Sometimes it is best just to sit back and do nothing, and perhaps, watching the World Cup isn’t such a bad way to spend your time at the moment. Last week, I laid out what I consider the two main economic and market themes. First, real narrow money and liquidity growth is slowing, which is usually a bad sign for risk assets and second, monetary policy divergence is being stretched to new extremes. I surmise that most of the key macro-trading trends can be derived from these two stories. All other important themes are just crammed into the box labelled political uncertainty, a box which incidentally is increasingly full to the brim. The consensus is that political risk is the dog the never barks; this true on a headline level. But I can’t help but think that markets are a like deer caught in the headlight. Everyone is waiting for one of the political land mines to blow up, but no one knows what to do about it. In the U.S., Mr. Trump has escalated the global trade wars, though markets are not exactly pricing-in the end of the globalised world order as we know it. Rather, they seem to have settled on the idea that the U.S. is winning. Small cap U.S. equities have soared, and the dollar is bid. The latter effectively is an equaliser. If the dollar rises as U.S. imposes import tariffs, the real economic impact of Mr. Trump’s policies will be curbed, perhaps even neutralised altogether.
Read MoreThe market always tries to distract investors from what the obvious themes, a bit like a good striker selling a dummy to a goalkeeper, before he tugs it away. I’ll try my best to avoid that mistake here. Seen from my desk, the state of play in the global economy currently can be boiled down to two stories: First, the intensifying slowdown in real narrow growth in the major economies, and second, the fact that monetary policy divergence between the Fed and the rest of the world is being stretched to hitherto unseen extremes. This doesn’t mean that other stories—EM wobbles, Italian bond market woes, and trade wars—aren’t important. They are, especially for macro traders who have deservedly re-gained their mojo this year. But no matter how much joy investors have in the murky world on emerging market currencies, they will, sooner or later, have to take a view on the two themes highlighted above. Using money supply as part of global business cycle analysis is a controversial topic. For some analysts, it is the holy grail, while others will walk out of the room if you even mention it. Many economists prefer the credit impulse—the second derivative of loan growth—but if you actually draw the charts, you will find that this indicator very often is closely aligned with M1 growth.
Read MoreI have two objectives with this week’s missive. I want to contrast what I think are the two prevailing narratives used to explain markets in the first half of the year. And then I want to have a look at the durability of large-cap equity earnings because it seems to be crucial to what happens next. The first story pits the storm chasers against the connectors. The former primarily sees events such as the equity volatility surge in February, the widening LIBOR/OIS spread and the leap in Italian two-year yields as a result of a change in market structure. The ratio of liquidity-providing market makers to crowded trades has shrunk dramatically, creating the condition for face-ripping reversals in consensus and complacent positioning. The storm chasers sees this, and are trying to exploit it. They don’t necessarily ignore the big picture, but they are sufficiently confident in its stability to believe that storms can arise independently of it. Proponents of this view would argue that it is the combination of 15-sigma events and a stable overall environment that is the central story. For example, the fact that the February blow-up of the short vol trade was linked to a bigger story—that the market as a whole would crash—is what makes the initial trade, and the rebound, so attractive.
Read MoreAfter two weeks on the road seeing investors, I am convinced that portfolio managers are becoming increasingly sceptical about the synchronized global recovery. That’s probably a good shout. I recently surveyed global leading indicators, and didn’t like what I was seeing. The data since have been worse. My in-house diffusion index of global leading indices has been flat since the start of the year. Its message is simple, global manufacturing accelerated sharply for most of last year, but momentum petered out in Q1. It doesn’t yet point to an outright slowdown, though other short-leading indices, such as the PMIs, do. The signal is more uniformly downbeat for the global economy if we look at liquidity indicators. Inflation is rising, with oil prices at a 12-month high, and nominal M1 growth is decelerating. Historically, this has been one of the more reliable omens for slowing growth in the global economy. Of course, investors don’t have to peruse economic data to tell them that something is afoot. Let me see whether I can remember everything. We have had wobbles in emerging markets, the return of political risk and higher bond yields, and even euro-exit chatter, in the Eurozone periphery as well as the morbid fascination that Deutsche Bank is going to blow a hole in the European, and perhaps even in the global economy.
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