Forget NFP. In fact, forget any data. Turn instead to the media

Yes, we are already aware of the power of social media, via Tweeter-In-Chief Donald Trump. If he carries on like this, what will he have left to announce on inauguration day itself? That’s the day, by the way, that most investors care about this month, at least according to a Goldmans survey:

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Given that he’s a reality TV star, Trump will no doubt leave some big announcements on the table for The Big Reveal on Jan 20th. The one that should be most in people’s minds is some kind of trade war / currency war with China. But we’re still too busy pretending he’s the new Reagan. Because that’s easier, isn’t it, than realising we are in a new world, where #FOTU will replace #FOMO.

And into this vaccuum, what will step in? Why, none other than anyone who shouts loudly enough, and particularly anyone who claims to represent the most powerful group of all, The People. The People Have Spoken, and don’t we all just know it. Instead of the world being driven by faceless central bankers propping up risky assets and in doing so, driving inequality, we now have The Man On the Street making himself very much known. (And amen to that, for without them we have technocracy rather than democracy). So who is the voice of the people? Well, we have seen and will see many specific characters represent this (Alexis Tsipras, Nigel Farage, and now Marine Le Pen) – but don’t forget about the much derided media. Yes, Twitter can make one voice sing loud, but there is still a lot of heft in the old skool print media. This is why the outpourings from the German newspapers yesterday are so relevant. Both the popular tabloid Bild and the broadsheet Suddeutsche Zeitung contained editorials demanding that the ECB should raise interest rates. Even business daily Handelsblatt pointed out that Germans were losing billions of euros a year on their savings from the ECB’s policy. Sure, their combined distribution is around only 10% of the number of German households, but what matters here is their role as an echo chamber. The German politicians care about what the newspapers say, because that’s a way to take the temperature of the electorate. And oh what’s that, an election hoving into view in just 9 months’ time? And savers would be one of the biggest sections of the voting public? And they’re still not getting any return on their savings, just as it’s revealed that German inflation nicely jumps up to the ECB’s target of just below 2%?

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If you think that the ECB are on autopilot this year with this kind of thing going on, then you’re dreaming yourself into a daze. The pressure from Germany is going to build and build. Trump and Theresa May have already ploughed fine populist furrows by criticising QE from their country’s central banks. How will the ECB be able to withstand this? The articles from the German papers weren’t just flaccid commentary on the parlous state of savings returns: Bild screamed “Raise Rates Now” and SZ warned “Change Course Mr Draghi”.

Another reminder, if it were needed, that it’s not about monetary policy divergence any more. It’s about political pressures.

Oh and one more chart from that GS investor survey…. over two-thirds of respondents though Marine Le Pen only had a <40% chance of winning:

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Given that it’s likely she gets into the second round, where it’s a two person run off, that’s a fairly distant pricing from the 50-50 baseline. Let’s not forget that Trump was only priced at 36% in his two person race on election day itself.

Oh but we do forget, don’t we? It’s so much nicer to plough along with the same narrative of the past 8 years isn’t it… cheap money forever, buy risky assets forever, and just follow the central banks. Ooh what could payrolls be? Ooh when will the Fed hike? Ooh…. pick up a newspaper.

Do these 3 things this year

Blondemoney has been agonising for days, worrying about what forecasts to carve out on the blog-stone. The joy and tragedy of a public forum such as this is that it’s all there, all in print, for all time, for all to see. Sure, there have been some past positive pronouncements; but also there are those that may have led you astray. And we don’t want you led astray. Blondemoney wants you full of insight, bursting to brimming point with good information. In the end, the year ahead comes down to these three points:

1. Forget the monetary policy divergence obsession

Everywhere you look, there is still a debate over how many hikes the Fed might deliver this year; over how the ECB and the BOJ remain the uber-funders, what with negative rates and all. That’s fine, if it wasn’t for the glaringly obvious point that a) monetary policy has reached its limits and b) inflation is back. A)+B) means all rates are going up, everywhere. The ECB and BOJ are preparing to taper. They’re holding their hands up and admitting defeat. The BOJ’s “Yield Curve Control” might as well be called “You Take Control”. Sure, some might go up more than others, due to economic growth prospects etc, but the divergence is not what it once was…. In fact, the world isn’t even that divergent. HSBC have moved their Global growth and inflation forecasts higher for the first time in 5 years. Manufacturing PMIs are going up everywhere:

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Yesterday, as the surge in US yields was alleged to have pushed the US Dollar higher, note that UK and German yields rose step for step alongside it:

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Divergence is not what it was.

2. Watch the VIX

However, the monetary policy divergence obsession holds if volatility remains low, because then Carry is King. Effectively the entire world has been involved in a carry trade ever since the central banks mandated us all to take that trade. Restoring animal spirits after the Lehman bust meant that they wanted us to go out there and find risk, buy it, hug it, hold it close and tell it we would never leave it. Last year Warren Buffett made $32m each day. Now, Warren is a proven investor, and Blondemoney has no beef with the old chap. But 32 million actual dollars income a day is as sure a sign as any that a rising tide lifts all boats. By September of last year, “lower-for-longer” had metamorphosed into “lower-forever”. We have only just begun to see this unravel. It’s not even really started, because volatilities have remained subdued. Bond vol is up, but it hasn’t contaminated other asset classes. One of the assets that fell the most last year was the VIX:

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Selling vol has been the trade for years – not least because it’s now the hedge of choice to own over any volatile event. Which means that as soon as the event risk materialises, you want to dump that insurance ASAP, if the world doesn’t end. The #FOMO of last year meant the insurance was worthless almost instantly. The open interest in the VIX has exploded since the financial crisis, as everyone tries to use it as a hedge, and also to sell it as part of the carry trade:

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In other words, it is the core of the carry trade. It is the proverbial canary in the coalmine. Once this blows up, everyone will realise the monetary policy divergence obsession is over. But what, pray tell, could cause it to spike?

3. Political Risk should be your only focus

Ah yes, Tweeter-In-Chief, Donald Trump. Yesterday he tweeted twice and got two almost instantaneous results: Ford scrapped its Mexico factory, Republicans drop their plan to scrap the Ethics Cttee. Meanwhile Marine Le Pen launches her Presidential bid by promising a referendum on France’s relationship with the EU within 6 months of her taking office, and argues France could ditch the Euro for the ECU. Now, note that these are more nuanced positions than just “Quit the EU and Quit the Euro” – all the more likely to help her win over voters who are nervous of too big of a change. Or who agree with her immigration views, but not on leaving the EU completely.

Forget monetary policy. Think instead about this possible scenario:
* Le Pen questions the very framework of the European Union, charges ahead in the polls, wins the Presidency and then the Euro falls as much as GBP did after the Brexit vote
* Meanwhile Donald Trump slaps tariffs on anyone who gets in his way, everyone brings foreign money home, and Donald’s Treasury declares a “Let’s Make the US Dollar Great Again” policy

Unlikely? Maybe. Impossible? No. EUR/USD sliding to 0.8000 should surely be on everyone’s agenda this year as a possible scenario. And that’s not because the ECB mess about with moving to -0.50% interest rates as the Fed anaemically hikes 3 times. Stop watching the data. It’s going to be all about who is making what political pronouncement; when; why; and how likely it is to come to pass.

Blondemoney at your service….

The Year of Maggie and St Francis

Blondemoney fondly remembers the footage of (her heroine) Margaret Thatcher’s ascenscion to the steps of no.10 Downing Street in 1979. She quoted St Francis of Assisi, whose prayer notes (among many other things):

‘That where there is discord, I may bring harmony.
That where there is error, I may bring truth.
That where there is doubt, I may bring faith.
That where there is despair, I may bring hope.’

Now, before alienating anyone’s faith/atheism/pan-theism, please note that this quotation is designed to flag up how the year ahead is likely to proceed.

1. Discord -> Harmony: Volatility of volatility is about to explode

Yes, those flash crashes that we have been having for the past few years are soon going to look like a walk in the park. We have already had some warnings: The stunning near 12% decline in GBP in the 24 hours after the Brexit vote; the equally stunning 5% rally in the US Dollar in the week after Trump’s victory. These were actual trends, not some flash-in-the-pan, zero liquidity, algo-black-box mangling of the markets. We have seen plenty of those too, of course, and they are the ongoing canaries in the coalmine. A reminder that what we think of as the most liquid, will not always turn out to be so. But it is the vol of vol that we have to be so careful about. One minute, a rapid increase in greed, with all the risk-seeking indicators flashing green; the next, a period of relative calm; and then finally, a vomitous plunge into the depths of despair. But we could flip between these three states with ever increasing frequency. Discord and harmony will both be with us, all the time. It’s no wonder that even with the volatility we have had, general vol measures still look fairly well behaved – with a few spikes, but the general level still near those doldrums of 2014:

cross-asset-vol-10-year-view

2. Error -> Truth: Politics will drive everything

The reason for the flip-flopping in volatility? Well that will be the market adjusting to political risk. This has been on the agenda ever since policy makers became so deeply embedded in the prices in financial markets post-Lehman. But the shift this year is that it’s politicians and fiscal policy that will now replace monetary policy as the driver. The central bankers were the key policy makers after their unprecedented interventions of unconventional policy. But their time is over. Monetary Policy is dead. Now it’s over to the actual politicians – just as the electorate has decided it’s had enough of The Establishment. However you want to call the new populist, post-truth world, the fact is that it was a vote against the establishment that brought us Brexit, Syriza, the end of Renzi, and now Trump. This year we get the chance to see if Le Pen, AfD, and the rest follow in their tracks. For all those who think the market has now woken up to political risk, let’s think about how we are going to know if it has. We don’t believe polls any more, do we? We don’t believe that political risk is “priced in”, because we don’t actually know in what asset price that would show up, do we? Mexican peso options were pricing a 5% move on US election night: it actually moved 10%. This means that asset prices will move in a much less linear fashion: there will be steps up and steps down as reality sets in. The truth will out.

3. Doubt -> Faith: Feelings versus Facts

Trump isn’t actually crazy. Putin doesn’t actually want a third world war. Nor does the Middle East. But everyone is jostling for position in the new world order, and doubt will creep in over what our leaders actually do want. The biggest difficulty that the market will have is how to interpret Trump. Note that already he is “The New Reagan”. What a sigh of relief accompanied that assertion, huh! Markets like to have a pattern for the future – a set of probabilities to trade off. But the thing is, Trump is Trump (much as Brexit means Brexit). He’s new. He has Twitter (and he’s not afraid to use it). He’s already wiped billions off defense shares with 140 characters. He will do anything to pressure the other guy; to get deals done. Remember how millionaire engineer and UK businessman James Dyson once wanted the UK vehemently to join the Euro, but last year became a vocal Brexiteer? Businessmen don’t do politics (or indeed God, as Alastair Campbell once famously remarked). They do deals. So keep the faith. They’re not demagogues creating a new Reich; their populism is one that keeps them powerful enough to keep power. That means making a profit.

4. Despair -> Hope: Structural trends persist – inflation is back; global trade is down; but the world isn’t ending. 

In the midst of all of this, you might feel quite concerned. As those pilots trapped in a crashing plane in the Second World War noted, “this is unfortunate. this is the end”. Well both of those pilots survived, and you will too. Reasons to be hopeful?

* If every electorate voices the same anger, then whatever happens in the elections of France/Germany/Netherlands/Italy, it will be a uniting force. It will even unite those administrations with those of the UK, even as it departs the EU. The negotiating sides may find they have more common goals than they think

* Yes global trade is slowing, and may slow further – but that should mean that domestic economies grow in order to find a home for the spare demand; it should drive innovation.

* Commodity prices will rise, as a global trade war might see tariffs slapped on various goods. Surely, after several years of panicking about deflation, we can see the upside in some inflation? (Or will the irony be that following bad deflation we now get some bad inflation…?)

* Sclerotic supranational organisations will wither, doomed as irrelevant institutions for another time: and new ones can then spring up in their place. Schumpeterian destruction can apply to politics as well as economics.

* Populism can’t, and won’t, last. Beware getting what you want. It’s much better, as the Rolling Stones noted, to get what you need.

Happy 2017 everyone! The next post will explain how to express all of this via your portfolio…

Cheeky China

China just slipped out one of their classic year end changes to their currency regime (not their year end of course, just ours). This lovely press release is all in Chinese, but the table says it all:

china-basket-29-dec-2016

Instead of managing their currency to a basket of 13 currencies, they’re throwing in an extra 11 currencies. Which means they are reducing the portion allotted to USD from 26.4% to 22.4%. Which basically means two things:

1) Less reliance on the USD – cheekily meaning that they don’t have to worry so much about their currency depreciating against a Trump-resurgent Dollar

2) Less need to intervene in those core 13 currencies – as they will spread the burden across more markets

Remember how, from the end of November, we noted “The World of One Trade” – and specifically how USD/JPY moved tick for tick with USD vs offshore China? Well logic might conclude that now we might see less of a correlation… and that the bid for USDs against those 13 original currencies might not be quite as large as it once was.

Oh, and for the currencies listed under THB in the table above, that’s from ZAR down to MXN, maybe there might be a little bit more movement in those currencies, now that the elephant in the room walked in.

What’s happened over Christmas then?

1) Trump got Tweet-happy again, taking credit for the rally in stock markets and the surge in the Consumer Confidence index:
The world was gloomy before I won – there was no hope. Now the market is up nearly 10% and Christmas spending is over a trillion dollars!’
‘the U.S. Consumer Confidence Index for December surged nearly four points to 113.7. The highest level in more than 15 years! Thanks Donald!’

Let’s see how he responds if/when the data turns down – and what happens when he realises Twitter is a two-way conversation. We already had a flavour of that when the criticisms from a woman on 4th December went viral

Danielle Muscato — who describes herself as an atheist, civil rights activist, musician and trans woman — immediately launched into Trump via tweet replies, attacking the president-elect for tweeting about frivolities instead of focusing on the lives of the Americans he now represents. “You are the president-elect,” she tweeted. “Pick your f—ing battles man. You are embarrassing yourself.” In all, her tweets were liked more than 200,000 times.

 

2) Tokyo core inflation fell at its fastest rate in 4 years

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3) Deutsche Bank will pay only half of its original fine
Funny how that panicky $14bn number ended up as only 7… politics once again wins the day

4) Lloyds Bank will set up a European arm if it loses single market access

In conclusion:
– Trump is still at his most dangerous right now because he feels at his most powerful right now. He’s breaking with traditions right, left and centre: criticising the UN vote against Israeli settlement building; appointing an anti-China guy to his new National Trade Council; calling up Taiwan. But he was elected on a platform to break tradition, wasn’t he?
– Brexit means Brexit in the sense that companies are already making new plans: money moves faster than politics
– But politics is messing with the valuation of companies (Deutsche must be delighted that 14bn was bandied around before 7 was settled upon)
– And no doubt will pile pressure on the central banks even as they’re powerless to respond (poor Japan)

And that’s before we have even said our sad goodbyes to Rick Parfitt, Richard Adams, George Michael and Carrie Fisher. As Carrie once said, “please don’t make me go back out there again”…. enjoy the sherry and mince pies while you can!!