1) The document outlines an investment strategy report called Animal Spirits that analyzes macroeconomic, fundamental, and quantitative factors to provide investment context and tactical recommendations over 3-6 months.
2) It discusses the current macroeconomic backdrop of deflation fueled by shocks like falling oil prices and discusses how this has led to underperformance of emerging markets and commodities.
3) It argues that a paradigm shift away from deflation may be underway, consisting of emerging markets outperforming in late 2016 as commodities rebound, followed by the Fed raising rates in early 2017 if falling oil prices lead to higher inflation expectations.
Affect of Money supply on inflation and GDP.................how our GDP and inflation vary with our Indian economy going up or down...................know thru did prez.........
Mr. Tohru Sasaki, Managing Director and Head of Japan Rates and FX Research, JP Morgan was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on 27 April 2013. He spoke about the economic policies advocated by Japan's Prime Minister and the implication that they have to the Asian economy.
Find out more about the Asia Club:
Website: https://clubs.london.edu/asiaclub
Facebook: https://www.facebook.com/LBS.AsiaClub
Twitter: https://twitter.com/LBSAsiaClub
Olivier DEsbarres: What to expect in 2016 – same, same, but worseOlivier Desbarres
It is clear that markets so far this year are trading on sentiment, more specifically fear, with hard-data playing second fiddle. Or more accurately, price action suggests that markets are focusing on disappointing December numbers (e.g. US ISM) or even reasonably uneventful data (Chinese manufacturing PMI) and ignoring strong data such as U.S non-farm payrolls, Chinese services PMI and exports (see Figure 1). The hit-and-miss approach of Chinese policy-makers to stabilise equity markets (and ultimately growth) have done little to restore confidence. I nevertheless flag in Figure 37 some of the key data and events to focus on this year.
Affect of Money supply on inflation and GDP.................how our GDP and inflation vary with our Indian economy going up or down...................know thru did prez.........
Mr. Tohru Sasaki, Managing Director and Head of Japan Rates and FX Research, JP Morgan was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on 27 April 2013. He spoke about the economic policies advocated by Japan's Prime Minister and the implication that they have to the Asian economy.
Find out more about the Asia Club:
Website: https://clubs.london.edu/asiaclub
Facebook: https://www.facebook.com/LBS.AsiaClub
Twitter: https://twitter.com/LBSAsiaClub
Olivier DEsbarres: What to expect in 2016 – same, same, but worseOlivier Desbarres
It is clear that markets so far this year are trading on sentiment, more specifically fear, with hard-data playing second fiddle. Or more accurately, price action suggests that markets are focusing on disappointing December numbers (e.g. US ISM) or even reasonably uneventful data (Chinese manufacturing PMI) and ignoring strong data such as U.S non-farm payrolls, Chinese services PMI and exports (see Figure 1). The hit-and-miss approach of Chinese policy-makers to stabilise equity markets (and ultimately growth) have done little to restore confidence. I nevertheless flag in Figure 37 some of the key data and events to focus on this year.
The Fed kept rates on hold yesterday – pretty much a done deal – and its statement yesterday following its two-day policy meeting was very short on new insights.
But it was in line with my expectation that while the Fed would present a marginally less dovish assessment of the global economy, it would paint a still cloudy picture of the US and nurse the recently faltering rally in global risk appetite. US equities closed up 0.3% yesterday and 2, 5 and 10yr US treasury yields are down 6-10bps since Tuesday.
The Fed faces seven rocky weeks ahead of its 15th June meeting. It will likely want to keep the door ajar for a hike and will therefore not want to see US yields break out of range. But the market’s violent reaction today to the BoJ’s unchanged monetary policy is also a stark reminder that an overly-hawkish Fed could derail global risk appetite and in turn delay any Fed hikes.
With this in mind, my core scenario of a June is likely to be tested in coming weeks and the risk remains that flat-lining emerging market currencies will come under pressure.
Over the past thirty years the neutral real interest rate across developed economies has declined substantially. Evidence suggests that secular rather than transitory factors are driving its decline. A lower neutral interest rate implies that the cumulative amount of tightening required for monetary policy to become neutral is much smaller than previously thought.
« Market Perspectives » est notre revue mensuelle des marchés. Elle présente de la façon la plus synthétique possible :
- notre analyse des principaux faits marquants et indicateurs macro susceptibles de dessiner les marchés sur le mois.
- notre vision sur les différentes classes d’actifs
Cette revue sera continument enrichie avec nos indicateurs quantitatifs.
La plupart de nos analyses sont disponibles sur www.finlightresearch.com
Our monthly publication “Market Perspectives” presents a synthetic view of all the asset classes we cover.
The report is composed of six sections covering Macro, Equities, FI & credit, FX, Commodities and Alternatives.
Each section is preceded by a summary of our views on the related asset class.
Most of our publications are available on our web site www.finlightresearch.com
What recent and past actions have Canada and the US taken to counter.pdfmeejuhaszjasmynspe52
What recent and past actions have Canada and the US taken to counteract their exchange rates
with the economy in such distress over the past 10 years?
Solution
Since 2007, the world has experienced a period of severe financial stress, not seen since the time
of the Great Depression. This crisis started with the collapse of the subprime residential
mortgage market in the United States and spread to the rest of the world through exposure to
U.S. real estate assets, often in the form of complex financial derivatives, and a collapse in global
trade. Many countries were significantly affected by these adverse shocks, causing systemic
banking crises in a number of countries, despite extraordinary policy interventions. Systemic
banking crises are disruptive events not only to financial systems but to the economy as a whole.
Such crises are not specific to the recent past or specific countries – almost no country has
avoided the experience and some have had multiple banking crises. While the banking crises of
the past have differed in terms of underlying causes, triggers, and economic impact, they share
many commonalities. Banking crises are often preceded by prolonged periods of high credit
growth and are often associated with large imbalances in the balance sheets of the private sector,
such as maturity mismatches or exchange rate risk, that ultimately translate into credit risk for
the banking sector.
Crisis management starts with the containment of liquidity pressures through liquidity support,
guarantees on bank liabilities, deposit freezes, or bank holidays. This containment phase is
followed by a resolution phase during which typically a broad range of measures (such as capital
injections, asset purchases, and guarantees) are taken to restructure banks and reignite economic
growth. It is intrinsically difficult to compare the success of crisis resolution policies given
differences across countries and time in the size of the initial shock to the financial system, the
size of the financial system, the quality of institutions, and the intensity and scope of policy
interventions. With this caveat we now compare policy responses during the recent crisis episode
with those of the past. The policy responses during the 2007-2009 crises episodes were broadly
similar to those used in the past. First, liquidity pressures were contained through liquidity
support and guarantees on bank liabilities. Like the crises of the past, during which bank
holidays and deposit freezes have rarely been used as containment policies, we have no records
of the use of bank holidays during the recent wave of crises, while a deposit freeze was used only
in the case of Latvia for deposits in Parex Bank. On the resolution side, a wide array of
instruments was used this time, including asset purchases, asset guarantees, and equity injections.
All these measures have been used in the past, but this time around they seem to have been put in
place quicker (for detailed informatio.
Degroof Petercam Asset Management's chief economist and asset allocator look into whether the reflation trade is for real and inflation is back in the cards.
As expected, the Federal Open Market Committee has embarked on another round of planned asset purchases. In its November 3 policy statement, the FOMC wrote that it expects to buy another $600 billion in long-term Treasuries by the end of 2Q11 ($75 billion per month), in addition to the $35 billion per month in reinvested principal payments from its portfolio of mortgage-backed securities. There has been much criticism of the move in the financial press. Certainly, there are risks in the Fed’s strategy. However, it’s hardly reckless or ill-advised.
Standpoint: Global Reflation by Kevin Lings STANLIB
Fears of sustained deflation and stagnant growth in the United States and Europe have been replaced by a more optimistic growth outlook as well as concerns about rising inflation. This has driven developed market equities higher, but also weakened major bond markets.
1. Paul M. Kitney, PhD
paul@ballingal.com
+852 2733 1000 (Direct)
+852 2733 1031 (Main)
+852 6975 8444 (Mobile)
Asia Pacific Investment Strategy
August 30, 2016
ANIMAL SPIRITS PART 1: Macro Backdrop – Base
Jumping the Fed with Oil and Inflation Expectations
Asia Pacific Investment Strategy
• In the following series of introductory notes, Animal Spirits will outline the
investment process and analytical framework we employ to provide context
for the regular pieces to follow.
• Animal Spirits is an equity-focused Asia Pacific Investment Strategy report. It
harnesses macro, fundamental, and quantitative analysis and selectively
incorporates and interprets elements of academic and central bank research
where it is helpful to the investment process. Animal Spirits is structured in a
long run framework but the investment horizon is tactical, usually in the 3-6
month range.
• We begin with ANIMAL SPIRITS Part 1: Macro Backdrop – Base Jumping the
Fed with Oil and Inflation Expectations
The dominant paradigm in 2016 has been deflation, fueled by a
series of shocks. The energy market has transmitted shocks through
to the real economy via the credit market, which is part of the Fed’s
policy reaction function. Central to Fed decision making is inflation
expectations, which are influenced by YOY changes in oil prices.
The deflation paradigm has been characterized by a generically weak
commodities sector, chronic underperformance of emerging market
(EM) equities and impressive outperformance of the US equity
market.
A paradigm shift - or at least a pause in the current deflation regime -
is likely underway. This should consist of two consecutive phases:
1. EM Goldilocks - APAC EM equities and associated currencies are
likely outperform into 2016 year end, driven by market clearing in
the commodities space. The Fed will run "hot" for a while.
2. Fed responds to a possible “inflation surprise” in Q1 2017 with at
least one rate hike, reacting to an oil price "base effect" and
possibly a stabilization in the liquid energy demand-supply
balance, which would exaggerate this effect.
• Next in this series is: ANIMAL SPIRITS Part 2: Earnings and Valuation
Snapshot
is owned by Paul M. Kitney, PhD, licensed to Ballingal Investment Advisors and is pending
registration.
ANIMAL SPIRITS • BALLINGAL INVESTMENT ADVISORS
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BALLINGAL INVESTMENT ADVISORS
The dominant paradigm in 2016 has been deflation, fueled by a series of
shocks. The first shock was the Fed lifting the federal funds rate off the zero
lower bound (ZLB) in December. Then, the spike in global risk premiums, after
the sharp RMB devaluation in August 2015, was repeated in February 2016.
Distress in the US high yield energy sector, led to a risk shock transmission from
high yield to investment grade energy credit and to the corporate credit market
as a whole, as shown in Figure 1.
Figure 1 – US Energy Sector Credit Spreads
Source: Ballingal Research, Barclays (Barcorp US HY-10Y Treasury Spread), Bloomberg (US HY and IG Energy
Option Adjusted Spreads), Data as of 12/8/2016
Ground zero for deflation is Japan, which has been battling it for over two
decades. The first half of 2016 has seen little change, with the BOJ having
repeatedly failed to meet its 2 percent inflation target. It followed the EU/Swiss
example and implemented a negative interest rate policy (NIRP). The more
recent shock has been Brexit.The monetary policy divergence between the Fed’s
attempts at normalization and the rest of the world pursuing somewhere
between loose orthodox policy to more extreme versions of quantitative easing
and NIRP, has induced a strong US dollar. This has been accompanied by a
generically weak commodities sector, chronic underperformance of emerging
market (EM) equities and an impressive outperformance of the US equity
market, together with an equally impressive expansion in valuation multiples.
(See a global valuation comparison in the upcoming: ANIMAL SPIRITS Part 2:
Earnings and Valuation Snapshot)
Animal Spirits has observed over various market and economic regimes that
scarcity demands a premium, associated with the prevailing paradigm. This
plausibly explains the macro outperformance of the US equity market, as growth
and quality (lower volatility) of earnings have been scarce in the first half of
2016 and as such the US has had a better offering than global peers. Similarly, in
this deflation paradigm, yield is scarce, which is why valuations have risen on
stocks with superior yield factor characteristics, a market microstructure
example of the scarcity principle.
ANIMAL SPIRITS • BALLINGAL INVESTMENT ADVISORS
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BALLINGAL INVESTMENT ADVISORS
A paradigm shift or at least a pause in the current deflation regime, is possibly
underway. This is likely to consist of two consecutive phases:
EM Goldilocks - Asia Pacific (APAC) EM equities and several of the
constituent currencies may outperform into 2016 year end, driven by market
clearing in the commodities space, resulting in a reprieve in commodity sector
earnings. The Fed will probably let the US economy run “hot” (allow inflationary
forces to resurface, at least temporarily) during this time, holding back on
further policy normalization, providing the fuel for a strong “catch up“ rally in
EM. The Fed is aware of the negative effect deflation has on consumption and
investment and may wish to let a little inflation boost US domestic demand, at
least short term without a blunt policy response. Shifting inflation up from the
ZLB mentality must be at the forefront of central bank decision making.
Whether this is achievable or not is another matter but Animal Spirits sees at
least a hiatus in deflation over the next quarter or two.
Fed responds to a possible “inflation surprise” arising from the oil market in
Q1 2017, with no fewer than one rate hike. At the very least, the oil price base
effect may be a boost to inflation expectations in Q1 2017 and there is growing
evidence the oil market is getting closer to clearing. If the global oil market
excess supply balance clears then the positive impact on inflation expectations
via the WTI YOY comparison, will be more exaggerated. In either case, the data
dependent Fed will not ignore forever the primary variable in its policy reaction
function, inflation and its evolution (explained below). The Fed will be tempted
to run “hot” for a while but part of challenge of getting the economy off the ZLB
mentality is credibly raising rates in response to inflation and its expectations.
This may signal a resumption of “policy divergence” and a US dollar rally in Q1
2017. This theme is explored next.
“Near” full employment has not been enough to induce the Fed’s 2 percent
inflation target and is explained largely by oil price deflation. Oil is not a
component of core inflation but it feeds into inflation indirectly via inflation
expectations. The Fed’s policy reaction function consists of looking at the gaps
between current and long run unemployment (NAIRU), the inflation rate and
the target rate and other factors such as credit spreads1. Figure 3 shows the co-
movement of the YOY change in oil prices (red) and the Michigan 1 year inflation
forecasts (blue). Inflation expectations have been edging down with the WTI
price falling from over $100/barrel in mid-2014 to $26/barrel in Q1 2016.
While the current 4.9 percent unemployment is nearing the NAIRU and 1.6
percent inflation is close to the inflation target, Animal Spirits contends that the
Fed would have raised the fed funds rate by another 25-50 basis points had
the oil market not reduced inflation expectations and increased credit spreads
in H1 2016.
1 Kitney, Paul M., Does the Central Bank Respond to Credit Market Factors? A Bayesian DSGE Approach,
CAMA Working Papers 2015-21, Australian National University
ANIMAL SPIRITS • BALLINGAL INVESTMENT ADVISORS
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BALLINGAL INVESTMENT ADVISORS
Figure 2 - US Baker Hughes Oil Rig Count and WTI Price
Source: Baker Hughes, Bloomberg, Ballingal Research
Figure 3 - US Inflation Expectations, Spot and Projected WTI Prices
Source: Federal Reserve Bank of St. Louis, University of Michigan, EIA, Historic Data as of 31/7/2016, Forward
looking YOY based on EIA estimates and fixed historic end-July data.
In Figure 2, the Baker-Hughes US oil rig count is plotted against WTI. The recent
60 percent rig reduction is similar to the GFC and the Dot Com Crisis. In these
cases, the global oil market cleared. According to the EIA (August), the market
for world liquid fuels will balance between Q2 and Q3 2017, with a 2017 mean
WTI forecast of $52. The IEA (August) claims the oil market has already cleared.
In Figure 3, Animal Spirits projects a YOY rise in WTI based on both constant-July
2016 prices (green) and EIA estimates (purple). Both cases point to a rise in WTI
YOY between November and May, implying a rise in inflation expectations.
This and falling credit spreads improve the case for a Fed rate hike in Q1 2017.
ANIMAL SPIRITS • BALLINGAL INVESTMENT ADVISORS
