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.