https://www.zhihu.com/people/tian-yuan-dong
Friday, January 29, 2016
Although Macro Man has generally subscribed to the idea that this is an orthodox market correction in developed markets (albeit in context of substantial duress in emerging markets, ala 1997-98), he has to confess that there are pockets of weakness that worry him.
The negative impact of oil on the energy sector has been well documented, with a concomitant impact on the equity and debt of relevant firms (with some spill-over into broader markets.) Macro Man has long thought there there would be payback and more through a boost to real household incomes and a consequent uptick in spending. However, both the official data and anecdotal reports from the Apples and Amazons of the world suggest that this boost continues to remain M.I.A.
Another source of concern is the price action in financials on both sides of the Atlantic. Obviously the decline in oil has an impact here too, with US banks on the hook for billions of dollars in loans to the oil and gas sector. No, it's not as big as the real estate exposure was a decade ago, but it will still hurt if there are a wave of defaults. As for Europe, plus ca change, plus c'est la meme chose.
Both the BKX and SX7E are in bear market territory, with the pace of decline over the last three months fairly troubling. It's not like you can just blame it on broad weakness, either....banks in America and Europe have both handily underperformed the broad index, with acute declines so far this year.
Obviously DB is a name that has caught people's attention; the bank has long been a concern given the size and opacity of its balance sheet, and recent price action is looking suspiciously like the sort of death spiral that we saw all too often in 2008. That being said, it's not even the worst performer in Germany (that survived) since the onset of the crisis. Macro Man looked at data from 10 large Eurozone banks; as you can see, not a one of them is priced higher than they were at the end of 2007.
This is quite a contrast to their US counterparts; your author looked at 7 large US banks, which bifurcate neatly into "Euro style" banks and those that....aren't.
What's immediately apparent from these charts is that Macro Man had forgotten how nasty things got in 2011-12 for US banks (though not European ones.) What's interesting to observe, though, is that despite criticisms over the years that Eurozone banks haven't done enough to de-lever, book values remain lower than before the crisis. (Of course, book value for banks is something of an ephemeral concept, given that it entails heroic assumptions of loans and illiquid securities being marked correctly.)
In this, US banks could not be more different from their Euro counterparts; book value has grown steadily since troughing in 2009.
Note that these indices are no cap-weighted, so while the overall level may not represent the aggregate change in book value, generally speaking the relative trends are pretty accurate. While price to book levels for banks on both sides of the Atlantic, one does wonder how accurate those book values may be....and how much room there is to decline. While there are a number of reasons to expect that 2008 will in no way repeat itself, that still doesn't preclude the idea that some of these institutions are banking on trouble. The issues with EZ banks are well known; Macro Man has to admit, however, that seeing the apparent build up in US banks' book values forces him to recall that that which can go up can also come back down.
The negative impact of oil on the energy sector has been well documented, with a concomitant impact on the equity and debt of relevant firms (with some spill-over into broader markets.) Macro Man has long thought there there would be payback and more through a boost to real household incomes and a consequent uptick in spending. However, both the official data and anecdotal reports from the Apples and Amazons of the world suggest that this boost continues to remain M.I.A.
Another source of concern is the price action in financials on both sides of the Atlantic. Obviously the decline in oil has an impact here too, with US banks on the hook for billions of dollars in loans to the oil and gas sector. No, it's not as big as the real estate exposure was a decade ago, but it will still hurt if there are a wave of defaults. As for Europe, plus ca change, plus c'est la meme chose.
Obviously DB is a name that has caught people's attention; the bank has long been a concern given the size and opacity of its balance sheet, and recent price action is looking suspiciously like the sort of death spiral that we saw all too often in 2008. That being said, it's not even the worst performer in Germany (that survived) since the onset of the crisis. Macro Man looked at data from 10 large Eurozone banks; as you can see, not a one of them is priced higher than they were at the end of 2007.
Subscribe to: Post Comments (Atom)
88 comments:
I think we are on the same page here. The only difference is that I prefer to think in terms of yield (equities' duration is much longer than that of the long bond... so I have nothing to compare against... there goes the Fed model btw). To me equities are basically perpetual deeply subordinated bonds which means lower price equals higher yield and vice versa.
Historically US equities yielded around 6% capital gain per year and around 3% dividends. So I think equties are "fairly" valued if the return over a reasonable time frame (10 years in my world) is around 9%. The difference between you and Siegel is that the latter says equities are always a buy, but tacitly ignores time. If you bought the S&P around mid of 2000 you should sit on a return between 0% and treasury yields until now...
Regarding "timing" I think it reasonable to wait for prices that give me the yield I want. Which means something between 950 (Hussman) and 1120 (Grantham) in the S&P. And I fully expect to see those over the course of this cycle. This wouldn't be bargain prices, btw, just "normal" valuations.
For the record, I am net long, with some single names that should prevail imo, some bombed out ETFs *cough*GDX*cough* and a healthy portion of cash and index shorts.
Re DB: I heard that morale was already low before the whole Russia business and the latest figures. They are too big to fail imo but you won't hold the bag... eehh... stock though. There should be at least one more capital increase. Regading banks I prefer WFC or JPM.
may I ask what your definition of "orthodox market correction" is?
Here's an argument for equities having a lower duration than the long bond:
http://www.jstor.org/stable/4479256?seq=1#page_scan_tab_contents
the weakening dollar theme has been well and truly nipped in the bud
who is next in the Asian currency race to the bottom ?
rates are out of control... dangerous times ahead i suppose...
I hope markets will show them what they're doing...
there's only a way to stop this asset deflation.. a G20 statement when they agree that race to bottom in rates is finished and won't be there any more unilateral FX depreciation...
wonderland?? do we really need a bank collapse before?? probably
For me, an orthodox market correction is a drawdown of less than 20% that does not accompany a recession.
thanks for the link. Two things bother me, though.
The assumption that increases in inflation flow through to the net income, at least to a significant extent (the authors claim 80%) sounds unrealistic to me. We are not talking about retail or tech companies, for sure. Utilities might fit the bill. These companies would be fantastic investments, anyway. Also the value of 80% was measured during the period from 1980 to 1987 (footnote 7), which is not very representative imo.
They claim that dividend growth is highly volatile. Since their chart doesn't show much I consulted FRED and got this (left hand scale is logarithmic):
FRED: Net corporate dividend payments.
It's not a perfect straight line, especially not during 2008/2009, but for me that's good enough. I think I will stick to the Dividend Discount Model for the time being :).
Given the degree of overcapacity in the world, it strikes me that there is little hope to independently stoke inflation until either capacity goes permanently off line or global consumption catches up to supply. I'd remind readers that this situation is actually not anomalous from an historical perspective.
are you seeing asset reflation on EM? on real assets? on equities?
house prices are not moving in same ways everywhere.. and differently on the same country...
Asset reflation is potentially a mixed concept... not played in the same way for Facebook and FreeportMcmoran.
I look at Shiller's data for the S&P (actual and implied) which can be found here.
If I look at the S&P price in Jan 1949 (I dunno how long I can go back due to data quality issues...) and at the price at Jan 2009 or Dec 2015, doesn't matter, I get a CAGR of more than 7%. This excludes dividends.
Where do your figures come from?
It is hard to be a USD.JPY bear in a bear cave with the BOJ when they still have a gun. Ok, they have fewer bullets, but it's hard to count exactly and you just never know when they will be nuts enough to let one off. Now the logical thing to do for the BOJ if they had only 3-4 bullets left is to wait until a real crisis, or when the bears are real close. So maybe they have more bullets than we realize or maybe they are just crazy in letting off another one yesterday, when really there was no reason to.
No point waiting for the BOJ to misfire or miss, I think you have to wait for them to run out of bullets for a decent position shorting USD.JPY and then the bears will be all over them. Now that will be an interesting thing to see.
http://www.businessinsider.com/switzerland-might-end-fractional-reserve-banking-2016-1
And you can look across the financial space, it's not just big banks, mReits, leasing companies, asset management. Etc etc. if you bought banks in 2011 you doubled your money pretty quick. I think a similar situation is shaping up. For those more macro in mind, when the banks start out performing I think it's a good risk sign. And I am basing most of my argument on US financials.
The problem, however, is that China’s competitors are employing the same tactics and their currencies have more or less shadowed the yuan’s movements against the dollar, according to Englander.
“If the trading partners keep matching CNY depreciation at this pace, CNY will have to go a long way before any material competitive advantage emerges,” he said.
That has not deterred the Chinese authorities from pushing the currency lower after its dramatic devaluation in August and analysts project the yuan-dollar pair USDCNY, +0.0806% to soften to 7 by the end of the year from 6.57 currently.
Ironically, in a bid to buttress the economy via the cheap yuan, China faces the risk of accelerating capital outflows.
...The graph shows that USD is moving up against all of Asia....not just China, as noted by the article...
my simple view is that from 3+% to zero you can reflate.. from zero to -infinite doens't work in the same way..
"Check every equities chart. Check property prices in every major city." Please stop looking at s&p500 and London prime prices...world is bigger than you think...
On a more serious note, I think banks may have further increases in regulatory scrutiny with the political climate and banking fees have probably peaked for the cycle, which rules out most of the big boys. I can't find too much wrong with a WFC or regionals though - household formation is strong and when you tune out the noise that matters the most for a domestically focused bank.
“Industries faced stiff competition from foreign rivals for U.S. market share, and exporters faced intense pressures abroad.” Thursday’s release is in line with data from Institute for Supply Management, a group of purchasing managers, showing a nearly three-year-long expansion in manufacturing came to an end in November. And the Federal Reserve’s reading on industrial production has declined in 10 of the past 12 months, putting it off nearly 2% from its peak in December 2014. A number of forces hampered U.S. factories last year. An economic slowdown in China, Brazil and other markets for U.S. goods limited foreign demand. Meanwhile, a stronger dollar made U.S. goods more expensive overseas and foreign products relatively more affordable for American consumers. And a pullback in U.S. oil production last year reversed a recent source of strength for many metal and equipment makers."
...When paired with the previous post, in that China isn't getting the competitive jump it expected because all their trading partners are copying their moves, it appears our manufacturing bust will continue, as the dollar should get stronger and durable goods should continue to weaken...
2 cnets...
Dear Abee Crombie,
For me a bank is the second derivative of an economy. If you think US growth is going to accelerate, then it makes sense to play the "beta" game. I don't see US growth accelerating? Do you?
Also, Banks’ net interest margin is already at the lowest level in history (check FRED...).
Underperformance by the banking sector always is a bad sign for markets and the economy; it suggests that the credit mechanism is clogged, with knock-on effects for the rest of the economy.
The flattening of the yield curve have left the banks with sharply reduced earning potential. The banks invest more in Treasury securities than in business loans, and the flattening yield curve crushes the differential between their cost of funds and the yield they earn on Treasuries. How is that going to make their business "profitable"?
So sure, go ahead, go for Financials, go for your "screaming buy".
Best,
Martin
If you want to talk equities, there is (arguably) generational value and low price available in Brazil and Russia, which are "out of fashion", while Spoos and Nikkei both seem a little rich, with Shanghai clearly not done wringing out the last drips of speculative excess from the recent bubble. So it's all very patchy and simply represents the envelope of places the super-rich are dropping off little wads of money in an effort to avoid taxation.
B in T, LB is still long equities, and be aware that this trade is grinding out some gains for us. However, we are open to the idea that this is now a bear market where we sell the rips instead of buying the dips. It's just that the data are not quite 100% conclusive, although to us the chart of the R2000 makes a pretty convincing argument. Macro-wise our biggest and most reasonable fear is another bout of devaluation from PBoC, and indeed we think that comes later on in the year.
Still we have all been wrong before. We are keeping an open mind and watching what develops. The trading strategy for now is to stay long until volatility ebbs and the news flow becomes complacent or "happy-clappy", in the phrase that is preferred here on the blog, luring the unwary in to the market to buy assets at prices where we would rather be offering than bidding.
We bought XLE and BP calls back in the sub-$30 oil abyss, btw, and that's doing nicely. It's just a trade, not an existential statement of philosophy, B in T, btw. We are agonistic about many markets, other than rates, where it is lower for longer. Above all else, I want to stress to B in T that being right is fun, but it just isn't as important right now as making money, or at other points in time, as preserving money in the way that you have also succeeded in doing.
The cynic in me says there's a new policy coming over the weekend
Equities are possibly about to send a signal on negative rates.
How does that work for Draghi in March?
We will possibly look back at this era of negative rates as the most ill-conceived of all Central Bank policy. And that's saying a lot!
What changed?
@Anon 1.16: I wrote this on Twitter early this morning: Amazing, really, that charging people for holding money is now seen as monetary stimulus. In fiscal terms that's called a 'wealth tax'. I see that something like 57% of German bonds eligible for QE are trading negative, with more than a third trading below the ECB depo rate. How's that for NIM? Judging by the charts above, 'pretty lousy' is the answer.
No need to get sensitive. This blog allows debate about ideas. Only profit and loss are the judges, and I am sure you are making money.
I have noticed that you tend to post more and get shriller if your trades are going south...we all do this to some degree. You boys do this for a living, and that's grand. Frankly, I don't think doing this full time would have appealed to me.
And I don't understand today's global financial players. It seems to me that Japan's initiation of NIRP-lite that everyone is discussing is going to be bad in the long run for US manufacturing and of course exporting. Yet our futures are up today, and probably we will finish green. When you boil it all down, though, it seems that just as the world followed QE, that in the end we will all have to go down the NIRP road too. Just seems logical....There is of course the old bugger bear...tariffs...that could be instituted across the board if anyone who cannot stand equities (for instance the elderly) would ever like a ROI...there will come a time when all the old people who own their homes have cashed out with negative mortgages and with NIRP...it might just be Solyent Green time...
you both are right somewhat. There is a structural break in this data set between the 30s and the 50s and is characterized by the monetary regime, as deflation was a regular visitor before. If you look at the data in real terms (Shiller is so nice to supply the series in the same sheet) the long term trend is more stable!
Finally please note that this offer is open to sovereigns, central banks, banking institutions and also to you dear readers. Really in such difficult times it's the least I can do.
Is there a property bubble around? yes, but localized... and being an illiquid asset, i think we'll see some downside (in London prime market you're seeing that..)
MM, so we agree, negative rates are a tax on wealth. No stimulus, only a recipe for deflation... trasmission channels are rates and banks...
EurChf going parabolic... any insight?
Furthermore the PBoC and now BOJ devaluations will push up the USD, hurting US corp earnings, which will hurt US equities.
Imposing tariffs on the banking sector and pushing them to taking on more risky loans (via NIRP) will hurt financials, thus hurting equities.
Please tell me how equities will rally here?
agreed. Are you sure that returns have outperformed the domicile-of-sales weighted nominal GDP? I am not, or at least have never seen a trustworthy analysis.
That said, US equities still are far from a bargain and do suggest below trend-returns for the next 5-10 years. Whether this will unravel in a crash as the ZH community believes or in couple more years like the last one will depend on the economic cycle.
no real estate bubble in Dubai, that's for sure.
Prices here are tanking since a mini bubble in 2013/14.
Down easily 10-15% from that peak and new villa's and apartments coming on the
market in the thousands............and no buyers in sight.
And the local currency (Dirham) peg to US$ makes it too expensive for many foreigners who's currency is tanking as well......so double trouble.
The problem with financial markets is that everyone is looking at the here and now and not many pay attention to the longer term. And in the long term valuation plays a significant role in your returns.
The problem with QE and the world we live in is that it inflates some asset values and then deflates them when the fundamentals catch up (over capacity). But all assets (in general) have a fair price band. When markets move prices below a fair price, even if the near term trends are deteriorating it makes sense to start buying bc the world is still awash with money. And money needs to earn a return eventually (after it is done hiding). When US housing was trading below replacement cost, foreigners and cash buyers came in. Similar with equity markets post GFC. Time will tell if I am right on financials being under valued...
...Probably true at ZIRP or NIRP...but this road is like hobbits going into a mountain in the dark....IF we leave today's stimulus, what happens to assets? Does time produce a persistent brake to these policies?
Abee I think US exposed financials are a safe, staid, utility stocks at this point (DB notwithstanding!) - they will keep trading at a discount to BV and sneakily increase dividends over time, so total returns will be good, but I doubt they will double or triple anytime this decade. I don't see more than 20% downside either (a distance AMZN seemingly covers in a day!)
How it all works out is anyone's guess, but like Graham/Buffet said, in the short term markets are a voting machine, in the LT they are a weighing machine.
BiT. I am worried about ZIRP but I see the bigger worry as inflation vs deflation. Asset prices will just fall to a point where valuations get too cheap to ignore in a worst case scenario, and CB's will keep on printing. As BoJ showed, they are pot committed and dont have any other options. I expect the inflation to emerge when policy makers realize they should have used fiscal stimulus vs monetary stimulus and that unleashes inflation
"You mean there's a catch?"
"Sure there's a catch," Doc Daneeka replied. "Catch-22. Anyone who wants to get out of combat duty isn't really crazy."
There was only one catch and that was Catch-22, which specified that a concern for one's own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn't, but if he was sane, he had to fly them. If he flew them, he was crazy and didn't have to; but if he didn't want to, he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.
Of course, comments like "buy algos are coming online" always make me wary, but we did have the Economist do "an explainer" on a bear market a few days ago, so I reckon the pendulum can still swing further!
Now, on EZ banks. Look there are many stories here which easily get confused. The BRRD (banking recovery and resolution) directive has shaken things up because it basically means that SMALLER banks' equity and credit are hanging in the balance. Governments and the ECB will screw these people like they did in Novo Banco; more crazy stuff ahead! Meanwhile, the bigger banks are more difficult and the case of the poor MPS is a great example. Also the new "bad bank" in Italy shows us that you can always count on a diabolical fudge when there is just a remote "systemic" risk.
In the medium/long term, a current account surplus, QE and ZIRP will contribute to the zombification of some EZ banks but ALSO, arguably, allow some to prosper. It's all part of the plan you see ... the ABSENCE of crisis in the Eurozone remains a powerful sedative, and should not be ignored.
If all three of these tailwinds were removed tomorrow, we would be straight back to 2012 in a heart beat, but it won't happen. Playing EZ banks now means being smart on BOTH the long and short side. No easy plays here.
I never trust end of month rally until after 2pm. Too many wipsaws historically. But that Chicago PMI was nice!
FRED says that nominal GDP grew at a CAGR of 6.49% between Jan 1947 and Oct 2015.
Very fair point. I suppose today's upside will then just be dumped on Monday? Not sure how the flows normally work here.
Anyway, agree with the technical points, which fits my base case. "Sell the rip" might be the theme of choice now, but you know, that requires a rip! ;)
"comments like "buy algos are coming online" always make me wary"
Well, 200+ ticks on NQ and climbing. Was there for the taking...
"With a marginal expansion in manufacturing, the growth figures of 7-8 per cent are absolutely not credible," said noted economist Ashok Desai, who was part of the Prime Minister's Economic Advisory Council in the first few years of liberalisation (1991-93).
http://www.sify.com/finance/raghuram-rajan-questions-govt-s-new-gdp-formula-news-economy-qb3pE7ejbgacj.html
"http://www.businessinsider.com/chinas-statistician-being-investigated-2016-1?utm_source=feedburner&utm_medium=referral
How does all that improve "growth & stability"?
Truer words have rarely been spoken, but this is not relevant since we were talking about GDP growth and not about growth in equity value. If we can agree that equities prices should rise around the rate of nominal GDP growth we just need to throw in 2.5 - 3% dividend yield to get to 9 - 9.5% total return.
Moreover, the prospect of long term NGDP growth at 6.5% is currently looking fairly dim.
If history is any guide (see Reinhart & Rogoff for more details) economic growth is subdued for 10 - 15 years after a housing bubble burst. Which we had... I personally expect 5 or so more years of low growth and a return to the good ol' 6.5% afterwards. We can agree to disagree here if you say that it's different this time.
Either way, thanks for taking your time to thrash this out.
Now my point on BOJ's action is if the negative rate cannot push USDJPY above the the previous high , then that really says something sbout BOJ's ammunation. In that sense, I think B in T is right: CBs' tricks have lost its appeal and market is more and more ignoring CBs' actions.
So I see BOJ's surprising action last night as a desperate move aiming at PBOC and it is a setup for a huge short for USDJPY. I will give it three weeks to reach a peak for USDJPY and then maybe short it from there.
"Lefty, No need to get sensitive. This blog allows debate about ideas. Only profit and loss are the judges, and I am sure you are making money. I have noticed that you tend to post more and get shriller if your trades are going south..."
This is neither true nor fair. We post pretty much the same frequency every day here, and in fact we usually get shriller only when Mr Shorty is bending over for the Anonymous Proctologist or people are picking up pennies in front of steamrollers.....
Somewhere, The Ghost Of Funny Money is laughing. Btw, to those who mocked the concpt of face rippers: how's yer face?
There is NO central bank buying... yes ofc... LOL
"RANDOM PUNTER USES BOG....CENTRAL BANK WIPES ARSE FOR HIM"
Any point of making that statement? Did CBs buy shorts at 2070 and buy longs at 1856?
From http://acrossthecurve.com/
"Will negative rates dissuade an ageing population with inadequate pension and healthcare cover from saving?er… No. Will negative rates encourage investors to shift out of bank accounts and into higher-earning assets? Perhaps, but this is asking them to do what they already do. The yen already weakens in risk-on markets and only rallies when a scary world encourages capital repatriation. Does the housewife who recently got stopped out of a short yen, long Brazilian real trade really need negative rates to lend more money to Rousseff and co? Of course not! She needs something to give her confidence in Brazil, not another reason not to keep her cash at home."
So true, BOJ just attracts more shorty and expose its vulnerable nature.
Inflection point? Not yet...
Today would be the closest thing we have had to a face-ripper so far and it's usually not a bad time to lighten up a bit. Have a great w/e punters. Our BP and XLE options trades are buying dinner for LB this weekend.
Good weekend everyone.
So there we have it - stocks are dropping, so central banks must intervene.
EURCHF and Bunds going bid simultaneously like there is no tomorrow in the last few days is clearly a hint that SNB has been doing the heavy lifting for the ECB on this front .... Especially today, with EZ flash CPI printing higher than expected.
Now, the stabilization that MM, LB and others invoked is happening and the missing piece of the puzzle is clearly the banking sector in EZ. Italian names have been hammered indiscriminately, but few of those are probably worth a look: remember that the Italian market has been the darling until only few weeks ago, before going through a torrid January. The newsflow has been bad, no doubt, but also positioning from HFs was kind of heavy and this has been probably washed out now.
Finally, I cannot push away the feeling that EM equities, in aggregate, are looking bid: here positioning is very light in terms of allocation in global portfolios and I see an opportunity of outperformance for the next 3/4 weeks. I increased the exposure here.
One last note: Norges Bank will buy 900 million NOK a day in February, almost double the amount of January. Such amount is not huge for the FX market, but if combined with a bid oil and a less risk averse environment, could make the NOK worth a punt.
I have the same feeling for em equities
For example, the Irish keep on extending interest only mortgages with no capital repayments. Extend and pretend, reduces default numbers. Then there's the almost total lack of repossessions. Government has resorted to restricting supply to bump up prices so banks can up their asset valuations.
But could be argued it's a reaction (not a cause) to what happens when too many people take more out than they put in, for too long. People probably including me to be fair.
northshore
Maybe Trump can implement fiscal managed growth and drag the Cbank cabal off the mat..b/c their f##cked. Their won't be another China growth story in our lifetime.
He said the BOJ currently holds only one third of that market, so two thirds is still out there.
“If necessary to achieve the 2 percent inflation target, particularly if the underlying inflation trend is seriously affected, then we can expand or further strengthen QQE in many(!) ways. There are many(!) ways to further strengthen and expand QQE even more creatively.”
At the central bank, he has shown a tendency to surprise investors and BOJ watchers -- in the scale of his original asset-purchase program in April 2013, and in an unexpected expansion of the initiative in October 2014. Surprise is a very important element of the BOJ’s policy under Kuroda ...
From a recent Bloomberg interview
More earning on Monday, maybe Google / alphabet beats big as well and helps the market out of the funk? Let's see. Some of the companies who disappointed earlier seem to be catching a small bid especially those that are cheap and whose issues are well known, when those stocks turn it's usually a good sign sentiment has turned. But I wouldn't extrapolate one day to a trend just yet. But hey at least oil is holding above $30.
Links to this post