Global Macro Trading Journal

[Daal]

Quote from horton:

Japanese QE will have an impact on global sovereign credit flows and this in turn will have an impact on the bid for equities in a manner similar to US QE.

I agree the impact on earnings is less clear given that the rate structure can't move much lower to generate the degree of excess consumer credit issuance observed in prior cycles since 1982.

Just think for a second how crazy this all sounds:
earnings growth sucks, the economy sucks, the overall mood is that equities are the place to be and the Fed is talking about cutting back QE but somehow US equities are supposed to be immune to all of this because there is easy money in Japan

 

[Daal]

A counter-argument that I can find is that the economy is weak but if it weakens more then QE won't be cut back and might be extended so the fact that it is weakening a bit its actually a "good" sign

But I don't know, back when interest rates were the main tool I don't think rate cuts prevented bear markets from happening so why should QE do? When everybody thinks QE means stocks can't decline, they won't decline for a while and the bull momentum will take place but at some point this false perception reverses...(in 2011 stocks declined 19% in a short period during the S&P downgrade and EU mess, NYT had a piece titled 'is this 2008?')

 

[horton]

Quote from Daal:

Just think for a second how crazy this all sounds:
earnings growth sucks, the economy sucks, the overall mood is that equities are the place to be and the Fed is talking about cutting back QE but somehow US equities are supposed to be immune to all of this because there is easy money in Japan

The US economy does not suck at the moment as conveyed by employment momentum and housing starts. The compares on consumer spending will get tougher over the next few months but easier before year end. The US Dollar is an issue for earnings among multinationals but not for small and mid cap domestic issues.

You might argue that the employment momentum is about to fall apart or the housing starts will roll over, and I would agree with you in the context of a continued rise in the rate structure. But if the Japanese are fueling the bid on sovereigns now then this scenario is unlikely until the JPY is much higher.

 

[Specterx]

Quote from Daal:

A counter-argument that I can find is that the economy is weak but if it weakens more then QE won't be cut back and might be extended so the fact that it is weakening a bit its actually a "good" sign

But I don't know, back when interest rates were the main tool I don't think rate cuts prevented bear markets from happening so why should QE do? When everybody thinks QE means stocks can't decline, they won't decline for a while and the bull momentum will take place but at some point this false perception reverses...(in 2011 stocks declined 19% in a short period during the S&P downgrade and EU mess, NYT had a piece titled 'is this 2008?')

I agree with you on a purely fundamental level, but in terms of psychology and the market action it's definitely better at this point to wait for things to visibly turn, rather than trying to call the top here. Clearly the common bear thesis in place for the past few years has totally underestimated the supportive effects of QE on stocks; most recently when it was held that initiating QE3 at the highs (rather than after a significant decline) was a mistake and stocks couldn't be driven higher, but yet here we are.

It could be that we're only in 1998/99, certain sectors are in or approaching a bubble stage and the broader market is way overvalued, but there's still a year or two left to run. Conversely, if we are near some sort of significant (say 30+%) drop, it's not going to happen overnight and not without several tradeable pullbacks to get in along the way.

It's actually starting to seem likely that equities will eventually face pressure from another front: as the sense of fear and crisis fades, the massaged unemployment statistics normalize, the federal deficits closes and the S&P 500 builds in a comfortable margin of safety above recent years' levels, further easing becomes less likely and elevated corporate profit margins become much harder to sustain, especially if inflation picks up in a couple of years as a lagged effect of the monetary explosion (just as happened in the late 1940s e.g.). It would be ironic if the stock-bear thesis (which can perhaps be expanded to include the gold-bull thesis) were finally borne out not because the Fed is ineffective, but because they succeeded...

 

[Specterx]

Quote from horton:

The US economy does not suck at the moment as conveyed by employment momentum and housing starts.

Anecdotally the housing market is several areas quite resembles the bubble years. Socal and the DC area are bidding wars with even ramshackle properties being snapped up after mere hours on the market, and of course there's the news that Vegas is up 25% yoy.

The main difference with 2003-06 is that (again anecdotally) you're seeing lots of all-cash buyers, many of them foreign, and institutional-level 'real money' investors (the Blackstones et al) on the bid. MBS stuffed with NINJA loans aren't at the core of things anymore; most of those folks are either still sitting in their underwater property, or got their credit trashed over the past few years and now can't get approved i.e. they're renters.

Bottom line is that housing may be on the frothy side, but valuations aren't extreme and it's certainly not the rickety house of cards it was in 2005-06. Should continue to be a tailwind going forward, if a mild one.

 

[Specterx]

Quote from horton:

Japanese QE will have an impact on global sovereign credit flows and this in turn will have an impact on the bid for equities in a manner similar to US QE.

I agree the impact on earnings is less clear given that the rate structure can't move much lower to generate the degree of excess consumer credit issuance observed in prior cycles since 1982.

Hussman has argued convincingly that elevated corporate profits are a function of elevated government deficits, which are steadily narrowing; beyond that, the traditional sources of cheap labor are drying up and cyclical unemployment continues to fall. At a minimum you're going to see upward pressure on wage costs even as the stimulus of federal deficits falls away. Structural unemployment might remain elevated but the structurally unemployed, someone with useless skills for instance, don't really factor into the wage-setting process.

Given that, as you said, consumer credit issuance can't be pushed much higher, what we have here is a recipe for poor earnings results if the recovery continues (however haltingly) - but upside earnings surprises if some new crisis triggers another round of federal stimulus, along with the psychological support from more QE. Either way it's not something that will become important tomorrow, but over the next few quarters to years.

 

[deucy28]

Quote from horton:

The US economy does not suck at the moment as conveyed by employment momentum....

Momentum is the operative word for the UNEMPLOYMENT picture, not the employment one. I heard on CNBC Thursday 11 April that you have to go back to the Carter presidency to find matching numbers for the "total employed." When you consider the population growth since then, that fact is dramatic. The only "momentum" I see is the drifting down in unemployment rate which is deceiving because it ignores those that fell off the dole from expiration of their benefit creating a massive pool of chronically unemployed and poor figures for total employment. And check out the trend of employees having to work "part time" including two or more jobs. Not too rosy either. I see nothing to herald the employment picture as allowing "the economy not suck." The suck is in, as evidenced by the nation's employment situation being sucked into a black hole. The long term unemployed have their job skills attrited and themselves becoming permanently, structurally unemployed. The new graduates for the last number of years are getting foggy brained and have no constructive accounting for their years since graduation, making their job prospects that much tougher in the future. Small business cannot afford to employ more. Big business in general isn't hiring because it is preserving capital, not investing it. The wet blanket of massive regulations, tax structure, and unknowns about Obama Care creates this.
It's a flippin' mess, horton, and getting worse. Except for the budding energy boom, should it be allowed to occur, there is no change in any of this for the next three years.

Quote from Specterx:
...you're seeing lots of all-cash buyers, many of them foreign, and institutional-level 'real money' investors (the Blackstones et al) on the bid.

...Should continue to be a tailwind going forward, if a mild one.

So when I think of the character of those buyers, especially the foreign and the institutional's, I think how quickly they will be willing to bail when they smell flying crap from the fan heading their way. They are best suited for cutting and running in a variety of scenarios that would have them dumping their housing investments. Dunno if it could occur within a few years or longer (or shorter), but should the end game include serious and continual economic inflation and/or market yield requirements rise, these buyers will try to sell or if they have to, desert. Should the economy get so bad that renters lose their jobs as the Great Recession Part 2 occurs, watch house values go down. When you consider the massive amount of foreclosures to come, the number of REO's still existing, and tremendous quantity of home owners underwater with trip wires that can have them abandon ship or be forced to move out, I would be reserved before pronouncing housing as not a rickety house of cards. Arguably, it still is for very different reasons than before becoming victim of the Great Recession Part 1.

 

[Daal]

Quote from Specterx:

I agree with you on a purely fundamental level, but in terms of psychology and the market action it's definitely better at this point to wait for things to visibly turn, rather than trying to call the top here.

I'm going defensive here. Yesterday I sold all my BRKB (I had been scalling out as it went higher but now I'm all out). The only significant long I own is AAPL. I got some EWI and EWP shorts (Italy and Spain ETFs) but they are not big and are mostly hedges against my long positions

 

[horton]

Quote from Specterx:

Hussman has argued convincingly that elevated corporate profits are a function of elevated government deficits, which are steadily narrowing; beyond that, the traditional sources of cheap labor are drying up and cyclical unemployment continues to fall. At a minimum you're going to see upward pressure on wage costs even as the stimulus of federal deficits falls away. Structural unemployment might remain elevated but the structurally unemployed, someone with useless skills for instance, don't really factor into the wage-setting process.

Given that, as you said, consumer credit issuance can't be pushed much higher, what we have here is a recipe for poor earnings results if the recovery continues (however haltingly) - but upside earnings surprises if some new crisis triggers another round of federal stimulus, along with the psychological support from more QE. Either way it's not something that will become important tomorrow, but over the next few quarters to years.

I agree that this will be a contentious factor for valuations in the coming quarters.

 

[horton]

Quote from deucy28:

I see nothing to herald the employment picture as allowing "the economy not suck."

I think you are comparing this business cycle to prior cycles whereas I am comparing this quarter's metrics to last quarter's metrics with respect to the current cycle. I agree that this cycle "sucks" relative to every cycle since 1982 because we are not enjoying the employment benefits of excess credit issuance. That may come but I doubt it will compare to those cycles. And I worry very much about the next cycle as we have reached the Keynesian end game with respect to rates versus inflation.