2014 - Consensus without Conviction.

2013 was the year that got away. Equities got away with leaving everyone behind. The Euro got away leaving bear blood on FX street. And The Fed did their best to make sure everyone ended up with losses in their short-end books despite getting the general move right. But the big trades of "Long nikkei, short yen","Long DM vs EM" and "long Euro things" have all gently been working their dividend magic. Unless you were in FX, where life as normal conspired towards the unexpected.

2013 was similar to 2012 in that it was another "no show" year for the disasternistas. Leaving fat tails, when illuminated by the light of outcome, looking positively anorexic. Still, as we know, disasternistas appear to have deep pockets and will no doubt be selling their grandmothers and mortgaging the kids (having already sold everything else to buy on the plethora of never ending dips) to buy more gold and of course, now bitcoins

The outlook for 2014 is not enthralling us with wild pizzazz as we stare out at it from the bow of January. Reading through the top trades for 2014 that are sent out by the big houses we are struck by the lack of excitement or conviction in many of them. Many could be photocopies of last year's (especially usd/jpy nikkei) but the overall urgency just doesn't seem to be there. Why? Our first question was - has the regulatory environment that has scared the bejezzus out of all forms of official communication led to houses having to couch their views in such a non-committal way that it shows up in non-committal research? Perhaps, but we still think that their really isn't that much conviction.

That doesn't mean that there isn't consensus, but consensus without conviction is as fragile as the gossamer of a French President's personal commitments.

So what is consensus? Perhaps -

The old favorite USDJPY and the Nikkei Abe trade.
Emerging Markets are going further down.
DM equities are going further up, but they are going to correct first.
US will continue to Taper (to the point that US curves are pricing in rate hikes ahead of guidance)
Inflation is dead.
Commodities will flatline.
France is a mess.

What's new? Well there isn't much new in there so with little new to get excited about and invoking our "consensus without conviction" clause we are tempted to look at a not so much rule as general observation about how trading years start. To generalise, December is the quiet month where folks read up and decide on the trades to start the year with. They start putting them on in small size over a glass of sherry between Christmas and New Year but then start to throw more at it as January gets underway. As prices start to move conviction builds and positions are added to (note that it is only price that is adding to conviction rather than new argument). Come the 19th Jan, (don't ask why we pick that) things start to wobble and prices reverse. Come mid Febraury and things are getting properly shaken down and a new set of rules are being drawn up for the trading year (normally more gloomy and involving a dump in something somewhere around mid March. Now we know this is completely unscientific and if you go and look at charts you probably won't see it in the recent years, but we posit that this is because this time is different as it's more like the old times when there isn't an obvious panic, there isn't an obvious tail risk and there really isn't, as we said, any conviction.

So in true TMM style the trades we are most willing to take are against what we see as consensus, starting next week.

DM equities - This is where we confuse ourselves because our core belief in them runs deep and we continue to see the great rotation provide a North Atlantic Drift style current propelling them gently North.

HFRI Macro Index vs SPX in % performance since start 2013 - Someone ain't got this trade on.




But having seen the run up we have had so far, married to weak conviction and our own sense of timing we are lightening up looking for a correction next week with the most likely catalyst being that forward valuations are back to 2007 levels and so traditionalists will take some profits. This is most notable in Eurostoxx

Orange line is 1 year forward P/E. Current Eurostoxx index is white.


 However TMM are scratching their heads and wondering why analysts are using valuations that seem to fail to apply changes to long term discount rates when calculating future earnings. Using current rates it should be 20% lower implying that stocks could be 20% higher.


Talking of timing perhaps we should have a look at the weirdly famous Bradley Siderograph ( courtesy of www.amanita.at) Nothing of note to support our January correction ideas, but look at that! What date is shining through as the turn of the year? If it isn't our old fave the 16th of July!




But back away from hocus-pocus and on to another consensus risk. This time inflation. There was much fanfare this week as UK inflation finally fell below the 2% target level. After TMM's constant ire directed at Merve the Swerve it is only fitting that the target is hit after he relinquishes the reins, but that isn't the point. More important is that inflation expectations continue to be low and this print may drive complacency. The UK has seen many types of inflation over the last 6 years, none of which have been the one that monetary policy should really be directed against.

First came commodity price inflation, which was effectively a tax on consumption. Then came taxation inflation with austerity seeing hikes in VAT, cuts in taxation allowances and hikes in top end rates.
Then came oligopoly inflation - hikes in prices of utilities and other services that couldn't be substituted such as Public transport costs, utilities, tolls, insurance premiums. All effectively taxes to subsidise deficits and to fund upgrades to failing infrastructure. OK, these were all countered by low interest rates which unfortunately never really impacted the public as higher bank margins or unwillingness to lend hampered any pass through.

The type of inflation that has remained benign through all of this has been wage inflation, no great surprise. But TMM are thinking that whilst the inflation types listed above may well remain dormant, it will be wage inflation that next rears its head. Nothing much suggests it's coming at the moment other than that the unemployment rate of short term unemployed (those who presumably have a better shot at getting another job quickly) is back to the long-term average, but we are hearing apocryphal tales of the supply of cheap semi-skilled labour becoming diminished and wages having to be hiked to retain staff, especially in construction, which really surprised us. We think wage inflation risk may be the greatest surprise of 2014.

Tapering - It looks fully priced to the point of the curve pricing in rate rises in the US ahead of their guidance. when something is fully proceed in it can only go one way. and thats the other way. Yellen is going to be ultra accommodative and any sign of weakness should see asymmetric rates responses in the market.

EM - India may be disaster waiting to happen and Turkey and Brazil may have had a shoeing but plenty of EM fear is hanging on credit and is in effect a derivative of the US tapering/tightening story. As equally as there is asymmetry in tapering risk the same should feed through to a bounce in EM, but to be honest we're willing to ride out the falling knife trade in EM and wait for something to actually happen. At the moment the list of obvious sells is longer than that of buys.

TMM on Abenomics and Usd/Jpy - "Never in the field of human trading has so much been expected by so many of so few"

Usd/jpy seems to be going through a goldilocks phase with everything lined up to go its way.

Abe policy commitment remains
Sightings of inflation corroborating policy success.
Waining confidence in EM sees DM Japan stock benefit.
Price justification (It's going our way)
Global "risk on" sees Mrs Watanabe happily run carry trades.
Tapering and US rate expectations.

But all of the above are vulnerable especially when the trade is so crowded ( Sep 2012 saw the start of the Abenomics yen run)

CFTC reports showing yen positions.



Even the trusty 2yr US/ JP yield spreads aren't calling for it higher in fact it's been a rubbish predictor for a long time.





Which makes Usd/Jpy particularly vulnerable to a pull back.

In summary, we aren't that bitten by the kick off to 2014 either but we are willing to play the pull back game for the next couple of weeks in order to bring the disasternists back out of their caves and then we can get on and buy the boring carry and risk trades again.


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Leftback
admin
January 16, 2014 at 4:40 PM ×

Welcome back, TMM! Sounds like you had a fair amount of sherry while you mulled that lot.

LB has some Non-Predictions of his own, some along the lines of a divergence from TMM's "consensus trades". Will be back with the list later today.

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Polemic
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January 16, 2014 at 4:47 PM ×

Thanks LB look forward to it

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VandalsStoleMyHandle
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January 16, 2014 at 5:06 PM ×

Welcome back, Pol. This Blackrock table, via Gavyn Davies, covers some of the same ground: https://twitter.com/gavyndavies/status/423472249903931393/photo/1

At the moment, everyone's telling me that the trades that are going to work in 2014 are exactly the trades that knocked it out of the park in 2013. Definitely feels like some views are overdue a bit of a shake-up; here's hoping they aren't mine :-)

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Polemic
admin
January 16, 2014 at 5:54 PM ×

Vandals - Thanks for that I hadn't seen it. Its taken some time to post mainly due to lack of conviction in anything really in the shorter term apart from some spiv trades. Its a bit like twitter feeds they are all a bit " look at this very worrying grain of dust ( teeny fact) I have found behind the sofa">
I just dunno ..

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Polemic
admin
January 16, 2014 at 6:06 PM ×

Ah .. Nice to see that George Osborne is doing his bit for wage inflation by suggesting that the UK minimum wage goes up by 10%.

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Anonymous
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January 16, 2014 at 6:19 PM ×

Speaking of "Come the 19th Jan ... things start to wobble and prices reverse. Come mid Febraury and things are getting properly shaken down and a new set of rules are being drawn up for the trading year ...." you might look at http://marketsci.wordpress.com/2014/01/01/day-of-month-seasonality-for-january-2/

I'm glad to see MM is posting again -- this site has been very educational for me.

Thanks!

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Corey
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January 16, 2014 at 6:39 PM ×

Glad your back. Interesting concept on wage inflation. My legislature has made raising the min wage a top priority this yr.

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Leftback
admin
January 16, 2014 at 7:05 PM ×

Speaking of spiv trades, NuSkin and Herbalife just went past my window on the way down from the 92nd floor, after news that the CHINESE (of all people) think they might be a bit dodgy. As a great man once told me, the secret to this business is staying away from the really big losses. Finally, a good day for Bill Ackman. Not the only Cliff DIve today, as US retailer BBY also tasted the pavement on holiday sales news. Not macro, but after all, it is a market of stocks....

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Polemic
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January 16, 2014 at 8:13 PM ×

Anon re timing .. Wow thats interesting - Gut feeling is backed up by stats .. what are the chances of that! ( hoho). Cheers

Corey my personal legislature has my my top priority of raising my wage inflation too. Failing miserably so far though.

LB yes it is .. feels like an old fashioned fund management yer rather that 0 to 100 boom or bust macro, Pick the smallest sectoral outperformances down to individual stock levels. We should start an index which monitors the complexity of minutia in trade recommendations as a volatility index. eg. blah blah spread to make half a pico basis point = THERE REALLY IS NOTHING GOING ON !

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Leftback
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January 16, 2014 at 11:08 PM ×

An angel came to me in my dream last night, and stood in front of one of those Escher paintings where the water seems to be flowing constantly uphill and said "there is no Macro. there are no carry trades. there is no RORO. the taper doesn't matter. there is no margin debt. there are no multiples. there are no earnings. there are no dividends. no, there are only spoos, going up, up, up to the sky. pour your money in here, and even more of it comes out here....."

LB's Non-Predictions for 2014:

1. Spoos will NOT reach the sky. Or even SPX 2000/SPY 200.
2. We will NOT see a 4.0% 10y, or even 3.5%, before we see 2.5%.
3. Gold will NOT fall below $1000.
4. Puerto Rico will NOT default (bailout, thank you taxpayer)
5. Europe will NOT go through 2013 without a sovereign bond hiccup.
6. DXY will NOT be strong all year. It peaked already last summer.
7. Abenomics will NOT succeed in reforming Japan's economy. Kuroda will NOT drive USDJPY to 120, but JGBs will NOT implode this year.
8. The Treasury will choose NOT to label China a currency manipulator.
9. The US housing "recovery" will NOT gather steam.
10. "Rising rates" will NOT savage investors in munis and REITs.

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CV
admin
January 17, 2014 at 6:55 AM ×

Good to see you back Polemic (and the rest of TMM). Nice synopsis too.I think the 2014 themes were very much copy-paste too.

If I agreed more with you LB my head would fall off from nodding so much. I mean, are you sitting next to me on the desk here? (Note, he isn't!)

Anyway ... especially agree on 1) and 2), especially 2). I think 10y offer value here (yes you read right) which also makes beaten down EM equities quite interesting.

1) US 10y goes down which benefits EM. The consensus wakes up to the fact that EM underperformance started in 2010 and NOT with the tapir scare in July 2013!!

2) US 10y grinds higher and growth improves. Well, if growth improves it has to involve EMs who are now very levered into higher growth through exports after 3 years of relentless currency appreciation. EMs learn to live with tapering and the world goes bubble-bonanza in earnest

win-win :)

A final point on 2014 which I am looking at is that I just can't see how the Fed's grand exit can work without a hiccup here. I mean, they are trying to separate forward guidance and tapering, but look at fixed income volatility and rates both moving higher. I think the short end could get very interesting here if the Fed continues to press on!

Claus

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Skippy
admin
January 17, 2014 at 12:39 PM ×

Welcome back gents,

One of the more amusing ones I read was the "wild ideas" from Credit Suisse. Really Andrew?

Perhaps a non consensus view might be:

The USD will NOT depreciate against the CNY this year?

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abee crombie
admin
January 17, 2014 at 1:28 PM ×

Glad to see you are back Pol, LB and the gang. CNY depreciation certainly seems consensus, but barring falling RE prices in most Chinese cities I think it is the course.

Shiny metals also seem out of favor, which is consensus, unless you speak with Canadians or Swiss.

Keeping my eye on the SHCOMP. My contrarian call was for Chinese financials to re-rate but it doesnt seem to be happening. Lets see. Funny the divergence with Chinese equities. US listed ADR and HK internet shares are going nutty, and SOEs are getting killed. While no one is going to say SOE's are S/H friendly investments one has to wonder how long the divergence can last.

Another market I like is Russia. Slowly reforms are taking place and its very cheap, though it has always been.

Thanks for picking up on my wage inflation theme. I think it will cause a mid year re -adjustment in inflation and bond prices. However wage inflation is not wide spread but just the thought of it seems so out of the realm of PhD CB thinking that it might take a while to re-adjust. How can we have wage inflation with such a large output gap? --> Skills!

Oil and Copper, the two big global growth commodities also seem left for dead. I guess the death of all the commodity HF's means there is no more vol? On an equity level, you can find pretty interesting plays in those spaces for relatively cheap prices

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VandalsStoleMyHandle
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January 17, 2014 at 4:42 PM ×

LB will like this:

UBS out with a note saying the first BOE hike, when it does come, should be 5-10bp, because, you know, 25bp would be a whopping 50%. While ostensibly silly, it does underline the roach motel aspect of ZIRP.

(as an aside: why do CB's move in 25bp increments? one CBer offered the explanation some time ago that this was the minimum increment that would ensure front-page coverage)

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Anonymous
admin
January 19, 2014 at 2:06 PM ×

Hey happy new year and welcome back Pol & the Gang.

Just a couple of mixed thoughts.

Very interesting catch on the wage inflation theme. I would guess that in the long run we need this to happen and profit margins need to take an initial blow, or otherwise the nominal economy will get stuck and we will continue to experience very sluggish commodity inflation (now add: China presumably will be requiring less raw materials with assumed transformation away from infrastructure investing to "consuming"). And in the long run revenues will start taking hits too, until prices are adjusted to lower income (and then after which, according to theory, unit consumption would go up again).

You're certainly right that imagining wage inflation happening right now is very hard. It's very much of a buyers market, especially in the case of massed low skilled work employments. It might be that things are improving in the upper skill areas though. Even though the low skilled masses are still in the wage ditch, the economy would welcome any improvement, even for a small segment. The general problem isn’t really with the interest rate and available financing (which seems to be the focal point of every CB), but the problem is precisely in wage dynamics. Improve wages and prospects and my guess is that the consumption flow would really get going. While a bit better wages might not account much alone in such a generally austerity environment, the key factor here is to create appetite and security to start taking out loans for consumption and thus acting as a multiplier. Without wages coming in to the rescue, the chance for that happening is quite small.

The consensus for European equities currently seem to be expecting improving earnings. Anyone notice how calm it's been in the PIIGS bond market last year? Rates have been steadily falling across the board: there's definately some Draghi magic at work here.

I have a gut feeling that we are going to have some hic-ups from the sovereign debt side. My non-prediction would be that France will become a headline, but not much more, and as a consequence of the ECB "latinization", ECB will be more openly turning dovish and will crush all hic-ups swiftly through easing conditions, maturities etc. There's even some signs of ze Germans softening up (minimum wage implementation). However, we should also be aware of the risks that slowing China will be presenting for Europe (mainly through German exports).

About taper: certainly agree that it is strongly linked to EM performance. In my opinion it looks a bit like, the FED accidently hung itself up in the promise to taper last May. For credibility reasons they had to keep the promise. The end result: QE continues at $75bln/month for the undefined future. What about the next (tiny) taper event? Perhaps we might get back to that in a year or two.

I think QE is as much about (the alleged) new job numbers as it is about the threat of foreign bond holders (China) increasing interest rates through liquidation of their holdings. So the answer to this would naturally be to dilute them. I'm going to agree with LB, 10yr is going to 2.5% before 4%. December NFP weren’t really that great, and there was some noise from the FED about the “labor market still being in transition and in need of some more work ahead”.

Perhaps further enhancing this view: the consensus seem
to be loading some heavy pessimism toward EM and REIT's, no doubt because the assumed rise in rates.

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Polemic
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January 19, 2014 at 10:08 PM ×

Anon 2.06

Thank you for your wishes and your comprehensive input .. much appreciated.

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Anonymous
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January 20, 2014 at 11:56 AM ×

The tapir problem kids are cheap (EM, REITs and retail-owned FI vehicles generally).

What we like though is that if US growth is that strong that rates end up inflicting more pain on those sectors, the front end will have to move too, FG be damned.

And getting ready for that is even cheaper.

So to move away from those "2013 = 2014" suggestions: Long EM + US flatteners?

DD

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Anonymous
admin
January 21, 2014 at 3:22 AM ×

2. We will NOT see a 4.0% 10y, or even 3.5%, before we see 2.5%.

well done LB... give yourself a pat on the back for this one

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Anonymous
admin
January 23, 2014 at 12:14 PM ×

Hey guys,
Just wanted to steer you towards the updated version of the 2y rates differential for usdjpy and others: spread of CB assets as %age of gdp, it's actually pretty good.
Use the ECWB to create it...
Cheers
JL

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Leftback
admin
January 23, 2014 at 3:55 PM ×

China PMI data overnight was extremely weak. They might even be in recession now, no matter what the GDP official data generating algorithm says. We went long some yen and short EWJ yesterday, mainly on the Abe "vision from Japan" speech at Davos, noise and fury signifying nothing, but also on the simple observation that China makes less plastic crap annually after December. Asian markets overall have had a "risk-off" vibe all year so far.

The REITs have been a decent early warning signal on rates for a while now, and they started the year strong, with REIT preferreds bid almost every day - even on days when rates rose slightly. Convexity hedging in full swing in reverse today, and whatever that leveraged trade is in Tokyo where selling yen means you have to sell USTs, it apparently works in both directions!

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Leftback
admin
January 23, 2014 at 5:30 PM ×

US10s have gone bid in a big way. It's absolute Cold Steel for the bond and yen bears today. Look away, Mrs. Watanabe !!

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Leftback
admin
January 23, 2014 at 5:57 PM ×

Don't look now, but USDARS and USDTRY are going absolutely parabolic lately. Is something about to go seriously pear-shaped?

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Polemic
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January 23, 2014 at 7:47 PM ×

Took a cpuple of days for momentum to roll but not a bad day at camp TMM

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Leftback
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January 24, 2014 at 5:16 PM ×

Yeah, babee. We are absolutely rolling in it this week, Pol. It's been a cracking start to the year.

Was even able to deploy some Argentinian Kevlar gloves (TEO) this morning for a while. As one wag put it, we are now effectively long the ARS.

Ready for a bit more EM distress before this is over, and there are probably some decent assets to be had before long in Turkey, Russia, Brazil, South Africa and Argentina. Digging though the ruble, a randy investor can really find a lot of ars to lira at.

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Rossco
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January 26, 2014 at 4:01 AM ×

worryingly (or not) I don't believe real money has even thought about allocating away from EM fixed income yet....though certainly once those month end statements come rolling in they will

"Excuse me Mr Market Maker ? May I have a bid in 40 % of the 600mm issue for Indoturk 3's of 32 that I own?"

Sorry shag, the bids in 500 bonds ....er I mean they're offered there

But my redemptions, my redemptions !!


EM credit looks worse that a bloodbath coming soon to a Basle III Volcker Theatre near you.

-long time lurker

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