World Global Strategy
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View World Global Strategy as PDF for free.
More details
- Words: 1,986
- Pages: 4
World Global Strategy
2 September 2009
Global Strategy Weekly Prepare for the next leg in the Ice Age journey into deflation
Albert Edwards (44) 20 7762 5890 [email protected]
Commentators have been perplexed by recent strength in government bond markets, especially set beside continued resilience in equities. They should not be. The bond market is responding to two key events. First, it is clear to us the ongoing march into outright deflation will accelerate during this short-lived economic recovery. Second, post-bubble realities will force commercial banks to aggressively step up their buying of government bonds.
Recent weeks have seen commentators either busy throwing in their towels, as the equity bull market has marched resolutely upwards and onwards (maybe that will change after Monday), or wrestling with their conundrums. Many have found the robustness in government bond prices through August most perplexing, especially when set beside continued resilience in developed equity markets. Q
Once again, equity participants are missing the big picture. For despite clear signs from the business surveys of some sort of H2 recovery, firm evidence is emerging that the global economy is sliding towards a full-blown deflationary episode once this recovery falters. Q
Global asset allocation %
Index
Index neutral
SG Weight
Equities
30-80
60
35
Bonds
20-50
35
50
0-30
5
15
Cash
Source: SG Global Strategy
Equity allocation Very Overweight US UK
Overweight Neutral Underweight
Cont Europe Japan Emerging mkts
Very Underweight Source: SG Global Strategy
My former colleague Rob Parenteau pointed out something interesting to me the other day. He noted the huge divergence between US economy-wide inflation as measured by the gross domestic product (GDP) deflator and a slight variant of GDP, the deflator for gross domestic purchases (see chart below). The key definitional difference between the two measures is that the latter includes recent savage import deflation (as GDP includes exports and excludes imports). Hence the gross domestic purchases deflator is a better measure of what is going on in the US domestic economy. With import prices down some 19% yoy and even a record 7.3% yoy if one excludes petroleum, no wonder the price of domestic purchases has already fallen into deflation. If anything, domestic purchases inflation leads trends in both GDP and core CPI, so this is significant news. (For those who have never come across Rob Parenteau, I believe he is one of the best and bravest commentators out there. His printed thoughts can be found in the renowned Richebächer Letter –link.) Q
US GDP measure of inflation lags domestic purchases inflation…or is that deflation? 5
5
4
4
gross domestic product (GDP)
IMPORTANT: PLEASE READ DISCLOSURES AND DISCLAIMERS
3
3
2
2
1
1
0
gross domestic purchases
0
BEGINNING ON PAGE 4 -1
-1 90
www.sgresearch.socgen.com
Source: Datastream
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Global Strategy Weekly
While there can be no doubt that survey evidence is pointing to a more robust second half, equity markets should be far more nervous than they currently are. We heartily concur with GMOs Jeremy Grantham who remarked recently that after 20 years of more or less permanent overvaluation of US equities, we saw just five months of under-pricing through the March trough. Do bursting global equity valuation bubbles really end like this? Of course they dont. One of the lessons from Japan was that, in a post-bubble world, equities were subject to far more violent swings. We expect to see an exact replica event play out in the west. The Great Moderation - where the 1980s debt super-cycle filled in troughs of recessions will now give way to far more violent swings in the economic cycle more usually seen in the pre-war years and the 19th century. Meanwhile, as we saw in Japan, each economic downswing will sink us deeper and deeper into the deflationary mire (see chart below). Japan’s core CPi (ex food and energy) crashes back into deep deep deflation 3.50
3.50
3.00
3.00
2.50
2.50
VAT hike 2.00
2.00
1.50
1.50
1.00
1.00
0.50
0.50
0
0
-0.50
-0.50
-1.00
-1.00
-1.50
-1.50 90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Source: Datastream
Investors will continue to be shocked by the robust performance of government bonds in the coming months as core CPI crunches lower despite the economic recovery (see chart below). For it is quite clear that it is the recovery phase that takes core CPI to new lows in each cycle. US core CPI crashes lower in the recovery phase 6.00
35
headline ISM (inverted, 6mth mav)
5.50
40 5.00
4.50 45 4.00
3.50
50
3.00 55 2.50
2.00 60 1.50
core CPI (rhscale) 65
1.00 88
89
Source: Datastream
2
2 September 2009
90 91
92 93
94
95 96
97
98
99
00
01
02
03
04
05
06 07
08
Global Strategy Weekly
This is because it is in the recovery phase where the lagged impact of yawning output gaps does its pernicious work to core CPI and companies lower prices in response to the cyclical impact of lower unit labour costs. Hence, while the market focuses on the recovery of volumes as signaled by survey evidence, nominal GDP and consequently nominal revenue growth continue to see lower highs in the recovery and lower lows in the downturn. The bond market has already caught onto this event and yields will continue to decline on a secular basis. But what about massive supply of government bonds I hear you ask? Wont that drive yields higher? Well it never did in Japan. But lets cast our minds back to the early 1990s US credit crunch (which seems so minor in retrospect!). What happened then is that US commercial banks bought US Treasuries aggressively at the same time as they contracted lending to the private sector (see chart below). This continued well after the end of recession in early 1991. US commercial banks buy government bonds aggressively in 1990s credit crunch, yoy % 14
20
loans to gov (treasuries)
12
15 10
8
10
6 5
total
4
2
0
0 -5
recession
-2
bank loans (private) -4
-10 1989
1990
1991
1992
1993
1994
1995
Source: Datastream
I note with interest that Swedish Riksbank recently took its target interest rate negative, in an attempt to force banks to remove surplus reserves and resume lending to the private sector. Of course, no such thing will happen as banks are continuing to buy government paper in unlimited quantities - I note here the recent collapse in UK 1 and 2 year yields to new lows. In the US and elsewhere, where commercial bank exposure to government paper is still close to all-time lows, the unwinding of grotesque over-exposure to bubble sectors like real estate (see chart below) will continue to underpin the secular bull market in government bonds. Share of US total domestic commercial bank loans to real estate and US government, % 50
50
45
45
40
40
35
35
real estate lending as % of loan book
30
30
25
25
20
20
15
15
Govies as % of loan book
10 74
76
78
80
82
84
86
88
90
92
94
10 96
98
00
02
04
06
08
Source: SG Global Strategy
2 September 2009
3
Global Strategy Weekly
IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securities and including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Société Générale (SG) believe it to be clear, fair and not misleading. SG, and their affiliated companies in the SG Group, may from time to time deal in, profit from the trading of, hold or act as market-makers or act as advisers, brokers or bankers in relation to the securities, or derivatives thereof, of persons, firms or entities mentioned in this document or be represented on the board of such persons, firms or entities. Employees of SG, and their affiliated companies in the SG Group, or individuals connected to then, other than the authors of this report, may from time to time have a position in or be holding any of the investments or related investments mentioned in this document. Each author of this report is not permitted to trade in or hold any of the investments or related investments which are the subject of this document. SG and their affiliated companies in the SG Group are under no obligation to disclose or take account of this document when advising or dealing with or for their customers. The views of SG reflected in this document may change without notice. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein. This research document is not intended for use by or targeted at retail customers. Should a retail customer obtain a copy of this report they should not base their investment decisions solely on the basis of this document but must seek independent financial advice. Important notice: The circumstances in which materials provided by SG Fixed & Forex Research, SG Commodity Research, SG Convertible Research, SG Technical Research and SG Equity Derivatives Research have been produced are such (for example because of reporting or remuneration structures or the physical location of the author of the material) that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation (« recommandation dinvestissement à caractère promotionnel »). However, it must be made clear that all publications issued by SG will be clear, fair, and not misleading. Analyst Certification: Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. Notice to French Investors: This publication is issued in France by or through Société Générale ("SG") which is authorised by the CECEI and regulated by the AMF (Autorité des Marchés Financiers). Notice to UK investors: This publication is issued in the United Kingdom by or through Société Générale ("SG") London Branch which is regulated by the Financial Services Authority ("FSA") for the conduct of its UK business. Notice To US Investors: This report is intended only for major US institutional investors pursuant to SEC Rule 15a-6. Any US person wishing to discuss this report or effect transactions in any security discussed herein should do so with or through SG Americas Securities, LLC (SGAS) 1221 Avenue of the Americas, New York, NY 10020. (212)-278-6000. THIS RESEARCH REPORT IS PRODUCED BY SOCIETE GENERALE AND NOT SGAS. Notice to Japanese Investors: This report is distributed in Japan by Société Générale Securities (North Pacific) Ltd., Tokyo Branch, which is regulated by the Financial Services Agency of Japan. The products mentioned in this report may not be eligible for sale in Japan and they may not be suitable for all types of investors. Notice to Australian Investors: Société Générale Australia Branch (ABN 71 092 516 286) (SG) takes responsibility for publishing this document. SG holds an AFSL no. 236651 issued under the Corporations Act 2001 (Cth) ("Act"). The information contained in this newsletter is only directed to recipients who are wholesale clients as defined under the Act. IMPORTANT DISCLOSURES: Please refer to our website: http:\\www.sgresearch.socgen.com http://www.sgcib.com. Copyright: The Société Générale Group 2009. All rights reserved.
4
2 September 2009
2 September 2009
Global Strategy Weekly Prepare for the next leg in the Ice Age journey into deflation
Albert Edwards (44) 20 7762 5890 [email protected]
Commentators have been perplexed by recent strength in government bond markets, especially set beside continued resilience in equities. They should not be. The bond market is responding to two key events. First, it is clear to us the ongoing march into outright deflation will accelerate during this short-lived economic recovery. Second, post-bubble realities will force commercial banks to aggressively step up their buying of government bonds.
Recent weeks have seen commentators either busy throwing in their towels, as the equity bull market has marched resolutely upwards and onwards (maybe that will change after Monday), or wrestling with their conundrums. Many have found the robustness in government bond prices through August most perplexing, especially when set beside continued resilience in developed equity markets. Q
Once again, equity participants are missing the big picture. For despite clear signs from the business surveys of some sort of H2 recovery, firm evidence is emerging that the global economy is sliding towards a full-blown deflationary episode once this recovery falters. Q
Global asset allocation %
Index
Index neutral
SG Weight
Equities
30-80
60
35
Bonds
20-50
35
50
0-30
5
15
Cash
Source: SG Global Strategy
Equity allocation Very Overweight US UK
Overweight Neutral Underweight
Cont Europe Japan Emerging mkts
Very Underweight Source: SG Global Strategy
My former colleague Rob Parenteau pointed out something interesting to me the other day. He noted the huge divergence between US economy-wide inflation as measured by the gross domestic product (GDP) deflator and a slight variant of GDP, the deflator for gross domestic purchases (see chart below). The key definitional difference between the two measures is that the latter includes recent savage import deflation (as GDP includes exports and excludes imports). Hence the gross domestic purchases deflator is a better measure of what is going on in the US domestic economy. With import prices down some 19% yoy and even a record 7.3% yoy if one excludes petroleum, no wonder the price of domestic purchases has already fallen into deflation. If anything, domestic purchases inflation leads trends in both GDP and core CPI, so this is significant news. (For those who have never come across Rob Parenteau, I believe he is one of the best and bravest commentators out there. His printed thoughts can be found in the renowned Richebächer Letter –link.) Q
US GDP measure of inflation lags domestic purchases inflation…or is that deflation? 5
5
4
4
gross domestic product (GDP)
IMPORTANT: PLEASE READ DISCLOSURES AND DISCLAIMERS
3
3
2
2
1
1
0
gross domestic purchases
0
BEGINNING ON PAGE 4 -1
-1 90
www.sgresearch.socgen.com
Source: Datastream
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Global Strategy Weekly
While there can be no doubt that survey evidence is pointing to a more robust second half, equity markets should be far more nervous than they currently are. We heartily concur with GMOs Jeremy Grantham who remarked recently that after 20 years of more or less permanent overvaluation of US equities, we saw just five months of under-pricing through the March trough. Do bursting global equity valuation bubbles really end like this? Of course they dont. One of the lessons from Japan was that, in a post-bubble world, equities were subject to far more violent swings. We expect to see an exact replica event play out in the west. The Great Moderation - where the 1980s debt super-cycle filled in troughs of recessions will now give way to far more violent swings in the economic cycle more usually seen in the pre-war years and the 19th century. Meanwhile, as we saw in Japan, each economic downswing will sink us deeper and deeper into the deflationary mire (see chart below). Japan’s core CPi (ex food and energy) crashes back into deep deep deflation 3.50
3.50
3.00
3.00
2.50
2.50
VAT hike 2.00
2.00
1.50
1.50
1.00
1.00
0.50
0.50
0
0
-0.50
-0.50
-1.00
-1.00
-1.50
-1.50 90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Source: Datastream
Investors will continue to be shocked by the robust performance of government bonds in the coming months as core CPI crunches lower despite the economic recovery (see chart below). For it is quite clear that it is the recovery phase that takes core CPI to new lows in each cycle. US core CPI crashes lower in the recovery phase 6.00
35
headline ISM (inverted, 6mth mav)
5.50
40 5.00
4.50 45 4.00
3.50
50
3.00 55 2.50
2.00 60 1.50
core CPI (rhscale) 65
1.00 88
89
Source: Datastream
2
2 September 2009
90 91
92 93
94
95 96
97
98
99
00
01
02
03
04
05
06 07
08
Global Strategy Weekly
This is because it is in the recovery phase where the lagged impact of yawning output gaps does its pernicious work to core CPI and companies lower prices in response to the cyclical impact of lower unit labour costs. Hence, while the market focuses on the recovery of volumes as signaled by survey evidence, nominal GDP and consequently nominal revenue growth continue to see lower highs in the recovery and lower lows in the downturn. The bond market has already caught onto this event and yields will continue to decline on a secular basis. But what about massive supply of government bonds I hear you ask? Wont that drive yields higher? Well it never did in Japan. But lets cast our minds back to the early 1990s US credit crunch (which seems so minor in retrospect!). What happened then is that US commercial banks bought US Treasuries aggressively at the same time as they contracted lending to the private sector (see chart below). This continued well after the end of recession in early 1991. US commercial banks buy government bonds aggressively in 1990s credit crunch, yoy % 14
20
loans to gov (treasuries)
12
15 10
8
10
6 5
total
4
2
0
0 -5
recession
-2
bank loans (private) -4
-10 1989
1990
1991
1992
1993
1994
1995
Source: Datastream
I note with interest that Swedish Riksbank recently took its target interest rate negative, in an attempt to force banks to remove surplus reserves and resume lending to the private sector. Of course, no such thing will happen as banks are continuing to buy government paper in unlimited quantities - I note here the recent collapse in UK 1 and 2 year yields to new lows. In the US and elsewhere, where commercial bank exposure to government paper is still close to all-time lows, the unwinding of grotesque over-exposure to bubble sectors like real estate (see chart below) will continue to underpin the secular bull market in government bonds. Share of US total domestic commercial bank loans to real estate and US government, % 50
50
45
45
40
40
35
35
real estate lending as % of loan book
30
30
25
25
20
20
15
15
Govies as % of loan book
10 74
76
78
80
82
84
86
88
90
92
94
10 96
98
00
02
04
06
08
Source: SG Global Strategy
2 September 2009
3
Global Strategy Weekly
IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securities and including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Société Générale (SG) believe it to be clear, fair and not misleading. SG, and their affiliated companies in the SG Group, may from time to time deal in, profit from the trading of, hold or act as market-makers or act as advisers, brokers or bankers in relation to the securities, or derivatives thereof, of persons, firms or entities mentioned in this document or be represented on the board of such persons, firms or entities. Employees of SG, and their affiliated companies in the SG Group, or individuals connected to then, other than the authors of this report, may from time to time have a position in or be holding any of the investments or related investments mentioned in this document. Each author of this report is not permitted to trade in or hold any of the investments or related investments which are the subject of this document. SG and their affiliated companies in the SG Group are under no obligation to disclose or take account of this document when advising or dealing with or for their customers. The views of SG reflected in this document may change without notice. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein. This research document is not intended for use by or targeted at retail customers. Should a retail customer obtain a copy of this report they should not base their investment decisions solely on the basis of this document but must seek independent financial advice. Important notice: The circumstances in which materials provided by SG Fixed & Forex Research, SG Commodity Research, SG Convertible Research, SG Technical Research and SG Equity Derivatives Research have been produced are such (for example because of reporting or remuneration structures or the physical location of the author of the material) that it is not appropriate to characterise it as independent investment research as referred to in European MIF directive and that it should be treated as a marketing material even if it contains a research recommendation (« recommandation dinvestissement à caractère promotionnel »). However, it must be made clear that all publications issued by SG will be clear, fair, and not misleading. Analyst Certification: Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or her personal views about any and all of the subject securities or issuers and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. Notice to French Investors: This publication is issued in France by or through Société Générale ("SG") which is authorised by the CECEI and regulated by the AMF (Autorité des Marchés Financiers). Notice to UK investors: This publication is issued in the United Kingdom by or through Société Générale ("SG") London Branch which is regulated by the Financial Services Authority ("FSA") for the conduct of its UK business. Notice To US Investors: This report is intended only for major US institutional investors pursuant to SEC Rule 15a-6. Any US person wishing to discuss this report or effect transactions in any security discussed herein should do so with or through SG Americas Securities, LLC (SGAS) 1221 Avenue of the Americas, New York, NY 10020. (212)-278-6000. THIS RESEARCH REPORT IS PRODUCED BY SOCIETE GENERALE AND NOT SGAS. Notice to Japanese Investors: This report is distributed in Japan by Société Générale Securities (North Pacific) Ltd., Tokyo Branch, which is regulated by the Financial Services Agency of Japan. The products mentioned in this report may not be eligible for sale in Japan and they may not be suitable for all types of investors. Notice to Australian Investors: Société Générale Australia Branch (ABN 71 092 516 286) (SG) takes responsibility for publishing this document. SG holds an AFSL no. 236651 issued under the Corporations Act 2001 (Cth) ("Act"). The information contained in this newsletter is only directed to recipients who are wholesale clients as defined under the Act. IMPORTANT DISCLOSURES: Please refer to our website: http:\\www.sgresearch.socgen.com http://www.sgcib.com. Copyright: The Société Générale Group 2009. All rights reserved.
4
2 September 2009
Related Documents
World Global Strategy
June 2020 10
World Global Strategy
June 2020 8
World Global Strategy
May 2020 5
Global Strategy
June 2020 13
Embraer: Global Strategy
May 2020 20