Material Evidence: Research

MATERIAL EVIDENCE
SEPTEMBER 17TH, 2013 Research Strategies Solutions
Sean Corrigan Chief Investment Strategist
Diapason Commodities Management Ltd

MATERIAL EVIDENCE BY SEAN CORRIGAN
SEPTEMBER 17TH, 2013
Money,Macro&Markets While steeling himself for the worst, Xia also is cord,however,isjustwhatthishasmeantforthe
sued a salutary warning to the yieldhungry profitability and balance sheets of an enormous
Just how easy is it to lose CNY5 trillion? Thats a many who have been riding the coattails of swatheofcorporateChina.
questionwhichshouldbeperplexingnotonlythose shadow bank/LGFV moral hazard by declaring
foolhardyenoughtobebuyingChinese(orChinese forcefully that, localgovernmentdebtguarantees While the Asianomics team has consistently
exposed) stocks, but also giving pause to that blind arenotrecognizedbyChinasGuaranteeLaw. drawn attention to this theme by highlighting,
army of unthinking macromancers and correlation forexample,themetricthattheaveragecompany
jockeys who are so eager to generate the next batch It is bad enough that a sizeable portion of these hasdebtsamountingtoalmostseventimesoper
of economic forecasts and geewhiz investment vastsumshavebeenpoureddowntheratholeof ating cash flow (meaning that, even if it sus
ideasthattheywillplugandalleconomicdatainto industrialduplicationandlandspeculationtothe pendedallformsofcapitalexpenditure,itwould
their spreadsheets, regardless of its likely prove pointthateventheofficialorgansofthePartyare takefromnowuntil2020topayoffitscreditors)
nance. now routinely carrying stories of excess and cu arecentreportfromBoAMLneatlyservestore
pidity. But even that prodigious misuse of re freshthememoryofsuchexcesses.
Wearepromptedtothisobservationbythemusings sourcesisonlyonepartofasagawherehopefully
in Caijing magazine of one Zhao Quanhou, head of malinvestment competes with the endemic According to the banks latest reckoning of the
research at the Fiscal Science Research Centre, that, scourgeofoutrightfraud. HI13 results season, total debt and net debt of
ratherthanconfirminganexpectedfigureofaround China nonfinancial companies were up 13.7%
CNY15 trillion, Chinas total of local government As a starting point, we could do worse than to and 16.7%, respectively, from a year ago, even
debt may be revealed by the ongoing audit to run glanceatthestateoftherailwayswhere,21stCen thoughcapexactuallyfell0.9%YOY(havingbeen
upto18trillionyuan,orpossiblymorefor,asZhao tury Herald reports, the latest incarnation of the +7.1% a year ago and as high as +18.6% for the
went on to point out, theNAOsstatisticalcriteria corruptionplagued, stateowned behemoth the sameperiodin2011).Meanwhile,theratioofthe
are still relatively narrow. The actual number would ex CRC has again been bleeding cash, recording sum of accounts receivable and inventory to net
ceed20trillionyuan. lossesofCNY6.5blninthefirstsemesterandbor profit among Ashare firms has nearly tripled
rowing CNY130bln to cover its insatiable needs over the past six years, rising from a multiple of
Nor is he the only one holding his breath. The out (total debt now stands a whisker under CNY3 5.3in2007toanalarming14.3inJune.
spoken honorary director of the Finance Institute of trillion),oftheproceedsofwhichloanmorethan
the State Council, Xia Bin, recently opined that the half (CNY79.3bln) was spent on servicing its ex Norwerethoseprofitsmuchtowritehomeabout
audit results could be quite shocking, with a sub istingdebtsasumequivalenttoaroundathird ifBoAMListobebelieved.Withbanksaccount
stantial part of the debt being shown to have gone ofthemoneydevotedtoactualcapexinthefirst ing for 56% of total market earnings and the re
sour.IncontrasttoZhao,Xiaexpectedtheexamina half. sidualnonfinancialincomeallbeingattributable
tion would be comprehensive and thorough, that to noncore activities, the whole of corporate
itwouldextendintothemostbasiclevelsofadmini On the wider industrial side, it is hardly news Chinaiseffectivelyreliantforitsincomeuponits
stration, and that it would involve a check on all thatvastovercapacityexistsinthelikesofsteel ability to extend or access cheap, official finance
kindsoffinancingactivitiesbygovernments,includ making,aluminiumsmelting,cementproduction, inordertofundthewiderfringesoftheshadow
ing BuildOperateTransfer schemes and leasing ac coalmining,shipbuilding,thesolarsector,orthe systemandthekerblendingmarkets.
tivity. automotive industry. What is chastening to re
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Newhighstaketotalto$3.4
trillion
Source:Bloomberg
Global70*M1vIMFWorldTradePrices3mmaYOY% Source:IMF,BIS,Bloomberg,Diapason
25.0
20.0 WorldTRDPx(lhs)
M1Raw(rhs)
20.0
10.0
15.0
10.0
0.0
5.0
10.0 Source:Bloomberg
0.0
*Global70=USA,Eurozone,Japan,China,UK,Brazil,Russia,Canada,India,Mexico,
Australia,Turkey,Indonesia&SouthKorea.CombinedNominalGDPof~$50trillionorc.70%
ofworldtotal
20.0 5.0
Nov90
Nov02
Nov87
Nov93
Nov96
Nov99
Nov05
Nov08
Nov11

As for the banks, well, it should not be too hard to They simplified loan approval procedures, gave us hasgone.
makemoneywhenyourcartelsNIMisfixedbythe discounts on interest rates and encouraged us to take
regulatoratsuchagenerouslywidemarkandwhen advantage of regulatory loopholes to borrow the Sucheasymoneyduplicityhasnotbeenconfined
you are not at all troubled by much in the way of money, Shao said. We are strong believers in the to the hapless stooges in the private sector, of
writeoffsandprovisionsforbadordoubtfuldebts. saying that cash is the king; therefore, we were more course. Local cadres ever eager to meet their
thanhappytotakethemoney. ownquotasandsoboostboththeireligibilityfor
Here, of course we come full circle, for a refusal to guanxigifts(i.e.,sweeteners)andcareeradvance
recogniseabadloanisnotthesameasnotbeingaf During the interview, Shao effectively accused menthavehardlybeenreluctantparticipantsin
flictedbyone.For,asCaixinhadWuXiaolingdep the banks ofbeing complicit in their own decep thegame.
uty director of the Financial and Economic Affairs tion, saying loan assessment officers told him
Committee at the National Peoples Congress say wink, wink he could move the same batch of Oneparticularlyegregiousexamplewasoutlined
ing, back at the end of last year: Thezerodefaultre steel products he had already borrowed against intheChinaBusinessNewswhichrecountedthe
cord is actually a sign of the bond markets immaturity to a different warehouse, and use it as collateral taleofcertainunnamedeasterncitygovernments
andfailstoreflecttruemarketconditions. against another loan. Rehypothecation comes to who have been caught in a scam which inflates
themetalsbusiness! the amount of foreign investments they receive
Asthemagazinealsoreported,somewereevenhav by paying brokers in Guangdong hefty, upfront
ingthetemeritytovoicesuspicionsofoutrightfraud Steel products worth several million yuan could be fees,typicallyofasmuchas2.8%ofprincipal,to
(cue: Captain Louis Renault). Citing a source at a collateralised several times to obtain credit that setupfictitiousfirmsunderthenamesofpeople
major bank, the highly believable claim was made amounted to scores of millions, Shao went on. basedinHongKongandTaiwan.Fromtheseen
that many recently issued urban investment bonds Nobody cared about our repayment capabilities at tities, phoney FDI dollars are then sourced
were actually designed to pay debts for last years thattimeThoseweretheboomtimesandweimag probablybyfakingexportinvoicesand/oroperat
projects under the name of a new, fake project. inedthatwecouldeasilybecomebillionairesinjusta ingthewellworncommodityfinancinggambit.
CharlesPonzilives! fewyears.
Onesuchcitywassaidtohaveexploitedthisar
Wherever one looks, such stories abound, Take the Some of the money was used illicitly to play the rangement so liberally that it more than quintu
caseofthepseudonymoussteeltraderShaoChunlin stock market, some flooded in to chase the high pled its FDI intake in the space of four years, to
as he described to the SCMP last week just how a rates to be had the underground lending system reach a sum in excess of $2 billion by 2012. The
good part of 200910s notorious CNY4 trillion in in Zhejiang province, but alas and alack! if a scale of the perverse incentives at work is not
stimulusendedupbeingspent. thingseemstoogoodtobetrue,thenitprobably hardtograspifweconsiderthatoneGongZhen,
is. anofficialfromtheCentralCommitteeoftheJiu
As Shao tells it, he and his peers wereapproached SanSociety,wasquotedasestimatingthatatleast
bybankseagertomeettheirtopdownlendingquo Ididntevenbothertoaskthemhowtheywoulduse US$500 million of the socalled foreign invest
tas with regard toa private sectorreeling under the themoney,Shaoconcludedmournfully.Thebor ment that another anonymous city claimed to
onslaught of the postLehman freeze in world trade rowerspromisedtopayhigherinterestthanthebanks havescoopedupin2010wasbought,foraprice
andhenceseeninneedofalittlestatesuccour. lendingratesandIjustagreedonthespurofthemo of no less than US$85 million. Nice work if you
ment.NowIdontevenknowwheresomeofthecash cangetit!

Source:Bloomberg
Source:Bloomberg
Source:PBOC,Markit,Diapason

Intriguingly, if we plot the difference between the plexeshavesprungupacrossthecountrythatthe close deals despite lacking the requisite standards,
exports bound for Taiwan and Hong Kong as re market is almost at saturation point, even before blindly expand cities without regard for financial fun
cordedbyChina,andtheimportsofficiallyreceived thefirstsodisturnedinthenextorgyofprogram damentals, and compete in the chase after everything
by those two destination countries, we find that maticconstruction. big and foreign. Theres no discussion of how much
whereastheirusedtobenodiscernablediscrepancy needs to be invested, how high the standards are, or
betweenthemupuntilthesecondhalfof2010,the If bubbles in residential properties burst, people can howfastthespeedis.Onthesurfacethefrenzycontin
sums have since become increasingly divergent, to stillsellthemifthestickerpriceislowenough,because uestobuild,butithidesunseencrisesandbringswith
the point that China has booked an average peoplealwaysneedaplacetolive,he said.Butonce it countless troubles. From frail industrial support to
$33.6bln of outbound goods since the early last thecommercialpropertymarketcrashes,nobodyiswill laggingpublicinfrastructure,fromtheenormouswaste
year, while HKTaiwan have only acknowledged ing to rent a shop that loses money every day, when of resources to the heavy burden of debt, the artificial
$22.6blnofincomingones.This42%gaphasthere thereisnocustomerbutaccumulatingrentalandutil building up of cities has long gone contrary to the
foreamountedto$10blnamonthsinceMarch2011 ityfees. original intent of developing cities. Its fallen into the
anumbernotentirelydivorcedfromtheaverage cycle of inputs without outputs, investment without
$9.7blnin official FDI receipts the entire countryis Alluding to the current official proscription on returns,andexplosivenesswithoutstamina.
supposedtohaveattractedoverthatsameperiod! ostentation and peculation, he went on to worry
about whether Chinas consumption power can Strongmeat,indeed!
With all this at work, it is perhaps no wonder that supporttheexpansionofsomanyluxurybrands,espe
Beijing is horrified at the thought that its much cially when the new leadership is cracking down on So,itisagainstthisbackdropthatwehavetoturn
vaunted urbanisation drive has been grasped by extravagant government expenditure. Previously, 70 to what, on the surface, was a reassuring robust
theflounderinglowerechelonsasonelastchanceto percentofthesetopbrandswereboughtasgiftsandI batch of Chinese data inthe recent round. Indus
keep the plates spinning precariously on their dontthinkthemoneywasfromthebuyersownpock trialproductionwasbacktoadoubledigitgrowth
poles, with no less than 144 prefectural level units ets. rate, to the accompaniment of a 26% increase in
havingsubmitted200proposalstobuildentirenew rolledsteel and a 10% growth in cement output;
city districts on their turf since the intention to AllofthiswasenoughtoprompttheflagshipPeo exportswereup7.2%YOYtoanalltimeseasonal
adopt this process as a driver of rebalancing was plesDailytopromulgateacryforrestraintunder high; there was, an uptick in fixedasset invest
announcedinthespring. the impassioned rubric, ResolutelyCurbtheBlind ment and a new seasonal record for FDI. Lets
BuildtheCityWind.In a piece of editorializing hearitforLiKeqiangseversoadept,macrofine
Muchoftheproposedworkwillnecessarilyberesi which could have been penned by Jim Chanos tuning,Fingerspitzengefuehl!
dential,butinevitablymuchwillalsoinvolvecom himself, the CCP organ fulminated against the
mercialdevelopmentandhereweshouldheedthe underlings,saying: Exceptwehavejustspent2,000wordsexplaining
words of George Yeung, North China managing toyouwhyyoutakethesenumbersatfacevalue
directorofthegiantColliersInternationalproperty The wide build up of new cities, the indiscriminate only at your peril and also why, even if you do
serviceenterprise,inanopedhehadpublishedin construction of new districts, not only represents a daretodoso,youcannotassumethatanyofthis
theChinaDaily. departure from reality, but also violates natural laws, was anything more than yet another turn of that
allthewhiledisregardingthevoiceofthepeople.Inthe debtriddled, valuefree, cycle of inputs without
In it, Mr. Yeung argued that so many urban com midstofthecollectivecrazetobuildcities,someplaces outputsaboutwhichthePeoplesDailywaxedso

EUM1/M3exM1vdIFO,dINSEE,t+6(YOY%):SourceBloomberg
EUM1/M3ex(rhs)
dIFO(lhs)
20.0 20.0
dINSEE(lhs)
7.5 7.5
5.0 5.0
17.5 17.5
Mar98
Mar01
Mar04
Mar07
Mar10
Mar13
Mar89
Mar92
Mar95
...andmoneygrowthitself
isbeginningtoslow
Asabove,creditgrowing
toofastinrelationtomoney
impliesfundingstress
acrossproductivechain

incandescent. thereisnoreasontosuggestthatasimilarsclero component(11.1:1).

sisofthecommercialarteriesmightnothavecon
Nordidthisseemingrenaissancecomeabout,absent sequencesinChina,too. From this, we can conclude one of only two
anotherorgyofcreditextension.IftheincreaseinM1 things: either the new Chinese regime is not
moneysupplyofCNY350billiononlyreversedJulys Accordingly, this ossification of claims has ma really in earnest about the need to rebalance
CNY290bln contraction leaving yeartodate lignimplicationsfortherealsideoftheeconomy but is content to mouth finesounding plati
growthstilllanguishingataseasonal,decadallowof in terms of the relationbetween costs and sell tudeswhilepresidingoverapolicyofbusiness
just 2.6% annualized in nominal terms and barely ing prices, as well as that between the timing of asusual; or the system has already run beyond
0.5%onanofficial,realbasisandifnewbankloans flows into and out of the firm or the household thepointofnoreturn,implyingthat,inorderto
of CNY711bln were nothing remarkable when com budget. But it is even more pernicious when we maintain even an outward show of continued
paredtothepreviousfourmonthsCNY755blnaver think about the implications for a thinly prosperity, the whole is spiralling ever more
age, then the shadow component of total credit capitalized, highlyleveraged financial system rapidly into a credit singularity and is soon to
showed no such moderation, rebounding smartly whichtherebybecomesincreasinglybrittleasthe be ripped apart by the intense tidal forces gen
from its alltoobrief, twomonth suppression by the densewebofinterlinkagesbecomesusceptibleto erateddeepwithintheeventhorizon.
PBoCtoregisterCNY859blnonthefinancialRichter the contagion of panic which may ensue when
scale in August versus June and Julys CNY142bln someone, somewhere within the network suffers Then again, even if the Potemkin village reality
mean. asuddencrisisoffaithintheabilityofhiscreak were to impress more than the shiny faade of
ing, receivableladen obligors to meet their bills wondrous economic resilience, who would need
Moreover, the size and illiquidity of the credit astheyfalldue. a vibrant China to bolster their bullishness now
pyramid perched atop the foundation of money that the fragile, verdant shoots of recovery are
proper continued to swell alarmingly (q.v., the Over the past decade, China has added 3.9 yuan everywheretobeseenpokingwarilythroughthe
comments on corporate cashflow above). Experi of total credit for every new 1 yuan of money soil,allacrosstheformerlyaridwastesofindus
ence in the West teaches us that when these two proper CNY2.4 in the form of renminbi bank trial Europe? At least, that seems to be a senti
becomedisproportionate,itisasignofstressthat loans and CNY1.5 in terms of shadow instru mentsharedbyagrowingbodyofinvestors,each
too much business is being transacted in the ab ments. Over the last five years the ratio has anxioustochasethenextBigThingandeachter
sence of final settlement (which is what a money grown to 5.2 to 1 (2.8:1 as loans and 2.4:1 in the rified lest he be caught all pantsdown under
paymentinvolves);thattouseanAustrianphrase shadows). The last two years have seen another weightifandwhenIlRisorgimentotrulydoestake
the structure of production is becoming far too intensification with the overall ratio climbing to hold.
roundabout. 7.8 to 1, this being split into 4.2:1 loans to 3.6:1
shadows. The only trouble is that this all seems a tad pre
Previously, we have shown graphs of how the likes mature to us. Yes, depression fatigue has set in
of the IfO index (itself something which fluctuates Thatmayseemtorepresentenoughofaconcern, (and,inanycase, we have to find somewhere to
along with changes in business revenues) tends to butwaituntilyouconsiderthenumbersfor2013 park the monies we manage to extract from our
fall when M3 expands visvis M1 (and vice versa), sofar:anoverallratioof23.1to1,roughlyevenly newlysuspect wager on the emerging markets).
as well as of how changes in the US NAPM index dividedintoloans(11.9:1)anddespitetheshort Yes, some of the recent PMI numbers have
move in concert with shrinkages in this multiplier: livedcampaigntoreininthesectortheshadow pushed tentatively above the 50 boombust wa

Source:Bloomberg
Source:Bloomberg
Source:Bloomberg
Source:Bloomberg

tershed,and,yes,wehaveevenseenamonthortwo rupted, downward trajectory for more than two matic to talk of a major breakdown occurring in
when the seemingly inexorable decline in measures years, IP is now a whisker above the postCrash theEuropeanengineroom,thepistonsarenever
of industrial output has been on abeyance. Yes, the lows,almost25%lessthanitspeakandnobetter theless not pumping up and down at quite the
cynicsfullyexpectafurthersofteningofthetermsof thanitwasaquarterofacenturyago. formidableratetheyoncewere.
austerityoncethevoteshavebeensafelycountedin
theGermanelectionsinaweekorso.Andaboveall, The Netherlands, meanwhile, despite a safe ha Finnish industry has been shrinking at an ever
yes, the monetary magus (or meretricious mounte ven status perhaps best attested to by the 60 faster rate since the latter half of 2011, touching
bank), Mario Draghi, has magically dispelled all something billion in T2 balances still parked rates not undercut in the last decade outside of
doubtwithhisstilluntestedincantation,Whateverit there,areonthevergeofafullblowndepression. the Big Freeze of 20089 itself and reducing the
Takes. Trade flows and industrial sales numbers have levelbacktowhereitwasatthestartofthecen
stagnatedformorethantwoyears.Houseprices tury. As for Spain, well, this measure may have
Ironicallyenough,itwastheGrandWarlockhimself havebeendroppingata7.5%annualizedpacein levelled out over the course of 2013, but not be
whoexpresseddoubtsonthismatterinhismonthly that same period and now lie 20% off their peak fore shedding a tenth over the preceding 18
newconference,sayingthathecouldnotsharethe innominalterms(adecadallow)and28%below months to stand almost 30% below the top, at
enthusiasm about budding growth in the Eurozone, be itinrealones(thelowliestin14years). levels last seen in 1994 and first recorded way
fore adding that, to him, it appeared that ...these backin1988.
shootsarestillverygreen.Whetherthiswasmerelyan While it may not be too surprising to find that
exinvestment bankers doublebluff, aimed at keep there has been no increase in credit extended to Outside the zone, Denmarks troubles are well
ing his nervousclientsfrom further diminishing the Dutchnonfinancialbusinessessofarin2013,itis known, but it should be noted that Swedens IP
contents of their bond portfolios is something we chastening to see that M1growth has simultane has fallen almost 10% in a 2 year process of
leave the reader to determine, but it was hardly a ouslysufferedadoubledigitdeceleration,having decay,while2waytradehasdroppedtothebot
ringingendorsementofthebuddingcrazetoplayfor stood stock still since the New Year, a degree of tom of a 3year range, losing a fifth of its early
thelongdesiredupswingontheOldContinent. nominal stasis which means that money supply 2011recoveryvaluealongtheway.
hasbeenshrinkingappreciablyinrealones.
The euro may be bumping up against a twoyear The only green shoots to be found here are the
highontheTWIandtheMSCIEurozoneindexmay Even the mighty Teutonic Atlas is beginning to first eager colonies of ragweed and buddleia
haveoutperformeditsUScousinbyfastapproaching shrug. Business revenues are off 1.9% yoy nomi pushingupthroughthecracksofabandonedfac
10% over the past two months but it is hard to be naland3.9%realand,ifmoneygrowthisstillin tory floors and along the tracks of eerily quiet
lievethissignalstheallclearfortheregion. doubledigits,NFCcredithasbeenwhittledaway marshallingyards.
overthepastyeartodipbacktolevelsfirstseen
Take France. After the briefest of rebounds in the fiveyearsago.AsurgingDAX,anevenmorevi AswetickeverclosertotheFOMCatwhich,itis
spring, manufacturing output has subsided once brant MDAX (up by more than a third in the widelyexpected,thedreadedTaperwillbeput
more for each of the past three months, leaving the QEternity/Abenomics rally to stand 30% above into effect (if only initially to the tune of $10bln
indexperilouslycloseto31/2yearlowsandstillal theold,2007peak),maybehelpingtobolsterthe USTs a month, the consensus believes), the mar
mostafifthbelowitspreCrashbest.InItaly,matters spiritsoftherespondentsandhencejuicetheIfO ket remains uniquely sensitive to every last wig
are even more parlous. Having been on an uninter indexatpresent,butifwouldbefartoomelodra gle in the data, even though it seems ludicrous


that anyone could expect a serious central bank to a partial consequence of that extension,been out firsttimein30monthssome35bpsloweratthe
allowitselftobeswayedbythevagariesofstatistical ofemploymentformorethanayearfromtheoffi zenithoftheirrally.
noise in whatever quantum of data just happens to cial count once they exhaust their eligibility to
arrive between now and the allimportant meeting claim(h/ttoJeffSnyderatAlhambraforthislast As for equities, the VIX index shed 3%, implied
date. point). correlation is at a mark not seen since Lehman
blew up, putcall ratios spiked to their second
Fortuitouslyforthosewhodoindeedhewtosucha In terms of job dynamics, job offerings as a pro lowest reading since the start of 2011, and the
viewpoint, just as the collective stress needle was portionofthepopulationistobefoundatlevels smallcaps which have always been in the van
pushing well into the red zone, the payroll lottery typical of the 20023 slump, while the hires ratio guard of the advance set aside their momentary
threw up a set of Goldilocks numbers which were lieswellbelowtheirequivalent.Forallthetalkof fears and powered on to yet new highs where
just weak enough in their internals to allay worries onshoringtotheUS,thenittygrittyofmanufac they now incorporate loftylooking P/E ratios
thattheFedmightcomeinallgunsblazingwhilenot turing are again looking decidedly anaemic for greater than 25. Couple this with a respite
beingpoorenoughtocallthewholeconceptofare what is supposed to be an increasingly robust (whetherofthedefunctfelinekindornot)inthe
coveringeconomytoomuchintoquestion. recovery,whileincomegrowthalsoremainslack emergingmarketsabreatherinpartattributable
lustre. As the commentariat voiced some inkling to the inauguration of yetanother superstar cen
Hereisnottheplacetogointothedetailsofthere ofthisweakness,thedelugeofsellingwhichhad tralbanker,thistimeatthehelmoftheRBIand
port, but suffice to say that the headline unemploy dominated the seven session preceding the re the urge to get back in the game was simply too
mentratecontinuestobeflatteredbyadeclineinthe lease suddenly dried up, as if a tap had been strongtoberesisted.
officialtallyofthoseactivelyseekingworkto35year turnedoff.
lows.Oneresultofthisisthatthenumberofaggre Tomany,thisresilienceinthestockmarketseems
gate private hours worked per head of the civilian Perhapsmorereflectiveofacorrectiontoheavily counterintuitive. After all, they ask, are equities
populationisstillnobetterthanitwasatthedepths oversoldconditionsthanofanymoreconvincing not where they are simply because of concerted
oftheearly1990screditcrunch reassessment of the shape and timing of likely central bank attempts to generate a little asset
Fed action, this was enough to encourage a inflationbypenalisingholdersofsafehavensecu
Thoughwidelypuzzledover,thebreakofthislatter promptreturntoamixofshortcoveringandbot ritiesanddeposits?Isthecentralbankersployto
gauge below the worst seen in the high female em tomfishingininterestratemarkets,whichgained hope that the rerating engendered by the
ployment era of the late 20th century coincided (a) another fillip when that supposed hawk, Larry euthanasia of the rentier would spur the 1%
with the offer of greatly extended unemployment Summers, bowed out of the race to replace Ber whoownenoughstockstofeelthedifferenceinto
benefitstoanunprecedentedlylargenumberofpeo nanke.Attheirbest,backmontheuro$recouped looseningtheirpursestringsandsohey,presto!
ple(thereweremorethanamillionsuchrecipientsat upto35ticsofthe185theyhadsurrenderedsince into instigating a little Keynesian demandpull
the2010peak);(b)theresultingjumpintheaverage thestartofMayandsohelpedtomove5yrUST withwhichtopropeleveryoneelsebacktowork?
duration of unemployment to almost double what straights to around 30bps off their worst levels
wasformerlythepostwarpeakof21weeks,setback (doing which this erstwhile dog with fleas out Under that same premise, any eventual diminu
in1983(theresnothinglikemoredoletocontribute performed the wings of the curve by 20bps) and tion of the stimulus could only redound to the
to higher joblessness); (c) and the complete disap to drive real yields on samematurity TIPS detriment of equities, could it not? Was this not,
pearanceonstatisticalgroundsofthosewhohave,as which had actually gone positive (gasp!) for the infact,thelessontaughtusbytherollercoaster

Source:Bloomberg
Source:Bloomberg
Source:Bloomberg
Source:Bloomberg

or perhaps the meat grinder would be the better consideration, at least for so long as equities can noone is likely to spoil the party by having the
metaphorthatwastheonagain/offagainhistoryof maintaintheirhaughtyindifferencetorisingrates temeritytosellout,atleastnotuntilthenewac
QE 0, I & II? Given this, how is it, then, that stocks and so keep the charts looking pretty enough to counting period begins. That way reality can be
arenotfallingalongwithbondprices? writetheirownadvertisingcopy. cosilydenieduntilwellpastthefestiveseason.
The answer to this conundrum perhaps lies in the The acid test, as ever, will be what the market Asvulnerableasmanyvaluationsseemtobe,on
factthat,aswearguedinsomedetaillasttimeout,it finds itself doing on the morrow of September any number of longerterm, more fundamental
isrealyieldswhicharerisingandnoteitherimplied 18threelingbackinhorroratthethoughtofbe measures, the doubters, too, will be given pause
inflation components or credit spreads to any great ingweanedoffitsdietofsteroidsiftheFedactu by a similar constellation of yearend considera
extent, while the whole package has so far done no allydoestomove,orbarrellingblithelyonwards, tions. Not even the most determined contrarian
morethanrenormalize(ifwecanhavethecheekto reassuredthattheparalysisofilldefinedfearhas can, after all, be certain, even if he is sure of the
use the term in such a context) rates back to the beentransformedintoamorereadilyquantifiable fact of her pursuit, that laggardly Nemesis will
(slightly)lessextrememeasuresofmonetaryaccom schedule of policy risk. Either possibility seems catchupwithfleetfootedHubrisrapidlyenough
modation which obtained before the bottomless equally plausible from the present vantage, but for him to make the necessary profit before the
bondbuyingoftheFedandBoJwerecoordinatedat what adds to the bipolar nature of the event is embers of the old year have gone cold in the
thebackendoflastyear. that we will have to face this bifurcation point grate.
well inside that notorious period of self
Under such a scenario, might it be that the decision reinforcingMochasingwhichtypicallymarksthe TheFedcouldyettriggeramajorreversaloffor
toreducesupportforthemarketcouldbebeingread lastthreetradingmonthsoftheyear. tune, as could a slew of bad European news, no
asasignofconfidencethatthethirdtimereallyisa longercarefullyhiddenfromsightnowthatFrau
charm, that it is onward and upwards from here Ifthisyearplaysoutlikesomanyothersbeforeit, Merkel has completed her run for office. Events
chocks away and damn the torpedoes after half a there will soon be a rush into some position or in the maelstrom that is Syria could again spiral
decadeofdashedhopesandpainfullyrenewedslip other as the leveraged crowd seeks to bootstrap out of control, while the Chinese Third Plenum
page?Orisitsimplythatifyoufeelbondsareunder itself toward its bogie (obviously a selffulfilling couldyetsurpriseusbyheraldingthelaunchofa
threat, the outlook for commodities too clouded, impetus if enough of themotley crewjoinin the determinedassaultonthenationscreditbubble.
emergingmarketsindisarray,realestateinjeopardy move). Such a herding movement, should it in But if we are still trading higher after the first
asmortgageratesriseandREOtorentstutters,then deed eventuate, will only be intensified as the and certainly the second of these fixed way
allyouarelefttobuyaregood,oldfashioned,devel peerpressured members of the more hidebound points, the will of the market may well be firm
opedworldequities? institutional flock then scramble to avoid being enough to see it through all but the most severe
caught underweight in whatever transpires to disappointments which could be associated with
EvenifthePanglossianoutlookthattheomniscient betheyearsstar,lastquarterperformer. eitherofthelattertwo,whollyhypotheticalones.
Fedhasfinallysoundedtheallclearreallywerethe
case,itwouldstillbegthequestionofwhethersucha Assumingthatnoexternalshocksthenemergeto Ifso,thebearswoulddowelltoreturninhiber
richlyvalued stock market has already priced in all threaten a rising tide which will be composed of nationuntilthestartof2014,realisingthatthefull
thegoodnewsitispossibletoimaginemightcome. an intoxicating cocktail of one part self housepantomimeaudiencewhosesharedassess
This,however,islikelytobeverymuchasecondary justification and one part selfenrichment, then menttheysoheartilydiscountandwhichtheyso

Source;USTDiapason
Deficithashalvedfrompeak
Canthemarketsurvivecold
turkeythistime?
Source:Bloomberg
RealAMSgrowthslowest Canthemarketsurvivecold
sinceearly2011;weakest4 turkeythistime?
monthssincespring2010
Source:Bloomberg

anxiouslyseektooverturnwillbetoobusyuntilthen The specs remain net short of copper, but the willsufferafurtherboutofnerves,butthisisin
affirmingthattheydobelieveinfairies,theydo! dropinopeninteresttoawhiskerof2013slows truth, merely clutching at straws. Ultimately, we
showsthatinterestisfadingfastandwithit,per areleftfearingtheworst.
CommodityCorner haps,hopeforthesectoringeneral.

Asallthiswastakingplace,commodityreturnshad Looking to the Red Doctors peers, aluminium SeanCorrigan
managedtoclimbjustshortof10%fromthequarter remains anchored to the bottom end of the last
end lows, led by a 12.5% peak gain in energy, with four years distribution and zinc is not a great
WTI the star performer, making over 17% at one dealbetteroff,whilenickelisappreciablyworse.
pointastensionsroseintheLevant.
Gold, too, remains friendless, having dumped
Though the labour unrest which was arguably far $128 in an accelerating rushinterrupted by a
more important for regional supply still abounds in little weekend shortcoveringonce the sus
Libya, the Russian diplomatic demarche over Syria pected position reversal of his gold swaps by a
hasnonethelesstakenagooddealofurgencyoutof certain large player turned GOFO positive and
the trade, knocking the thick end of $5 off front relaxed the squeeze from the $1180 nadir. With
monthcrudeand$34offtheextremebackwardation 50% of the rally from Junes 3year lows already
intheprocess. havingbeendissipated(dittoforsilverandplati
num),itishardtoraiseanycheerforthegroup.
Ifnonewimpetusisreceivedsoon,thethreatisthat,
havingtradedbacktothelasttwomonthsmean,the Nordidthebriefglimmerofpossibilityafforded
next test will be of the lower end of that band. Be
by the earlier prospect of a long, drawnout in
yondthat,shoulditarise,wouldbetheArabSpring dustrial dispute in South Africa turn out to be
mean around $95/bbl and a much less inverted anything other than a false flicker of hope. No
curve,toboot. wonder net longs have begun to evaporate once
more, even though they had only managed to
Copper,too,enjoyedanicespurtashopeswerekin build back to the 4th percentile of the past 12
dled of a wider economic rebound,led byUS hous yearsbullmarketrangebeforelapsingagain.
ing and autos, those Eurozone PMIs we discussed
above,andthecrossingofmassfingersonaccountof It says everything when we point out that the
China. But, having rallied 12% or so in the four gold chart, these past 1112 weeks, has been
weeks to midAugust, the delivery of superficially hardlydistinguishablefromthatofthatotherse
better data from Beijing turned out to be a damp rial flatterertodeceive, Chinese Rebar. Perhaps
squib,promptinginsteadaliquidationinclassicbuy Janet Yellen might save the day by issuing some
therumour,sellthefactfashiontocancelouthalfthe injudicious promise of a further loosening of the
gains. Feds stance, or maybe the Latin bond markets

Anotherreasonwhypeopleno
longerfeeltheurgetoholdgold
Backtothemean?
Source:Bloomberg
Backtothemean
Source:Bloomberg
Source:Bloomberg

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SEPTEMBER 17TH, 2013 Research Strategies Solutions

Sean Corrigan Chief Investment Strategist

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