Fra Steen Jakobsen, Saxo Bank:
Net lending is the main fuel for an economy – the concept that for every borrowed dollar there is a lender is of course total rubbish – the banking system, fiat money, leverage your deposit so that debt far exceeds savings (4-5x debt to net assets) – this implies and mean that lending and velocity of lending pretty much dictate inflation and growth.
Inflation is not really about wage inflation but about velocity of money – Velocity of money is main driven by NET demand on lending and / or lack of faith in money (In high inflation economies people will rather spend than save money)
charts which backs up yesterday’s early noise in Credit:
Note: Please observe how net lending drops and recessions co-incide
Note: This is ETF which mirrors S&P/LSTA US Leveraged Loan 100 price Index – operative word: Leveraged – meaning this is high risk deals financing. The price seem highly correlated with 2YR US Yield – higher rates = lower leverage. Despite extreme easy monetary conditions this segment has not performed – unlike stock market – YTD return is – 39 bps – to me this confirms “credit impulse” negative draft and early lead on credit overall and downside of inflation
Finally my favorite chart – US Monetary Conditions vs. BAA-10YR US spread- This explain why market despite FED hikes been rising and to me this is the “leading indicator” in market moves week-by-week….
It’s still to early to call any major change of markets (bubbles) as there is lots of room before we do technical damage to many asset but…. I was always taught that when there is macro change the change will come first in “poor volume” markets and here FX EM is sending a warning signal!
IF – the equity market starts to follow credit & FX EM then a real signal of top could be in place, but market right now (and last ten years) is always looking for a 5-6% maximum correction, meaning if we exceed a two days close of 6-7% down then all the passive investments will have to sell and hedge into a market of low liquidity, high correlations or as I like to say.. the game of musical chairs, which is normally played with one chair missing when the music stops, will be played with 10 chairs missing. Again – defensive approach is warranted – and let me end by re-stating yesterday’s tactical bias:
We have lowest risk exposure in years right now:
Fixed Income: UW
Commodities: UW
Equity: UW
Cash: OW
The main “convictions” being:
- Dollar is long-term down channel– small risk of 97.00 in DXY (94.50 today) but 85.00 next year
- FX EM and soon EQ EM is biggest short– FX EM is tanking hard and led credit down.
- Crude topping hereand falling 50% next 24 months
- Next “revolution” will be driven by R&D in Electric Cars, where China and soon India will join China in 100% electrification– This will unleash biggest productivity gain since 1870-90 as money flows to “real problems” instead of into bubbles.
- In equity we like biotech, e-commerce (Asia centric), robotic & automation, plus selective mining plays– We are enticed by Woolworth(South Africa) and GE at these levels in the old “world”
- The commodity the favorite is silverbased on industrial usage and underperformance
Net lending is the main fuel for an economy – the concept that for every borrowed dollar there is a lender is of course total rubbish – the banking system, fiat money, leverage your deposit so that debt far exceeds savings (4-5x debt to net assets) – this implies and mean that lending and velocity of lending pretty much dictate inflation and growth.
Inflation is not really about wage inflation but about velocity of money – Velocity of money is main driven by NET demand on lending and / or lack of faith in money (In high inflation economies people will rather spend than save money)
Here is two concerning charts which backs up yesterday’s early noise in Credit:
Note: Please observe how net lending drops and recessions co-incide
Note: This is ETF which mirrors S&P/LSTA US Leveraged Loan 100 price Index – operative word: Leveraged – meaning this is high risk deals financing. The price seem highly correlated with 2YR US Yield – higher rates = lower leverage. Despite extreme easy monetary conditions this segment has not performed – unlike stock market – YTD return is – 39 bps – to me this confirms “credit impulse” negative draft and early lead on credit overall and downside of inflation
Finally my favorite chart – US Monetary Conditions vs. BAA-10YR US spread- This explain why market despite FED hikes been rising and to me this is the “leading indicator” in market moves week-by-week….
It’s still to early to call any major change of markets (bubbles) as there is lots of room before we do technical damage to many asset but…. I was always taught that when there is macro change the change will come first in “poor volume” markets and here FX EM is sending a warning signal!
IF – the equity market starts to follow credit & FX EM then a real signal of top could be in place, but market right now (and last ten years) is always looking for a 5-6% maximum correction, meaning if we exceed a two days close of 6-7% down then all the passive investments will have to sell and hedge into a market of low liquidity, high correlations or as I like to say.. the game of musical chairs, which is normally played with one chair missing when the music stops, will be played with 10 chairs missing. Again – defensive approach is warranted – and let me end by re-stating yesterday’s tactical bias:
We have lowest risk exposure in years right now:
Fixed Income: UW
Commodities: UW
Equity: UW
Cash: OW
The main “convictions” being:
- Dollar is long-term down channel– small risk of 97.00 in DXY (94.50 today) but 85.00 next year
- FX EM and soon EQ EM is biggest short– FX EM is tanking hard and led credit down.
- Crude topping hereand falling 50% next 24 months
- Next “revolution” will be driven by R&D in Electric Cars, where China and soon India will join China in 100% electrification– This will unleash biggest productivity gain since 1870-90 as money flows to “real problems” instead of into bubbles.
- In equity we like biotech, e-commerce (Asia centric), robotic & automation, plus selective mining plays– We are enticed by Woolworth(South Africa) and GE at these levels in the old “world”
- The commodity the favorite is silverbased on industrial usage and underperformance
