Risk takers are fond of the line, "No guts, no glory". With that in mind, I present three cases of risks, and possible opportunities.
The full post can be found here.
FTAV’s further reading
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Showing posts with label UK. Show all posts
Showing posts with label UK. Show all posts
Tuesday, August 18, 2020
Sunday, October 20, 2019
The stealth decoupling sneaking up on portfolios
Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Asset Allocation Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"
My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.
The latest signals of each model are as follows:
Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
A stealth decoupling
As the Sino-American trade war has progressed into Cold War 2.0, a consensus is emerging among analysts that the Chinese economy is starting to decouple from the rest of the world. However, in the short run, there is a stealth and surprising decoupling in performance occurring in global equity markets. It's the US market from the rest of the world.
This development is important because US equities amount to roughly half of global equity market capitalization. The chart below of major markets relative to MSCI All-Country World Index (ACWI) tells the story. US relative strength peaked out in late August and began to roll over in September. At the same time, Japan has been climbing steadily, Europe has broken out of a bottoming process, and EM equities appear to be making a relative strength bottom.
We consider the implications of this emerging trend, and what it means for equity investors.
The full post can be found here.
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Asset Allocation Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"
My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.
The latest signals of each model are as follows:
- Ultimate market timing model: Buy equities*
- Trend Model signal: Bearish*
- Trading model: Bearish*
Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.
A stealth decoupling
As the Sino-American trade war has progressed into Cold War 2.0, a consensus is emerging among analysts that the Chinese economy is starting to decouple from the rest of the world. However, in the short run, there is a stealth and surprising decoupling in performance occurring in global equity markets. It's the US market from the rest of the world.
This development is important because US equities amount to roughly half of global equity market capitalization. The chart below of major markets relative to MSCI All-Country World Index (ACWI) tells the story. US relative strength peaked out in late August and began to roll over in September. At the same time, Japan has been climbing steadily, Europe has broken out of a bottoming process, and EM equities appear to be making a relative strength bottom.
We consider the implications of this emerging trend, and what it means for equity investors.
The full post can be found here.
Monday, August 19, 2019
Peak Brexit panic?
The Brexit headlines look dire and Apocalyptic. The Sunday Times published the leak of Operation Yellowhammer, which was the UK government's base case plan for a no-deal Brexit.
In other words, it's going to be ugly, especially when Prime Minister Boris Johnson has vowed to take the UK out of the EU by October 31, with or without a deal.
The full post can be found here.
Britain faces shortages of fuel, food and medicine, a three-month meltdown at its ports, a hard border with Ireland and rising costs in social care in the event of a no-deal Brexit, according to an unprecedented leak of government documents that lay bare the gaps in contingency planning.The newspaper went on to reported that up to 85% of truck "may not be ready" for French customs, and disruption may last up to three months. In addition, the government is preparing for a hard border at the Irish border, as current plans to maintain the Irish backstop are unrealistic and unsustainable.
The documents, which set out the most likely aftershocks of a no-deal Brexit rather than worst-case scenarios, have emerged as the UK looks increasingly likely to crash out of the EU without a deal.
In other words, it's going to be ugly, especially when Prime Minister Boris Johnson has vowed to take the UK out of the EU by October 31, with or without a deal.
The full post can be found here.
Tuesday, August 9, 2016
Brexit: Fantasy vs. reality
I am seeing an unusual level of rising anxiety over the political implications of Brexit. Last week, Stratfor published a report entitled "Brexit: The First of Many Referendum Threats to the EU", which detailed the threats of additional referendums to the future of Europe.
Jim Rogers, writing in the Daily Reckoning, also painted a dire picture of the world after Brexit:
I beg to differ. In fact, the Brexit experience has made Europe stronger, not weaker.
The full post can be found at our new site here.
Jim Rogers, writing in the Daily Reckoning, also painted a dire picture of the world after Brexit:
Are we at a point right now where it feels like it’s accelerating. People all over are very unhappy about what’s going on. If you read history, there are a lot of similarities between now and the 1920s and ’30s. That’s when fascism and communism broke out in much of the world. And a lot of the same issues are popping up again.In addition, Philippe Legrain fretted about Brexit opening the door to European disintegration in an essay in Project Syndicate.
Brexit could be a triggering moment. This is another step in an ongoing deterioration of events. It’s also an important turning point because it now means the central banks are going to print even more money. That may prop the markets up in the short term...
The European Union as we know it is not going to survive. Not as we know it. Britain voted to leave, and France could very well be next. Why France? One of the main reasons is because the French economy is softer than the German economy. At least in Germany people are still earning money and making a living, despite all the recent turmoil. In France, the same malaise that’s settling over the U.S. and other places is settling in. And it’s going to spread.
There is no place to hide with what’s coming. I’m not saying it’s coming this year, or even the next. I can’t give a specific date. But imbalances are building up to such a degree, they just can’t continue much longer.
I beg to differ. In fact, the Brexit experience has made Europe stronger, not weaker.
The full post can be found at our new site here.
Saturday, June 25, 2016
Brexit: LTCM or Lehman?
Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on research outlined in our post Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"
My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bullish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.
The latest signals of each model are as follows:
Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.
What now?
In the wake of the Brexit referendum surprise, I sensed that a lot of investment professionals were in shock and didn't know how to react to the market turmoil. I have found that having the proper analytical framework focuses the mind. I found one tweet by the FT`s Gillian Tett particularly useful for investors.
That's the critical question: Does Brexit represent a Lehman moment or LTCM moment for investors? In the former case, investors should de-risk portfolios and sell equities down to a minimum weighting in order to avoid severe losses. In the latter, investors have been handed a golden opportunity to buy stocks, Blink and the correction will be gone.
For traders, it's entirely a different story, which I will also address in this post.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on research outlined in our post Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"
My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bullish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.
The latest signals of each model are as follows:
- Ultimate market timing model: Buy equities*
- Trend Model signal: Neutral*
- Trading model: Bearish*
Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.
What now?
In the wake of the Brexit referendum surprise, I sensed that a lot of investment professionals were in shock and didn't know how to react to the market turmoil. I have found that having the proper analytical framework focuses the mind. I found one tweet by the FT`s Gillian Tett particularly useful for investors.
That's the critical question: Does Brexit represent a Lehman moment or LTCM moment for investors? In the former case, investors should de-risk portfolios and sell equities down to a minimum weighting in order to avoid severe losses. In the latter, investors have been handed a golden opportunity to buy stocks, Blink and the correction will be gone.
For traders, it's entirely a different story, which I will also address in this post.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
Thursday, June 23, 2016
Brexit fallout watch
Well, my Bremain call didn't go so well (see Positioning for a Bremain result). As I write this, the BBC has called the referendum in favor of Leave by a margin of 52-48. GBPUSD is down about 10% and Asian stock markets are down 2-4%.
If you were correctly positioned for this outcome, congratulations, but don`t get overly excited about doing a victory lap as there is going to be market volatility ahead. During these episodes of unexpected market shocks, here is what I am watching for:
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
If you were correctly positioned for this outcome, congratulations, but don`t get overly excited about doing a victory lap as there is going to be market volatility ahead. During these episodes of unexpected market shocks, here is what I am watching for:
- Technical: Watch for logical areas of technical support
- Sentiment: Signs of panic and oversold reading that signal a bottom
- Macro: Either official intervention or policy responses that could rip a short`s face off
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
Wednesday, June 22, 2016
Positioning for a Bremain result
Mid-week market update: Even though the polls show the two sides running neck and neck, my inner trader is positioning for a Remain result in the UK referendum for the following reasons.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
- Polling internals indicate momentum towards Remain;
- Bookmaker odds overwhelmingly favor Remain over Leave; and
- Market anxiety is rising - so a "buy the rumor, sell the news" position is not warranted.
This is obviously a speculative trade and much could go wrong. The pollsters totally missed the results of the last UK election. In addition, severe weather in southeast England could affect turnout and therefore skew results.
The full post can be found at our new site here.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
Tuesday, June 21, 2016
The Brexit Pandora's Box
For my (mainly) American friends, file this under "why you don't understand Europe":
The Vietnam War was a war that scarred the national psyche and dramatically changed the tone of American foreign policy for a generation. If you visit the Vietnam Memorial in Washington DC today, you will find roughly 58,000 names of fallen soldiers from that period. Now imagine if instead of losing 58,000 soldiers, the United States lost 2.5 million during the Vietnam War. For a country like the US of roughly 300 million people, that kind of casualty rate would mean that virtually every household in America would be touched by combat death, whether it's a father, son, brother, uncle, friend or neighbor. Then 25-30 years later, which is roughly the span between the Vietnam War and 9/11, the country got involved in another conflict with a similar death toll.
Imagine the resulting national trauma.
That's what happened to many European countries in the First and Second World Wars - and the losses quoted would be roughly what the equivalent losses are for the US on an equivalent per capita basis on par with many European countries.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
The Vietnam War was a war that scarred the national psyche and dramatically changed the tone of American foreign policy for a generation. If you visit the Vietnam Memorial in Washington DC today, you will find roughly 58,000 names of fallen soldiers from that period. Now imagine if instead of losing 58,000 soldiers, the United States lost 2.5 million during the Vietnam War. For a country like the US of roughly 300 million people, that kind of casualty rate would mean that virtually every household in America would be touched by combat death, whether it's a father, son, brother, uncle, friend or neighbor. Then 25-30 years later, which is roughly the span between the Vietnam War and 9/11, the country got involved in another conflict with a similar death toll.
Imagine the resulting national trauma.
That's what happened to many European countries in the First and Second World Wars - and the losses quoted would be roughly what the equivalent losses are for the US on an equivalent per capita basis on par with many European countries.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
Sunday, June 19, 2016
How the S&P 500 can get to 2200 and beyond
Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on research outlined in our post Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"
My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bullish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.
The latest signals of each model are as follows:
Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.
Where's the growth?
My last post (see Why you need to give the bull case a chance) elicited a considerable amount of comment. Most of the pushback I got on the equity bull case amounted to a question of, "Where's the growth coming from?"
I recognize the concerns. As this chart from Factset shows, the equity market has had to endure five consecutive quarters of falling year-over-year EPS growth. How can anyone possibly be bullish under such circumstances?
In this post, I would like to explain my bull case for stocks, with an initial SPX target of 2200 and, depending on the Fed's reaction function, up to 2400-2500.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on research outlined in our post Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.
The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"
My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bullish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.
The latest signals of each model are as follows:
- Ultimate market timing model: Buy equities*
- Trend Model signal: Neutral*
- Trading model: Bearish*
Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.
Where's the growth?
My last post (see Why you need to give the bull case a chance) elicited a considerable amount of comment. Most of the pushback I got on the equity bull case amounted to a question of, "Where's the growth coming from?"
I recognize the concerns. As this chart from Factset shows, the equity market has had to endure five consecutive quarters of falling year-over-year EPS growth. How can anyone possibly be bullish under such circumstances?
In this post, I would like to explain my bull case for stocks, with an initial SPX target of 2200 and, depending on the Fed's reaction function, up to 2400-2500.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
Tuesday, June 14, 2016
The VIX tail wagging the SPX dog
Mid-week market update: What's going on with the VIX Index? The VIX, which measures implied option volatility and a useful measure of "fear", spiked dramatically on Monday. While SPX did fall, the magnitude of the decline didn't match past VIX spikes. It prompted this tweet from Ryan Detrick:
Rob Hanna at Quantifiable Edges also observed that the combination of a VIX spike of this magnitude is unmatched by the shallowness of the fall in stock prices.
As you can see from the chart below, the VIX Index spent the second day above its Bollinger Band (BB), which has marked regions of limited downside risk in the past. On the other hand, the bottom panel shows the 10-day rate of change of the VIX Index, and such events have often foreshadowed further SPX weakness (see vertical lines).
What's going on? My analysis suggests that we are seeing the case of the VIX tail wagging the SPX dog.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
Rob Hanna at Quantifiable Edges also observed that the combination of a VIX spike of this magnitude is unmatched by the shallowness of the fall in stock prices.
As you can see from the chart below, the VIX Index spent the second day above its Bollinger Band (BB), which has marked regions of limited downside risk in the past. On the other hand, the bottom panel shows the 10-day rate of change of the VIX Index, and such events have often foreshadowed further SPX weakness (see vertical lines).
What's going on? My analysis suggests that we are seeing the case of the VIX tail wagging the SPX dog.
The full post can be found at our new site here.
Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:
Wednesday, May 18, 2016
What's spooking the stock market?
Mid-week market update: No, it isn't just a more hawkish Federal Reserve that's spooking the stock market. Stock prices were been falling before Fedspeak and the latest FOMC minutes sounded a more hawkish tone. The SPX staged a successful test of its 2040 neckline support of its head and shoulders pattern today. In fact, today`s action could be interpreted constructively as it is experiencing a minor positive divergence on RSI-5.
Don`t blame the Fed. Market weakness is a symptom, not the cause of the retreat.
I turned more cautious on the stock market last week because of growing market fears of a slowdown in China (see Tactically taking profits on the commodity and reflation trade). There seems to be a bifurcation starting to occur in the global economy. The US macro picture looks fine as the American economy is motoring along, as evidenced by the latest news of the April rebound in industrial production. Outside the US, the picture looks far less rosy.
The latest BoAML Fund Manager Survey revealed the top two tail-risks on fund managers' minds were Brexit and China, which did not appear as a source of concern in the previous month's survey. It's no wonder that the markets are getting spooked.
Here's how I am preparing myself and how I would watch for the turn upwards, should it come.
The full post can be found at our new site here.
Website notice
Come over to the new site and check out our track record. We have something for traders and investors:
Don`t blame the Fed. Market weakness is a symptom, not the cause of the retreat.
I turned more cautious on the stock market last week because of growing market fears of a slowdown in China (see Tactically taking profits on the commodity and reflation trade). There seems to be a bifurcation starting to occur in the global economy. The US macro picture looks fine as the American economy is motoring along, as evidenced by the latest news of the April rebound in industrial production. Outside the US, the picture looks far less rosy.
The latest BoAML Fund Manager Survey revealed the top two tail-risks on fund managers' minds were Brexit and China, which did not appear as a source of concern in the previous month's survey. It's no wonder that the markets are getting spooked.
Here's how I am preparing myself and how I would watch for the turn upwards, should it come.
The full post can be found at our new site here.
Website notice
Come over to the new site and check out our track record. We have something for traders and investors:
Wednesday, March 30, 2016
Updates on the Brexit, energy and SPX trades
Mid-week market update: Rather than the usual mid-week market technical comment, I thought that I would present updates on a number of trades that I had suggested in the past:
The full post can be found at our new site here.
Site Notice
The new site is now re-open for new subscribers. We closed our site to new subscribers in January in order to better control the rapid growth of our community. After listening to feedback and making a few tweaks to the site and the content, such as the addition of a mid-week technical update, the site is now re-open for business.
You can subscribe for 1 year (US $249.99), 1 month (US$24.99) or 1 day (US$4.99);. Even if you are not ready to subscribe, you can always sign up for email notification of free posts as they are free and available to the public two weeks after publication.
- How to play the Brexit referendum (published February 29, 2016): Setting up for a trade?
- A possible generational low in oil and energy stocks (published January 20, 2016): Staying long energy
- Long SPX: A shallow pullback (published March 23, 2016): US equities climbing a Wall of Worry
The full post can be found at our new site here.
Site Notice
The new site is now re-open for new subscribers. We closed our site to new subscribers in January in order to better control the rapid growth of our community. After listening to feedback and making a few tweaks to the site and the content, such as the addition of a mid-week technical update, the site is now re-open for business.
You can subscribe for 1 year (US $249.99), 1 month (US$24.99) or 1 day (US$4.99);. Even if you are not ready to subscribe, you can always sign up for email notification of free posts as they are free and available to the public two weeks after publication.
As a reminder, here is a sample of some of past posts:
- Why I am bearish (and what would change my mind) May 2015
- Relax, have a glass of wine August 2015
- Why this is not the start of a bear market September 2015
- The reason why the bulls should be cautious about a January hangover December 2015
- Why this is a correction and not a bear market January 2016
Thursday, September 4, 2014
Why a Scottish-UK currency union is an idiotic idea
Speaking as a Canadian who has seen several Quebec referendums on sovereignty, let me put in my two cents worth on the prospect of a Scottish currency union with the rest of the UK. Business Insider recently published an alarmist article about the implications of a Yes vote for Scottish independence:
Scotland can use the Pound
First of all, if an independent Scotland chooses to use the Pound, no one can stop them, as the Yes side points out (emphasis added):
Considerable costs to using GBP
However, there are costs. The first is the issue of whether Scotland adopts a de facto currency peg or enters into a currency union with the rest of the UK. If so, what does the currency union look like?
For instance, Hong Kong has pegged the HKD to the USD for decades. The USD is also freely used as a second currency in many countries around the world. However, the HKMA does not have a seat at FOMC meetings and the Fed does not take into consideration the effects of its monetary policy decisions on HK or other countries that use the USD. Hong Kong tycoons are acutely aware of US monetary policy. At times, Hong Kong may either be importing either inflation or deflation from the US depending on the differential in growth rates.
Would the BoE go so far as to allow Scotland representation at MPC? If not, Scotland could see a wildly inappropriate monetary policy for its economy. If the UK economy heats up, but Scotland is weak, the act of BoE tightening would send the Scottish economy into a deeper recession than if it had its own currency. No doubt Scots saw first hand in the last few years the effects of a currency union in the eurozone without a political union.
Is this what "independence" would look like? To see the Scottish economy be at the whims of BoE decisions?
On the other hand, would the BoE actually allow representation from a foreign government or entity at to have sway on its monetary policy decisions? Even so, how much influence does Greece or Portugal have on ECB deliberations?
Mark Carney, the Canadian head of the BoE who undoubtedly understand these issues, noted that while there could be negotiations, a currency union requires "some ceding of national sovereignty" (vias the Guardian):
If the referendum were to pass, adopting the another currency for use in a newly independent country is an idiot idea, for both Quebec and Scotland. An currency and economic union without a political union is a potential disaster in the making. But then, the last time Europe saw both an economic and political union was in 1941 under Hitler - and look how well that turned out.
Three separate reports published by economic experts warn a separate Scotland would require deep public spending cuts and lead to higher interest charges for mortgage holders.
Scottish independence would herald a new wave of painful public spending cuts, an increase in mortgage costs and a eurozone-style currency crisis, economic experts have warned amid claims “the penny is finally dropping” about the dangers.
City analysts from Goldman Sachs and Berenberg, a German-based multinational bank, published reports concluding a Yes vote would force Scotland into deeper austerity, requiring a “significant reduction in the provision of public services” to gets its finances in order.
In a separate analysis, Iain McLean, professor of politics at Oxford University, predicted every Scot would be £480 worse off under independence now thanks to sharply declining oil revenues.
All three agreed that a separate Scotland would pay a higher interest rate on its borrowing, an additional cost that would be passed onto borrowers and mortgage holders.
David Cameron on Wednesday warned this hike would be even higher if Alex Salmond made good his “chilling” threat to refuse to accept a share of the U.K.’s national debt, adding the consequences would be “crippling” for the Scottish people.
Goldman Sachs also predicted a eurozone-style financial crisis could hit both Scotland and the remainder of the U.K., with uncertainty over a currency union causing a run on assets and deposits based north of the Border.
Alex Salmond has said the three main U.K. parties are bluffing by ruling out a formal deal to share the pound, but the global investment bank concluded the warning was “credible.”
Scotland can use the Pound
First of all, if an independent Scotland chooses to use the Pound, no one can stop them, as the Yes side points out (emphasis added):
The Scottish Government proposes that an independent Scotland will continue to use the pound and enter into a formal currency agreement with the government of the United Kingdom – as explained in this article.
In adopting this policy, the Scottish Government has accepted the recommendation of a group of independent and internationally renowned economists -the Fiscal Commission - that a formal currency union is the best way ahead. A formal currency union would provide the right balance of autonomy for government and stability for business, as well as straightforward access to markets in the remainder of the UK.
It is important to remember, however, that Scotland cannot be stopped from continuing to use the pound, which is a fully tradeable currency. As No leader Alistair Darling was forced to admit recently, "of course Scotland can use the pound".
Considerable costs to using GBP
However, there are costs. The first is the issue of whether Scotland adopts a de facto currency peg or enters into a currency union with the rest of the UK. If so, what does the currency union look like?
For instance, Hong Kong has pegged the HKD to the USD for decades. The USD is also freely used as a second currency in many countries around the world. However, the HKMA does not have a seat at FOMC meetings and the Fed does not take into consideration the effects of its monetary policy decisions on HK or other countries that use the USD. Hong Kong tycoons are acutely aware of US monetary policy. At times, Hong Kong may either be importing either inflation or deflation from the US depending on the differential in growth rates.
Would the BoE go so far as to allow Scotland representation at MPC? If not, Scotland could see a wildly inappropriate monetary policy for its economy. If the UK economy heats up, but Scotland is weak, the act of BoE tightening would send the Scottish economy into a deeper recession than if it had its own currency. No doubt Scots saw first hand in the last few years the effects of a currency union in the eurozone without a political union.
Is this what "independence" would look like? To see the Scottish economy be at the whims of BoE decisions?
On the other hand, would the BoE actually allow representation from a foreign government or entity at to have sway on its monetary policy decisions? Even so, how much influence does Greece or Portugal have on ECB deliberations?
Mark Carney, the Canadian head of the BoE who undoubtedly understand these issues, noted that while there could be negotiations, a currency union requires "some ceding of national sovereignty" (vias the Guardian):
Any negotiations on a currency union would involve major concessions by both sides. The UK would have to abandon the clear commitments of Osborne, Alexander and Balls. But Salmond would have to acknowledge for the first time that joining a currency union would involve the loss of some sovereignty after Mark Carney, the governor of the Bank of England, said in Edinburgh in January: "A durable, successful currency union requires some ceding of national sovereignty."During the debate leading up to Quebec referendums, the Oui side has always held out the siren song of an independent Quebec using the Canadian Dollar as a currency. Nothing will change, they assured the Quebecois. However, serious sovereigntists who have studied the issue have concluded that Quebec needed its own currency in order to be truly independent.
If the referendum were to pass, adopting the another currency for use in a newly independent country is an idiot idea, for both Quebec and Scotland. An currency and economic union without a political union is a potential disaster in the making. But then, the last time Europe saw both an economic and political union was in 1941 under Hitler - and look how well that turned out.
Thursday, July 18, 2013
A better way to buy Europe?
I have been constructive on Eurozone equities for some time. The imbalances in the region are healing slowly. Ed Yardeni, on his Fed Blog, highlighted a speech by ECB Vice-President Vítor Constâncio who indicated that the competitiveness gap between the North and South is narrowing:
Political risks?
Meanwhile, nagging doubts remain. In particular, the political situation is crumbling and, under such circumstances, the likelihood of an anti-EU leader taking power or achieving enough power to become kingmaker, such as a Beppe Grillo in Italy or Marine Le Pen in France are increasing. Euroskeptic Ambrose Evans-Pritchard documented the political problems in Spain, which is hindering the government's ability to act:
Britain a better way to play Europe?
There may be a way to get exposure to the Eurozone economies without the drama - Britain. The UK is a relatively large and diversified economy that is part of the EU and trades principally with its partners on the Continent. However, it does have the advantage of being able to adjust competitive differences through the exchange rate mechanism instead of being locked into a single currency like the euro.
More recently, the outlook for the British economy is looking up. The UK June PMI beat expectations as the British economy posted its fastest growth in two years. Business confidence is surging and hit levels last seen in January 2008.
Take a look at this ten year chart of the relative returns of UK stocks (EWU) against Eurozone equities (FEZ). Both are ETFs trading in USD so that any currency effects are already factored in. UK equities had been in a trading range against its Eurozone counterparts until the adjustments after Lehman Crisis and the EWU/FEZ ratio has been in a relative uptrend ever since. As the ratio has retreated to test the relative uptrend line, it may be a good entry point for this trade.
Indeed, the UK market may be a better way to gain exposure to Europe, but without the drama.
It is also a cautionary tale for the gold standard cheerleaders who believe in a rigid exchange rate regime (like the euro) compared to the flexibility of floating exchange rates, but that's a post for another day.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.
They are achieving greater sustainability by moving towards an economic model based less on external borrowing and more on internal competitiveness. Indeed, according to harmonised competitiveness indicators based on unit labour costs have all registered significant improvements since 1999, Ireland (-19% since 1999), Spain (-9.5%), Greece (-9%), and Portugal (-6.6%). The loss of competitiveness accumulated until 2007 has been totally offset since the beginning of the crisis. As a consequence, the EU Commission forecast for this year is that all stressed countries will show a surplus on current account with the exception of Greece with a deficit of just 1.1 % of GDP.What's more, the solutions have turned away from the popular perception of "all austerity, all the time" to a greater focus on growth. The recent Berlin summit that Angela Merkel held on youth unemployment is just one signal that the Eurozone leadership is now focusing on greater stimulus measures.
Political risks?
Meanwhile, nagging doubts remain. In particular, the political situation is crumbling and, under such circumstances, the likelihood of an anti-EU leader taking power or achieving enough power to become kingmaker, such as a Beppe Grillo in Italy or Marine Le Pen in France are increasing. Euroskeptic Ambrose Evans-Pritchard documented the political problems in Spain, which is hindering the government's ability to act:
Spain’s crisis has a new twist. The ruling Partido Popular is caught in a slush-fund scandal of such gravity that it cannot plausibly brazen out the allegations any longer, let alone rally the nation behind another year of scorched-earth cuts. El Mundo says a “pre-revolutionary” mood is taking hold.Then there is the political crisis in Portugal:
A magistrate has obtained the original “smoking gun” alleging that Premier Mariano Rajoy accepted illegal payments as a minister. The Left is calling for his head but so are members of the Consejo General del Poder Judicial, the justice watchdog.
“Citizens cannot tolerate a situation where the prime minister has received undeclared payments,” said José Manuel Gómez, a Consejo member. Much of the ruling party appears tainted by a network of covert funding. If proved, said Mr Gomez, it poses a “very grave” threat to Spanish democracy.
Portugal is slipping away. Professor João Ferreira do Amaral’s book - Why We Should Leave The Euro – has been a bestseller for months. He accuses Brussels of serving as an enforcer for Germany and the creditor powers.
Like Greece before it, Portugal is chasing its tail in a downward spiral. Economic contraction of 3pc a year is eroding the tax base, causing Lisbon to miss deficit targets. A new working paper by the Bank of Portugal explains why it has gone wrong. The fiscal multiplier is “twice as large as normal”, or 2.0, in small open economies during crisis times.
What is new is that Vitor Gaspar, the high priest of Portugal’s shock therapy, has thrown in the towel. He blames the fainthearted for refusing to slash with greater vigour. Needless to say, he still refuses to accept that a strategy of wage cuts and deflation in a country with total debt of 370pc of GDP was always likely to fail.
Britain a better way to play Europe?
There may be a way to get exposure to the Eurozone economies without the drama - Britain. The UK is a relatively large and diversified economy that is part of the EU and trades principally with its partners on the Continent. However, it does have the advantage of being able to adjust competitive differences through the exchange rate mechanism instead of being locked into a single currency like the euro.
More recently, the outlook for the British economy is looking up. The UK June PMI beat expectations as the British economy posted its fastest growth in two years. Business confidence is surging and hit levels last seen in January 2008.
Take a look at this ten year chart of the relative returns of UK stocks (EWU) against Eurozone equities (FEZ). Both are ETFs trading in USD so that any currency effects are already factored in. UK equities had been in a trading range against its Eurozone counterparts until the adjustments after Lehman Crisis and the EWU/FEZ ratio has been in a relative uptrend ever since. As the ratio has retreated to test the relative uptrend line, it may be a good entry point for this trade.
Indeed, the UK market may be a better way to gain exposure to Europe, but without the drama.
It is also a cautionary tale for the gold standard cheerleaders who believe in a rigid exchange rate regime (like the euro) compared to the flexibility of floating exchange rates, but that's a post for another day.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.
Monday, March 8, 2010
The canary keels over?
I have written before that Britain and Pound Sterling (GBP) could be the canary in the mine for the US because of the similarities in their economies, except that the UK is not in the envious position of being the issuer of a major reserve currency.
These days Pound Sterling is falling apart. What's more, the UK housing market seems to be moving into double-dip territory:
A hard landing in China?
While I recognize that the Chinese authorities are trying to engineer a soft landing, but fiscal and monetary authorities have had a nasty habit of overshooting and turning intended soft landings into hard landings. What happens to risk aversion should the US consumer slows (even more) at the same time that China slows? What does that do to the risk of a Chinese hard landing?
Heightened downside stock market risk
Meanwhile, Mark Hulbert reported that there is too much bullishness in stocks and in gold, which are contrarian bearish signs.
John Hussman believes that "the Market Climate for stocks was characterized by unfavorable valuations, overbought conditions, and hostile yield pressures". To put the current conditions into perspective Hussman gave a market history lesson:
The top-down macro, fundamental, technical and the sentiment pictures are all lining up bearishly. Don't say you weren't warned.
These days Pound Sterling is falling apart. What's more, the UK housing market seems to be moving into double-dip territory:
The housing market seems set to undergo its own "double-dip" recession, with Halifax announcing yesterday that there was a 1.5 per cent fall in house prices between January and February, and with the slow economic recovery now on course to depress sentiment for the rest of the year.
Are the troubles in Britain a bad omen for America? Across the Atlantic, there are signs that the US could face a 2Q contraction. James Hamilton at Econbrower points out that a new financial conditions index is plunging which indicates further near-term deterioration. What's more, Patrick Chovanec highlighted that Bloomberg reported that China, which has been the bulwark of growth and stability in a growth-starved world, is moving to further cool down her economy by nullifying financing guarantees by local governments [emphasis mine]:
Many of the stimulus projects undertaken this past year have been financed, not by the central government directly, but by local governments, including cities, counties, and provinces. For the most part, however, they have limited funds and face official restrictions on their ability to borrow directly. To circumvent these limits, they set up special investment vehicles to borrow the money instead. Because these debts are supposedly guaranteed by the local governments (meaning they would step up to pay if the immediate borrower couldn’t), banks and other lenders tend to treat the loans as essentially risk-free. Northwestern University Professor Victor Shih calculates that local governments have already accumulated RMB 11 trillion (US$ 1.7 trillion) in outstanding debt, with RMB $13 trillion (US$ 1.9 trillion) in available credit lines, belying China’s low reported levels of public debt.
Now comes news, from top regulators in Beijing, that “China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.” (According to the report, the Ministry of Finance is also drafting rules to ban local governments from issuing any more such guarantees in the future). Without the guarantees in place, Shih believes, China could face a “gigantic wave” of bad debts and halted projects.
A hard landing in China?
While I recognize that the Chinese authorities are trying to engineer a soft landing, but fiscal and monetary authorities have had a nasty habit of overshooting and turning intended soft landings into hard landings. What happens to risk aversion should the US consumer slows (even more) at the same time that China slows? What does that do to the risk of a Chinese hard landing?
Heightened downside stock market risk
Meanwhile, Mark Hulbert reported that there is too much bullishness in stocks and in gold, which are contrarian bearish signs.
John Hussman believes that "the Market Climate for stocks was characterized by unfavorable valuations, overbought conditions, and hostile yield pressures". To put the current conditions into perspective Hussman gave a market history lesson:
Based on the current overbought status of the market, there are only three similar periods that we can identify in post-war data: August-October 1999 (which was followed by an abrupt air pocket of greater than 10%), September-October 1987 (no comment required), and September-December 1955 (which was followed by a 10% correction, a brief recovery, and a secondary decline to re-test the initial low).
The top-down macro, fundamental, technical and the sentiment pictures are all lining up bearishly. Don't say you weren't warned.
Friday, July 10, 2009
The Grand Experiment
The long term outlook for the USD continues to look dire. As the story broke that the G8 failed to reach a consensus on policy, but believed that the world economy is too weak to withdraw stimulus, and the developing economies rose to challenge the G8, the BoE surprised by halting the expansion of its quantitative easing program.
As I have written before, Britain is the canary in the coal mine for the US. The UK, unlike the US, has a very similar range of problems as the US but does not have the luxury of being the issuer of a major reserve currency.
As Macro Man commented yesterday (before the BoE announcement):
The BoE is embarking on a grand experiment with its QE policy.
Watch this space for what may follow if the Fed follows this path.
As I have written before, Britain is the canary in the coal mine for the US. The UK, unlike the US, has a very similar range of problems as the US but does not have the luxury of being the issuer of a major reserve currency.
As Macro Man commented yesterday (before the BoE announcement):
[I]t's worth noting that today sees an announcement from one of the few CBs in a tighter spot than the Fed....the Bank of England. Inflation has consistently exceeded expectations, and a prior raft of better-than-expected activity data has recently receded into sharp declines. Oh, and the fiscal situation is worse than that in the US, and adminsitered by a government that's now utterly bereft of credibility.
The BoE is embarking on a grand experiment with its QE policy.
Watch this space for what may follow if the Fed follows this path.
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