The Winners and Losers from the Great Reflation

Transcription

Global Macro Strategy
Spring 2014
The Winners and Losers
from the
Great Reflation
David Zervos
Chief Market Strategist
[email protected]
+1 212 323 7586
Jefferies LLC
The single most important driver for ALL global asset prices is the aggressive
and unprecedented moves in global central bank balance sheets.
Total Assets of Major Central Banks ($ Trillion)
US Monetary Base ($ Trillion)
18
4.5
QE3
16
4.0
14
3.5
12
3.0
QE2
10
2.5
8
2.0
QE1
1.5
6
1.0
4
0.5
2
Operation
Twist
0.0
0
'75
'00
'01
FED
'02
ECB
'03
BOE
'04
'05
BOJ
'06
BOC
'07
'08
RBA
'09
PBOC
'10
'11
SNB
'12
SRB
'13
'80
'85
'90
'95
'00
'05
'10
'14
RBI
Source: NCBs through both Bloomberg and Haver
Source: Bloomberg
Jefferies LLC
2
David Zervos – Chief Market Strategist – [email protected] - +1 212 323 7586
Since 2008 there has been quite a lot of divergence in central bank
aggressiveness.
Total Asset Levels of Major Central Banks
Central Bank Total Assets as a % of GDP
550%
100%
500%
90%
Indexed Value s in National Currency, 2008=100%
450%
80%
400%
70%
350%
60%
300%
50%
250%
40%
200%
30%
150%
20%
100%
10%
50%
1/08
BOE
1/09
1/10
BOJ
1/11
FED
1/12
ECB
1/13
SNB
1/14
0%
'08
BOC
'09
BOE
'10
BOJ
'11
FED
'12
ECB
'13
SNB
PBOC
For Both, Source: National Central Banks: balance sheets and GDP figures
Jefferies LLC
3
The story for the last 2 years has been the BoJ’s commitment to catch up, and the ECB’s reluctance to stay
the course. This has played itself out aggressively in EURJPY and the relative outperformance of the Nikkei
vs EStoxx. This trend will likely continue throughout 2014.
EURJPY Currency
Change of Nikkei and Estoxx (Aug. 2012=100%)
150
190%
180%
140
170%
160%
130
150%
140%
120
130%
110
120%
110%
100
100%
90%
8/12
90
8/12
10/12
12/12
2/13
4/13
6/13
8/13
10/13
12/13
11/12
2/13
Nikkei
2/14
5/13
8/13
11/13
2/14
Euro Stoxx
Source: Bloomberg
Jefferies LLC
4
As we look across developed markets inflation remains subdued, but Japanese inflation is finally starting to
look more “normal”. Who would have thought Japanese inflation would run ABOVE Italian, French and
German inflation in 2014!!!!
World Inflation (YoY %)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
‐1.0
‐2.0
‐3.0
'01
'03
US
'05
Germany
'07
'09
Japan
UK
'11
France
'13
Italy
Canada
Source: OECD, NCBs, Bloomberg
Jefferies LLC
5
GDP growth has been accelerating at reasonable pace post crisis in the US, UK and Japan – QE
works!!! In Europe, balance sheet expansion has been less aggressive and hence it has only worked
for those economies that are in the strongest position within EMU – for example Germany. Sadly
the level of balance sheet expansion by the ECB has been wholly inadequate for the periphery.
Real GDPs (Jan 2008 = 100)
108
106
104
102
100
98
96
94
92
90
1/08
7/08
1/09
US
7/09
France
1/10
7/10
1/11
Germany
7/11
Japan
1/12
7/12
Italy
1/13
7/13
UK
Source: OECD, NCBs, Bloomberg
Jefferies LLC
6
Short term real interest rates provide the best indication of the stance of monetary policy. Ex-post real short
rates have moved sharply lower since the crisis, but they are on the rise except in Japan. Ex-ante real short
rates have a similar pattern. Overall real rates remain in “the highly accommodative zone” across most
developed markets. The sad exception to all this is the periphery of Europe – but it is getting better !
Real Rates of Developed Countries
5 Year Implied Real Yields
10.0
6.0
5.0
8.0
4.0
3.0
6.0
2.0
4.0
1.0
0.0
2.0
-1.0
0.0
-2.0
-3.0
-2.0
-4.0
-4.0
1/07
-5.0
'00
'02
US
'04
Germany
'06
Japan
'08
UK
'10
France
'12
'14
Italy
7/07
US
1/08
7/08
1/09
Germany
7/09
1/10
Japan
7/10
1/11
UK
7/11
1/12
7/12
France
1/13
7/13
1/14
Italy
Real Rates, Source: Bloomberg (2yr yields – 2 Year Annualized Headline CPI)
Implied Real, Source: Bloomberg (5yr yields – Breakeven Inflation)
Jefferies LLC
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As long as real rates fall enough - policy becomes accommodative, inflation rises and unemployment falls…in other words QE
WORKS!!!! But if real rates are not pushed low enough, unemployment and disinflation problems remain. That was the
problem in Japan for 20 years and it’s the current problem in the periphery of Europe. Complicating the employment picture
however are changes in the participation rate. Central bankers can never really be sure if there is truly slack in the economy or
if there are structural and demographic issues in play.
Unemployment Rates (%)
Participation Rate (%)
70
14
12
65
10
60
8
6
55
4
50
2
45
'70
0
'91
'94
US
'97
'00
Germany
'03
Japan
'06
Italy
'09
France
'75
'80
'85
'90
'95
'00
'05
'10
'12
US
UK
Germany
Japan
Italy
France
UK
Source: Bloomberg
Jefferies LLC
8
But based on what we know about the US from the FOMC’s summary of economic projections (SEP),
FOMC sees A LOT of slack in the US economy – even at equilibrium at the end of 2016. How else could you
explain these forecasts?
Mar-14
FOMC SEP (Midpoint of
Central tendencies)
Change in real GDP
Unemployment rate
PCE inflation
Dec-13
2014 2015 2016
Longer
run
2.9
3.1
2.75
2.25
6.2
5.75
5.4
5.4
1.5
1.75 1.85
2
Central tendencies)
Change in real GDP
Unemployment rate
PCE inflation
Target federal funds rate at year-end
Sept, 13
Dec, 13
Mar, 14
Sep-13
2014 2015 2016
3
Longer
run
3.2
2.9
2.3
6.45 5.95
5.5
5.5
1.5
1.9
2
1.75
Central tendencies)
Change in real GDP
Unemployment rate
PCE inflation
2014 2015 2016
3
3.25
2.9
2.35
6.6
6.05 5.65
5.5
1.55
1.8
1.85
Jefferies LLC
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2014
2015
2016
Longer run
Mean
0.4
1.25
2.26
3.93
Median
0.25
1
2
4
Mean
0.34
1.06
2.18
3.88
Median
0.25
0.75
1.75
4
Mean
0.30
1.13
2.42
3.88
Median
0.25
1
2.25
4
Source: Federal Reserve Bank
Longer
run
9
But as much as the Fed sees slack, the private sector has performed
remarkably well post crisis.
Real GDP of Govt and non-Govt Sectors (YoY, %)
US Real GDP, by Component (YoY %)
6%
8%
6%
4%
4%
2%
2%
0%
0%
-2%
US Avg. Real GDP
from 1990-2007 = 3.0%
from 2010-2014 = 2.2%
-2%
-4%
Cumulative Annualized GDP Figures
-6%
-4%
Private Sector Nominal GDP from 1990-2007 = 5.5%
Private Sector Nominal GDP from 2010-2014 = 4.8%
Private Sector Real GDP from 1990-2007 = 3.1%
Private Sector Real GDP from 2010-2014 = 3.2%
-8%
'90
'93
'96
'99
'02
'05
'08
'11
'14
-6%
'90
Govt
'93
'96
'99
'02
'05
'08
'11
'14
Ex-Govt
GDP, ex-Govt
Govt (additive)
Govt (subtractive)
Source: Bloomberg, Jefferies
Jefferies LLC
10
The FOMC looks like it will be taking some significant longer term inflation risks in order to unwind slack associated with a
falling participation rate. And the BoJ finally looks like it will apply QE in such a way as to keep risk free real rates low and
negative. But the Europeans are just flailing in the wind. The ECB got it right in the beginning of the crisis, but since the
summer of 2012 they have let the trade weighted Euro appreciate sharply. The ECB is making the same “relative” mistake the
Japanese made during their lost decades. That is why they have high real rates, a weak economy, a strong currency, strong
bond markets and weak equity markets! It’s a tragic mistake!
Trade-Weighted 20-Country Euro NEER
115
110
105
100
95
90
'09
'10
'11
'12
'13
Source: Bloomberg, ECB
Jefferies LLC
11
Looking ahead, there are surely long term developed market inflation risks associated with all of this
monetary expansion. And while breakeven inflation rates suggest these risks are minimal, Gold still prices
in some serious long term inflation dislocations. So far though the breakevens seem to be winning the
battle!
Inflation Adjusted Gold Prices (indexed to 1983)
Fed 5y5y Breakeven (%)
900
16
800
14
700
12
600
10
500
8
400
6
300
4
200
2
4.0
3.5
3.0
2.5
2.0
100
0
0
-2
'70
'75
'80
'85
'90
Inflation Ajusted Gold Prices $ (LHS)
'95
'00
'05
1.5
6/99
'10
12/00
6/02
12/03
6/05
12/06
6/08
12/09
6/11
12/12
US YOY Inflation % (RHS)
Source: Bloomberg
Jefferies LLC
12
Near term, as developed market central banks push the printing press pedal to the metal, force risk
taking and generate increased real growth potential, EMG will become the weak link - remember
the last time US rates started to rise, a US recovery took and Japan went on a devaluation tear by
using a combination of expansionary fiscal and monetary policies.
Japan’s Fiscal Expansion Post the 1995 Yen Lows
150
Dollar/Yen & Japan’s Monetary-Base
37
160
140
36
130
35
120
34
110
33
6,000
5,500
140
5,000
120
4,500
100
32
100
90
4,000
31
80
30
'92
'93
'94
'95
'96
'97
'98
80
3,500
'90
USDJPY (LHS)
1988-1994 'Avg Annual Gov't Spending/GDP' (RHS)
1995-2001 Avg 'Annual Gov't Spending/GDP' (RHS)
'92
USDJPY (LHS)
'94
'96
'98
Japan Montary Base 12MMA (RHS, NSA ¥10 Bln)
For Both, Source: National Central Banks: balance sheets and GDP figures
Jefferies LLC
13
It did not end well for EMG. And take a look at the relative value of SPX to
MXEF - EMG looks VERY expensive!!
SPX/MXEF Ratio (1988=1)
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
'88
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
'14
Source: Bloomberg, MXEF is a free float weighted emerging market equity index.
Jefferies LLC
14
Here are the winning and losing assets in the great reflation.
There Are Two Types of Assets
Non-Printable
• Equity Capital
• Real Estate
• Commodities
• Distressed Fixed-Income Assets
Printable
• Cash
• Low-Yielding Fixed Income Instruments
In a world where the developed market central banks drive risk-free real rates lower, and the portfolio balance channel forces risk
taking, two things can happen. The risk-taking generates innovation, technological advance, productivity gains, real returns on
capital, real growth and job creation; or, the risk taking generates no innovation, no technological advance, no productivity gains, no
real returns on capital, no real growth and no job creation. Folks who believe in the former – the lovers - should own equity capital,
real estate, and distressed assets. Folks who believe in the latter – the haters - should own commodities such as precious metals. No
one should own printable assets - anyone who does so will be in the “loser” camp.
Winners
•
•
•
•
•
Losers
Nikkei
S&P
DAX
Real Estate
Distressed Fixed-Income Assets
Jefferies LLC
• Cash
• Low Coupon Bonds
• Emerging Market Assets
15
Our favorite way to play the great reflation has evolved through time. In general we have always
recommended at a “long/long” strategy. For every 100m of risk assets (ie SPX), we would hedge with
100k/01 in 2s, duu’s, blues or chartreuse. For 2014, however we are fully risk-on. No more levered fixed
income hedges in the front-end. It’s time for just Spoos and Q’s!!!
2010, SPX & 2s
2011, SPX & DUU’s
25%
15%
20%
10%
15%
5%
10%
0%
5%
-5%
0%
-5%
1/10
3/10
5/10
7/10
9/10
11/10
1/11
-10%
1/11
3/11
2012, SPX & Blues
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
3/12
5/12
7/12
7/11
9/11
11/11
1/12
2013, SPX & Chartreuse
30%
0%
1/12
5/11
9/12
11/12
1/13
0%
1/13
3/13
5/13
7/13
9/13
11/13
1/14
Source: Bloomberg, Jefferies: -Using weightings of $100K/01 for every $100m in equities.
Glossary:
SPX is the S&P 500…. DUU’s refers to Schatz futures contracts …. Blues are blue (3 yrs out) Eurodollar futures contracts …. Chartreuse is blue and green (2 and 3 yrs
out) Eurodollar future contracts
Jefferies LLC
16
The Fed backstop is fully in place, QE has worked its magic and US equities
do not look expensive.
Total US Equity Market Cap/GDP
Real Value of US Equities (in 2013 dollars)
18,000
2,250
16,000
2,000
14,000
1,750
12,000
1,500
10,000
1,250
8,000
1,000
6,000
750
4,000
500
2,000
250
DJ US Total Stock Market
2.0
1.5
1.0
0.5
0.0
1987
1992
1997
2002
2007
2012
Mkt Cap/GDP
S&P 500
1.5
1.0
0.5
0.0
0
0
'27
'37
'47
'57
DOW (LHS)
Mkt Cap/GDP
'67
'77
'87
'97
'07
SPX (RHS)
Source: Bloomberg, Fed, Jefferies.
Jefferies LLC
17
Meet the new bubble….same as the old bubble.
Adjusted Nasdaq Composite Index (Jan 1990 = 100%)
1,200
1,000
800
600
400
200
0
'90
'91
'92
'93
'94
'95
'96
'97
'98
'99
'00
'01
GDP Adjusted
'02
'03
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
CPI Adjusted
Source: Bloomberg.
Jefferies LLC
18
The most important lesson from the CORRECT implementation of QE is that
the US is NOT Japan.
US Equities and Japan Equities Performance
140
120
100
80
60
40
20
0
0
20
40
60
80
100
120
140
160
180
200
220
240
260
280
Months from Peak
S&P Peak to Present
Nikkie Peak to Present
Nasdaq Peak to Present
Source: Bloomberg, Jefferies.
Jefferies LLC
19
The greatest monetary policy mistake since the 1930s took place in Japan,
from 1990 to 2013.
US Price Levels (1980=100)
Japan Price Levels (1980=100)
350
250
300
200
250
150
200
100
150
50
0
100
'80
'82
'84
'86
'88
'90
'92
CPI (1980=100)
'94
'96
'98
'00
'02
'04
'06
'08
3% Annual Inflation
'10
'12
'80
'14
'82
'84
'86
'88
'90
'92
'94
'96
'98
'00
CPI (1980=100)
US GDP
'02
'04
'06
'08
'10
'12
2.5% Annual Inflation
Japan GDP
24,000
900
800
20,000
700
600
16,000
500
12,000
400
300
8,000
200
4,000
100
0
0
'80
'82
'84
'86
'88
'90
'92
'94
GDP (1980=$2,730B)
'96
'98
'00
'02
'04
'06
'08
6% Nominal GDP YoY
'10
'80
'12
'82
'84
'86
'88
'90
'92
GDP (1980 = 250T ¥)
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
3.5% Nominal GDP YoY
Source: Bloomberg, Jefferies.
Jefferies LLC
20
Sadly, Japan relied on fiscal policy expansion instead of monetary policy
expansion to spur a recovery….that clearly did not work out very well.
Government Gross Debt/GDP Levels (%)
250
200
150
100
50
0
'81
'84
Japan
'87
USA
'90
France
'93
UK
'96
'99
Spain
Canada
'02
Germany
'05
'08
Mexico
'11
Austrailia
'14
China
Source: Bloomberg,.
Jefferies LLC
21
The bottom line is that we have seen some amazing benefits from QE when it
is appropriately applied. However, like any pain medication, the benefits are
very much upfront and the costs are much more long term. What are some
of these long term costs:
1. Financial instability/bubbles
2. Losses on the balance sheet
3. Inability to extract reserves and control short rates on the exit
4. Unhinging of long term inflation expectations
5. Income and wealth distribution skews
All of these are serious issues for the long run, but the most worrisome one is
the income distribution skews. We are likely to see much more political
instability in the US over the long run as QE continues to widen these skews.
Let’s look at a few charts on the negative distributional consequences of US
QE.
Jefferies LLC
22
A worrisome trend developing.
US Gini Coefficient
0.47
0.45
0.43
0.41
0.39
0.37
0.35
0.33
'47
'50
'53
'56
'59
'62
'65
'68
'71
'74
'77
'80
Tightening Fed Monetary Policy (noted from 1954 and after)
'83
'86
'89
'92
'95
'98
'01
'04
'07
'10
US Gini Coefficient
Source: Bloomberg, US Census.
Jefferies LLC
23
Income has stayed the same for the upper class, but has fallen for the middle
and lower-tier earners.
US Cumulative Real Income Increases since 1967, by Income Cohort
100%
80%
60%
40%
20%
0%
'68
'72
'76
'80
'84
'88
'92
Tightening Fed Monetary Policy (noted from 1954 and after)
Cohort of Bottom 40% Earners: Mean Income
Cohort of middle 20% of Earners: Mean Income
Cohort of Top 5% Earners: Mean Income
'96
'00
'04
'08
'12
Cohort of Top 40% Earners: Mean Income
Source: US Census.
Jefferies LLC
24
The wealth distribution has also widened sharply.
US Household Nominal Wealth Growth Since 1989 by Cohort
300%
250%
200%
150%
100%
50%
0%
'89
'93
25-49.9
'97
50-74.9
'01
75-89.9
'05
90-100
'09
All Households & NPOs
Source: US Census, Fed., Jefferies.
Jefferies LLC
25
Big house, low rate - small house, high rate.
Average Original Loan Size ($K) by Net Coupon(%) (Fannie & Freddie 30-yr, Conforming and Non-Conforming)
350
300
250
200
150
100
50
0
2.50
3.00
3.50
4.00
4.50
5.00
5.25
5.50
5.75
6.00
6.25
6.50
6.75
7.00
7.50
Source: Five Bridges Advisors, Sept ‘13.
Jefferies LLC
26
The structure of the US mortgage market is the culprit behind these distributional asymmetries. A
fixed rate mortgage combined with a house price collapse is a toxic structure. The biggest problem
for the US has been the inability of those in the lower income quintiles to refinance. The Fed should
have thought more clearly about these distributional issues back in 2009!!
Effective Outstanding Mortgage Rates (%)
10.0
14
9.0
12
8.0
10
7.0
8
6.0
6
5.0
4
4.0
2
3.0
2.0
'06
'07
US
'08
'09
UK
'10
'11
Sweden
'12
'13
0
'14
'77
'82
'87
'92
'97
'02
'07
'12
US
Australia
Source: Fed, SCB, RBA, BoE
Jefferies LLC
27
Relationships between QE, credit market and bubbles
Jefferies LLC
28
Total US System Credit Debt
20%
360%
15%
310%
10%
260%
210%
5%
160%
0%
110%
-5%
US system credit growth, Y/Y
US system credit debt/GDP
Source: Fed
Jefferies LLC
29
Trillion USD
C&I Loans
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1947
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
C&I loans
Source: Fed
Jefferies LLC
30
C&I Loans/GDP
12%
10%
8%
6%
4%
1947
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
C&I loans/GDP
Source: Fed
Jefferies LLC
31
Financial and Non-Financial Corporation Debt/GDP
120%
90%
100%
80%
80%
70%
60%
60%
40%
50%
20%
0%
1977
1982
1987
1992
1997
2002
2007
2012
40%
1977
1982
1987
1992
1997
2002
2007
Nonfinancial business credit
Financial corporation debt
Source: Fed
Jefferies LLC
32
2012
US BBB and HY OAS (%)
9
20
8
18
7
16
14
6
12
5
10
4
8
3
6
2
4
1
0
1996
2
1998
2000
2002
2004
2006
2008
2010
2012
0
1996
US BBB OAS
1998
2000
2002
2004
2006
2008
2010
2012
US high yield spread
Source: Fed
Jefferies LLC
33
Nonfinancial Corporates: Total Credit/Total Assets
29%
27%
25%
23%
21%
19%
17%
15%
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
Credit/Assets
Source: Fed
Jefferies LLC
34
Household and Nonprofit: Total Credit/ Total Assets
21%
19%
17%
15%
13%
11%
9%
7%
5%
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
Credit/Assets
Source: Fed
Jefferies LLC
35
Total HY Bonds Outstanding
$1800B
1520.6
$1500B
1305.2
$1200B
1140.4
983.0
$900B
825.1
642.6
709.3
727.6
588.4
$600B
495.8
337.6
$300B
674.6
209.0
246.5
561.9
372.6
274.2
Source: S&P Capital IQ
Jefferies LLC
Sr Secured
Sr Unsecured
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
$0B
Subordinated
36
Total HY Leveraged Debt Outstanding
$2500B
2203
$2000B
1857
1657
1489
$1500B
1266
1324
1356
1074
$1000B
890
781
710
632
464
$500B
503
374
321
243
Institutional First Lien Bank Debt
Second-Lien Bank Debt
Sr Secured Bonds
Sr Unsecured Bonds
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
$0B
Subordinated Bonds
Source: S&P Capital IQ
Jefferies LLC
37
Equity Market Cap Normalized by GDP
S&P 500
Nasdaq
0.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
1970
1975
1980
Mkt Cap/GDP
1985
1990
1995
2000
2005
2010
Mkt Cap/GDP
DJ US Total Stock Market
Wilshire 5000
1.6
2.0
1.4
1.2
1.5
1.0
0.8
1.0
0.6
0.4
0.5
0.2
0.0
1987
1992
1997
2002
2007
0.0
1971
2012
Mkt Cap/GDP
1976
1981
1986
1991
1996
2001
2006
Mkt Cap/GDP
Source: Bloomberg
Jefferies LLC
38
2011
Household and Nonprofit Real Estate Market Value/GDP
200%
180%
160%
140%
120%
100%
80%
60%
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
Household and nonprofit real estate market value
Source: Fed
Jefferies LLC
39
Question 1: Where is the next bubble?
Question 2: Will monetary policy create the next bubble?
Question 3: Can monetary policy stop the next bubble?
Jefferies LLC
40
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David Zervos
Chief Market Strategist
[email protected]
+1 212 323 7586
Ryan Siegal
Analyst, FI Strategy
[email protected]
+1 212 323 7649
Jefferies LLC

The Winners and Losers from the Great Reflation

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