Chart: US Dollar, EMFX, Asian FX, and the USDCNY

By Callum Thomas

Well it’s a mouthful of a title, but sometimes you just have to say exactly what’s in the post and today we’re looking at 4 charts-in-one… and they are about as topical as it comes.  The charts come from our weekly Global Cross Asset Market Monitor: the top left is the US dollar index, the top right is an equal weighted emerging market currency index (25 currencies vs USD), the bottom left is an equal weighted index of 10 Asian currencies vs the USD, and the bottom right of course is the Renminbi against the US dollar (USDCNY).  Bottom line is there is a big move underway across global foreign exchange markets right now, and it’s quite likely there’s more to come.

What’s driving this, aside from a few idiosyncratic issues (e.g. Turkey – which I believe is simply a symptom of a wider issue), is monetary policy divergence, a subtle desynchronization of global growth, and softening macro picture in China.  Fed tightening (rate hikes and QT) is a key catalyst, and the trade war just adds fuel to the fire.  I talked previously about how Fed tightening and a stronger dollar is going to put stress on emerging markets, and the charts above show basically this thesis in action.  The biggest risk is that you get a feedback loop of stronger dollar >> EM stress >> stronger dollar >> and so on.  As previously noted, the USDCNY going through 7 could be a critical test (aka nail in the coffin) for the low volatility environment, and as I write the USDCNY is trading just over 6.933, so this test may come sooner than you expect…

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Pure Corruption

By Jeffrey Snider

In December 1999, Princeton Professor Ben S. Bernanke wrote a relatively obscure paper largely denouncing the Bank of Japan’s shyness. Japan’s economy had by then been mired in its first Lost Decade, one which at that moment not everyone was sure should have been lost. It was fashionable at the time to pile on the BoJ.

Dr. Bernanke argued for extreme aggressiveness, truly radical experimentation. Big problems require equally big solutions. These were necessary because of the huge scale of the issue facing them. In conclusion, the future Fed Chairman wrote:

Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. [emphasis added]

His larger point was valid, and poignant. In Japan’s case, as anyone’s might be in the same situation, there should be no stone left unturned when confronted by such a substantial break in economic function. A dislocation of that magnitude, meaning length of time if not depths to some 1930’s trough, demands emergency thinking rather than stolid patience almost to the point of indifference.

To be so relatively passive would be a crime, especially if the results were to be losing a decade of actual economic sufficiency. Dr. Bernanke argued for thinking way outside the box, for what else would be demanded by this sort of situation?

Continue reading Pure Corruption

Global Equity PE10 Valuations

By Callum Thomas

As the pressure comes down on global equities – particularly global Ex-US (and particularly emerging markets) – valuations have likewise come down.  But the movement in valuations is so far relatively small.  US PE10 valuations have clawed back much of the decline, while emerging market valuations have moved to new lows for the year, down -15% since the top now (and developed markets ex-US valuations are down -11%).  This places the Emerging Markets PE10 at a 55% discount vs the USA and a 23% discount vs developed markets ex-US.  I wonder though if we wont see even cheaper valuations and a wider discount for EM equities as Fed tightening and US dollar strength start to bite.  Longer term, valuations will speak for themselves, but they will speak louder if they move to a more extreme level…

Continue reading Global Equity PE10 Valuations

Bringing Bad Things to Life

By Tim Knight

General Electric has been falling for two solid years, having lost about two-thirds of its value. Let’s face it, ANY stock which can do that poorly in this completely fake, central-bank-supported, sugar-high of a market has got to have SERIOUS trouble. I thought it might manage to double bottom, but nope – – even with markets near lifetime highs, this piece of crap is breaking down to levels not seen since 2011.

Continue reading Bringing Bad Things to Life

Is the Fed Model a Good Valuation Tool?

By Charlie Bilello

Should investors use bond yields as a baseline to determine if stocks are over-or-under valued?

If you believe in the “Fed Model,” your answer is “yes.” The model instructs investors to compare the S&P 500’s earnings yield (Earnings/Price, the inverse of the P/E ratio) to the 10-Year Treasury yield:

  • If the Earnings Yield is above the Treasury Yield, stocks are said to be “undervalued.”
  • If the Earnings Yield is below the Treasury Yield, stocks are said to be “overvalued.”

With the Earnings Yield (“EY”) today currently above the 10-Year Treasury Yield (“TY”), many pundits are arguing that stocks are still undervalued (and therefore attractive), despite other metrics indicating otherwise (click here for recent post on this). Are these pundits correct? Is comparing the Earnings Yield to Treasury Yields an effective way to value stocks and forecast future equity returns? Let’s take a look…

Continue reading Is the Fed Model a Good Valuation Tool?

Monetary Consequence of Tariffs, Report

By Keith Weiner

Last week in Monetary Paradigm Reset, we talked about the challenge of explaining a new paradigm. We said:

“The hard part of accepting this paradigm shift, was that people had to rethink their entire view of cosmology, theology, and philosophy. In the best case, people take time to grapple with these challenges to their idea of man’s place in the universe. Some never accept the new idea.”

We were talking about the fact that money is the unit of account, and the assertion that irredeemable paper currencies are money.

Monetary Relativity

This week, Turkey provides an opportunity to discuss this in a way most people can relate to. Their currency, the lira, has been falling for years, but the rate of its plunge accelerated dramatically this week. It closed last week at 19.6 cents, but on Friday it was 15.5. This may not seem like a lot, but those 3.1 pennies are about 21 percent. In a week!

Continue reading Monetary Consequence of Tariffs, Report

Where’s the Outrage?

By Tim Knight

James: Hey, Tim, do you want to know how to make a small fortune from cryptocurrencies?

Tim: Sure, James, how DO you make a small fortune from cryptocurrencies?

James: Start with a large fortune!

{rim shot}

Tonight, as I’m watching the crypto space continue to do what it has been doing for the entirety of 2018 – – that is, fall in value – – I am reminded of those ads which absolutely flooded the Internet late in 2017. Surely you saw them. There were dozens of flavors of this ad, but they all pretty much looked like these:

The basic come-on, if you followed any of these ads, was roughly along these lines:

Continue reading Where’s the Outrage?

Pullbacks Heading Into Opex Week

By Rob Hanna

Opex week often carries some bullish seasonality. Pullbacks into strong seasonal periods will often offer substantial edges. The study below utilizes this concept and examines pullbacks of at least 3 days just prior to opex week.

2018-08-12-1

Numbers here are strong, and suggest a possible upside edge. Of course, August opex week has NOT been great. (Click here to see opex week broken down by month.) So that generates the question of whether the above study would be effective in August. Below are the instances that have previously occurred during August.

Continue reading Pullbacks Heading Into Opex Week

Congratulations, Argentina! A New Record!

By Otto Rock

A round of applause for the Macri government, which has managed to push the Argentina Peso (ARS) over the 30-to-1 barrier against the US Dollar (USD) for the first time ever:

Yes, Mauri, we know you have inflation under control. Of course, relax. Now, cue up those front page headlines about how Chileans are happy to come and buy in Buenos Aires and how that’s going to benefit the economy. You know it makes sense.

You guys can keep your Turkish Lira, I’ll take the 62.3% deval in the Argy Peso in 2018 YTD and the total fruitcake country behind it every single time.

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Gold: Bearish Fundamentals, Bullish Sentiment

By Steve Saville

For the first time this year, about two weeks ago the sentiment backdrop became decisively supportive of the gold price and remains so. At the same time, the fundamental backdrop is unequivocally bearish for gold. What will be the net effect of these counteracting forces?

Before attempting to answer the above question let’s briefly review the most important sentiment and fundamental indicators.

The following chart from goldchartsrus.com shows that at Tuesday 7th August (the date of the latest COT data) the net positioning of traders in gold futures was similar to what it was in December-2015, which is when a powerful 7-month rally was about to begin. Therefore, in terms of net positioning the COT situation (the most useful of all the gold-market sentiment indicators) is as bullish as it has been in many years.

The one concern is that while the open interest (the green bars in the bottom section of the following chart) is well down from where it was a month ago, it is still more than 50K contracts above where it was at the December-2015 and December-2016 price lows (the two most important price lows of the past five years). The open interest may have to drop to 400K contracts or lower before there is a strong, multi-month rally.

goldCOT_130818

Continue reading Gold: Bearish Fundamentals, Bullish Sentiment

Global Equities Death Cross Breadth

By Callum Thomas

Given the swiftly changing picture in global markets, this is a key chart to keep on your radar.  In fact, I like this chart so much that it actually featured in my top 10 charts to watch for 2018 back at the start of January.  What it shows is the proportion of the 70 countries we monitor whose stock market has seen a death cross (50-day moving average trading below the 200-day moving average).  As of the latest data 64% of countries (45 out of 70) are in death-cross mode.  Within cohorts, Developed Markets have 48% of countries in death cross mode, while Frontier Markets are sitting at 73% and Emerging Markets at 71%.

So it’s clearly being driven by emerging markets, and this makes sense – I’ve written a lot about the headwinds facing emerging market currencies and EM risk assets more broadly due to the impact of a stronger US dollar and Fed tightening (rate hikes and QT).  And this is where indicators like the one in this chart prove their value by flagging the emergence of real fundamental issues in drawing on information in the price.  So the key takeaway from this chart is that below the surface there is trouble stirring in global equities.

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