Archive for May, 2015

In these weeks the German Greek saga is reaching is climax.

Some interesting notes to think about.

Greece is really struggling….last week it really had to scramble to put together a payment of E.200 million.

I mean just  E. 200 millions. Most medium size corporations have that amount and even some ultra high net worth!

This week there is another payment of Euro 750 million. Greece says that  it will oblige it (even if there are quite a few persons that they do not understand where they will get hold of that sum).

And there are other payments (bigger ) in June/July/August.

In Germany Merkel, very smartly, wants to keep Greece in Europe, but she is starting to feel the opposition of her own party.

At this point a Greece default by error/misjudgement cannot be excluded.

Merkel has a big conundrum:

She has to keep Greece in the Eurozone

-It helps keeping the Euro down (Germany is a 60%GDP  exporter)

– A Grexit that provokes an immediate rout of Greece, but then a rebound in 3 years (there is an interesting article by the Chairman of the Bank of England on the matter) would push Portugal, Spain and Italy to follow the same steps with disastrous effects on the export biased Germany economy.

– Merkel cannot tell the electorate or even publicly this (as she cannot say we keep Greece in as we are taking advantage of Greece) and she has to answer to an increasing anti -EU / anti-Greece electorate.

So nor Greece nor Germany want a Greek exit…but bringing the discussion to the wire increases the potential for errors.

This issue is highlighted by the sharp increase in yield in Europe (German 10 year quadrupled in 3 weeks and Italian and Spanish breached 2%….for the matter now they slightly retreating (so favouring a positive solution)

On Thursday I got my hand on a research from Credit Suisse that shows the scale of the fact – probably still underestimated as not everything is ‘above water”.

Finally some light on this issue.

The following investments, in 80% of cases, are directed to Melbourne and Sydney (40-60, but starting to tilt to Melbourne).

In 2013-14 USD8.7 billion were invested in Australian real estate (+60% year on year since the year before), which is the 15% of the Australian housing supply..\

In the next 6 year (to 2020, as the research is now public and outdated) – the forecast tell us that another USD60 billion will be invested (the same figure in the 6 years pre 2014 were USD28 billion).

The purchases have been done 2% by new immigrants and 5% as investment.

There were 1.2 million Chinese in 2014 with a net worth of over USD $1,000,000 and, bar a Chinese meltdown, there will be 2.6 million Chinese with such a net worth in 2020.

If you add some issues unique to China:

The Chinese  corruption squeeze stimulate the idea that is better to have some assets out of reach of the Chinese Government.

A general insecurity towards the State that can decide anything in regarding to your property (and else)

A real estate property in China cannot be purchased as in Australia. When you buy in China it is for a 99 year lease(!)

The conclusion is that this trend – aside a black swan event – is unstoppable. And for sure a small hike in foreign ownership taxes will not stop it.

In the UK, it seems the Conservatives will win more than expected, but they will still have a weak Government.

Nothing much will change, even if it is clear that the current election system does not work.

The main result of the election is, similar to the anti -Europe party, the rise of the regional and anti Euro party like UKIP – apparently 34% of the voters are voting outside the two main parties.

Due to the political system, these parties will not gain many seats…..but they will have a significant discussion power.

All of this would not concern any of non UK resident, unless you consider that in 2017 there is practically an Anti-EU Referendum.

If the rise of the regional parties gives an hint to what is to come…it will be a very interesting and potentially defining referendum, not just for the UK.

In France another interesting event for 2017 happened.

Marie le Pen very publicly ousted her father from the Front National.

Marie le pen needed to oust her “quite fascist” (no offence meant, just a definition) father to bring her party more towards the centre (it is a move started since the last presidential election), if she wants really to have a winning chance in the 2017 French Presidential elections.

Marie Le Pen is seriously anti European.

These two events – potentially even more than the Greek saga – could define the European political future

Oil and gold – May 2015

Posted: May 8, 2015 in Uncategorized

Oil…the big question is …it is a bear rally or a new rally trend.

At this point it is impossible to know. Only a rejected  retracement to $54 with selling pressure would confirm a new trend.

At the moment also the macro situation does not help. On the Bear side we have Greece and a potential saturation of the stockpile facilities in the US and on the Rally side a pressure for the Saudis to start a ground campaign in Yemen (Yemen is very similar to Afghanistan…every invading army got really blooded).

Gold is in a similar situation consolidating just under $1,200. The support line is $1,140 which would give us a target of $1,000.

For the historically minded the famous mid 1970s low (the one before the really mega rise in 1980) inflation adjusted would be about $1,000/$900)

I like the bond market as it is made up by professional…so in a sense it is much more precise than the stock market.

The currency market is even better as it cannot be meddled with even by Central Bankers, but it is not as precise.

Three weeks ago, when we advised our clients to get their profit in safe position the bond yields started rising…signalling an increase in risk of two types.

– the Greek issue is solvable – but more complicated than the market thinks. The chance of a Grexit due to a political miscalculation are 50/50. It would not start a global meltdown (probably), but definitely a serious hiccup

-investors are not accepting the Quantitative Easing mandated negative yields on Germany bonds (sorry, too complex to discuss in this simple blog)

On this already whimpering scenario you have two errors

Locally the RBA chairman practically suggested that this is the last move down for the RBA …..so the move had a contrarian effect and  currencies and yileds went up!

Also the Fed Chairman Yellen committed an error practically saying that when the FED will start tightening (increasing the rates) you could see a move much sharper than the market predicts (rates gets increased monthly each month (the market is still scared by Chairman Greenspan that in 2006 exited his post with 14 consecutive .25 monthly rate rise to 4.5% and Bernanke finished up the job at the 17th at 5.25% – if my memory serves me right).

And guess who has the biggest fallout….the ASX and in particularly the Australian banks.

Australian banks are the “yield play” of the world…so when other yields plays out “foreign money” run away*

*Surprise: the media tricked you again. In the last several months the media was spinning the news that our banks were safe as they were owned by SMSF trustee that they want to keep them forever – it was a lie. Foreigners (specially Japanese owns a lot of it – as it shows in these days.

And a future surprise….did you notice that there is a little talk of  Australian real estate bubble ready to explore.

Well realestate.com.au is owned by Rupert Murdoch and its news empire. And there are consistent gossips (gossips not fact)  of Fairfax considering a Domain IPO…so let’s not talk bubble please!

PS Technically speaking this is still normal volatility…no major trendline has been broken (generically SP 2072 and 1970) – so no panicking- yet. Just two or three intense weeks,

The government seems to start to be really keen to attack the foreign investment in the Australian real estate market.

It is an easy political pick in a moment where the government needs to get money whenever they can.

Moreover the Australian government has been rebuked by the International body Financial Action Task Force headed by the Australian Roger Wilkins to turn a blind eye and not applying the usual anti money laundering provision compulsory in banking and finance – which is a big issue since there is a big anti corruption campaign in China pushing Chinese to try and smuggle out money

And already the various political lobbies are screaming that the real estate (specially apartments in the inner Melbourne/Sydney) will collapse with also ramifications on the building industry.

The real outcome will be interesting as the authorities statistics says that the mainly Chinese investments are big, but not enormous – but the people in general feels quite different (me included).

There are two side story in the US economy – one is wrong.

The correct one will make or bust the ongoing share market rally.

Which one is the correct one – it is the hardest decision.

Story A – Positive for the market

The US GDP came in at +0.2% -a long way down from the previous +2.2%.

Market reaction was quite muted as the US economy always slow down in the first quarter due to bad weather.

But there could be other two factors that could point to an US economy really slowing down.

The strength of the US Dollar.

Usually this “issue” has always played down by the fact that the US exports only 13% of GDP – but this has never been tested recently as the last “strong dollar” period was pre-2000 in a completely different economy. So there are no hard data to support this theory.

The demise of the oil price.

The shale oil and gas industry has been the engine of the US recovery. The effect of the slowdown of this fledgeling new industry it is not known.

So, if really there is a slowdown in the US economy the Federal Reserve will have to push in the future any rate hike (last prediction September 2015) and fuel this “free money” addicted rally to higher highs.

This scenario seems to be what the market thinks: The swaps for the  Feds Fund Rate (FFR) for 2017 is at 1.7%

Story B – Negative for the markets

Each Federal Reserve member median forecast instead agrees to a FFR to 3-3.25% for 2017.

And at least some large institutions like Blackrock agrees with this scenario

 

This divergence of “opinions” is really staggering and never seen before.

Practically the market says that the US is in a long term stagnation scenario, while the Federal Reserve sees the US economy in recovery mode and it is preparing to normalize the rates in light of this “normal economy scenario”.

 

These two scenarios bring two completely different scenarios.

As bond yields are more maths-based the difference is easier to calculate on bond.

25%!!!

So if the Federal Reserve really increase the rates the yield will jump up 25% and the capital value of fixed interest US Bonds (Eg Us T-Bond 30 years- let’s not make a bundle of every bond as the media always  does) will be crashed.

The share market will be crashed of the same amount (or more, depending by animal spirits).

 

Per converse, if the FED is wrong the reverse will happen with a mega rally.

These two profoundly different visions have deep repercussions in any markets – share market, bond, currency and commodities.

Probably the reality will be in between this two extreme scenarios – but it is interesting to note that, historically, there has never been such a difference – so we just proceed with the usual caution

 

NOTE1 : you are invited not to assume that the FED is always right as it is not. More often than not, historical data show that the FED overshot/undershot the target. But, even when they are wrong, the ball (interest rate decision) is in their field.

Note 2: this strangeness is on top of various strange situations introduced by the meddling of the Reserve banks in the market (such as negative yields on “up to 5 year German Government bond (it is like if a bank paid you in order for you to get a loan…really hard to explain!) or Italian Bond being priced as being less risky than the equivalent US Bond (Italian Bond 10y yield: 1.43%pa vs US Bond 10y yield 2.11%pa

There is an interesting news on the net – apparently some Arab special forces went into Yemeni’s capital.

The Saudi strongly denied it – but the sources where the news came are really reliable.

They talk about 40 -50 special forces.

As also the Saudi National Guard has been moved to the border – it could be a forewarn to a ground invasion.

A ground invasion against a Houthi will be much more messy – similar to Afghanistan as the Houthis are battle hardened by 20 years of constant warfare.

UPDATE

Finally a Turkish news team found what are the overseas fighters.

They are actually 120 soldiers from UAE of Yemeni descent – very well armed and trained – but still Yemeni.

A very nice marketing trick to send in troops without being involved. I still personally believe that such insertion needs some special forces uses. But that is what they did to capitalize the current Houthi’s weakness.