Article / 14 November 2017 at 10:31 GMT

Macro Digest: Bubbles, credit and FX EM

Chief Economist & CIO / Saxo Bank
  • The credit impulse is imploding and impacting credit and the economy
  • Peer-to-peer borrowers tend to carry higher debt loads
  • Like cryptocurrencies, peer-to-peer is a totally unregulated space
  • Share prices in old stalwarts like GE are collapsing
  • Spurious newbies are being driven higher on hope alone
Bubble economy
 Bubbles all over. It's time to be cautious. Trading Floor montage /Shutterstock

By Steen Jacobsen

There is some ”noise” in credit we need to monitor. Any time the market slips, like last week, there are plenty of new bids coming according to the consensus analysis, but could it be that we finally are entering a phase where both the primary money printing (Fed and the BoJ and the ECB and the BoE) is coming to a stop plus the first derivative – the credit impulse – is imploding and having an impact on credit and hence the economy? I think so, you all know I am firm believer in the credit impulse and its leading projection of growth (and credit volumes).

My friend Daniel caught an interesting story about online loans and their effect on consumer debt. Steen1
This in peer-to-peer lending not far from ICO, initial-coin-offering in crypto space, which shows that a bubble is forming and this, like cryptocurrencies in a TOTALLY unregulated space!  This may be the next bubble to burst – who will protect unregulated borrowers, and which agency should do it? Of course, the crypto space is even more in bubble territory!

Yes, you can mathematically say if a market is in a bubble or not – when prices becomes super-exponential, rising growth YoY, it’s a bubble. (Super-exponential endogenous bubbles in an equilibrium model of fundamentalist and chartist traders.)

Meanwhile, old Kings of the Dow like GE are collapsing in price while companies with ZERO earning, but only hope (read: Tesla), are flying high on storylines which make Trump look humble. Of course we can’t predict the next down move, but the market is heating up, as the many “support channels” are weakening gradually, this is, to me, a time to be EXTREMELY conservative in your asset allocation.

Source: Bloomberg

Note: The correlation between the S&P (inverted here) and credit spreads broke down. Either credit comes roaring back or the S&P needs to correct to 2450/75 level.
Source: Bloomberg
Note: A look at different risk tranches and the outsized move last week… most of these moves have a Z-score of >+2!
 Source: Bloomberg

Note: The above chart shows thirty years of 30-year US Government bond yields – we are clearly entering phase where the break is a “risk”.  I doubt we make a move higher on this channel on the first attempt – thirty years is a long, long time. Rather, I think the credit impulse impact will be felt in data from November and December when they become available in January:
 Source: Bloomberg

Note: This is the Chinese Credit Impulse 12 month forward vs. The Li Keqiang Index (which is one of the best leading indicators for China growth). It seems that we will see consolidation and lower growth impulse in the wake of the recent Communist Party Conference.

Note: This is linking the Chinese Credit Impulse to the US PMI (proxy for “high in hopes”) – we should be topping round about now for impulse.
Source: Bloomberg
Note: JPM Emerging Markets (FX) is also testing it’s lower channel – this one is key (ZAR, RUB, MXN  making new lows vs. the dollar)


We are entering a period where bubbles (stock markets, crypto currencies, credit space, real estate) meet a new economic reality of negative credit impulse and the end of central bank support.

This happens in a global environment of rising global tension (North Korea, Syria, Saudi Arabia, Qatar, Venezuela and Brexit) and a rising inequality and religious hard-wiring. A very dangerous cocktail. This time of the year we normally have a Christmas Rally to pay for the underperformance in the first nine months, maybe 2017, is upside-down , we get market setback as managers and traders alike pare down risk to control and keep the nice profit given to them courtesy of shortsighted central banks who are in the 11th inning of a game which should ended at the bottom of the 9th.

We have our lowest risk exposure in years right now:

  • Fixed income: UW
  • Commodities: UW
  • Equities: UW
  • Cash: OW

The main “convictions” being:

  • Dollar is long-term down channel – small risk of 97.00 in DXY (94.50 today) but 85.00 next year.
  • FX EM and soon EQ EM is biggest short – FX EM is tanking hard and led credit down.
  • Crude topping here and falling 50% next 24 months.
  • Next “revolution” will be driven by R&D in electric cars, where China and soon India will join China in 100% electrification. This will unleash the biggest productivity gain since 1870-90 as money flows to “real problems” instead of into bubbles.
  • In equities we like biotech, e-commerce (Asia-centric), robotic & automation, plus selective mining plays. We are enticed by Woolworth (South Africa) and GE at these levels in the "old world”.
  • The commodity favourite is silver based on industrial usage and underperformance.

– Edited by Clare MacCarthy and Clemens Bomsdorf


Steen Jakobsen is chief economist and CIO at Saxo Bank


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