Archive for January, 2018

Markets

The US Treasuries 10 year T-Bond are over 2.71% and the market is shaking.

It is a difficult argument to explain, but it is very much critical to understand it.

When the US Treasuries are sold, their yield increase. By the institutional market this is considered the no-risk yield (as the US should go in default if not paid).

As the mega pension fund have to allocate money to the Government bond or stock market they will always allocate the money where the yield is better (to rely on yield to pay pension is much smarter than rely on gains).

As long as the yield on T bond is under 2.5%pa it is clear that is better to allocate to the share market.

Between 2.5% to 3% it is still convenient to allocate to the market, but is more of a grey zone – specially over 2.8%pa.

Over 3% it is definitely better to take the money out of the share market and into the bond market.

As we are talking about trillion of dollars, the effect is quite nasty.

Geopolitics.

There is also a geopolitical side? Who is selling so much T bond to spike the yield?

There is no public information about this, but a guess

  • Apple and company in order to pay the tax bill for the repatriation (that would be temporary as once paid, the money will go to buy Treasuries, once the tax is paid in April?
  • The Chinese as a warning shot against further US trade sanction?
  • The European disengaging by the Trump led US after Davos meetings?

Probably all three and something else.

 

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Italy election: O Bella Ciao

Posted: January 24, 2018 in Uncategorized

Italy will have its elections on the 4th March.

For the people in the know Italian election were always been the most interesting and dangerous.

Italy went backwards economically since joined the EURO and even got abandoned by the rest of Europe with the huge influx of immigration. Italians even feel that the “one million migrants” invited by Germany as a ruse – Germany got the top pick of migrants – leaving the bad apple to the rest of Europe.

Italian are destitute and angry. And Italy cannot be left failing like Greece as its banking system and debt market (3rd largest in the world) are too big to let fail.

Even strategically is important. It always had an independent streak – always has been closest to Russia and very friendly with China. Even in the middle east has good relation with Iran and was trying to stop the US attacking Libya.

While there are starting signs of recovery it is too late and most of the recovery is exogenous (more because France, Spain, Germany goes well than anything to do with Italy).

At the moment the current governing party (PD – Left) looks like finished.

The more likely outcome is a right wing  alliance Forza Italia (yes, Berlusconi again!) Lega Nord – so a against migrant, pro business, less State.

The pollies are now giving the majority to M5Star (high deficit, universal income, abolishment of the European Fiscal Compact) , but I do not think it could form a coalition.

The parties seems now to avoid taking of an Italexit. But this does not mean there will be trouble.

It looks more like the Italian party decided to work as a fifth column (a minority group that is against the majority) by sabotaging Europe (or better aid the German vision of Europe) by breaching the Germany imposed Deficit limit, supporting France, avoiding the fiscal compact rules, siding with Russia and other mean.

Hence the post is called O Bella Ciao. A very famous Italian song from the 2 World War Partisan. It say Oh beautiful woman bye, I woke up with the invader (German troops) in the town and I leave to the country to fight and die for freedom and Italy.

The outcome of this election will most probably not be market breaking (unless M5 Star win), but they will seed problems that will come up with vengeance in the next recession.

 

Syria: A Turkish invasion

Posted: January 22, 2018 in Uncategorized

Turkey followed on its words and invaded Syria, Afrin to create a buffer zone.

Apart the possibility of errors this situation begs some dig in.

It all started with the US idea of forming a 30,000 Kurdish force as a buffer to prevent Islamic State return (in reality it was done to carve a US – allied part of Syria).

Now we find a NATO-US ally attacking the YPG Kurds – US ally. This could have never have happened (a NATO ally member attacking a  US ally) if President Obama did not respect the famous red line on Syrian gas attack.

It has  forever weakened the US standing (well unless the US changes idea).

Afrin will fall (Turkey has the second largest NATO army), but things get complicated if then the Turks will try and seize Manbij. All the American strategy kind of pivot on Manjib and practically a fall of Manjib will be a fall of the US influence in Syria.

The US probably will not intervene unless shot upon and Syria will be lost.

Definitely the Turks made an agreement with the Russians (Russians owns the sky with missile defenses and it would be impossible for Turkey to attack without their consensus).

The Russians will not be super -happy, but it is better Turkey than the US and they had to pay back the US as President Trump authorized the sale of lethal weapons to Ukraine. They probably also helped carve some deal with Assad (Turkey is not really interested in invading Syria – they just do not want a US armed Kurdish force at their doorstep).

I picked up and interesting and unknown fact in my news feed.

 

In the next 4 years there will be AUD60bn of interest only loan to be refinanced.

Due to the more stringent rules for the bank capital most oif them will have to be transformed into capital and interest – increasing the cost for the real estate investor and decreasing the tax deduction.

Moreover, there is an estimated 20% of “liar loans” (where people declared financial positions different from the reality and the banks closed their eyes).

This fact will add a new downward pressure on real estate and on consumer spending (higher loan repayment- less money to spend).

A little policy mishap could really spell the end of the Australian real estate fantasy (that houses are the only secure investment).

Factset has done a beautiful study of the recommendation of Research Houses on which most of the people rely or have to rely (most advisers are compliance bound to take follow it) to make investment choices.

Factset took all data within the last 20 years and got these results

BUY – While generally good performance out of this group, the BUY does show more a behaviour in line with benchmark – not better than benchmark.

Hold – this is the best performing group where some real gems can be found.

Sell – this group generally is true to form, they perform worst than the index.

So, if you want to translate

Research House                                            Action

BUY                                                                HOLD

HOLD                                                             BUY

SELL                                                               SELL

and good luck!!

Syria: Turkey’s hand

Posted: January 16, 2018 in Uncategorized

Turkey is losing patience with both the US and Russia. It has been outplayed by both the US and Russia, but now it wants to set things right with brute force.

The issue are the Kurds – the fighters that had a large responsibility in defeating IS, but considered terrorists by Turkey.

The US has just declared that is supporting a Kurdish border force which will be made up by over 30,000. The US says this is to be sure IS will never return – the reality is that – having lost the proxy – war against Syria, it wants to partition Syria so to have a zone of influence.

The Russians have a long standing friendship with the Kurds 9they were used by the Soviets for operation against NATO- Turkey) and are directly interposing their forces between the Turkish -supported fighters and Kurdish forces.

Now Turkey lost its patience and wants to get rid of the Kurd and is planning a military action.

Initially the drone attack on the Russian base was seen as Turkey sponsored. But both Putin and Erdogan denies it.

This is a major issues as there are American and Russian forces embedded  with the Kurd and mistakes can easily lead to escalation.

North Korea tactics

Posted: January 15, 2018 in Uncategorized

Again North Korea is disappeared from the media radar screen.

Kim is playing a very smart game. The idea of the reconciliation to the Olympic Games (9 to 25 February 2018) is perfect to buy time to build the deterrence arsenal before the US could strike.

In all effects it is become a strategy game where Kim is trying to arrive to the “fait accompli” and negate the US strike.

It does fit perfectly with Kim dream to reunite North and South Korea, without the US (also a Chinese dream).

It is also a US nightmare, such a result would give the entire China Sea to China on a gold platter, as Korea would be a natural ally of China and Russia (look at the map…practically US would remain – as steadfast and relevant ally – with Japan and Australia in the entire Pacific).

The US knows that and they just had a series of military exercises in US that mock a North Korean war. In essence, the US are so used to fight counterinsurgency wars that need to prepare for a potential conventional war against a state

This does not mean that they have decided to make war, simply the military needs to be prepared in case that it is the choice.

And also there are differences. Contrary to Iraq wars, North Korea has real retaliatory capacities* – so the US cannot pre-warn population (say US personnel to leave South Korea) or have military build up (like Iraq invasion) as Kim Yon Un will definitely decide for a pre-emptive strike.

In a sense a potential war with North Korea will have to come out of the blue. A bit like the false ICBM on Hawaii this past weekend – it was just lucky that the ICBM did not exist and that the alarm came from a civilian agency that had no effect on US military. Errors can happen.

There are also Chinese military exercises on the other side of the frontier.

North Korea meanwhile seems to be preparing a satellite testing (not much difference between satellite rockets and ICBM..but less controversial).

So after the 25th February, the chicken game goes on.

*This behavior of the US clearly show that the CIA knew that Iraq did not have retaliatory capacity against the US troops way before it admitted it.