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09102009_Edwards

09102009_Edwards

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Published by: ejlamas on Sep 19, 2009
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09/19/2009

 
  WorldGlobal Strategy 
 
10 September 2009
 
Global Strategy
Weekly
What is the Gold breakout telling us? Less than the Baltic Freight
Albert Edwards
(44) 20 7762 5890albert.edwards@sgcib.com
Global asset allocation
%
IndexIndexneutralSGWeight
Equities 30-80 6035Bonds 20-50 3550Cash 0-30 515
Source: SG Global Strategy
Equity allocation
 Very OverweightOverweightUSUK 
 
Neutral Cont Europe
 
UnderweightJapanEmerging mkts
 
 Very Underweight
Source: SG Global Strategy
IMPORTANT: PLEASE READDISCLOSURES AND DISCLAIMERSBEGINNING ON PAGE 4
www.sgresearch.socgen.com
It’s almost as if the biggest credit bubble in history never occurred. Investors are increasinglyconvinced that a sustainable global recovery is emerging out of the wreckage. All praise to thecentral bankers (and Gordon Brown) for saving the world! I’m waiting till someone writesabout the return of
The Great Moderation
and suggests Ben Bernanke is the new Maestro.Then I’ll know the lunatics have taken over the madhouse…..yet again!
 
When you look at the ever shrinking rate of bank lending to the private sector around theworld it is clear as the nose on my face that the global economy is still very, very sick. As wehave repeatedly highlighted, one key lesson from Japanese boom and bust is that banks arenot the problem. Bankers
bonuses are not even the problem. The pigmies that populate thepolitical and monetary elites prefer to genuflect to the court of public opinion in a patheticattempt to deflect blame from their own gross and unforgivable incompetence. It is themonetary and regulatory authorities that are responsible for this mess. It is not obvious inretrospect. It was obvious from the very start.
 
The problem is that after the boom there will be a bust. The issue now is one of de-leveraging and the deflation that is starting to unfold. The problem is that Bernanke is aslave to Milton Friedman
s view of the Great Depression (at Friedman
s 90
th
 
birthdayBernanke promised that the Fed would never allow another Great Depression to occur). The Australian economistSteve Keen
sobservation that "Bernanke
s dilemma is that he is livingin a Minskian world while perceiving it though Friedmanite eyes
explains his actions todate. It also explains why he will fail.
 
Meanwhile the Baltic Freight index is some 40% off its June high, closely mirroring therecent performance of bond yields (see chart below). If anything, this series has some leadqualities. The CRB has also stalled since June. Equities are the outlier.
Baltic Freight Commodity Index recently leading bond yields (…and also equity markets)
Source Datastream
O N D J F M A M J J A S O N D J F M A M J J A000'S0246810122.803.003.203.403.603.804.004.204.404.604.80
10y bund yield
Baltic Dry Index
(Rhscale)
 
Global Strategy Weekly 
10 September 20092
Much excitement abounds this week as gold broke above $1,000 intraday and tries yet againto rise above the $1,030 intra-day high set in March last year. To many, the breakout above$1,000 is reflective of a surge of inflationary worries or/and the weakness of the US dollar. Aswith all these events, there is so much ex-post justification for random market moves (I haveeven seen a press report citing the weakness of the dollar
 because
gold had been so strong!).In fact, chartists had been flagging up a major
event
for gold for some weeks as it gottrapped in a nice wedge pattern (see right-hand chart below). It broke out of that wedge to theupside some days ago. For a chartist, this could have broken either way. Looking at howimplied inflation expectations have remained wholly unmoved I read very little into thisbreakout regarding fears of inflation. It is purely technical.
US 10y bond yield is still locked in a long-term bull market Gold bullion $/oz
Source: Datastream
I was reading the other day the blog of my former colleague Daniel Pfaendler
 link, who wasmaking some interesting observations on bond yields and the Baltic Freight Index which wereplicate on the cover chart. He believes the weakness of commodities is evidence that theChinese commodity re-stocking cycle is drawing to an end. He cites Trader
s Narrative blog
 linkthat suggests equity investors should also be watching closely (see chart below).
Does the Baltic Freight also lead the equity market?
 
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0823456789102345678910
O N D J F M A M J J A S O N D J F M A M J J A70075080085090095010001050
 
Global Strategy Weekly 
10 September 20093
 
 An end of the Chinese bubble of belief will have serious consequences for the global financialmarkets. For those who are looking for a trigger for a retrenchment in equity markets, wesuggest watching the RJ/CRB and Baltic Freight indices closely.Meanwhile in the US, despite the better-than-expected August non-farm payrolls, the ABCweekly measure of Consumer Confidence saw a steep step down this week (see chart below),remaining in the tight trading range it has been caught in since March of last year! This isentirely consistent with somewhat weaker Michigan confidence measures. But the good newsis that this series has bottomed, but no recovery has occurred. Some point out that the lack ofany recovery at all in average weekly hours worked in manufacturing (which normally precedesa bottoming of the jobs market) suggests the labour markets remain far weaker than recentpayroll data suggest. This is consistent with the
wallowing
in the ABC optimism series.
US Consumer Confidence stuck in a range
Source: Datastream
But it is collapsing core inflation that poses the greatest risk to the global economy goingforward. We highlighted last week that core CPI inflation descends rapidly, with a lag,
 after 
therecession ends. If core US CPI inflation falls by around the 3% shown in the chart below overthe next year, that will take the yoy rate to minus 1.5%! Hence the growth in nominalquantities (e.g. corporate revenues) is set to see disappointing
lower highs
in this upturn afterlower lows. And that, in our view, is just a prelude to a 2010 collapse into outright deflation.
US Core inflation set to collapse
NOW
. And expected to stay low despite the recovery.
Source: Datastream
S O N D J F M A M J J A S O N D J F M A M J J A-55-50-45-40-35-30-25-20-15-1055606570758085
ABCMichigan(Rhscale)
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10-25-20-15-10-5051015-4-3-2-1011.50
ECRI leading indicator(led 2 years)
Ch in core CPI(rhscale)

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