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Thu, 29th June 2017

Anirudh Sethi Report

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Archives of “TIME” Tag

IMF Slashes US GDP Forecast, Says Trump’s Growth Target Is “Unrealistic”

The IMF has cut its US GDP forecast to 2.1% in 2017 from 2.3% projected in April and to 2.1% for 2018 from 2.5% previously, it said in a statement following its U.S. Article IV Consultation, and saying it could no longer assume the Trump administration will be able to deliver pledged tax cuts and higher infrastructure spending. Specifically, in giving up on the Trump agenda, the fund said “we have removed the assumed fiscal stimulus from our forecast.”

Worse, the revised US forecast is now expected to peak in 2017, remains flat in 2018, and then continues to decline to 1.7% by 2022, which once upon a time was considered stall speed.

Brazil’s central bank cuts benchmark interest rate by 100bps

Banco Central do Brasil pulls out the big knife

  • Cuts benchmark interest rate to 10.25 percent (The latest Reuters poll showed a consensus expectation for the cut to 10.25 pct)
  • Says interest rate decision was unanimous
  • Says moderate reduction of easing pace will probably be adequate at next meeting
  • Easing pace will depend on activity, balance of risks
  • Rising uncertainty over reforms hinders faster drop in estimates of structural rate and makes them more uncertain
  • Main risk to scenario is uncertainty over speed of reform process and economic adjustment
  • Forecasts 2017 inflation at around 4.0 pct vs 4.1 pct in previous meeting
  • Sees 2018 inflation at around 4.6 pct vs 4.5 pct in previous meeting
  • To monitor possible impact of heightened uncertainty over inflation expectations
  • Data continue to show economy stabilizing in the short term
  • prolonged uncertainty could have negative impact over economic activity
  • International scenario has been favourable

Quick headlines via Reuters

IEA maintains global oil demand growth forecast for 2017 at 1.3mln bpd

International Energy Agency out with their latest market report 16 May

  • brings demand to 97.9m bpd
  • global oil supply fell 140k bpd in April to 96.17mn bpd,
  • output 90k bpd
  • raises f/cast for non-OPEC supply growth by 100k bpd to 600k bpd for 2017
  • raises US crude output f/cast by 100k to 510k bpd. largest source of supply growth
  • Oil market is rebalancing and “essentially here”, accelerating in the short term

Let’s see what the 25 May meeting brings re output cut deal extension. 9 months now the favoured period by Saudis and Russia

Full report here

Trump just set some kind of record for reversing rhetoric

Four election promises/statements reversed within an hour

Trump just reversed his position on NATO.

“NATO is not obsolete,” he said at a press conference today.

  1. He had previously said: “I said a long time ago that NATO had problems,” Trump said during the interview with the Times of London and Germany’s Bild. “Number
    one, it was obsolete, because it was designed many, many years
    ago. Number two, the countries weren’t paying what they’re supposed to
    pay.”
  2. Yellen is ‘toast’, he had said.  He railed against Yellen and Federal Reserve in one of the debates but now he’s having second thoughts, saying he likes Yellen and is open to extender her term.
  3. Low rate policy. “They’re not doing their jobs,” by keeping rates low at the Fed, he said in the debate. Today: “I like low rate policy.”
  4. “China isn’t manipulating it’s currency,” he said today. That’s a 180-degree turn from what he was saying in the final weeks of the campaign, when he promised to label China a currency manipulator.

To top it off, he just said “Right now we’re not getting along with Russia at all. We may be at an all-time low” in the relationship. He also said that going it alone against North Korea means going at it with other nations. “Going it alone means going it with lots of other nations.”

SocGen Reveals The Best Trading Strategy Of The Year

Despite the recent modest drop in stocks, the S&P remains just shy of all time highs, and near valuations which according to Goldman are at nosebleed levels and which market participants recently admitted are the most overvalued since 2000. Furthermore, with the market seemingly finding itself painfully rangebound in a world where until recently volatility was non-existent, traders desperate for alpha, have been scrambling for a strategy that produces a steady stream of profits.

One such trade was proposed overnight by SocGen’s Andrew Lapthorne, who notes that “the only strategy to stand out this year is short-term (1 month) price reversal, which involves selling last month’s  winner and buying the losers.”

Here is his overnight note, according to which “Outperformance of reversal strategies points to a market struggling for direction” 

Equities experienced a bit of a speed bump last week when the S&P 500 fell by more than 1% for the first time since September. The language accompanying this “steep sell-off” was really quite over-the-top, but given that the S&P 500 has declined by 1% or more on just seven occasions over the past year (versus an average of 25 per year historically), perhaps there was a pent-up desire to open the bear’s dictionary, particularly with commentators now having long exhausted the thesaurus for variations on the word “complacent”.

 There is plenty to be bearish about. Equity valuations are tortuously high, with median valuations in the US and Europe near or at record highs, particularly once debt is included (i.e. on a EV/EBITDA basis). We estimate the US to be 25-30% over-valued if we compare today’s EV/EBITDA of 13 times to the 20-year average of 10 times (charts and data available on request). And earnings momentum, whilst improving in Japan and OK in Europe, is struggling in the US (1.5% has been cut from the S&P 500’s 2017 EPS so far this year, and 5% from the Russell 2000 2017 estimates), and what positive EPS momentum there is, is largely coming from Basic Materials (i.e. commodities). Expensive valuations coupled with no meaningful pick-up so far in US EPS momentum (quite the contrary for US smallcaps in fact) – and the market is struggling to make headway.

 This directional doubt is also visible across our factor indices, with this year’s lack of performance dispersion across styles a complete contrast with last year’s volatility. Indeed the only strategy to stand out this year is short-term (1 month) price reversal, which involves selling last month’s winner and buying the losers.

 

New Fed paper finds ‘considerable uncertainty’ on FOMC economic projections

The Federal Reserve have a new research paper out:

(full piece at that link, PDF)
In brief (bolding mine):
  • Since November 2007, the Federal Open Market Committee (FOMC) has regularly published participants’ qualitative assessments of the uncertainty attending their individual forecasts of real activity and inflation
  • Benchmarks used 
  • This paper documents how these benchmarks are constructed and discusses some of their properties
Several conclusions:

10 Life Lessons We Learn Too Late

What Are the Lessons People Often Learn Too Late in Life?

1. Time passes much more quickly than you realize.

2. If you don’t take care of your body early then it won’t take care of you later. Your world becomes smaller each day as you lose mobility, continence and sight.

3. Sex and beauty may fade, but intimacy and friendship only grow.

4. People are far more important than any other thing in your life. No hobby, interest, book, work is going to be as important to you as the people you spend time with as you get older.

5. Money talks. It says “Goodbye.” If you don’t plan your finances for later in life, you’ll wish you had.

6. Any seeds you planted in the past, either good or bad, will begin to bear fruit and affect the quality of your life as you get older — for better or worse.

7. Jealousy is a wasted emotion. People you hate are going to succeed. People you like are going to sometimes do better than you did. Kids are going to be smarter and quicker than you are. Accept it with grace.

8. That big house you had to have becomes a bigger and bigger burden, even as the mortgage gets smaller. The cleaning, the maintenance, the stairs — all of it. Don’t let your possessions own you.

9. You will badly regret the things you didn’t do far more than the things you did that were “wrong” — the girl you didn’t kiss, the trip you didn’t take, the project you kept putting off, the time you could have helped someone. If you get the chance — do it. You may never get the chance again.

10. Every day you wake up is a victory.

Jeff Gundlach’s Forecast For 2017

Investors will confront excessive debt, high P/E levels and political uncertainty as they enter the Trump presidential era. In response, according to Jeffrey Gundlach, U.S.-centric portfolios should diversify globally.

Gundlach is the founder and chief investment officer of Los Angeles-based DoubleLine Capital, a leading provider of fixed-income mutual funds and ETFs. He spoke to investors via a conference call on January 10. Slides from that presentation are available here. This webinar was his annual forecast for the global markets and economies for 2017.

Before we look at his 2017 predictions, let’s review his forecasts from a year ago. His two highest conviction forecasts were that the Fed would not raise rates more than once, despite the Fed’s own predictions, and that Trump would win the presidency. Both predictions were accurate.

But he was also downbeat on emerging markets, and singled out Brazil and Shanghai as likely underperformers. Brazil turned out to be the best-performing emerging market last year, gaining 69.1%, but he was correct about Shanghai, which was the worst performing market, losing 16.5%.

Gundlach said he had a “low conviction” prediction that the yield on the 10-year Treasury would break to the upside. It began 2016 at 2.11% and ended at 2.45%. He said the probability was that U.S. equities would decline in 2016, yet the markets gained approximately 13%. Gold, he said, would hit $1,400 at some point in 2016. It began the year at approximately $1,100, hit a high of $1,365 during the summer and closed at approximately $1,150. 

FOMC Minutes: Saw gradual rate hike pace appropriate for now -Full Text

Highlights of the Minutes of the Dec 14 FOMC meeting

The Fed hiked rates by 0.25% at this meeting

Highlights of the Minutes:

  • Almost all officials saw upside risks to growth on expectations fiscal policies will be more expansionary under Trump
  • About half of policymakers incorporated those assumptions into forecasts
  • Many saw increased chance of faster rate hike pace due to higher risk of sizeable undershooting of longer-run normal unemployment rate leading to higher inflation
  • Policymakers emphasized their considerable uncertainties on timing, size and composition of legislative and spending changes
  • Almost all members saw unemployment rate running below longer-term normal level
  • Generally agreed o continue to closely monitor inflation
  • Full text

There is never as much detail or conviction in the Minutes as market-watchers hope for. This is the closest thing there is to guidance:

“At this meeting, members continued to expect that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee’s 2 percent objective over the medium term as the transitory effects of past declines in energy prices and non-energy import prices dissipated and the labor market strengthened further. This view was reinforced by the rise in inflation in recent months and by recent increases in inflation compensation. Against this backdrop and in light of the current shortfall in inflation from 2 percent, members agreed that they would continue to closely monitor actual and expected progress toward the Committee’s inflation goal.”

The knee-jerk reaction in the FX market was disappointment and the US dollar fell 30 pips but it quickly rebounded back to unchanged.

On the election, here is what the Minutes said:

The Ten Harsh Financial Commandments

I) You will not buy low or sell high.

II) You will cut your winners and let your losers run.

III)  You will wish you owned more of what’s going up and less of what’s going down.

IV) You will be fearful when others are fearful.

V) You will fight the trend.

VI) You will not buy when there is blood in the streets.

VII) You will spend too much time worrying about low probability outcomes.

VII) You will invest for the long-term, or until we get a ten percent correction, whichever comes first.

IX) You will go broke taking small profits.

X) You will not just sit there, you’ll do something.