Connect with us

Economics

Will Higher Rates Choke The Latest Rally In Emerging Markets?

Shares in emerging markets topped returns for the major asset classes during the trading week through Nov. 15, based on a set of US-listed ETFs. But if…

Published

on

This article was originally published by The Capital Spectator

Shares in emerging markets topped returns for the major asset classes during the trading week through Nov. 15, based on a set of US-listed ETFs. But if interest rates are set to rise, triggered by higher inflation, the prospects for an extended rally could be short lived, or so market history suggests.

But hope springs eternal, at least for this month. Vanguard FTSE Emerging Markets (VWO) rose for a second week, gaining 2.3% — the fund’s biggest weekly jump since mid-September and the strongest gain for major asset classes.

Most markets, however, lost ground last week. The downside bias weighed on the Global Market Index (GMI.F) — an unmanaged benchmark (maintained by CapitalSpectator.com) that holds all the major asset classes (except cash) in market-value weights via ETF proxies. The benchmark fell 0.4% — the first weekly loss in six weeks.

Despite the latest rally in emerging markets shares, VWO continues to trade in a range that’s prevailed since the summer. Future gains may be limited if central banks lift interest rates rise to battle higher inflation.

Higher rates are a headwind for stocks generally, but the risk is higher than average for emerging markets because “they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions that can lead to financial crises,” observes a recent Federal Reserve research note.

As shown in Figure 1 below, the rise in the federal funds rate (the black line) during the Volcker disinflation of the early 1980s was associated with a sharp rise in the incidence of financial crises in [emerging markets economies] EMEs (the green bars). However, on other occasions, such as in the mid-2000s, EMEs weathered rising US rates with few difficulties.

The threat of higher rates should be weighed against relatively low valuations, writes Chris Dillow at Investors Chronicle. “The ratio of MSCI’s emerging markets index to its developed world index is now at an 18-year low. You might reply that this tells us more about how expensive US equities are than about how cheap others are, but the fact is that this ratio has in the past helped to predict annual returns on emerging markets.” He adds that “even if US interest rates do rise, they will stay very low by historic standards – low enough, perhaps, to support capital flows into emerging markets.”

The Fed paper recommends focusing on two areas to evaluate the risk of spillovers for emerging markets from US monetary policy. The first is understanding why US rates are rising.

A rise in interest rates driven by favorable growth prospects is likely to have relatively benign effects on emerging financial markets, since the benefits of higher US GDP through increased import demand from its trading partners and increased investor confidence should mute the costs of higher rates.

By contrast, “if higher rates are driven mainly by worries about inflation or a hawkish turn in Fed policy, which we jointly describe as monetary news, this will likely be more disruptive for emerging markets.”

The second factor: local conditions in emerging markets. “Financial conditions in economies with higher macroeconomic vulnerabilities tend to be more sensitive to a given rise in US interest rates.”

Our findings help to explain why the rise in US Treasury yields in recent months has had fairly muted effects on financial conditions in EMEs. Despite some uptick in response to recent inflation readings, much of that rise likely owes to mounting expectations of a swift economic recovery in the United States, which should redound to the benefit of the global economy more generally. In addition, despite a notable rise in EME debt in recent years, which was accelerated by the pandemic, macroeconomic vulnerabilities are still generally lower than in the tumultuous years of the 1980s and 1990s: macroeconomic policies are more prudent, currencies are generally freer to respond to shocks, and financial sectors are more resilient.

Dillow notes that “if the Fed raises rates at a time when yields are rising because of increased optimism for the world economy, emerging markets will do well. But if on the other hand investors fear that higher short rates will weaken the economy and so bond yields fall, emerging markets will suffer badly.”

That leaves room for optimism these days, but he thinks its trumped by the slide in MSCI’s emerging markets index (in US dollar terms) below its 10-month average. Although it’s not perfect, the indicator is good enough so that its current risk-off signal deserves attention, he concludes. Why?

“It protects us from the long and deep bear markets that really destroy our wealth. If your main objective is to avoid heavy losses you should stick with this rule even if doing so comes at the risk of missing out on gains. There is – as indeed there should be – a trade-off between capital preservation and profit.”


Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return

By James Picerno











Author: James Picerno

Precious Metals

Who Was Kondratiev & What Is the Wave Cycle Theory?

Kondratiev concluded that each long wave was driven by technological advances. He identified four distinct phases.
The post Who Was Kondratiev & What…

…Nicholas Kondratiev (1892–1938) was a Russian economist in the Soviet Union who was tasked by Josef Stalin to study long-term capitalist economies (U.S., Britain, and France wholesale prices and interest rates) and concluded that there were peaks and troughs in economic activity that lasted roughly 50–60 years. Other economists did similar work that traced similar cycles back to the Romans and even the Mayans that all supported Kondratiev’s work. (Kondratiev was rewarded for his efforts by being sent to Siberia by Stalin. Stalin didn’t like the fact that his theories also applied to Russia and that the capitalist economies would rise again from their depressions. Kondratiev died in a Siberian labour camp.)

This post by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) excerpt from an article by David Chapman, for the sake of clarity and brevity to provide you with a fast and easy read. Please note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

Kondratiev concluded that each long wave was driven by technological advances. He identified four distinct phases.

  1. spring—beneficial inflationary growth, stocks rising, commodities and gold weak;
  2. summer—stagflation, recession, stock market weak, commodities and gold booming;
  3. autumn—deflationary growth, stocks booming (bubble?), commodities and gold weak;
  4. winter—deflation, depression, financial crisis, stock market weak, commodities and gold booming.

While Kondratiev’s study is important, we note that many economists do not buy into it. That is, no doubt, the old adage of stick ten economists in a room and you’ll have eleven different opinions.

Our table below on the Kondratiev Wave Cycles is based on generally consensus as the start and end of each wave. The long Kondratiev Wave is measured stock market trough to trough while the phases are measured trough to top, top to trough etc.

Kondratiev Wave Cycles—The Long Wave

Spring (expansion)

Beneficial inflation, economic growth, stocks up, commodities weak

Summer (recession)

Stagflation, weak economic growth, recession, stocks weak, commodities up

Autumn (plateau)

Mild deflationary growth, stocks up, possible bubble, commodities weak

Winter (depression)

Deflationary growth and steep recessions/depression, stocks weak, commodities up

Length of the Long Wave/Technological Drivers of the Long Wave
1784–1800

American Revolution, Indian Wars

1800–1816

War of 1812, Indian Wars, stagflation

 

1816–1835

“Era of Good Feelings,” Indian Wars, booming stock market

1835–1844

Indian Wars, the Hungry Forties, depression

60 years/steam engine, cotton, Industrial Revolution, age of steam and railways
18451858

Mexican American War, Indian Wars

1859–1864

U.S. Civil War, stagflation

1864–1874

reconstruction, Indian Wars, booming stock market

1875–1896

Indian Wars, the Long Depression

51 years/railways, steel, age of steel
18961907

Spanish-American War, Philippine- American War

1907–1920

WW1, Mexican Revolution, Banana Wars, Russian Civil War, stagflation

1921–1929

The Roaring Twenties, booming stock market

1929–1949

Great Depression, WW2, China Civil War

53 Years/electrical engineering, chemistry, age of oil, automobiles, and mass production
1949–1966

Korean War, Vietnam War, Cold War

1966–1982

Vietnam War, Indochina Wars, Cold War, Arab Oil Crisis, stagflation

1982–2000

“The New Economy,”

Gulf War, Yugoslav Wars, booming stock market

2000–2009

dot.dom bubble bust, global financial crisis, Great Recession, War on Terror – Afghanistan, Iraq, Syria, Libya

60 years/ petrochemicals, automobiles, age of information technology, telecommunications
2009-??

War on Terror -Afghanistan, Iraq, Syria, Libya

??/age of post-informational technology, artificial intelligence (AI), renewable energy??

Note how war dominates the Kondratiev cycle. All periods experience war of some nature, whether it be ongoing low-level wars—i.e., Indian wars, War on Terror, etc.—or major wars like World War I and World War II. The last major Kondratiev cycle 1949–2009 saw ongoing wars, opening with the Korean War 1950–1953 and ending with the War on Terror 2001–2021. What war will dominate the next period? NATO/Ukraine/Russia, U.S./China, or something else?

If Kondratiev’s studies showed that the long wave lasted roughly 50–60 years, it appears to have concluded the last wave right on schedule. The last wave started with the end of the Great Depression and World War II in 1949 and, we conclude (our opinion), ended with the Global Financial Crisis of 2008.

  • The winter of the Kondratiev wave was 2000–2009. The period followed a classic pattern as stocks were weak while commodities boomed.
  • While we didn’t have a depression, we had two steep recessions, culminating in what became known as the “Great Recession” of 2007–2009. This was the result of the financial crisis of 2008 that almost collapsed the financial system. If it had not been for the actions of the central banks and governments a depression might have been a possibility. It is no surprise that all might not agree with this analysis.

We come to that conclusion because the next move was the long bull market that got underway in 2009 and economies once again returned to a period of growth driven by low inflation, QE, and ultra-low interest rates.

  • The stock markets eventually moved to new-all-time highs in 2013, signaling that the long period of weak stock markets was over.
  • Gold topped in 2011, oil had already topped in 2008, and
  • the Commodity Research Bureau Index (CRB) topped as well in 2008 with a secondary top in 2011.

Our conclusion is that a new Kondratiev wave cycle got underway in 2009. If the long wave theory continues to hold, the current long wave could end somewhere between 2059 and 2069. As to the current spring phase that has an historical range of 11 to 17 years, average 14.3 years. The current spring phase will have its 13th anniversary in March 2022.

The question now is, are we poised to enter the second phase of the Kondratiev wave—the Kondratiev summer?

  • Given the rise in inflation,
  • the word stagflation now being bandied about, and
  • the recent rise in commodity prices with many of them making multi-year highs

we are seeing some of the prime characteristics of the “summer” of the Kondratiev wave cycle. At this time, we cannot confirm as to whether the stock market has topped. Confirmation could take a year or more.

During the last Kondratiev summer (1966–1982) the stock market topped in 1966. However, confirmation of that top didn’t occur until the stock market failed to make any significant new highs, despite strong rallies in 1968 and 1972–1973. Further rallies in 1976 and 1980 also failed to see any new significant all-time highs. It wasn’t until 1983 that the stock market left the period 1966–1982 behind for good. Gold rallied strongly during the period once the gold standard ended in 1971. Oil prices bubbled higher, thanks to the Arab Oil crisis of 1973 and the Iran hostage crisis in 1979. Other commodities also saw huge moves during this period. Gold did not go into a bubble market until 1976–1980. Commodity prices bottomed in 1968 and topped in 1980, rising some 250%.

We believe the Kondratiev wave cycle can be a useful tool, even though we freely admit the cycles of the Kondratiev wave are usually viewed in retrospect as are many cycles. However, what caught our eye was the resurgent commodity prices (CRB bottomed in March 2020) and the return of inflation that is beginning to look a lot more than just transitory. That, and the word “stagflation” keeps coming up. Stagflation has been a key characteristic of the Kondratiev summer. The period 1966–1982 was a long period of stagflation and ended only when Fed Chair Paul Volker hiked interest rates to unheard-of levels. The result was the very steep recessions of 1980–1982. We have noted that the central banks are trapped following years of ultra-low interest rates. Raising interest rates could spark a steep recession as it could cause problems for the housing market and more. During the last Kondratiev summer 1966–1982 bond prices plummeted (interest rates rose as prices move inversely to interest rates). The U.S. 30-year treasury bond made its final low in September 1981 as the 30-year U.S. treasury bond hit a high yield of 15.1%.

Since the bottom of the pandemic crash in March 2020 record funds have flowed into the stock markets, sparking new all-time highs and what many describe as a bubble. QE and ultra-low interest rates have unleashed a torrent of money printing contributing to the bubble. The pandemic sparked major supply disruptions as economies came back to life. There is the potential for climate change to spark more disruptions. That in turn leads to higher prices and inflation. The resurgence of COVID could also spark more disruptions. We are, we believe, in the early stages of new phase. If we are right, we are on the cusp of the Kondratiev summer and long period of stagflation, recessions, a weak stock market, and booming commodities.

Nothing, however, is coincidental and each component (stocks, bonds, commodities) will top and bottom at different times. The Kondratiev long wave is always measured from stock market trough to trough. However, phases of the long wave are measured from trough to top, then top to trough, etc. Evidence is surfacing that the spring phase of a new Kondratiev wave that got underway with the bottom in 2009 may be coming to an end. The question is, when will we see the final stock market top?

For those interested, there are numerous articles on the Kondratiev wave theory that can be found on the internet. In particular, one we wrote back in June 2006 may be of interest and appears to still be posted. It was titled “Looking Down the Road” and can be found at http://www.321gold.com/editorials/chapman_d/chapman_d_062606.html.

Related Article From the munKNEE Vault:

1. Current Long Wave Kondratieff Winter Snow Storm to End in an Economic Avalanche – Here’s Why (+3K Views) October 13, 2012

There are several variations of Long Wave theory, but the most famous is based on the work of Nicolai Kondratieff, a Russian economist who gave the various stages seasonal names, with summer and autumn denoting the peak of financial speculation and winter the aftermath of the resulting crash. The conditions for a global catastrophic failure are in place. Snow (in the form of trillions of new dollars and euros) is falling. There’s no way to know which dollar (or which external event) will start the avalanche, but without doubt something will. [Let me expand on why I hold that view.] Words: 888

Scroll to very bottom of page & add your comments on this article. We want to share what you have to say!

Thanks for reading! If you want more articles like the one above visit our Facebook page (here) and “Like” any article so you can get future articles automatically delivered to your feed. You can also “Follow the munKNEE” on Twitter or register to receive our FREE twice-weekly newsletter (see sample here , sign up in top right hand corner).

Remember: munKNEE should be in everybody’s inbox and MONEY in everybody’s wallet!

 

 munKNEE.com has joined eResearch.com to provide you with individual company research articles and specific stock recommendations in addition to munKNEE’s more general informative articles on the economy, the markets, and gold, silver and cannabis investing.
Check out eResearch. If you like what you see then…

 

The post Who Was Kondratiev & What Is the Wave Cycle Theory? appeared first on munKNEE.com.
















Author: Lorimer Wilson

Continue Reading

Economics

You Only Die Once As TINA Quietly Leaves The Building

You Only Die Once As TINA Quietly Leaves The Building

It was about a year ago when we first pointed out a remarkable divergence in this broken…

You Only Die Once As TINA Quietly Leaves The Building

It was about a year ago when we first pointed out a remarkable divergence in this broken market: retail investors (as proxied by the 50 most popular retail-held stocks) were outperforming the smart money by a factor of 10 to 1 (and blowing out the S&P500 in the process).

And while retail investors continued to dramatically outperform both the entire hedge fund universe (and to a lesser extent the broader market) for much of the following year, this unprecedented outperformance by stimmy-fueled apes almost came to a screeching halt last week when, as we noted, the universe of retail favorite stocks – mostly low liquidity, low float, high momentum small and mid-cap names as well as a couple of giga-caps such as Apple and Tesla – was on the verge of ending its remarkable streak of steamrolling the rest of the market:

A few days later, it got even uglier, as the “retail basket” of non-profitable, mostly tech, high momentum names continued to slide following Friday’s rout, sending it to the lowest level since May, and back to levels first seen in Jan 2021. And while retail continue to outperform (modestly) the HFRX hedge fund universe, the 50 favorite retail stocks are now trailing the S&P500 by about 50% on a YTD basis.

Picking up on the recent stretch of miserable retail performance, Bloomberg this morning writes that individual investors “are facing a moment of reckoning” adding that “the obsession with risk-on assets – short-handed by the term YOLO for you only live once – was a blessing for amateur traders during the meme-stock craze.” However, as we first showed last week, it has since turned “into a curse as the going got rough in every nook of the stock market last week.” And when looking at our chart of (last) week, today Bloomberg points out that Goldman’s basket of the 50 most-popular stocks among individual investors plunged 7.8% last week, trailing companies most-favored by mutual funds by 5.8 percentage points, the most ever.

Virtually no momentum name was spared: retail investors incurred several big losses last week, from Plug Power Inc., which plunged 17%, Beyond Meat, which lost 16%, and Tesla which shed 6.2%.

This is a problem because the retail crowd, which was among the first to scoop up shares during the 2020 pandemic rout, now appear to be leaving the YOLO mentality behind because, well, YODO.

As confirmation, Bloomberg notes that last week, the daily average premium that small-lot traders – those buying or selling 10 options contracts or less – shelled out for protection jumped to about $786 million, surpassing a January peak for the highest level in recent history, according to a Susquehanna analysis of the latest Options Clearing Corp data.

That premium spent on small-lot put buys is about twice as high as where it was two months ago.

“While the small-lot call premiums continue to outpace those put premiums in absolute terms, we can see that they are trending in different directions,” said Chris Jacobson, a strategist at Susquehanna. That’s “suggesting that retail activity on the put side is in fact ramping up alongside the market weakness.”

Of course, a different – and perhaps more correct – way of analyzing the data is that even retail investors are smart enough to hedge their positions during times of surging market vol… like right now. And if stocks tumble, retail investors will have puts to fall back on. As in, you know, hedging – something that hedge funds used to do once but then completely forgot how to do in centrally-planned markets.

Still, with stocks remaining in deep negative gamma territory and market pain showing no end to its weakness, retail traders whose willingness to stand firm amid prior turmoils, are showing little appetite for risk. Evidence is piling up quickly: SPACs are taking a drubbing. Until today, bitcoin was hovering steps away from a 30% correction from its peak. Off-exchange volume has dropped to near the lowest level since last year’s rout. A gauge of newly minted initial public offerings, measured by the Renaissance IPO exchange-traded fund, lost 11% last week.

A separate analysis from Goldman Sachs showed that last Wednesday some $2.2tn in option were traded in the US, with puts dominating amid a frenzy to hedge downside.

“There must be an issue with either 1) meme stocks losing interest, 2) general profit taking into year end,” said Ben Emons, global macro strategist with Medley Global Advisors LLC.”

To this all we can add say is that i) the data, when massaged enough, can show whatever one wants it to – after all, just last week we also showed that contrary to Bloomberg’s, and Susquehana’s analysis, retail investors were in fact buying the dip furiously and waving in everything that hedge funds had to sell. After all, according to Vanda Research, retail stock purchases rose to a new record on Tuesday of $2.2 billion, after reaching $2.1 billion during Friday’s rout.

That said, until we get evidence to the contrary, it’s probably safe to say – as Bloomberg’s Cormac Mullen did – that for U.S. stock investors TINA has left the building. His thoughts below:

It’s time to look for alternatives to America’s outperforming stock market, especially for global investors with a longer-term horizon.

As any good Irishman will tell you when you ask for directions, you shouldn’t really be starting from here. Anyone seeking to put fresh money into U.S. stocks right now will see them already at a record relative to the rest of the world, with margins at an all-time high, trading at their most expensive since the dotcom bubble.

But history shows the best returns for U.S. stock investors come when they buy at more sensible valuations and that they leave themselves open to losses when they pay up. Here’s a look at 10-year rolling returns for the S&P 500 superimposed with the starting P/E at the beginning of the investment period, which shows a strong inverse relationship since the 1960s.

The relative valuation gap between American shares and global peers is also at a record, with the MSCI AC World ex-U.S. Index on less than 14 times forward earnings compared to the MSCI USA Index on 21 times.

Forget TINA, that suggests there are plenty of opportunities in other markets for investors willing to take a chance: from bets on a rebound in China’s beleaguered shares (12 times earnings), to Japan’s economic reopening (14 times) to a contrarian wager on the U.K. (11 times). The French, Dutch, Austrian, Czech and Vietnamese benchmarks are already set to beat the S&P 500 this year — at least in data through Friday — along with over 20 others.

None are without risk, but U.S. stocks face their own country-specific headwinds from the withdrawal of stimulus to the potential for a policy error to the threat of increased regulation of tech firms to mean-reverting margins. All without a decent valuation buffer.

U.S. shares have been a fantastic investment, with a total return of almost 350% over the last decade compared with 100% for their international peers. But the risk/reward looks less favorable for the next 10 years, suggesting it’s time investors take a more serious look at alternatives.

In conclusion, it is safe to say that all bets are off: after all, this morning Gartman called for a bear market sparking a furious market rebound and short squeeze (just as Goldman predicted would happen as the lows for the year are now in)… 

… and should the extremely oversold rally continue tomorrow, wiping out the sour taste of the post Thanksgiving rout, then retail investors may be one surge higher away from taking the S&P to new all time highs.

Tyler Durden
Mon, 12/06/2021 – 22:20


Author: Tyler Durden

Continue Reading

Economics

China’s RRR Cut Risks A Bond-Leverage Crackdown

China’s RRR Cut Risks A Bond-Leverage Crackdown

By Ye Xie, Bloomberg Markets reported and analyst

RRR Cut Risks a Bond-Leverage Crackdown

Beijing…

China’s RRR Cut Risks A Bond-Leverage Crackdown

By Ye Xie, Bloomberg Markets reported and analyst

RRR Cut Risks a Bond-Leverage Crackdown

Beijing is moving toward putting a floor under the slumping economy. The PBOC cut the reserve requirement ratio for a second time this year, while Beijing signaled some policy fine-tuning in the housing sector. Neither move has changed the overall tone that China is doing the bare minimum to support the economy.

Meanwhile, investors are taking advantage of cheap funding to build up leverage in the bond market, sending the overnight repo volume soaring. The risk is that the PBOC may step in to crack down on the leverage.

Three days after Premier Li Keqiang flagged a cut in the RRR, the PBOC duly followed through. The central bank quickly came out to say that the RRR cut is a routine maneuver, in part to replace the maturing MLF loans that banks borrowed from the central bank. The PBOC said its stable monetary policy hasn’t changed, downplaying the notion this is the start of an easing cycle.

The RRR cut in July did little to arrest the growth slowdown. After all, the economy is faltering not because there’s a lack of loan supply, but because the real-estate deleveraging has dampened the demand for credit. Hence, China’s growth outlook relies on whether the housing market can stabilize and whether investments in other industries can pick up the slack.

There, Beijing also offered a glimpse of hope. The Politburo on Monday promised to provide more affordable housing next year. It indicated Beijing will take more of a supply-side approach, by increasing land and housing supply in the private sector, to address lofty housing prices, as opposed to cool housing demand, which is more economically damaging, Nomura’s economist Lu Ting noted. Still, Lu also pointed out that there has not been a 180-degree change in Beijing’s property curbs yet, suggesting the economic slowdown may continue in coming months.

It’s worth pointing out that the previous RRR cut in July hasn’t lowered overall corporate borrowing costs much, as China Bull Research pointed out. In fact, the weighted average lending rate for corporates rose by 10 bps to 5.3% in the third quarter. In other words, the RRR cut didn’t fully pass through to the economy.

Where did the money go? At least part of the liquidity has been channeled to the bond market, as investors borrowed short-term funds in the interbank market to buy government paper. The daily overnight repo turnover reached 4.7 trillion yuan ($737 billion) Monday, a level last seen in the early stage of the pandemic last year. (The 20-day average actually reached a record last month.)

Banks’ interbank lending to non-bank financial institutions rose to elevated levels last quarter, another sign of financial speculation, according to China Bull Research.

Beijing has been stressing that financial institutions should support the real economy, not speculate. In the past, the PBOC periodically drained liquidity to shake up leverage. The risk is that they do it again.

Tyler Durden
Mon, 12/06/2021 – 22:18





Author: Tyler Durden

Continue Reading

Trending