Here is the link to my interview today on Bloomberg TV.

Followed by my brief notes which formed the basis of the interview:


Macro fundamentals, forward earnings estimates, and top-line growth projections are all declining. EPS growth for the first quarter of this year could end up negative, due to the strong dollar and declining oil prices. This means that market growth can only come from multiple expansion. However, market multiples are extremely high and on some measures (e.g. cyclically adjusted P/E) are at extremes that have rarely been seen in history. With profit margins also at multi-year highs it will be hard to achieve any further multiple expansion from here.

Market volatility is increasing (the swing in the Dow over the past 6 days has been 2000 points), market internals are deteriorating and out of the money put options are being bid up. This is a sign of increasing risk aversion.

In addition, in further signs of “risk off” credit spreads are rising once again. In the energy sector credit spreads have soared in the last few days to above 925bps, the highest seen in over a month. Bankruptcies in the sector are starting to mount.

The Atlanta Fed’s GDP Now Forecasting model is predicting Q1 GDP growth of just 0.3%. Economic data has been missing estimates across the board (most recently manufacturing, retail sales and housing starts).  Bloomberg’s US Macro Surprise Index is having its worst start to a year on record (since 2000). The main exception to that has been the jobs data where we have seen 13 consecutive months of 200k+ jobs added. However, whilst the unemployment rate is 5.5% the employment-to-population ratio of those between the ages of 16-54 has barely recovered from its lows and remains at a level lower than during the financial crisis. Wage growth is anaemic so as a result there is no pick up in spending (as indicated by the latest retails sales report) despite the low oil price.

In addition inflation is low and declining. The Dallas Fed’ Personal Consumption Expenditure measure has now dropped below 1.5% after being between 1.6 to 1.7% for most of 2014. The last time the PCE was this low in 2010, the Fed launched QE2.

It is in this environment that the FOMC meets this week. The surge in the USD is not being supported by US growth. It is being fuelled by policy divergence between the US and the rest of the world. Therefore if the FOMC leaves the word “patient” in its statement, expect a sharp reversal in the USD. Should it take the word out focus will simply shift to when the Fed will raise and what would prompt the Fed to raise rates. However, the Fed has missed the boat. It should have raised rates last year. It will now be very difficult for the Fed to do anything more than a token rate rise in the summer. But that will be all. It certainly won’t achieve its target of 1 to 1.25% by the end of 2015. Therefore the new language in the statement indicating what factors the Fed will take into account when deciding if to raise rates, will become very important. The market focus will move from the word “patient” to focusing on what comes next and how fast will the Fed tighten over the coming year.

The fact of the matter is that US rates have not risen for 9 years. They have been at zero for the past 7 years, despite being touted as an emergency one-off measure. Yet 7 years later we are still discussing whether the US economy can withstand a 0.25% increase from zero. The Fed is either massively behind the curve, or the US and global economy is in dire shape. If the latter the bond markets are correct to price in zero or negative years. If the former, then sovereign bond markets and credit markets are massively overvalued and will crash.

7 years of QE, monetary stimulus and zero per cent interest rates from the world’s central banks have now created a bubble and distortions in financial markets the likes of which have never been witnessed before. On the back of this unprecedented monetary stimulus, debt and leverage has increased massively since the last financial crisis. Credit market debt globally is now $200 trillion. Yet economic conditions have not improved in the way that central bankers intended when they launched this enormous monetary policy experiment.  Wages have not climbed for the majority of workers in G7 economies. There is disinflation or deflation rather than inflation (The BOJ is now admitting that the Japanese economy could slip into deflation again). Global demand and industrial production is weak and economies have either stagnated (Japan and Europe) or grown very weakly (US).

The reason for this is that banks are not lending because we are already at peak debt. As an example in Italy (the 3rd largest issuer of sovereign bonds in the world), lending by Italian banks to families and businesses has fallen for the 33rd consecutive month. Bad loans at lenders has hit a new record of $197 billion, equivalent to 10% of Italian GDP. This is a problem that is plaguing banks across Europe.

The ECB’s QE is not going to be able to fix the problem because it is already struggling to purchase sovereign bonds. In the first full week of QE it purchased just EUR 9.8bn of bonds. Whilst the ECB is the only buyer, institutions for various reasons will find it hard to sell. Banks need to hold the bonds for regulatory capital purposes. Pension funds cannot sell without creating a mismatch between assets and liabilities. Insurance companies don’t want to sell as they will have to invest in even lower yielding assets. Which leaves just speculative sellers who are betting on rates being driven even further into negative territory.

The main beneficiary of QE is the financial markets. It seems to me that 90% of global stock market moves are now dependent upon the central banks and the biggest moves occur around central bank meetings and statements, QE programs, and rate cuts/stimulus or anticipation of rate cuts/stimulus. Market sentiment as measured by bulls vs. bears is at all-time highs in some markets (see the Investors Intelligence Survey as an example) as bearish investors have been almost entirely driven from the market place. In such an environment where central banks are the primary driver of markets many investors are finding that they don’t need to engage in stock picking. A good example is Japan. The Nikkei 225 is at a new 15 year high. However, foreign investors are buying index futures rather than equities. In February alone, foreign investors bought nearly 2.1 trillion yen ($17.3 billion) worth of futures but just 190 billion yen worth of cash equities.


Greece has a deadline of Friday to make EUR 2 billion in payments to the IMF, ECB and Goldman Sachs. It is unclear as to where the money will come from.

Furthermore Greek banks are under strain and are only being supported by the ECB. Greek deposits are down 14% since November. Eurosystem funding is now around 22% of assets, up from 14% four months ago. If Greece were to leave the Euro, and the ECB withdrew its support, its banks would not be solvent. There could be a funding gap equivalent to around 40% of GDP. Greece would have to introduce capital controls before that point.


China is in a bind. The strong dollar is hurting its economy and exports through the currency peg. It badly needs to devalue the yuan. However, if it does so it will result in an acceleration of capital outflows. Therefore it feels obliged to defend the peg. However, in doing so it will slip even further below its 7% growth target, something which  the government admitted over the past weekend was going to be a hard target to achieve.

There is almost $2 trillion of USD denominated debt in China. With a mismatch of earnings in RMB and debt in USD, the strong dollar is hurting Chinese companies in the same way that it is in other emerging market economies. Property companies are being hurt particularly badly. Today’s data show property declines in 69 out of 70 Chinese cities surveyed and an annual decline of 5.7%, the worst on record. With the real estate sector accounting for more than 25% of GDP, this will make the 7% growth target even more unattainable.


Investors have been piling into energy-related positions over the last month hoping that the sell-off in oil prices was over.  However, this has become a dead cat bounce. The decline in rig count is likely to continue leading to companies trying to generate cash flow at the expense of profitability in order to pay down debt. This will lead to a further deterioration in earnings in the energy space, reduce CAPEX spending and increased employment reductions. The drop in employment will also be felt in the energy related sectors such as transportation and service sectors. There is $120bn of debt in the US high-yield energy sector. Credit spreads are rising and are now over 925bps above treasuries. More companies will have funding problems and there will be more bankruptcies.