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Thursday, 6 March 2014

FPM Macro and Markets Themes for 2014

We were writing our top-down investment themes for the year ahead, deliberating in the cold day of light after the exuberance of the seasonal festivities and the New Year celebrations. Then we were distracted by putting into play one of our macro themes: Ukraine. You've seen the headlines since our chart below,which captures CDS premiums to 10 February 2014 – what do you think happened since to this chart?

We like volatility-based asset plays for 2014, especially to confirm the capital markets secular uptrend established from the ‘mirage’ economic recovery contrived by colluding central governments. If the illusory recovery, established on quantitative easing and other accommodative global government policies, has any foothold we seek policy-bucking assets with intrinsic macro-volatility.

Sovereign CDS, municipal-debt-referenced assets and other futures and options based strategies are FPM's vogue recommendation in our bumpy recovery outlook. For example, we recognise sovereign states that we expect to undergo a process of tumultuous evolution before arriving at democratic and financial stability.

We highlight one such country CDS chart below in current trading observations 



Source: Deutsche Bank, note that this chart is before the full escalations of protests into near civil war centred in the capital city of Kiev

Of course there is civil unrest in many other countries simultaneously, including Egypt, Thailand, Venezuela, South Sudan, Greece etc. However, for our asset play recommendation and outlook we point to the destabilising situation in Puerto Rico, which is a self-governing territory of the USA with its inhabitants having American citizenship. Never mind the largest USA municipality debt bankruptcy declaration to date in mid-2013 by Detroit City with US$18 bn debt; Puerto Rico's debt is said to be US$50 -70 bn! This territory's default is expected to have far-reaching systemic consequences, not only because of the size of debt, but due to its tax-advantages making it a widely and popular constituent in portfolios.


While one of our major risk thesis hangs on sovereign-sized implosion, we are also mindful that news is managed in a way as not to cause sensational market panics but drip-fed for shocks to fizzle-out. So when the Puerto Rico default does eventually materialise it would be damp-squib event.

Our joined-up thinking does not think the fall-out from the inevitable hard landing of the Chinese economy will be a mere ripple of a shock. Having analysed the historic levels of national debt accumulated in the Chinese economy in a record time, i.e. twice as much as its GDP in 5 years, unprecedented economic crash is expected. The Western foreign banks credit alone represents nearly a trillion US Dollars, currently at US$709 bn, according to a ZeroHedge article. Of that western banks' creditor total claim against China by European banks represents US$329 bn. While debt default and recovery levels in China maybe uncertain and irrelevant, what is sure is that emerging markets type exodus of hot-money is likely from any liquidity panics. Referring to the second largest economy as an emerging market may seem a misnomer but the likelihood of easy-money fuelled enterprises becoming insolvent would not be a new phenomena in the Far East markets. This writer was at a global bank and topl player in the regions at the the time of the 1997-98 Asian financial crisis and recognises the sequence of crisis. Then it was the crisis of confidence about Thailand's Bhat currency devaluation which was the trigger and catalyst for the region's crisis. For China's bursting bubble scenario some punters are looking at chain-reaction defaults in their Trust Company funding arrangements. There maybe other bubbles such as housing related write-down of investments.
In regards to China, FPM deeply shares the conclusions reached in the aforementioned ZeroHedge comment, as below:

There is a very good chance that the crisis that began in 2008 is actually not over by any stretch – it is merely moving from one place to the next. After all, the developments discussed above are a direct result of the reaction of the world's monetary authorities to the initial crisis. China's credit bubble and ZIRP in the US and Europe are all children of the crisis and have evidently sown the seeds for the next crisis. As we always stress, we expect that the next major crisis will eventually lead to a crisis of confidence in said monetary authorities. At some point, faith in central banks is bound to crumble and then we will really experience 'interesting times'.”

This leads us to financial Armageddon in slow motion, and gathering of pace in re-rating economic values and principles, a sort of new deal for socio-economic politics. Beginning with the disintegration or greater convergence of the European union, by circa 2017. As we seemed to have hedged our original view for the breakup of European Union, we reserve any conviction trade based on the pivotal referendum on Scotland's split from Europe.

FPM principal has returned from a convalescing break in Braemar, Scotland near the Cairngorm National Park and the Royal Family's Balmoral Castle. See our next provocative post: European Indpendence By The Scottish Bravehearts.

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