Tactical Style Selection - TSS November 2014

by Michael J. Howell13. November 2014 23:01
All current evidence points to the Speculation investment zone, according to our models. With Global Liquidity conditions set to further deteriorate over next 6-12 months, paced by Central Bank tightenings and slowing private sector cash flows, we expect 2015 to be a year of Turbulence. Our latest TSS reports published today for DM and EM detail the appropriate investment strategies.

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A Peak With A View?

by Michael J. Howell10. March 2013 22:02
New highs on Wall Street have prompted inevitable navel-gazing. A popular repost is the 'lack of correlation between GDP and stock prices'. Another is the artificial '100-150bp drop in bond yields caused by QE policies'. The real questions should be (1) is there a strong correlation between GDP and profits growth, and (2) what governs the valuation of these profits? The first answer is an unequivocal 'yes' and the second comes down to two things - the scale of QE (and other liquidity effects) and the underlying inflation rate. It is clear that more QE reduces risk premia on risk assets. Since bonds are a low risk asset for long-term funds, QE is more likely to raise not lower risk prema on bonds. Therefore, the longer than QE persists, the more that equity risk premia will fall and bond risk premia will rise. Regarding inflation, Central Banks do not create CPI inflation, but governments do. While private sectr debt is high and excess capacity high, there will be no acceleration in inflation. Therefore, based on these 'internal' risk factors, Wall Street et al should rise. But two 'external' risk factors worry us: a too strong US dollar and the recent tightening by the ECB. End-February GLI liquidity data will be published around March 14th. They need to be watched.

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Publication and Mid-Month Update

by Michael J. Howell24. January 2013 18:35
Latest Global Liquidity Update Report and First Quarter Outlook slide pack published today.... What have we seen so far in 2013? Weak Eurozone economic data; more evidence that ECB is cutting back its liquidity injections; announcement that Japan is moving to a 2% inflation target, alongside a record 2012 trade deficit, and decent US and China economic data, plus firmness in commodities and evidence from the breakout in the Dow Transportation Average that investors are moving back to cyclicals. Yield curves are inching upwards, gold is wobbly and the dollar is muscling forwards. To us this data confirms the view from liquidity data: hold your nose and buy cyclicals, especially EM; reduce gold; watch out for another Euro Crisis, and take a bet on structural change in Japan.

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Global Liquidity Update

US Dollar Yield Curve...Moving On Up

by Michael J. Howell3. January 2013 09:53

A recap of our recent fixed income market views: (1) QE policies steepen and do not flatten yield curves as the consensus apparently believes;(2) QE and Liquidity must be judged from the entire US Dollar Area; (3) the Fed has clearly changed policy from attacking inflation to attacking the jobless numbers. This is the most significant policy change since Volcker's in 1979. Yet the Fed's balance sheet has grown too slowly of late because of the long settlement times involved in MBS buying, but fact is it is buying. On the other hand, US Dollar Area liquidity is already rising because of China and EM expansionary policies. Conclusion: expect the US yield curve to steepen more and the 10-year bond to sell-off. The yield curve has already steepened from a July 2012 low of 85bp between 10 and 5 year Treasuries, to 108bp in early January 2013. On top, the 10 year yield is testing it's 1.9% break-out level. So far so bad for fixed income, but this is what QE does to 'low risk' assets. 2013 should be 'Risk On'.

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How to Understand 2013: Think 'M'

by Michael J. Howell2. January 2013 02:14

If like us you believe in the power and efficacy of Liquidity, then you should think about how liquidity moves? We maintain that it flows in a regular pattern that roughly traces out an M-shape over a decade long cycle. Liquidity leads by around year, but troughs are associated with banking crises and peaks with asset booms. The 'v' of the 'M' is typically shallow, giving approximately two asset booms per banking crisis. Banking crises occurred in 1966, 1974, 1982, 1990, 1998, 2007-08. The next is slated for sometime around 2016/17. Near enough to register, but too distant to worry about. Before then the next Liquidity peak is likely to be 2014, with 2013 a likely year (or should be) of rising liquidity. The last Liquidity peak was in 2010, and the recent 'v' lasted on cue from mid-2011 to late-2012, with liquidity drifting around its mid-levels. Thus, if we and our more prescient assistant history are correct, 2013 should see the monetary spigots open; yield curves steepen, paper currencies weaken, commodities jump and risk asset prices rise. This is our roadmap for 2013.

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The Big Event of 2013: 2012

by Michael J. Howell2. January 2013 01:51

We remain upbeat for this year, convinced the seeds for success were sown in 2012. Three 'liquidity' events proved critical: (1) Draghi at the ECB backstopped Eurozone risk with promises of extra cash; (2) Fed policy switched from attacking inflation to promoting employment. This message resonated among several other key Central Banks, so making it the most significant global policy change since Volcker took over the Fed in 1979, and (3) China's PBoC stepped up the pace of its liquidity injections from mid-year 2012. This halted domestic economic weakness; reversed the whopping outflow of foreign capital and promoted outperformance of EM equities from Q3. More of the same should be expected in 2013: paper currencies, notably the Yen, will remain fragile; commodity prices will pick-up; yield curves should steepen and rates start to rise, against the backdrop of still sluggish but better than expected economic activity. Above all EM equities will outperform: they are typically pro-cyclical and currently are out-of-favour with skeptical global investors, whose exposure remains a whopping two standard deviations below average.

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2013: Big Questions For The Big Consensus

by Michael J. Howell19. December 2012 15:41

The first flush of November liquidity data allows us to reassess 2013 prospects. Hard evidence of extra cash inflows are thin. Latest data show the aggregate GLI (Global Liquidity Index) slipping back to 46.5 from a value of 57.0 in October, 2012 ('normal' range 0-100). The bulk of this setback came from lower Central Bank Liquidity in both the Eurozone and Japan in November. BoJ liquidity injections measured at an index value of 27.9 are proving remarkably weak in the face of persistent criticism of its policy and expectations that its hand will be 'forced' towards greater ease after the early December Election. Given that latest capital flow data highlight a sharp net outflow of money from Japan, this fact by itself would normally (and may be currently does) signal a domestic monetary tightening in response. Therefore, talk of a further flood of Yen from re-starting the printing presses could prove significant and highly disturbing for the forex and JGB markets in 2013. The long-threatened sell-off in JGBs could prove the key event for global bonds because if Japan can escape from deflation, so can the other economies.

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Global Liquidity Update

Asset Allocation: Growth and Equities?

by Michael J. Howell12. December 2012 20:44
A recent FT blog contained academic wranglings concerning the 'fact' that faster economic growth is associated with lower equity returns! The professors are striving to find a paradox when really there is not one. Bonds (taking due account of inflation) correlate negatively with GDP growth and commodity prices (taking due account of resource sector productivity) correlate positively with GDP growth. These two asset markets seem to do what theory says. However, when equities are introduced, sometimes they correlate negatively with bonds and sometimes positively. It looks like equities are at fault. But we know that eps growth is strongly positively correlated to GDP growth, so the true culprit is equity valuation. Since P/Es cannot disappear to zero, this tells us that different valuation regimes must exist that include periods when valuations move oppositely to eps growth. Thus, sometimes equity valuations are pro-cyclical, e.g. right now, and sometimes they are anti-cyclical, e.g. 1980s and 1990s: two periods when they saw their highest correlation to bonds. What explains these regimes is a combination of inflation, the credit cycle and the starting valuation level. Moderate inflations, with strong credit growth, are typically when equity valuations are at their highest. The bottom line is that when economic activity picks up: equities will outperform. See latest research note: 'The Return of TAA'


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