Macro Roundup: "Risk-On" Won't Last (Except for Oil)
ARTICLE OF THE DAY: The estimable Richard Bernstein argues in the FT that the 'risk-on' rally will not last. His secular theme for the 2010s is "risk-off" on the back of a continuing deflation of the credit bubble, which he believes has yet to reach emerging markets. I agree with him, except where he states that "U.S.-based assets (both stocks and bonds) continue as our favorites." As I argue in the latest issue of The Real Returns Report, investors shouldn't expect to earn more than 2% from U.S. stocks. However, the following statement is uncontroversial:
The performance see-saw between risk-on and risk-off assets reflects this fight between economic and political realities. When policymakers take actions to attempt to counteract the economic reality that bank balance sheets must contract (as the ECB has recently done), then risk-on assets outperform.
Platinum: Short-term short, long-term long. The FT's commodities editor makes a concise and cogent argument that platinum prices are now stretched relative to short-term prospects. Car manufacturing accounts for forty percent of platinum production – not a good augury in light of oil's price rise. However, on a longer-term perspective, the price remains (slightly) below parity with gold, which hasn't been the historical norm (platinum is rarer than gold and it has more industrial applications.) Futures spread, anyone?
Speaking of precious metals, I have to agree with one precious metals analyst, who warned:
"What has to concern the gold bugs is that any whiff of the idea that there won't be QE3 in the U.S, causes the price to tumble. The probabilities of QE3 are diminishing by the month as the data improve."
Oil rally looks well-supported. Switching commodities, things are coming together nicely for a continuing rally in oil prices. By removing Iran's supply from the global supply/ demand equation, the U.S./ EU boycott places the burden of the adjustment on Saudi Arabia. However, the kingdom's spare production capacity is not what it once was. The IEA estimates maximum pumping capacity at 11.9 million barrels per day. At 2 million b/d, spare capacity is already 40% lower than it was prior to the disruption in Libyan oil production. Between the expected seasonal increase in Saudi consumption this summer and the need to make up the shortfall in supply, that cushion could yet fall below one million b/d. Even uncertainty over the numbers warrant some sort of risk premium; as one analyst put it:
There are many in the market who are skeptical of the Saudi numbers, for the simple reason that they've never produced this much before.
Bank hazard: Yesterday, I suggested that the ECB's cheap money program may allow European banks to delay cleaning up and recapitalizing their balance sheets. In today's FT, Lorenzo Bini Smaghi, former ECB Board member argues that this is the main risk of the LTRO and that national banking supervisors must coordinate efforts to keep that risk from materializing.
Punitive rates: I hadn't realized how high bond yields really are in peripheral nations that are directly in the market's line of sight. The Irish 9-year yield is nearly 17%, with the Portuguese 10-year close to 14%. Even if the bond market is wrong about the fiscal position of these nations, borrowing rates like those will quickly turn a wrong into a right. Surely, a debt restructuring or second bailout cannot be too far in the future. The LTRO salve, so effective in lowering Spanish and Italian yields, hasn't done the trick here.
***That's all there is: Find out why investors shouldn't expect to earn more than 2% from U.S. stocks in the latest issue of The Real Returns Report.***