Thanksgiving is a nice opportunity to step back and look at the big picture of what’s going on in the world without getting distracted by the latest headline.
Here is a quick summary of the big macro stories in the world that are actually a matter of some debate and interest.
1. Japan and the yen: On a debt-to-GDP basis, the Japanese government is the world’s most indebted. Yet for years, those who have bet against the yen or Japanese Government Bonds have hit a brick wall. But without much fanfare (up until recently) the yen has been weakening, and is now at an 8-month low against the dollar. This comes amid two big developments. One is that Japan is now persistently running monthly trade deficits (contrary to its long standing reputation as an export giant). The other is that the country is about to have an election, where the leading candidate is running on a platform of aggressive inflation targeting and bond buying.
These developments have given Japan uber-bears like Kyle Bass new motivation to make the case that the country is going to have a meltdown.
Most of Wall Street is far more sanguine, but there is no question that the short-yen trade is the hottest thing around.
As SocGen’s Kit Juckes put it in his morning note this morning…
There has been no news in USD/JPY, but the yen is still weakening steadily across the board. That can continue as yen shorts are put on against other Asian currencies. AUD/JPY and NZD/JPY can be popular trades that suck in a lot of semi-retail funds. EUR/JPY has broken sharply higher, too. By mid-December there may be too many yen shorts out there, but we’ll worry about that another day.
Morgan Stanley’s 2013 FX outlook is titled: The Year of JPY Weakness.
Photo: Morgan Stanley
In that note, they make an interesting argument for why foreign money will likely desert Japan, further weakening the yen.Over the past two years, net portfolio inflows into Japan have been almost entirely in the money markets. With Japanese money market instruments providing no yield, foreign investors have bought these investments in the hope that JPY appreciation ‘pays the dividend’. As such, with the BoJ likely to engage in a much more aggressive easing stance, this should drive not only an unwinding of currency hedges, but also an outflow from the Japanese money market. We believe that the combination of these flows will drive JPY materially weaker…
2. Chinese green shoots: China has had a pretty dismal year. It’s stock market has been a dog, and fears of hard landing grew much louder. But… over the past several weeks, sentiment has shifted fairly significantly. If people aren’t outright positive about it, the number of hard landing folks have diminished.
For one thing, the country’s leadership transition went smooth.
For another thing, the data lately has been better.
China’s Flash PMI hit a 13-month high last night.
And from Morgan Stanley, here’s another set of green shoots charts. Click to enlarge.
Photo: Morgan Stanley
There’s still the big issue of China converting from an investment-led economy to a consumer-driven one. And that’s expected to result in a very different picture of demand (bad for commodities, etc.). It might also result in a much slower than expected long-term glide path, in terms of GDP. But the big story aside, the story at the moment is all these jumps in lines with red circles around them.
3. European crisis: The sovereign debt crisis really started on Thanksgiving Day, 2009, when Dubai World went bust, and people immediately started talking about Greece as the next big risk. And yet here we are. The European crisis really seems to go anywhere, but if you go back to this time last year, you can see that actually a lot of progress has been made. Nobody thinks that Spain or Italy or France or anyone else is about to go bust. Greece seems to be close to a deal to push its problems in the future. And the ECB has a plan in place to buy bonds from countries (except the country has to ask for that, and nobody has done that yet). Everyone’s waiting on Spain, which is really dragging its feet. The big problem is now less about debt and more about a horrible growth environment, which doesn’t seem to be getting any better.
4. The US: Housing vs. The Cliff: The debate over the US is really about two completely opposed forces, and trying to figure out which one will win. On the one hand, the bullish housing story is really gathering steam.
Starts are blowing through the roof.
Prices are also rising. According to Zillow, home prices just had their best month of price gains in over 7 years, though of course, prices remain pretty far from their peak.
And then on the other hand, you have the threat of austerity hanging over the head of the economy in the form of the fiscal cliff.
If current law goes into place, Goldman Sees a drag of 3.5% of GDP occurring. We’d almost certainly go into a recession. A drag will even happen with a “deal” that averts most of the expiring provisions. And ominously, a lot of the provisions that are assumed to expire (in full or in part) fall right on the consumer (the Payroll Tax Cut and the Emergency Unemployment Benefits).
Photo: Goldman Sachs
As Richard Koo has made clear, austerity is really poisonous in an economy dealing with a deleveraging cycle, which is why it’s disturbing that there’s any austerity at all right now.
Photo: Richard Koo
The Fiscal Cliff has clearly weighed on business sentiment.
A poll of 120 US companies done by Credit Suisse found that 30% said they had postponed investment decisions due to the Fiscal Cliff. That’s consistent with other surveys as well.
Photo: Credit Suisse
The bullish housing vs. the bearish cliff is the story of the US and arguably the story of the world.
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