Macro Digest: Sell in May and go away. Also, German politics turning hard left!
Chief Economist & CIO
Summary: Sell in May and go away... We are reducing risk into May as global liquidity, internals and valuations have gone too far. Reduce to 50% of exposure by the end of April.
Action: Sell in May and go away...
- Expected return after incredible run higher indicates a loss 75% of the time (BofA source)
- Geopolitical risk is rising: Navalny and Russian troops on Ukraine border, Iran, China vs. USA, Taiwan, with wide ranging impact beyond politics: Energy prices, semiconductors flow, marginal recycling of capital to finance US deficit.
- We see both commodities & yields rising from here. There is slowly a recognition that inflation is structural and a n“under-measurement” of realised inflation, bottlenecks getting worse, and now companies are repricing products higher.
- The credit impulse has peaked in China, the US and UK, only Europe now “waiting” for opening. The marginal change of earnings, rates, flow, liquidity means higher inflation + price of money.
Policy response: We fully expect a massive fiscal spending increase in Q3, when rising inflation + price of money meets the post-opening economic reality. China GDP for Q1 was disappointing in composition, we expect similar outperformance on headlines in US and Europe, but without a forward carrying momentum. So H2 will see rising 10Y to 200 bps then 250 bps, on the back of equal moves in the term structure (on rising deficits) and inflation expectations. This will create havoc and a need for further intervention. The Fed and ECB are far, far, far behind the curve as illustrated by both the rise in German Bunds (+35 bps since the beginning of the year) and the US long yields rising in reaction to a huge earlier rise in breakevens.
I find it a struggle to navigate the present macro environment of low volatility, high correlations, and low volume, but fortunately sometimes a fellow macro traveler, in this case Michael Wilson of Morgan Stanley can aspire me to think “differently” about the market.
Morgan Stanley and Michael Wilson are noticing that the IPO and SPAC space is losing momentum and as such could be “... a warning sign on real time liquidity dynamics”…. I will freely interpret this to mean that the recent heavy load of IPOs and SPACs has been so large that they take liquidity from the rest of the market and in the process make fund managers sell some names to make room for the new ones.
This has certainly been the case with Coin, Coinbase, which hyped managers like ARKK are buying heavily but in doing so reducing their exposure to the likes of SQ, ICE, NVDA, and even TSLA.
But let’s have a look at the ‘evidence’:
Below is the IPOX SPAC Index – tracking SPAC valuations. It peaked in late February and is now breaking down… if it closes below yesterday’s close, it looks like a downside breakout and sell from a technical point of view.
IPOX SPAC Index
The Renaissance IPO Index shows similar pattern:
We also have crazy stories like the valuation of the New Jersey Deli listed in the US with a market cap of $120 million. Greenlight Capital’s David Einhorn notified the market about that one.
Meanwhile the market overall is powering to new highs, the S&P 500, the Nasdaq 100 hit all time highs and the EURO STOXX 50 is hitting a post-global financial crisis high, under the umbrella of fiscal dominance….paying for shortcomings on earnings, yield and market functioning (price discovery).
Another great note is from BofA global research named: Five reasons to curb your enthusiasm (on US equities):
The five reasons amount to: Euphoria (according to their sentiment measure), S&P 500 Index expected return now less than 2% for next decade, the outsized 12-month performance from March 2020 to March 2021, is >50%, which has not been seen since 1936, the fair value model @ 3635 S&P, the Equity Risk Premium is below 400 basis points – only happened twice before: Jan 2018, Sep 2018, with -10 and -20% return following.
Finally, we need to talk about Europe, but in particular Germany. The 10YR German Bunds have risen over 50 basis points from the lows and about 25 basis points since the beginning of the year.
The likelihood of a Green Party government is rising by the day, compounded by a corruption scandal related to PPE procurement hitting the ruling CDU/CSU government, as well as the infighting between the CSU and CDU. The Green Party is extremely Pro-Europe, meaning that a future government with the Greens would increase not only the spending on the green transformation, but also on deeper European integration. This is music to the ears for the likes of Draghi and Macron. Geopolitically, the Greens are distinct in that they have promised to close down the Nordstream2 pipeline that provides natural gas directly from Russia and is nearly complete. I personally think Germany has already moved 120 degrees from the frugal, austere fiscal approach of the 1990s and 2000s, but if the Greens have the election they are expected to have, then Europe will be changed overnight.
Besides the surge in the Greens, one of the most discussed politicians is Ms. Sahra Wagenknecht who has left Die Linke and started a leftist movement: Aufstehen (Stand up), which pursues an interesting cocktail of anti-immigration and far left policies which despite being announced only this month led to tens of thousands promising to support the cause:
By Friday, there was more good news for Wagenknecht's platform: A poll by Focus magazine showed that more than a third of German voters "could see themselves" voting for Aufstehen if the movement transformed into a political party. The response was overwhelmingly positive among the Left voters, where 87 percent were open to supporting her initiative at the polls.
Merkel is gone, and German politics will prove unrecognizable in her wake…
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.