Credit Writedowns

Europe’s GDP numbers have just been released today and they are miserable. They show the Netherlands and France in recession along with the rest of the periphery. And even outside the euro zone, we got some pretty dire numbers out of the Czech Republic as well. A: What’s going on? and B: why I am still bullish despite this?

Analysts’ latest adjustments to corporate earnings forecasts for Japanese firms show many more upward than downward revisions. Merrill Lynch tracks the “number of stocks for which consensus EPS estimate has risen vs. the number for which it has fallen” over a 3-month period. That ratio (chart below) has spiked relative to other nations.

Now, you may well deduct from all of this that I am as bearish as I have ever been, but nothing could be further from the truth. The issues I have discussed in this month’s letter are clouds on the horizon which are likely to take years to play out and, in the meantime, investors will continue to be preoccupied with far more mundane issues. All I know is that financial markets cannot stay disconnected from economic fundamentals forever so, ultimately, the Tony Dyes of the world will be proven right. Unless they lost their jobs beforehand, that is.

I have been posting for a while now that I think Greece provides the greatest upside potential. Greece’s sovereign bonds outperforming was one of my ten surprises for 2013 three months ago. And with bond yields now falling below 10%, Morgan Stanley is getting onboard so I am not the only one recommending this trade. I would also posit here that Greek equities have been well beaten down and trade at low multiples based on low earnings, meaning that if recovery does take hold in Greece as I expect it to, then you will get a double benefit from earnings growth and multiple expansion.

Since we’ve never been at these yield levels, this is uncharted territory in corporate bond pricing. Certainly bond spreads have been lower in the past – especially during the boom years. But in the post-crisis era, corporate spreads seem to have found a floor.

Amazon, Apple, and Samsung, three of the biggest names in the technology space, have reported this week. In all three cases, there were gaps in the earnings reports and the earnings outlooks. For me, however, Samsung’s report was the best and Apple’s was the worst. And this is meaningful for investors in US markets.

Gold is breaking down in a big way right now. We are well into bear market territory here. Marc Faber thinks it could fall to $1300… before rebounding. A number of noted goldbugs are talking about a Fed conspiracy. So what is going on here? Personally, I like the way Pawel Morski puts it. Gold – unlike bank deposits, equity [...]

This is a good interview with Kyle Bass because it cuts to the heart of the matter. If you are a partisan in the Bass debate on Japan, you can see him as being either correct or incorrect. Now, I have covered this before and I have stressed that he is looking to make an asymmetric bet on outlier events to hedge his market-long portfolio. He is not taking a flyer via outsized risk exposure to short JGB trades. And Bass does make this clear in his commentary. Nonetheless, his macro view of the way interest-rate targeting central banks operate in a fiat currency system is completely wrong.

In the short term, though, a continuation of the currently lax monetary policy is likely to lead to higher assets prices. The investor mindset is very much in risk-on mode at the moment, as documented by the surprisingly calm reaction to the crisis in Cyprus. Mind you, none of this incorporates the risk of an outright war between the two Koreas or an escalation of hostilities between Israel and Iran, just to mention two wild cards. Barring a Black Swan event, though, we are on relatively firm ground for now, but the seeds of the next crisis have already been sown.

It’s only fitting that I write something today on Europe’s multiples since I wrote yesterday on P/E multiples in the US. What prompted this were two different articles.

After I released my daily commentary a few weeks ago about S&P500 earnings, wages and multiple expansion, there has been a lot of talk about multiple expansion in the media. I think this talk is warranted because this is the crux of the rise in shares right now.

Why does the federal government need to balance its books? Where does the money come from that the government spends? Whose income gets cut when spending gets cut? These are a few of the questions we should be asking when thinking about cutting or raising taxes. My view is that government deficits should be economically endogenous, meaning that they are the outcome that results from private sector savings and investment decisions and public sector policy choices. The deficit is not a goal. Making it a goal of policy makes policy an endogenous variable and brings uncertainty and pro-cyclicality into the business cycle.