MorningWord 12/3/14: Global Weirding

by Dan December 3, 2014 9:40 am • Commentary

I seriously have no idea how we can be this far apart.  I am fairly certain we read the same financial news and look at most of the same inputs.  Maybe others are placing too much emphasis on the performance of U.S. equity holdings and have been blinded to what appears to be mounting trouble spots the world over.  Maybe some are of the belief that “Fortress America” can De-couple from what appears to be a deteriorating global economy and geo-political landscape.  I get it, you’re a “glass half full sort of gal”.  Well, that positive sentiment has gotten them this far, and for those “glass half empty” peeps out there, good luck trying to pick a top on this juggernaut which is the S&P500.

But I would add that just because it has been the right strategy to fade any and all perceived bad news lately, it does not mean that will always be the case.  It is my simple view that the volatility that has been brewing in credit, fx and commodity markets for months, coupled with the weakening global economic data in almost every part of the world aside from the U.S., is likely to have a profound impact on the bullish U.S. investment thesis in 2015.

I am not an economist but what I can tell you is that the depressed levels of equity volatility in the U.S. is artificial and is likely creating a potentially explosive cocktail in a market where most market participants have essentially been turned into zombies by a zero interest rate environment.  Rates remain low in the U.S. because it is our financial overlords’ belief that our economy can NOT handle higher rates, plain and simple.  When you look at the unemployment rate it continues lower with a 5 handle on Friday morning, a year ago you would have thought that the Fed would have already been in a much more hawkish stance getting ready to raise the Fed Funds rate.  Think hard about why they are not and what that means for the current investment outlook for U.S. equities at all time highs.

So here is what I am looking at. Is it just me or are things getting weird?:

Eurozone economic growth at 16-month low From Markit

The slowdown reflected the weakening trend in new order inflows, as new business fell for the first time since July last year. Job creation also remained near-stagnant.


It’s a Lose-Lose Situation for the ECB by Mohamed A. El-Erain

If the ECB refrains from venturing deeper into the experimental terrain of such unconventional monetary policies, it will be accused of not doing enough to keep Europe from getting trapped in a lost decade. After all, it is the one institution in Europe that has significant operational flexibility and political autonomy. But if the bank expands QE, it will be seen as resorting to a largely ineffective instrument whose collateral damage could well offset the few economic benefits that may materialize.

While this dilemma is placed at the feet of the ECB, only national politicians can deliver durable measures in the four needed areas. The longer it takes them to do that, the greater the detrimental impact on the ECB’s effectiveness and credibility — all of which would leave Europe in an even tougher economic, financial and social bind.

More on QE

Japan Consumers Feel Squeezed, and That’s a Problem for ‘Abenomics’ from

Japanese consumers who are struggling nearly two years into “Abenomics”—Prime Minister Shinzo Abe ’s program to try to revive the economy. As the government attempts to reverse two straight quarters of contraction, its biggest challenge could be restoring the confidence and lifting the real wages of people such as Mr. Uehara. Consumers account for nearly two-thirds of the nation’s gross domestic product, and many feel vulnerable.


China’s $6.8-trillion hole?  from The Economist

HAS CHINA really blown $6.8 trillion on worthless investments over the past five years? This is the startling claim made by two Chinese government researchers that has, understandably, caused quite a stir. If true, it would mean that fully 37% of Chinese investment since 2009 was wasted on building bridges to nowhere and homes with no one in them.

In the U.S., maybe lower gas is NOT a tax break as routinely touted

Black Friday Revealed How Poor Americans Really Are from Business Insider

“With uncertainty lingering and patience wearing thin after five-plus years of still lackluster wage growth, consumers are increasing saving for the future, hedging against a continuation of ‘more of the same,'”Piegza said. “Thus, for many, extra savings at the pump as a result of lower gas prices are simply being stored away to help supplement spending needs in the future, ramping up savings, not spending.”

Basic Costs Squeeze Families from WSJ

 The American middle class has absorbed a steep increase in the cost of health care and other necessities as incomes have stagnated over the past half decade, a squeeze that has forced families to cut back spending on everything from clothing to restaurants.

Oil crash posied to create an unwelcomed credit event??

Oil’s Widespread Impact, Including on High Yield Bonds from Business Insider

The high-yield bond sector is now bifurcated. Energy-related high-yield debt may come under increasing pressure since it is supported by the energy price level. Non-energy-related high-yield debt may strengthen due to some cost relief for the businesses that benefit from the fall in energy pricing.

Russia, ugh for so many reasons.

How Close Is Russia to Financial Crisis? By Mohamed A. El-Erain

Aggravated by lower oil prices, the recent financial turmoil reflects the geopolitical tensions and Russia’s decision to favor regional adventures over internal economic and financial stability. The sovereign analysis that the vast majority of investors use isn’t often comprehensive enough to easily and effectively capture this reality.

So we have rolling QE that has lessening positive affect each roll aside from inflating risk assets. We have a credit disaster brewing in China with the backdrop of weakening growth. Oil crashing which is likely to cause Russia to do something dumb, or dumber. Which will force the West at the very least to impose more sanctions causing further delay of a European recovery,. Europe is already struggling to avoid recession. And the U.S.  (stocks, bonds and real estate) which is still the preferred safe haven asset for investors the world over, despite a rising dollar.  Something has to give.

But no worries, Apple is gonna sport a $1 trillion market cap soon.