselves:
  • A faltering Chinese economy with growth ultimately slowing down to 3%.
  • A hard landing for those countries plugged into China’s growth - especially Australia, South Africa and Brazil.
  • A fall in commodity prices bringing with it pain to those heavily exposed. For oil this is the Middle East, Venezuela, Argentina, mid-west USA, Canada, Norway and Scotland.
No one forecast how fast and how far those commodity markets would fall. However, the same people who singly failed to see this coming are the first to say that the benefits of falling prices will outweigh the costs. My problem with such a hopeful outcome is that, in my experience, those that lose out from a fall in their income are quicker to adjust than those that benefit. In that intertemporal space lurks a recession.

For me, the slowdown/recession finds a secondary downturn thanks to the immediate closing down of any discretionary capital expenditure in the affected industries and countries, something we are only just seeing. This obviously has knockon effects for incomes and employment. At that time the exchange rate is likely to be falling to give some support. In my world this slowdown in the commodity producer’s economy is felt via falling exports back in the beneficiary’s economy, which finds external markets weaken. Again, if I am right on timing, the effect can be great because it is not yet affected by a pickup in spending in the beneficiary’s economy.

As always, that is the theory and markets will show whether it works in practice. In my world, this hit to the world economy is the first experience of a business cycle since 2008. Most investors do not believe we can experience such a downturn. They rely upon Central bankers who they think have solved the problem.

However, let’s also deal with three counters that I currently have to field:
  • ‘How long dare you be wrong?’
  • The opposite. ‘Do you think after a good quarter, this is all in the price?’
  • ‘But isn’t a downturn in the world economy leading to massive counter-measures in terms of liquidity, as envisaged by Draghi and the ECB, which will push markets and assets higher?’
My answers are as follows:
  • The performance of the fund since I decided that the world would end differently to my previous thinking, which was in March/April 2014, reflects that I have not been especially early in this call. It would have been rather nice to get the fall in oil spot on, but we didn’t.
  • No change in cycle lasts for nine months. This down cycle is likely to be remembered in a hundred years, when we hope it won’t be rated for “How good it looks for its age!”. Sadly this down cycle will cause a great deal of damage, precisely because it will happen despite the efforts of the central banks to thwart it.
  • We need to go back to 2008. We had seen reckless spending and reckless borrowing, fraudulently obtained credit advances and overvalued housing. And yet, despite the banks losing a great deal of money and house prices in the USA tanking, we hardly saw a recession in 2009. Why? Because when the Anglo-Saxon central banks lowered interest rates from 5.25% to effectively zero, they put the equivalent of 30% of net income into the hands of the overborrowed. There were other QE measures taken but this was the important one.
Today we get excited about what Draghi is going to with his QE plans for Europe. However, buying government bonds yielding 1.2% does not move the dial for European borrowers. Moreover it is almost impossible with negative short rates of 0.2%, because why would anyone sell a bond to the government, even if the yield is only 0.4%, to get a –0.2% yield on their cash? It looks like Draghi’s measures will disappoint markets. Faced with a deflationary bust, monetary policy will prove to be but “pushing on a string”.

There will be a strong temptation for individual countries to act independently of each other to soften the downturn. In this regard the story looks like it is only half way through. Russia will necessarily have to introduce exchange controls, and that really quite soon. Australia, where the average wage is over $70,000, while the USA is creating jobs at $28,000, will have to allow the currency to fall further. Japan has shown, under Abe, how it intends to react. ‘Everyman for himself’ puts enormous stress on a world trading system which has watched world trade rise from 12% to 32% of world GNP in little over 20 years.

So, where am I placing my money?
  • Firstly, I think equity markets will get devastated. Unannounced business cycles ensured Japan’s stock market rating fell by two thirds over 20 years.
  • Equities are priced for perfection, pushed up by SWF and high yield investors looking for higher yields and better covenants than high yield bonds.
  • Commodity-related sectors look unappealing and dangerous.
  • International consumer companies look overexposed to EMs.
  • Fund management companies look overexposed to the wrong assets, especially EMs.
  • Volatility is rising. Not every trade will work.
  • Australia is still to see rates down to 0.5% at the short end, 1.5% at the long end, down from 2.5% currently.
  • Currency trading is still to make the money. It made money last year as it was where the ‘tyres hit the road’ – equities are just the residual.
  • Equity markets will struggle to understand the quarterly translation and transaction effects of these currency moves on corporate profits, starting with Q1 2015.
We have seen though some strange things, with economics 101 turned on its head. We’ve seen that falling prices produce more supply, as the biggest producers see that they can take market share and use the opportunity by reducing average costs through excess production. We’ve seen that in the oil, minerals and iron ore industries. We have also seen in the last couple of years that as bond yields fall, governments are able to issue more debt.

But this time round the problem we have as well is that politics will start to rear its head and we are left to deal with politicians who are increasingly critical of the capitalist system’s ability to allocate capital and provide for society.

For me the shorting opportunity looks as great as it was in 07/09, if only because people are still looking at what is happening and believe that each event is an individual, isolated event. Whether it’s the oil price fall or the Swiss franc move, they’re seen as exceptions.

After the 1987 crash, a friend of mine, then a young Director of Sotheby’s, was sent to consult an old Partner who had been at Sotheby’s during the 1930s and was still alive, albeit in a nursing home. My friend asked the question “What was it like in the 30s?” and the man replied “It was like being bitten by a tarantula.” My friend didn’t really understand that, but later on in the conversation the old Partner said “A spasm of activity followed by a death.”

My point is that we used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point to try to counter the effects of a slowing China, falling commodities and EM incomes, and the ultimate First World effects. This is the heart of the message. If economic activ-ity far from picks up, but falters, then there will be a pain-ful round of debt default.

We already have volatility across asset classes and as I say, equities are the residual. There is a precious little earnings growth ex-Japanese exporters and we have now reduced our US cyclical exposure as we expect the commodity-induced recession in the mid-west to effect the resilience of the greater US economy. In Europe, we are half way through the write-off process, having written off half as much as the US. Draghi will disappoint and this may cause the first Euro rally given the fall from €1.25 to €1.15 in a month.

We are in the first stage of this downturn. It is too early to see what will happen – a change of this magnitude means the darkness and mist is very great. We will make some mistakes but with our thinking we won’t make the major mistakes. The problem is where you stand – I am amazed to see so many are fully invested given that equities are already fighting the downtrend. Mid and smallcaps have moved into bear markets and much relies on large caps to keep the whole thing going and they are very exposed to international trade.
Edited by AstonZagato on Friday 30th January 13:23

Digga

40,316 posts

283 months

Friday 30th January 2015
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Interesting. I can't follow all of that, but what I understand of it I agree with.

Inertia keeps my ISAs in equities, but it is something I've agonised over for a while now.

turbobloke

103,942 posts

260 months

Friday 30th January 2015
quotequote all
coyft said:
I certainly agree that equities are priced as though everything will remain perfect. It's also true that in the last down turn Central Banks had the flexibility to reduce interest rates.
Don't forget there are negative numbers below zero wink

Andy Zarse

10,868 posts

247 months

Friday 30th January 2015
quotequote all
turbobloke said:
coyft said:
I certainly agree that equities are priced as though everything will remain perfect. It's also true that in the last down turn Central Banks had the flexibility to reduce interest rates.
Don't forget there are negative numbers below zero wink
It is this fact which is going to somewhat hamper the ECB's QE programme.

If you owned Bunds paying say 0.5%, why would you sell them to the ECB and place the proceeds on deposit with the same bank and pay them -0.5% to keep the money safe? hehe