“I'm not upset that you lied to me, I'm upset that
from now on I can't believe you.” (Friedrich Nietzsche
1844-1900)
Credibility Lost
Yellen's much anticipated interest rate hike last
December was symbolic, not driven by substance. Now, investors
are not buying the Federal Reserve’s recent upbeat “trickery,” as reality is
sinking in quickly. For close data
observers, the bleak picture was evident from corporate earning to retail sales
to grim sentiment of business owners.
These factors were somewhat dismissed by the Fed, including low
inflation which was screaming that central bank stimulus is ineffective. Theoretical
and public-relation driven approach by the Fed has now failed to produce
tangible or lively recovery. Instead rage is mounting, and Central
Banks are desperate and surely unreliable on the depiction of ground-level
reality.
Hardly Surprising
As alluded above, signs of weakness have persisted for
a long-while and the recent correction is not a random shock.
First, the global economy has been slowing for several months, which has become clearer in the last 24 months. From China to Brazil, sharp declines in economic growth were clearly evident. BRICS collapsing has been a daily theme for a long while:
“For starters, world trade is growing at an anemic
annual rate of 2% [in 2015], compared to 8% from 2003 to 2007. Whereas trade growth during those heady years far exceeded that of world
GDP, which averaged 4.5%, lately, trade and GDP growth rates have been about
the same. Even if GDP growth outstrips growth in trade this year, it will
likely amount to no more than 2.7%” (Bruegel, January 5,
2016).
Not to mention the capital outflow as Emerging Markets
investors began to take their money off, reflecting lack of confidence. Of
course, that capital outflow was driven by weakness in real economic situations
again and again.
Secondly, the commodity decline in the past few years
reflected the soft demand, not only from China, but from other economies as
well. In addition to the commodity weakness, EM currencies collapsed, as the US
Dollar became the safe haven and heavily sought after currency. As if that
wasn't enough, the US real economy got praised given its relative appeal. No
question, when EM is burning the US looks "amazing.” However, on an absolute
basis, tons of mixed data suggests a conflicting story, which at best can be
described as a slow/ sluggish recovery.
Finally, the lack of wage growth was one issue,
decline of small business another, and now the terrible policies to boost
growth are harshly revealed. By the start of 2016, the murmurs around a flat
broad index were highly discussed. Many company’s stocks got crushed beyond
energy and China related areas, so to think this was an isolated sell-off
appears flawed. To cheerlead Yellen & Co's unjustified rate hike was a
reckless acceptance of lies. To ignore the decline of Crude as
confirmation of slowing global growth was thoughtless and dangerous, at least
for "seasoned" professionals. In other words, plenty of clues
suggested a slowing global economy.
Digesting Big Moves
To act surprised about this sell-off is rather naïve
or putting too much faith on central banks. Otherwise, it is a deliberate
acceptance to be lied to by the central banks' ineffective stimulus. Now,
central bank credibility is vanishing, election year uncertainty is brewing,
and corporate earnings are confirming weakness with specific data.
These factors unsettle those who bought into the status-quo narrative, which
was too smooth sailing. The history of cycles train one to be skeptical and
cautious, yet the "cautious" bunch were trashed during the Fed-led
bull market.
As if the bloody two week period was not quite an awakening,
some still doubt the continuation of this synchronized decline across asset
classes. Basically, when it, rains it pours, and the current junction defines
that. Short-term or drawn out selling is
a key question. Yet, do many see Crude below $20 for sustainable period? Do
most see this bleeding continuing or is wishful thinking of a quick turnaround
more common? Already, banks are feeling the bad energy loans, and corporations
are feeling the slowing Chinese economy. This inter-connected world is too
linked to ignore.
The US 10 year yields never surpassed 2.50%, Crude
struggled to stay above $40 (of course it is below $30 these days), and stock
markets flat-lined in 2015. What did one expect? All of the clues were there
and now the confirmation is kicking in. The
panic-like behavior needs to settle at some point. However, flushing-out
various worries takes time, as the process is in full gear.
Article Quotes
“Banks have remained relatively lenient with
cash-strapped energy companies rather than set tougher lending constraints that
could make their survival harder. But losses and reserves, which come out of
earnings, are starting to tick up in a number of banks’ energy portfolios. Pittsburgh-based
PNC said charge-offs rose in the fourth quarter from the prior quarter but
didn’t specify whether that was due to issues in its relatively small $2.6
billion oil-and-gas portfolio… Beyond the big banks,
isolated energy problems also swayed earnings at smaller lenders in the fourth
quarter. Regions Financial Corp., Birmingham, Ala., said its
fourth-quarter charge-offs jumped $18 million from the prior quarter to $78
million, largely because of problems with a single unspecified energy borrower.
More than one-quarter of Regions’ energy loans were classified as “criticized”
at the end of the fourth quarter. BOK Financial Corp., Tulsa, Okla., said
Wednesday that its fourth-quarter earnings would miss analysts’ expectations in
part because its loan-loss provisions would be higher than expected, also
because of a single unidentified energy-industry borrower.” (Wall Street Journal, January 15, 2016)
“China’s biggest military shake-up in a generation
began with a deliberate echo of Mao Zedong. Late in 2014 President Xi Jinping
went to Gutian, a small town in the south where, 85 years before, Mao had first
laid down the doctrine that the People’s Liberation Army (PLA) is the armed
force not of the government or the country but of the Communist Party. Mr Xi stressed the same law to the assembled brass: the PLA is still the
party’s army; it must uphold its “revolutionary traditions” and maintain
absolute loyalty to its political masters. His words were a prelude to sweeping
reforms in the PLA that have unfolded in the past month, touching almost every
military institution. The aim of these changes is twofold—to strengthen Mr Xi’s
grip on the 2.3m-strong armed forces, which are embarrassingly corrupt at the
highest level, and to make the PLA a more effective fighting force, with a
leadership structure capable of breaking down the barriers between rival
commands that have long hampered its modernisation efforts. It has taken a long
time since the meeting in Gutian for these reforms to unfold; but that reflects
both their importance and their difficulty.” (The Economist,
January 16, 2016)
Key Levels: (Prices as of Close: January 15, 2016)
S&P 500 Index [1,922.03] – The index sank below August 2015 lows, which showcases the severity of a
sell-off. Being close to 1,880 signaled
a bottom in August and October last year. Some may anticipate the same;
however, the current meltdown may deter previous buyers.
Crude (Spot) [$29.42] – Below $30 marks the fear of over-supply and dreadful demand. A bottoming
process has not formed, yet, suggesting the price pressure remains intact.
Gold [$1,093.75] – Sell-off pressure
has eased in the near-term, suggesting a possible bottoming between $1,060-$1,080.
DXY – US Dollar Index [98.95] – Strength remains intact. Further re-acceleration appears plausible, as the
Emerging Market currency debacle persists. For several months, the dollar index
has stayed above 96.
US 10 Year Treasury Yields [2.03%] – Lower and lower. Yields sharply declined after failing to hold 2.30%. A combination
of lack of economic growth and a rush to own safer assets has helped push
yields lower to 2% or so.
Dear Readers:
The positions and strategies discussed on MarketTakers
are offered for entertainment purposes only, and they are in no way intended to
serve as personal investing advice. Readers should not make any investment
decisions without first conducting their own, thorough due diligence. Readers
should assume that the editor holds a position in any securities discussed,
recommended or panned. While the information provided is obtained from sources
believed to be reliable, its accuracy or completeness cannot be guaranteed, nor
can this publication be, in any Publish Post, considered liable for the future
investment performance of any securities or strategies discussed.
