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Article / 02 October 2012 at 12:57 GMT

Easy does it, or constant repetition carries conviction

Chief Economist & CIO / Saxo Bank

Constant repetition carries conviction – Robert Collier

There is an uncanny belief among the “always positive” crowd that ultimately QE3 is both different from previous iterations and will work. It’s flying in the face of the old maxim that the market is always right, but I am indifferent to the QE3 message – it’s been a long time since I really could make heads or tails of the “political messages” from the central banks and politicians.

The bottom line remains the same: this is Extend-and-Pretend squared, where we continue to deal with solvency issues with mere liquidity injections, and in which the end result is a 70 percent chance of global version of Japanisation.

The positive news on the Pretend-and-Extend front is that we may have finally exhausted the avenues of “new alternatives” and we can get down to business again. This is seriously needed, not only for this old macro guy, but also the far more flashy hedge funds in macro. The macro world has suffered with this stop-and-go policy always awaiting the next big event to save Europe and the US.

HFR Hedge Fund Index versus the SPX Index


The chart clearly shows how Macro funds have failed to appreciate the new world of maximum intervention. Last year was not much better.

The good news though is that the perceived tail-risk has been reduced, meaning we are less dependent on news from a random week-end summit in Europe or the next leak from Ben Bernanke in the Wall Street Journal, so we can instead focus on data and trends.

How is the “real world doing” – just in case anyone cares?

Data is likely to hit a cycle low just now and next quarter

The business outlook is negative and the fiscal cliff is holding back investment and jobs. The fiscal cliff may or may not happen, but business across the US, it is already holding back on investment and new hires which will likely mean further bad data to come, as the Business Roundstable Q3 CEO Economic Outlook finds:

  • 34% project decreased employment in the next six months
  • 29% see higher employment
  • 58% of CEO’s see company sales growing in the next six month vs. 75% in Q2 report



In terms of the actual economic data, it is extremely important to realize that the “expected data” from the US eventually reverts to the mean, in terms of the “surpise” function:


As the chart shows, we have seen an improvement in the data relative to expectations, explaining the excellent credit- and stock market performance, but very recently we have had a stalling in the improvement.

If the premise is that tail-risk is reduced by the Fed, ECB, BOJ, and BOE money-printing sprees, then clearly the incoming data and outlook should dictate the coming month and quarters.

To me Q4-2012/Q1-2013 will be the absolute low point in economic activity, as we have maximum austerity talk around the world, extremely defensive investors and consumers and a bank environment where regulatory capital is far more important than customers and their lending needs. In other words, maximum headwinds.

The fiscal multiplier is making things worse in this phase, not better, indicating that Q4-2012/Q1-2013 will be new low and an easy like-for-like data point to beat later in 2013, but it could also accentuate my intangible point on potential for more social unrest as the real economy will not benefit from our high stock market valuations.

We could reach the limit of what sacrifices the population will be willing to live through while their own politicians multiply their errors with hopeless policy choices. The ECB plan for a plan based on conditionality is great in theory, but hard to accept in major nations like Spain and probably soon France after their disaster of a budget. High growth has many fathers, recession, it seems, has none.

We may be wrong to assume things won’t deteriorate further beyond Q4-2012/Q1-2013 – We certainly see some positive signs, mainly in the US, where housing and the new QE will improve financial conditions by 0.25-0.50% GDP, but this is still in the context of a “best case” negative 0.5-1.5% GDP stemming from the fiscal cliff. I recommend reading Gavyn Davies blog from The Financial Times: Market focus shifts to the US fiscal cliff on the potential outcomes from this potential event risk.

Q4- how strong is the historic performance?

Against this relative negative outlook for both micro-level, consumers & business, and macro-level, austerity and non-sense printing of money, comes the fact that Q4 is traditionally the strongest quarter of all.

Using input from and the article provided by Johnson Research Group, here is the scope of Q4 over history:

  • Q1 performance all results: +1,3%
  • Q2 performance all results: +2,1%
  • Q3 performance all results: - 1,1%
  • Q4 performance all results: +4,9%

Easy, isn’t it? Hold on a minute. In election years, the month of October normally means a return of volatility after slow summer months. Partly due to the kick-off in earnings season (October 9th this year) but also due to the return to market participation after the holidays.

October is positive 68% of the time, 64% Novembers have been up, and a stunning 82% of Decembers! Seems like the stock market should easily climb the wall of worry, but being an old seasoned macro guy, I’m afraid that this only works…until it doesn’t.

A few years ago many investment banks were aggressively encouraging their clients to go long the EUR vs. the USD in December as it had been up in excess of 90% of the time. Guess what happened? Yes, you are right.

Another “war-story”: as a young salesman in London in the early 1990’s, I was dealing with a smart FX client who once every quarter would survey the ten biggest FX banks on their target for USD/DEM, USD/JPY, GBP/USD and USD/CHF – and if 75% of the banks predicted a rise or a fall, then the client would….do the opposite. This client was by far the most successful client!

The point is – the above exercise is called counting – or odds making based on statistics. It is good information, but it is after all only another input. Do not forget that markets are 70% psychology and 30% economics, not the other way around.

Q4 this year is more likely than usual to deviate from normal seasonality patterns

We are about to release our Q4-Outlook called Groundhog Day, where we are nervous about social tensions, the fiscal cliff, and the embedded lower world growth. We do not foresee massively negative stock markets, but the failure of the follow through from ECB and QE-to-Infinity to fulfill the wishes of the always positive crowd keeps us skeptical.

To illustrate this point and why – I have included chart by my colleague Mr. Peter Garnry in which he measures the difference between the real economy (as measured by IFO Expectations) and the next six months performance. On the chart, find a point on the light dark blue line then see the matching % performance on the chart. Take low point in 2008 – where dark line dives – the following six month the market rose approximately 20 percent. Now, however we are at an extreme in divergence not seen since 2000, and the expected forward return is -20%.

Stocks vs. Expectations  - Divergence Index



Hence we are still short growth stories like SPX CFD and AUDUSD, and recently long EURSEK.

Our Alpha positions are presently:

 - Short SPX, short AUDUSD, long EURSEK, long Corn

In terms of overall allocation and FX overlay:

  • Stocks: 10%
  • Fixed Income: 25%
    - Government 0%
    - High Yield 25%
  • Commodities: 10%
    - GDX, Gold, GLD
  • Alpha plays: 25%
  • Cash: 30%

One thing is certain, should Q4 fail to produce the usual strong positive performance there could be a lot of stop losses going through as macro is in pain, and I have a feeling that in Long Only Land, the performance this year is really down to whether you own Apple or not, and if not, you are doing poorly and if you are, you are merely crowd surfing.

Safe travels,

Steen Jakobsen

Jozsef Jozsef
IMHO, Bernanke went for an old-fashioned Beggar thy Neighbor devaluation to help the US exports. This policy is based on an "empirical regularity" - i.e. one can observe if currency is weak, exporters earn more, etc. All others are mambo-jambo and utter BS. Economic theories, as we knew it, models etc just simply don't work, never did. But the centuries old university industry has been chugging and whistling as if nothing happened...
fxtime fxtime
''Ground Hog Day '' a perfect title for the mkt and as you say your Q4 Outlook :-)
Solidus Solidus
long EURSEK. Do you think RB will end up doing QE as the other CBs or why this position.
Steen Jakobsen Steen Jakobsen
Doubt it - Finance Minister too smart for that, but he is promising lower corporate tax as 1st solution...
Umbeluzi Umbeluzi
Thanks Steen for your experience, I like this decision making so much! > "and if 75% of the banks predicted a rise or a fall, then the client would….do the opposite. This client was by far the most successful client!"
Umbeluzi Umbeluzi
Hello Steen, just a question regarding this statement: " are 70% psychology and 30% economics, ...". How do you think HFT trading is influencing markets and the disconnection between economics and valuations? Speculations refer that HFT accounts for 70% on NYSE volume.


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