Learn in three minutes why the dollar will continue to fall

Linchpin Associate, Michael Howell,  speaks on CNBC on why the US$ is going to continue to decline and what that means for inflation​. Watch the video here.

ARE Investor sentiment surveys WORTH ANYTHING?

I found myself being given some grief last week in the comments thread after an FT article by Chris Flood because I questioned whether investor sentiment surveys gave much useful information.  The debate, perhaps because of the ‘Global investors shun UK stock market' headline, was rather hijacked by the Brexit pro and anti brigades – hence the suggestion that I was the devil incarnate from I’m still not sure which side.  My perspective was simply that of an investor. It led me to ask myself the question again. I have spent over 30 years viewing investor survey sentiments as simply publicity for the sponsor, on the basis that the information tends to be stale, sample rather than aggregate, and inconsistent because investors will not all be using the same benchmark.  My comments aroused ire because I also suggested that institutions might be a little cynical in what they tell the world.   I prefer to use the risk appetite data provided by our friends at CrossBorder Capital.  It is true that it answers a slightly different question: viz are investors in aggregate overweight relative to their long term average, rather than their benchmark.  But it has the advantage of being timely, aggregate and it also gives a clear signal of investors’ overall risk appetite - ie. are they risk ‘on’ or risk ‘off’?  Particularly at extreme times like 2007-8 (greed was on top) and early 2009 (fear dominated), the fact that this was an entirely objective signal was invaluable. Right now?  I’m awaiting end February data imminently, but at end January investor holdings in UK equities were between 1 and 2 SDs above their average. From my experience last week, there is clearly a different body of opinion about investor sentiment out there, but if you wish to find out more how CrossBorder do it, please click here. ​

What is the difference between Bitcoin and blockchain? Who will be the eventual winners?

Do you know the difference between Bitcoin and Blockchain?  If, like me, you’re the wrong side of 50 by some way, probably not.  Our friends at Crossborder Capital have put out some intriguing research which tells you why gold will probably outlast both of them, and why the real winners are likely to be the central banks.  That is not to say that the growth of digital ‘money’ won’t change things.  It clearly will, but the long term solution is unlikely to be cryptocurrencies or Blockchain. To find out who the losers are, purchase the research here. 

​Global credit and money flow data from end January now available

We now have February reports on global credit and money flows available for purchase.  Provided by our friends at CrossBorder Capital Ltd, there are three separate versions.   One covers fourteen major markets and regions, the second covers Emerging Markets, and the third the Asian region from Pakistan to Japan.  The data used is end-January, and they give a heads up on where liquidity is strongest (Brazil heads the pack) and where weakest (Japan at present).   We don’t think there is any data out there that provides a quicker sight of what’s really going on in the world. The main theme today is the shift in liquidity from Developed to Emerging Markets.  Even the ECB is now tightening, while Emerging Markets policy, led by China, remains relatively loose.  More important right now is the surge in capital flows towards Emerging Markets, as investors of all sorts redeploy capital to higher growth areas.   It all suggests that Emerging Markets economies and markets will outperform Developed Markets over the next year or two.  If, as at Linchpin we expect, the trend for a weaker US$ continues, that may lead market investors to the same conclusion.  Find out more by purchasing these reports from the liquidity tab on this website.​

Are bond markets about to fall over the cliff edge? william bourne thinks not yet

One of my themes over the past year has been the remarkable lack of volatility in currency, equity and bond markets.  I have tended to ascribe it to QE: there is always a cash-rich buyer to buy into a dip.   In 2018 we have seen a rise in bond yields but, to my mind, it is pretty clear that this is simply normalisation as a term premia (ie. the return premium investors require to accept duration risk) rise from the exceptionally low levels of the last two years.  At 2.85% the US ten-year bond yield may be the highest level in six years (with one small exception in 2013) but it is still a lot lower than it has been through much of its history.  This week equities have reacted by falling sharply.  Again, I would consider this as being both healthy and normal: it is a reminder to investors that markets go down as well as up and promotes healthier investment decisions.   The big question today, of course, is what happens next.  Will bond and equity markets continue to fall or will buyers come in at lower levels as they have in the past? On the one hand the market’s inflation expectations have clearly risen, partly because of the signals given by the US Federal Reserve.  Our friends at CrossBorder Capital suggest from their analysis that a 2.5% inflation level is the inflection point at which higher inflation begins to reduce equity market valuations.  The medium is a higher discount rate reducing the value of their future earnings stream. We are not quite there yet: 10 year break-even on US TIPS is currently 2.0%.  But we will be keeping a beady eye on this metric in particular. So, are markets heading over a cliff?  In the absence of a geo-political event, we doubt it at the moment, though the risks are clearly rising.  Inflation is still benign, investors are still cash-rich and bond markets are still in the process of normalising. Information on how to purchase CrossBorder’s research can be found here.​

Despite headlines about US bond yields, William Bourne, albeit reluctantly, is staying ‘risk on’​

Investors have begun 2018 much as 2017 ended – with a high appetite for risk (call that complacency if you will) and a willingness to ignore politics in the hunt for return of any kind.  Hence arises the conundrum we have regularly referred to – ie. that market volatility remains stubbornly low while political risk appears to be high.     Global liquidity at end December, as measured by our colleagues at CrossBorder, was 51 on a scale of 100.  This provides some justification since it is not at a level which predicts any kind of financial crisis.  However, when there is a consensus, one has to ask the question: what could possibly go wrong? Well, there are the obvious geo-political risks but they would have to be of a cataclysmic scale to burst investors’ complacency.  In the Linchpin view of the world, all market setbacks involve some form of financial crisis where one entity can’t pay its debts to another.  Think back to the UK in the 1970s, Latin America in the 1980s, Russia in 1998, Enron in 2002 or banks in 2008.  We can only see a few plausible candidates here, principally in the US and China. Today’s headlines feature a technical break of the US two year bond yield downward trendline, with comments that they are for, the first time in ten years, close to 2008 levels.  If this does signal an end of the bull market in bonds and a normalisation of the ‘price’ of money, that has the potential to impact investor complacency, simply because of the level of debt in the western economy.    Investors should also keep an eye on the US$ since cross-border flows out of the US are accelerating.  If currency weakness is gentle, investor confidence will probably be maintained; however a sudden lurch could be sufficient (as in 1987) to burst confidence, and lead to a further rise in bond yields and downward repricing of equities. China is another possible candidate, though the level of state control in the financial system means that any financial crisis would be the result of deliberate state intervention rather than market forces.  We are more optimistic about China than the consensus in the short term but are also aware that at some point the People’s Bank of China will need to turn off the monetary taps, as it did in 2015, to control excessive domestic credit growth.  This is not a 2018 story but if it is done in a clumsy way, so that there are major defaults, the domino effect may take over. All that said, despite the jitters in US bond markets, we are not predicting an imminent correction, simply because the gross level of cross-border flows remains healthy (currently 66 on a scale of 1 to 100) at the end of December.  It is when they turn sharply down that we should be afraid.  So we will be watching them closely in 2018 and until then will retain a reluctant ‘risk-on’ mindset. Information on how to purchase CrossBorder's research can be found here.​

Liquidity to ward off the bears in 2018?

The growling of bears seems to be growing louder, despite the fact that markets have so far been remarkably calm in the face of unsettling political news on a range of fronts.  I very much doubt we have seen the end of history, as Francis Fukuyama’s celebrated 1992 book postulated when liberal democracy seemed to win over all other political systems, but we have to ask why the bears have been wrong so far. The latest piece from our colleagues at CrossBorder starts off: ‘Does Global Liquidity Warn of a Bear Market in 2018?’  From a liquidity perspective, the answer is pretty clearly ‘no’.  At the end of November, global liquidity stood at 48, just below neutral.  They argue that the world is focusing too much on Developed Market central banks withdrawing liquidity and not sufficiently on what is going on in Emerging Markets, where liquidity is loose and the sums are - surprising though it may be - significantly larger.  The implication is that what’s going on in China, in particular, will be sufficient, at least for the time being, to stop the world catching a cold if America sneezes. In their experience, sharp and accelerating falls in cross border flows are also a valuable signpost to an impending market crisis.  The aggregate today stands at 58 (scale 0-100), compared to 88 six months ago but the trend is not speeding up, which should give investors some reassurance.   We see the US as late in its economic cycle, Europe as mid-cycle, and China and the Asian bloc as early cycle.  It can be seen most clearly in private sector liquidity flows, where Europe is strongest at 88 and the US weakest at 34.  This underpins our view that when economic trouble comes it is most likely to come out of the US.  But, unless history reasserts itself through a geo-political jolt, probably not in 2018.  We would advise investors to watch the upswing in China just as much as the downturn in the US. Information on how to purchase CrossBorder's research can be found here.​

The end of austerity - but not yet?

The Chancellor’s budget has a clear theme of extra spending.  I was waiting until the end for the hammer-blow of more taxation somewhere to make up for all the goodies but it never came.  As it happens, I believe his approach is the right thing to do when gilt yields are so low, but I do note from the Treasury’s detailed documents that the fiscal loosening doesn’t really kick in till 2019-20 and there’s actually a small fiscal tightening compared to March 2017’s forecasts in the next two years.   It will all be very convenient if this Government lasts the full five years but could backfire if it falls after, say, two. I’d applaud a number of the micro measures the Chancellor is proposing: to allow councils to charge 100% premium on the council tax for unoccupied properties and to remove the transitional arrangements for taxing carried interest (designed to ensure that tax is paid on the full economic benefit of a partnership’s activities) immediately, to take two tiny examples.  As always, however, the Budget is long on headlines and I am cynical about how much of them will really make it into legislation, particularly given the weakness of this Government. I will highlight a couple of the details I found interesting: he is making £1bn available for local authorities to finance local infrastructure at a rate of Gilts +60bps.  I wish he would make more use of this - effectively allowing them to borrow.  On the other hand, there is a mention of a new long term strategy for the asset management industry, ensuring it continues to ‘thrive and deliver the best possible outcome for investors and the UK economy.’  That could be taken as code for making them pay for some of the infrastructure improvements he wants to bring about. All in all, I would give the Budget a thumbs-up, though with the caveat that all these detailed measures may never happen.  Ending austerity must be the right thing to do, with the BREXIT risk looming, and the Chancellor was absolutely right to talk up Britain’s strengths rather than falling prey to the gloom everywhere.