Tag Archives: eurozone

Renzi’s Great Gamble

Renzi’s Great Gamble

By Nick Andrews and Stefano Capacci
August 24, 2016

Prime ministers come and go in Italy – four since the financial crisis – but precious little seems to change. The latest incumbent, Matteo Renzi, has pursued structural reform more energetically than his predecessors. But for all the progress he has made, he might as well have been wading through molasses. Now, in a bid to secure a popular mandate for his restructuring program, Renzi has bet his premiership on a referendum over badly-needed constitutional reforms. It is a high stakes gamble.

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Global Uncertainty Strengthens Dollar

Five years ago the financial world was coming to an end. The stock market tanked and interest rates went negative due to the unsurpassed flight to safety in U.S. Treasuries. Most of this was due to greedy lending practices that claimed to be championing President Clinton’s thesis that everyone in America should be able to own a home. Lax lending requirements that were intended to get lower income earners into their own homes travelled up market and allowed upper middle and upper tier earners to refinance their houses at artificially low rates to buy second homes and Harley’s. Once again, misguided bureaucratic endeavors have been perverted by greed. The roaches in China are beginning to surface and the banking system stress tests in Europe are uncovering the depth of this five-year-old issue and once again, the primary beneficiary of these actions will be the U.S. Dollar.

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Third Stage Growth in Agri-Business

The run up in food prices this year has, hopefully, shined a bright light on the oligopoly that controls the world’s grain markets. An oligopoly is a market that is controlled by a small number of producers, which allows them to collaborate and set prices for the market as a whole. OPEC is the most common textbook example. The U.S., Brazil, Argentina and Australia dominate the grain industry. There is grain production in every country but these four control the vast majority of the export market. That may be about to change and bring new, long-term investment possibilities with it.

When crude oil topped $145 per barrel in 2008 it was a painful, but simple adjustment to the world’s lifestyle. When the grain market soared to all time highs this summer, forcing food inflation on the world’s population, the adjustments weren’t so simple. The mechanization of the global grain production process places more and more of the world’s food production in the hands of fewer and fewer people.

The global grain stores are running at multi year lows, just as they were at the beginning of this U.S. growing season. This summer’s drought was the worst in 50 years here. The weather pattern also knocked 13% off of Australia’s wheat crop and they’re the world’s largest wheat exporter. This also led to a nearly 60% decline in their ending stocks over the last three years. The only thing keeping prices in check at the moment is South America’s increasing efficiency. Brazil’s soy production may surpass the U.S. this year and thanks to their long growing season, double crops of corn are becoming normal.

The global demand growth for coarse grain production has been fueled by the Pacific Rim’s meat production industry, rather than by population growth. China’s population growth is less than one percent per year, yet their hog market is growing by an average of 3.5% per year. The growth in their agricultural markets for both grains and meats has been astounding, as production of both have shifted from individual farmers on their own land to the mechanized version of agri-business that is the model of the industrial world. Their soybean imports, which are used for feed, have grown from 3 million metric tons in 1997 to approximately 56 million tons this year.

These wheels have been set in motion and will not be derailed by a collapse in the Eurozone or a surprise in our elections. The trends in population growth and the move towards global improvements in diet are really just beginning. The United Nations and the Food and Agriculture Organization (FAO) just reported that global wheat prices for 2012 were up 25%. They added further that source inputs have now caused the price of dairy to rise by 7% in just the last month.

The arguments over who gets their principal back on a Greek or Spanish Bond is far less important to Greeks and Italians than the ability to put food on the table. Food inflation, as a result of the commodity rallies of ’07 and ’12, was also a primary cause of the Arab Spring. It is far easier to control a population with a full belly than it is to placate a parent unable to stop the crying of a hungry child.

So, where’s the trade? The trade starts with slowing global growth and negative growth across Europe. Negative growth will increasingly put the pinch on Eastern European countries like Kazakhstan, Ukraine and Russia. This is the main breadbasket of Europe and North Africa. Bottom up analysis of these macro trends reveals very large growth potential in several African countries. The BRIC’s have received most of the attention over the last ten years and rightfully so. However, as more and more resources are pulled from African countries for global production, it becomes clear that these countries are also next on the open borders list to develop.

Therefore, using the pending global economic contraction as the setup, I’ll be using declines in the stock market to knock the valuations of agri-business stocks like ADM, Monsanto, Cargill, AgroSA, Bunge, Caterpillar, DeutzAG, down and for retail investors to get washed out. There are two important things to take away from this. First of all, I am not a stockbroker. These trades cannot be executed through me. I stand to gain nothing financially from anyone following this advice. Secondly, I believe that we will get an equity selloff similar to 2008 and I plan on being ready to put cash to work in companies that stand to profit the most from the commodity markets I know best in the coming decade.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Reprofiling Greek Debt Boosts Gold and Dollar

Trading the markets is sometimes like being a relationship counselor. There are times when it’s easy to see how one thing done or said affects the other’s actions. We use a fancy term for it, correlational analysis. When the correlation is positive, both things move in the same direction and when it’s negative, they move in opposite directions. Pretty straightforward stuff like when the Dollar falls, gold climbs. That’s a negative correlation based on inflation. Similarly, the stock market rises as interest rates decline because businesses find cheaper money for expansion and capital equipment acquisition. Unfortunately, every good therapist knows that relationships change over time. These markets, in particular, are not performing true to pattern.

Fortunately, in the financial world, we have tools that let us quantify these relationships. Now, it’s true that over the last year, gold has rallied and the Dollar has fallen. However, over the last couple of weeks, both the Dollar and gold have rallied. I think there is a significant change in the underlying nature of their relationship that could cause this to continue throughout the summer.

The primary reason for the Dollar’s strength has not been the domestic economy. The strength should be attributed to the global fear of a collapsing Euro, which attracts money to the U.S. as a flight to safety. We’ve talked at length about the troubles in Ireland and Greece. Well, Spain and Portugal are right behind them. The global credit markets are already pricing in the pending defaults. Greek 10 year bonds are yielding north of 16% and Ireland and Portugal are both above 9%. This compares to the U.K. Gilt 10 year yield of 3.3% and the U.S. 10 year Note’s yield of 3.1%. The European Union is caught between balancing what the Union’s lenders will accept as payment versus what rights of autonomy the borrowers will relinquish to remain in the Union itself.

The new catch phrase is a, “reprofiling” of debt. This word isn’t even in Microsoft’s spell check. However, this invention by the European Central Bank is really a synonym for, “default.” They want to extend the maturity dates of Greek debt. The Euro has fallen 7% as we’ve hunted through Webster’s Dictionary for, “reprofile.” The reprofiling or, restructuring of Greek debt would seriously devalue the 50 – 80 billion the ECB has already contributed monetarily and devastate the value of the European Union’s political solidarity.

The same fear of a Euro collapse has attracted money to the gold market. This week, gold hit an all time high priced in Euros. Investors are looking for a safer holding facility for their liquid cash than the Euro currency can provide them with. This move has been extended as the ECB has chosen to cancel its June meeting while reprofiling studies are being completed for their newly scheduled July meeting. Consequently, there have been four trading days in the last ten where both gold and the Dollar have rallied more than half of a percent. This compares to six days in the last twelve months when this has happened.

The rise in the Dollar has also coincided with a flood of money into U.S. Treasuries and a decline in the U.S. stock market. Commercial traders are aggressively rotating their positions from stocks to bonds as the Euro Zone drama is playing out. This is taking the classic low yield/high growth stock market relationship and turning it into a low yield/no growth scenario more consistent with times of fear. We’ve seen commercial money buying 10yr Notes in six of the last seven weeks and selling in the stock indexes in each of the last four weeks.

Reconciling relationships means being able to cope with change and allowing the relationship’s participants to grow in their own directions. Being able to recognize these changes in the marketplace as they are happening requires a sound combination of reading the back-stories and quantifying the participants’ actions.

This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk of loss in investing in futures.

Defending the Global Slowdown

I’ve taken a bit of heat over the last few weeks as I’ve suggested that we may be nearing the end of a very good bull run in all tangible markets. These include the stock and commodity markets which are at levels we haven’t seen since before the economic crisis began. More and more data has come out on the negative side of things going forward and it’s being discussed and given weight to, by several economists, central bankers, traders and hedge fund managers.

Here is a consensus survey of their bearish take on the global economic landscape:

China – Their economy is slowing down. I mentioned the declining velocity of trade in China a few weeks ago. This includes shipping, fertilizer sales, stock market turnover, raw steel manufacturing as well as other factors. China has also raised the required lending reserves on their banks as well as raising the outright interest rates at which they can lend to fight off inflation and cool down their economy.

United Kingdom – Their economy shrank by .5% in the last quarter of 2010.  Their unemployment rate is 7.7% and rising. They’ve yet to work through the excesses of their own housing bubble. Finally, the voting members of the Bank of England are already at odds over raising rates to combat inflation. High unemployment, high interest rates and declining production are spurring fears of stagflation.

Eurozone – Ireland and Greece have been forced to accept bailout money and enact austerity measures that would cause civil upheaval in the United States. Spain and Portugal are on the cusp of having bailout funds and austerity measures jammed down their throats and Italy is now on the short list, as well. Germany is the only Eurozone country that benefits from a strong Euro, which attracts capital to their value added manufacturing and technology industries. The agrarian and tourist based economies of southern Europe desperately need to weaken their currencies to allow them to compete in the global market. This is creating a huge political disconnect between Germany and the other members of the European Union.

India – India nearly doubled their interest rates in 2010 and just raised it another .25% on Tuesday. The sincerity of India’s government to get a grip on inflation dropped crude oil nearly $2 per barrel due to forecasts of declining Indian demand.

Brazil – Brazil’s currency has appreciated 40% since the bottom in 2008. The global surge in food prices is placing severe strain on the manufacturing and public service sectors. Brazil is using interest rate manipulation to cap currency valuation. This is effective on low value added agricultural exports but hinders the ability of the manufacturing sector by making capital more expensive. This also hurts the public sector as workers are laid off and look to more expensive government programs for support.

United States – The broad strokes are best covered by Gary Shilling in his January 2011 edition of, “Insight.” We look for slow U.S. economic growth of 2% or less this year. The post-recession inventory bounce is over. Consumers are probably more interested in saving and repaying debt than in spending. State and local government spending and payrolls are falling. Excess capacity will retard capital equipment spending while low rents curtail commercial real estate construction. Economic growth abroad is unlikely to kindle a major export boom. Housing is overburdened with excess inventories. QE2 will be no more effective than QE1 in spurring lending and economic growth, while net fiscal stimuli will decline $100 billion in 2011 compared with 2010.

These global factors all point to a pending slowdown in economic activity. Many of the discussions I’ve had recently have focused on the recognition of the turn. The simplest predictor I can share is when what has been making money quits working. We use pattern recognition to determine market setups and risk values. When the bullish patterns stop working and the bearish patterns start to pan out, the turn will be near. Fortunately, this tool can be used on everything from one- minute charts to weekly charts. We will watch for the turns in scale as they progress from minute to hourly, daily and weekly. This is not doom and gloom. It’s simply the ebb and flow of the markets and with these tools we hope to see the tide’s reversal.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Commodities Still Strong Amid Global Uncertainty

The Eurozone debt concerns have finally taken their rightful place as a daily front -page news story. Tuesday, Spain brought 2.5 billion Euros to market in 12-month bonds. The average rate for the auction was 3.45%. This is 45% higher than previous month’s auction rate. For the sake of comparison, it’s hard to find a 12-month CD over 1% here. Wednesday, 20,000 Grecians rioted in response to the latest round of austerity cuts. Finally, European Central Bank President Jean -Claude Trichet is calling for an expanded role of the bailout fund. These headlines all echo the same theme…uncertainty.

 

Uncertainty is a bigger impediment to fully functioning markets than fear or, greed. Uncertainty prevents planning and prevents action. While Europe digests their own financial crisis, we can take a look at the effects of our own actions here as well as what to expect in the coming months.

 

Throughout the late summer and into fall, many leading analysts suggested that the domestic stock market was a much better investment than the domestic bond market. This includes people like Warren Buffet, James Paulson and Alan Greenspan. Their general assertion was that the effects of the loose monetary policy put in place to provide liquidity and jump- start the economy was holding interest rates at artificially low levels.  Therefore, the risk premium, which compares investing in stocks versus bonds, had swung in favor of equities. The fourth quarter has clearly proven this to be correct with the stock market up 9% so far in Q4 while the 30yr. Treasury bond has declined more than 9.5% in price.

 

Most of this rally has been based on the unwinding of the fear and carry trades. Investors must constantly balance yield versus safety. Lately, the investment world has become virtually unmanageable to the individual investor attempting to figure out what the global leaders will put into play, how it will affect their portfolio and finally, what actions can be taken to capitalize on that analysis if it is correct. For example, it was generally accepted that the domestic stock market, metals markets and the U.S. Dollar could not simultaneously trade in the same direction yet, that has been the case of the fourth quarter. In fact, a decline in commodity prices combined with a rise in borrowing costs would put a real squeeze on the carry trades that have been placed over the last two years.

 

One solution to this puzzle is to focus on individual pieces. Sometimes, we don’t have to know what the final picture looks like. Eventually, if we keep putting the pieces in the right places, the picture will take shape. Therefore, some of the assumptions we will be working with are:

–       The U.S. is ahead of Europe in dealing with the financial crisis.

–       The U.S is still the largest safe haven economy.

–       Euro weakness will make the Dollar seem strong by comparison.

–       Developing Tiger countries are the engines driving global growth.

These ideas will continue place us on the long side of the commodity markets, while trading both sides of the Stock market and the U.S. Dollar. The markets should become less predictable and volatility should increase as the risk premium between the currency, equity and commodity trades continues to tighten. This will place many asset classes on equal footing and leave alpha to be gained only through the careful examination of the individual issues within those asset classes.

 

Out of the 36 markets that we track on a daily basis, 25 of them are facing negative commercial trader momentum. As we discussed a couple of weeks ago, some of these markets are near all time speculative limits. In fact, crude oil just set a new record for speculative long positions this week. This means that professional money managers are putting money to work buying crude oil while the people who produce it are selling all they can. The ability to follow the money flowing through the individual commodities provides a degree of certainty. This allows us to take action, using bottom up, micro economic analysis while the people at the top are still trying to figure it out on a macro economic basis.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.