Well, so much for my assertion that 2014 is going to be a quiet year in which risk assets will chug along and where the most challenging decisions were going to be where to go for lunch. The body blow which emerging market currencies suffered on Friday and the subsequent kick in the teeth which Asian markets found themselves exposed to today on the back of the very poor Japanese trade figures have put paid to that.
As anybody in my position, I feel tempted to look into past comments and to conclude that “I told you so!” I could probably go back to the beginning of the crisis in 2007 and find strings of comments which suggested that the base economic borrow-to-spend model was fatally flawed and that our twin-deficit economies needed to be reformed from the bottom up but that, in the immortal words of the muppet-in-chief, Jean-Clause Juncker, “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
Well, we also all know that very little which should have been done has been done and that in essence economic policies have been focused on first borrowing and then slotting another coin into the Nickelodeon.
Sooner or later this was going to come unstuck – or at least some parts of it were – and this seems to be the current case. There is a sense that most of the optimism which drove markets last year has evaporated in the matter of just two or three days. I have never ceased to remind investors that markets will always focus on the economic indicators which justify the direction in which they are going and much of what has spooked or is spooking folks now has consistently been there for all to see. The majority which had no desire to focus on what was clearly visible has nobody to blame but itself.
Taking Japan first: Abenomics – borrow-to-spend on a grand scale – has never convinced me but the challenges of pushing a currency down by 25% just at a time when the country is exposed to a massive increase in post-Fukushima fossil fuel imports has come home to roost. Abenomics is up against the ticking time bomb of Japanese demographics and was, in my humble opinion, doomed to failure before it began. Fukushima was the joker in the pack and, to stick with the analogy from cards, left the very poker-faced Abe-san with a pair of deuces, a three, a four and a six. The great push for export growth might be working in parts but the domestic economy and hence the much vaunted revival in retail spending is evidently being stifled by energy costs.
“We have two classes of forecasters: those who don’t know - and those who don’t know that they don’t know”
Meanwhile, the emerging markets are experiencing the same fate that has befallen them in crisis after crisis – speculative investment by yield greedy pension funds in developed economies is mistaken for long-term capital formation and once the floodgates open, none of them want to be left sitting in a canoe immediately down-stream.
Sentiment was beautifully summed up by my old chum Beat Matzinger, a market veteran of bank Julius Baer in Zurich in its “Market Two Liner” when he wrote: “The world is still over-leveraged and dominated by fast moving money.”
As the Fed tapers (they will taper again next week), global liquidity starts to dry up, market-makers are less able to provide liquidity. As that happens, emerging markets gets crushed. As emerging markets get crushed, players in that market try to hedge, they sell equities, equities plummet, mild panic ensues, and there is a flight to quality to US Treasuries and Bunds etc. …
That is what I predicted (not exactly, but close) and it seems to be happening.” He goes on “The Fed is not here to stabilise emerging markets, which is what they have said multiple times …”
Markets are markets and economies are economies – it is a fatal error to mistake one for the other.
So there we are with Australia sporting the only Eastern equity market not to get slaughtered which is not all that surprising as it was closed for the Australia Day holiday (and not, as some at SwissInvest might wish to believe to celebrate their countryman Wawrinka’s “stanning” victory over Nadal in the final of the Australian Open tennis) while the rest of the world is most probably chewing its finger nails up to the elbow.
Opportunities
Many years ago I covered as a client a German reinsurer, Aachen Re for those who remember it. In those days before email and when not everybody had either a Bloomberg or even a Reuters system and when some still struggled with Telerate or even with no more than a data fax from their brokers, the Monday morning call was the most important point of input of the week. Anyhow, I called my man on a morning after one of these week-end wobbles and opened with “Markets are looking bad today….” My man, head of fixed income at Aachen Re immediately interrupted me and retorted “Whether this is a good or a bad market depends entirely on whether you are invested or whether you are looking to invest….” A lesson for life. Last opportunity to sell or first opportunity to buy?
I still suspect that the impact of measured and gradual tapering move on is being overplayed as growing fear of the January 29 FOMC meeting is stalking pretty much all markets other than the usual flight to quality suspects. I am more sanguine, am not tempted to sell and would be quite happy to dip a toe in and put a bit of cash to work today, albeit in core market equities.
Meanwhile, Davos has been handed back to the skiers. Left behind is a legacy of billionaires and other plutocrats having tried to discuss how to create a more equal world while complaining the Dom Perignon being a tad too cold. Who’d invite a pride of lions to a conference intent on promoting vegetarianism? Tax deductible net-working for CEOs and tax-payer funded networking for the politicians. Charming.
Do I have a right to question why Bank of England Governor, Mark “The Magician” Carney needs to go to Switzerland to announce the demise his forward guidance nonsense? I thought the Dignitas Clinic for assisted suicide is in Zurich and not in Davos. I was recently reminded of a brilliant pearl of wisdom from the late US economist, John Kenneth Galbraith, which reminds us: “We have two classes of forecasters: those who don’t know – and those who don’t know that they don’t know”.