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Has the Bluff Been Called?

On der Wille

A year ago, I posted Can the Bluff be Called?, which spoke about the beginning of a rising equity market. The focus was the markets on steroids, a steroid called easy money administered by a doctor called Mario Draghi and other central bankers around the world. In his Bumblebee address, he vowed to do "whatever it takes" to salvage the European economy and keep the Euro together. As I pointed out then, there were a select group of men and women at the top central banks in the world, who were willing to use nuclear power to avert an impending armageddon. A couple of years on from the Bumblebee address, we have seen record rises in equity markets around the world, as hot money chased the highest returns. Emerging markets (EM) were both embattled and supported in equal measure. That is the nature of hot money. However, two years on, economic activity has shown little signs of sustained improvements and Germany - the bellwether, the flagbearer of Europe, the EU and the Euro is one quarter away from a recession. Mr. Abe's third of the three arrows in Japan hasn't yet left his bow. But at least the EMs and the US seem to be doing better. But how has it come to this? With the central banks having pumped more money into the system than ever before, why hasn't it translated into an improving economy? Why have more and more people stopped looking for a job? And why do the Western baby boomers now have to hope that the EM young savers bail them out?

The fight to save the Euro

Back in 2012, Mario Draghi tried saving the Euro the only way he could - by bringing down the spreads between the German Bunds and the bonds of the Southern profligates. He had to enable the profligates to continue to borrow. He had to make a big bang announcement and he knew that he had to keep the money managers around the world onside. He came out and announced, what amounted to, infinite liquidity and eventually, what amounted to, a bond buying spree. A risk on year, morphed into a risk off second half. However, there wasn't a commensurate increase in business sentiment. France continued to struggle with structural reforms - they couldn't sort out housing or taxation. Italy didn't come up with structural reforms either. These countries threw away a lifeline that Draghi threw their way. Without labour reforms or manufacturing returning to these shores, there is no way France or Italy can work their way out of this. And yet, in fractured parliaments reforms are the hardest things to pass.

No one can call the end of a debt super-cycle with any degree of precision. Can the Bluff be Called spoke about the hedge fund manager Deepak Narula, who was 3 years too early with his bet on the sub-prime - the bet that came to be called as the big short. With the markets flushed with liquidity as the European Central Bank borrows more and more, it is near impossible to pinpoint when this bubble will burst, but changes in the perceptions of various market participants are a good lead indicator. You now hear a lot more money managers and senior economists starting to worry about the EU, as now it is France and Italy on the line, not Greece and Spain.

Germany could never commit the political suicide of throwing the profligates a lifeline, yet the EU is its' largest trading partner. Such dichotomies are rife on this continent and we are no closer to solving it that before the Bumblebee.

Macro rotation in financial and economic activity: Where is the opportunity?

On Ideas in the Making

US markets delivered truly outstanding, amazing results last year. On average there was no better place to be invested, optimism reached new highs and everyone is convinced a recovery is in play, even though for some reason or another people still talk about how times are tough.

Those who own stocks have seen their assets go up incredibly from the insane market bottom that was 2009. 2011 saw another pullback and now 2013 has been crazy. But the question is, can the US continue to deliver such outstanding returns on investments? or even a better question is, was the insane returns justifiable? The US economy isn't substantially better, and defintely not 30% better, and the outlook is still somewhat hazy. Although most people would agree a modicum of a recovery is happening, real wages, unemployment and the like continue to improve rather slowly.

From a technical standpoint, US markets haven't touched their 200 DMA average in around 400 days, and haven't been below it for any significant amount of time since 2011. The markets experienced a pullback last few weeks, but have quickly readjusted. the question is will this adjustment go through? how far will we go? Noone knows the answers to this question, but in my opinion, a macro rotation is at play.

What do I mean by macro-rotation? I mean I a long term money flow cycle is slowly changing, and it will effect just about every kind of money flow imaginable. Bonds, equities, commodities, emerging markets etc.

It all starts with the falling of U.S. Hegemony. Last year We saw the number one indicator of the U.S. hegemony take on a massive reversal, that is the 10 year treasury yield began to break out of long-term decline. it is uncertain if the breakout will continue, but one thing is for sure, demand for U.S. treasuries is beginning to wane. At the same time, The US dollar index has also began to wane, even though there has been an insane amount of money tied up in he U.S. dollar the past couple of years as the dust settles around the world and investors consolidate.

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