*Extensive stimulus packages, record monetary easing, huge wealth transfer from the public sector to the private sector, all globally, has had its stimulative effects on the economy.
Not that it has actually cured the patient, but rather been soothening the pain. No promises what tommorrow brings though, as the cause of the problem has not really been dealt with.
The "sweep it under the rug" policy is still the all governing policy.
* Whats the problem then?
Sentiment indicators globally with both consumers and producers are improving, exports have been rising and corporates have delivered "good" results, relatively speaking. On top of it, the housing markets globally seem to be recovering somewhat, especially in the US and the UK, two very important markets from this aspect.
Well, my main concern is still the fact that so far in history, there has never been an economic recovery without serious credit expansion. With all the massive fiscal spending and monetary stimulus, we should have seen a credit multiplying effect kick in by now, but we are not.
The main reason for this lack of creditmultiplying effect being the still huge amount of debt saddling the financial system via bad assets and bad loans. Financial institutions are still accumulating reserves for upcoming credit losses, not pushing and multiplying the liquidity via lending(=leverage) into the economy via production etc.
* Weak corporate balance sheets
Corporates in general have weak balance sheets and ditto cashflows in an environment of still relatively tight credit. Corporates have gone through the phase of frantic costcutting and are now in the process of restructuring.
This will provide beneficial effects further down the line, but profits will suffer in the meantime as those costcuttings were mostly oneoffs and sales are not really recovering as unemployment levels globally looks set to remain at high levels for the foreseeable future.
* Equity markets riding on excessive liquidity, pricing in too high expectations
Meanwhile, the equitymarkets are pricing in a steep recovery where exit strategies from quantitative easing and growth related inflation concerns are in focus. Excessive liquidity is driving this process via mainly an institutional investor allocation frenzy.
While the world is still trying to adjust its massive output gap, it would seem to me deflation concerns will still linger, and equity markets will have to adjust their growth and profit expectations downwards.
Remember, a depression was avoided via drugs, not by sorting out the bad debt and loan issue. Therefore, to me it would seem more likely than not that the underlying problem comes back to haunt capitalmarkets.
* Why the decline of the Baltic freight index provides important information.
Signs of physical demand can be seen in freightrates or in commodities that are difficult to store (difficult to speculate). Over the last five weeks, the Baltic freight index has declined from 3520 to 2470. At the same time, commodity related equities, commodity currencies and commodities have continued their upward journey.
The rationale being that the price move lower has been due to increased freight capacity. Well, this does not seem to fit in with the decline of recent weeks as shipbuildings have been stopped due to a lack of finance and has not increased over recent months. Worth noting is also that during the financial crisis even shipbuilding projects that had already started were stopped due to funding withdrawn.
Even if the Baltic freight index is an indicator of overcapacity in global shipping, one cant help but notice that a) The Baltic freight index has hardly recovered since 2008.
b) the global freight capacity was fully utilised in 2008.
Hence, even with a moderate increase, global demand seems to have fallen. This is not reflected in the commodity markets. Reason mainly being overliquidity and speculative flow.
* Where from here? Risks are increasing for Chinese policy changes as we approach the 1Oct Chinese 60th revolution anniversary.
This could weigh on commodities, commodity currencies and commodity related stocks. At the same time, the equity market in general should be topheavy as pricing adjustments from inflationary to deflationary outlooks are taking place.
The shift from Jpy as the worlds main funding currency into the other " top six" new funding currencies is ongoing. GBP will likely be a popular such short currency near term. The market is still overly short the USD, so I expect it to strengthen.
* New positions and positionchanges
-Long Aud/Usd puts
-Long Gbp/Usd puts
-Long Eur/Usd puts
-Long Usd/Chf
-Long Eur/Nok
-Long Gbp/Jpy puts
Sold my remaining Citigroup calls.
As usual good luck
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