15/4/18: US Trade Wars and the Global Economy

My interview for Icelandic TV on the threat of trade wars led by the U.S. :http://www.visir.is/section/MEDIA99&fileid=VTV094E2C7D-0F20-48CA-ADB4-8F8515C4B1E7

15/4/18: EuromoneyCountryRisk 1Q 2018 report

Euromoney Country Risk 1Q 2018 report (gated link) is out, quoting, amongst others, myself on geopolitical and macroeconomic headwinds to global economic growth:

Two interesting tables/charts:

My quote:

8/4/18: Talent vs Luck: Differentiating Success from Failure

In their paper, "Talent vs Luck: the role of randomness in success and failure", A. Pluchino. A. E. Biondo, A. Rapisarda (25 Feb 2018: https://arxiv.org/pdf/1802.07068.pdf) tackle the mythology of the "dominant meritocratic paradigm of highly competitive Western cultures... rooted on the belief that success is due mainly, if not exclusively, to personal qualities such as talent, intelligence, skills, efforts or risk taking".

The authors note that, although "sometimes, we are willing to admit that a certain degree of luck could also play a role in achieving significant material success, ...it is rather common to underestimate the importance of external forces in individual successful stories".

Some priors first: "intelligence or talent exhibit a Gaussian distribution among the population, whereas the distribution of wealth - considered a proxy of success - follows typically a power law (Pareto law). Such a discrepancy between a Normal distribution of inputs, suggests that some hidden ingredient is at work behind the scenes."

The authors show evidence that suggests that "such an [missing] ingredient is just randomness". Or, put differently, a chance.

The authors "show that, if it is true that some degree of talent is necessary to be successful in life, almost never the most talented people reach the highest peaks of success, being overtaken by mediocre but sensibly luckier individuals."

Two pictures are worth a 1000 words, each:

Figure 5 taken from the paper shows:

• In panel (a): Total number of lucky events and
• In panel (b): Total number of unlucky events 

Both are shown as "function of the capital/success of the agents"

Overall, "the plot shows the existence of a strong correlation between success and luck: the most successful individuals are also the luckiest ones, while the less successful are also the unluckiest ones."

Figure 7 shows:
In panel (a): Distribution of the final capital/success for a population with different random initial conditions, that follows a power law.
In panel (b): The final capital of the most successful individuals is "reported as function of their talent".

Overall, "people with a medium-high talent result to be, on average, more successful than people with low or medium-low talent, but very often the most successful individual is a moderately gifted agent and only rarely the most talented one.


Main conclusions on the paper are:

• "The model shows the importance, very frequently underestimated, of lucky events in determining the final level of individual success." 
• "Since rewards and resources are usually given to those that have already reached a high level of success, mistakenly considered as a measure of competence/talent, this result is even a more harmful disincentive, causing a lack of opportunities for the most talented ones."

The results are "a warning against the risks of what we call the ”naive meritocracy” which, underestimating the role of randomness among the determinants of success, often fail to give honors and rewards to the most competent people."

7/4/18: Markets Message Indicator: Ouuuuch... it hurts

An interesting chart from the VUCA family, courtesy of @Business:

'Markets Message Indicator', created by Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management, takes 5 different data ratios: stock market relative performance compared to the bond market, cyclical stocks performance relative to defensive stocks, corporate bond spreads, the copper-to-gold price ratio, and a U.S. dollar index. The idea is to capture broad stress build up across a range of markets and asset classes, or, in VUCA terms - tallying up stress on all financial roads that investors my use to escape pressure in one of the asset markets.

Bloomberg runs some analysis of these five components here: https://www.bloomberg.com/news/articles/2018-04-03/paulsen-says-proceed-with-caution-across-many-asset-classes. And it is a scary read through the charts. But...

... the real kicker comes from looking back at the chart above. The red oval puts emphasis on the most recent market correction, the downturn and increased volatility that shattered the myth of the Goldilocks Markets. And it barely makes a splash in drawing down the excess stress built across the 'Markets Message Indicator'.

Now, that is a scary thought.

5/3/18: Rational Valuations Meet a Parody Cowboy

There is one word that explains the latest Bloomberg musings on the markets pricing in the impact of Trump's aluminium & steel tariffs: ambiguity. Here is the original article:
"The good Donald, the bad Donald and the ugly market" https://www.bloomberg.com/gadfly/articles/2018-03-02/tariffs-the-good-donald-the-bad-donald-and-the-ugly-market via @gadfly

With its cool imagery:

And here is my analysis: tariffs pricing by the markets reflects three VUCA factors. Factor 1: Ambiguity. This relates to ambiguous nature of Trump's policies, with tariffs seemingly laying waste to the idea that Trump Administration can be deemed to be 'maturing' into the office. Factor 2: Complexity. This relates to the nature of the global economy and its dependence on international cooperation agreements and frameworks, the very same institutions that Factor 1 puts into question without providing any certainty as to the exact direction of future change or, indeed, the metrics by which policy successes will be measured. Factor 3: Second Order Ambiguity. This arises from the interaction between Factors 1 and 2 above: as Trump Administration bites chunks out of international structures and treaties, ambiguity and complexity arise not only within the context of the Administration tenure itself. Trump's actions drive unpredictable, uncertain and ambiguous changes into the post-Trump era responses from the future U.S. Presidents. If you are running a business or investing in a company, you need to think beyond November 2020 (which is just over 2.5 years away) and that thinking is virtually impossible under current policy volatility and uncertainty.

In Hollywood, falling out of the second story window, while showering the town around you in bullets is a fun game. In the real world, you just might end up being killed. Companies and investments are not run like an Indiana Jones' movie set. Even when a 'Western' parody cowboy is sitting in the White House.

27/2/18: Volatility & Uncertainty are Back with a Bang

My recent article on markets volatility for the Sunday Business Post https://www.businesspost.ie/business/volatility-uncertainty-back-bang-408742

9/2/18: Markets Mess: Sunday Business Post

My Sunday Business Post article from last week on the beginnings of the stock markets troubles: https://www.businesspost.ie/business/markets-mess-unable-take-decisive-much-needed-downward-correction-yet-equally-unable-push-valuations-much-higher-408224.

As predicted: we had a messy week, with no catalyst to inflict a real, much needed and deeper correction onto grossly overvalued markets.

My next instalment on the continued mess is due this Sunday. Stay tuned.

29/11/17: Four Omens of an Incoming Markets Blowout

Forget Bitcoin (for a second) and look at the real markets.

Per Goldman Sachs research, current markets valuation for bonds and stocks are out of touch with historical bubbles reality: https://www.bloomberg.com/news/articles/2017-11-29/goldman-warns-highest-valuations-since-1900-mean-pain-is-coming. As it says on the tin,

“A portfolio of 60 percent S&P 500 Index stocks and 40 percent 10-year U.S. Treasuries generated a 7.1 percent inflation-adjusted return since 1985, Goldman calculated -- compared with 4.8 percent over the last century. The tech-bubble implosion and global financial crisis were the two taints to the record.”

Check point 1.

Now, Check point 2: The markets are already in a complacency stage: “The exceptionally low volatility found in the stock market -- with the VIX index near the record low it reached in September -- could continue. History has featured periods when low volatility lasted more than three years. The current one began in mid-2016.”

Next, Check point 3: Valuations are not everything. In other words, levels are not the sole driver of blowouts. In fact, per Goldman, valuations explain “less than half the [markets] variation since 1900.” But, when blowouts do happen, involving 60/40 portfolios “over the past century [these] amounted to 26 percent in real terms on average, lasting 19 months. It took two years to get back to previous peaks, on average.” And the problem with this is that there might be no firepower to fight the next blowout. “Central banks “might not be able or willing to buffer growth or inflation shocks.” They also face fewer options to ease monetary policy given low rates and big balance sheets.”

So to sum the above up: levels of market valuations are screaming bubbles in both bonds and stocks; investors are fully bought into the hype of rising valuations; and there might be a shortage of dry powder in store at the Central Banks.

Goldman’s team, predictably, thinks the likeliest unwinding scenario from the above will involve, you’ve guessed it… a soft landing.

Now to Check point 4:

Source: ZeroHedge

Observe the following simple fact: the rate of the ‘balanced’ portfolio appreciation in the current cycle is sharper than in the 2002-2007 cycle. And it is sharper, in cumulative terms (both nominal and real), than any other cycle in modern (post 1970s - end of Bretton Woods and stagflationary environments) period.

So the Check point 5 adds strong bubble dynamics to bubble signals of levels of out-of-touch valuations, investors complacency and risks to the Central Banks’ commitment.

This is, put frankly, ugly. Because all four components of a major market blowout are now in place. So while the froth might still run for some weeks, months, quarters, … and may be even a year or two, the longer it runs, the worse the fallout will be. And the fallout is coming.

26/11/17: FAANGS+ Brewing up another markets storm

One of the key signals of a systemic mispricing of financial assets is concentration risk. I wrote about this in a number of posts on the blog, so no need repeating the obvious. Here is the latest fragment of evidence suggesting that we - the global financial markets and their investors - are at or near the top of froth when it comes to 'irrational exuberance':  http://www.zerohedge.com/news/2017-11-26/david-stockman-derides-delirious-dozen-2017.

So what should investors do? Some lessons from the GFC that can help are summarized here: http://trueeconomics.blogspot.com/2017/11/241117-learning-from-gfc-lessons-for.html. And some additional warning signs of the bubble are summarized here: http://trueeconomics.blogspot.com/2017/11/191117-next-global-financial-crisis.html.

Quote: "...our new Delirious Dozen consists of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) plus seven additional high flyers (Tesla, NVIDIA, Salesforce, Alibaba, UnitedHealth, Home Depot and Broadcom)."

What the above valuations imply?

•  "Amazon is now valued at $550 billion and thereby trades at 293X its $1.9 billion of LTM net income" - EV/EBITDA ratio of x46.5
• "Broadcom trades at 246X net income"
• "Netflix is valued at 194X" or x107.8 EV/EBITDA ratio
• "Salesforce (CRM) ... is currently valued at $77 billion, and Tesla, which sports a market cap of $54 billion. Yet both had large net losses during the latest 12 months. In fact, during the last five years, CRM has posted cumulative net losses of $650 million and Tesla has lost $3.3 billion." Enterprise Value/EBITDA for CRM is now x154; for Tesla: x80.7 after  the recent price drops.
• NVIDIA sports EV/EBITDA ratio of x44.9 and Alibaba of x43.5
• UnitedHealth is absolutely cheap at x13.3 EV/EBITDA as is Home Depot at x13.9 although the latter does sport a P/BV ratio of x57.3 and that is before it takes a full writedown on the 'value' of its stores, in lines with forward expectations of the changes in the retail environment in the near future
• Facebook EV/EBITDA is x26.6 with expectations forward on earnings bringing trailing P/E ratio from x41 to x27.6 which is really equivalent to saying that there is no business cycle that can impact adversely Facebook's business any time soon.
• Apple's EV/EBITDA is x13.3 - cheap by all 'FAANGS' measures, but forward relative to trailing P/Es imply earnings growth of at least 35-40 percent in 24 months horizon. Which is, again, suggesting no one should ever expect any clouds on Apple's horizon.
• Google's EV/EBITDA is x19, while forward vs trailing P/E ratios imply earnings growth of at least 33-40 percent, similar to Apple's.

There is, quite clearly and transparently, an eyes wide shut moment for the markets. Greenspan might have called this the 'irrational exuberance', while your friendly sell-side broker will undoubtedly call it 'time to buy into the market' moment. But you have to have guts of steel and brain the size of a pea to not spot the trouble ahead with the current markets valuations.

14/91/17: Risk, Uncertainty, Political Risks and Markets

My article on the links between political risks, financial returns and economic growth in the MFTimes: http://issuu.com/publicationire/docs/mf_august_2017?e=16572344/51951043 pages 5-7.

21/6/17: BusinessInsider: The Most Important Charts in the World

My contribution to the BusinessInsider "The most important charts in the world from the brightest minds on Wall Street" is out. See my chart here: http://www.businessinsider.com/most-important-charts-markets-finance-chartbook-2017-6?op=0#/#constantin-gurdgiev-52 and the full deck of charts here: http://www.businessinsider.com/most-important-charts-markets-finance-chartbook-2017-6.

7/6/17: European Policy Uncertainty: Still Above Pre-Crisis Averages

As noted in the previous post, covering the topic of continued mis-pricing by equity markets of policy uncertainties, much of the decline in the Global Economic Policy Uncertainty Index has been accounted for by a drop in European countries’ EPUIs. Here are some details:

In May 2017, EPU indices for France, Germany, Spain and the UK have dropped significantly, primarily on the news relating to French elections and the moderation in Brexit discussions (displaced, temporarily, by the domestic election). Further moderation was probably due to elevated level of news traffic relating to President Trump’s NATO visit. Italy’s index rose marginally.

Overall, European Index was down at 161.6 at the end of May, showing a significant drop from April 252.9 reading and down on cycle high of 393.0 recorded in November 2016. The index is now well below longer-term cycle trend line (chart below). 

However, latest drop is confirming overall extreme degree of uncertainty volatility over the last 18 months, and thus remains insufficient to reverse the upward trend in the ‘fourth’ regime period (chart below).

Despite post-election moderation, France continues to lead EPUI to the upside, while Germany and Italy remain two drivers of policy uncertainty moderation. This is confirmed by the period averages chart below:

Overall, levels of European policy uncertainty remain well-above pre-2009 averages, even following the latest index moderation.

7/6/17: Markets, Investors Exuberance and Fundamentals

Latest data from FactSet on S&P500 core metrics is an interesting read. Here are a couple of charts that caught my attention:

Look first at the last 6 months worth of EPS data through estimated 2Q 2017 (based on 99% of companies reporting). The trend continues: EPS is declining, while prices are rising. On a longer time scale, EPS have been virtually flat in 2014-2016, but are forecast to rise nicely in 2017 and 2018. Whatever the forecast might be for 2018, 2017 increase would do little to generate a meaningful reversion in EPS to price trend

However, the good news is, expectations on rising EPS are driven by rising sales for 2017, and to a lesser extent in 2018. This would be (if materialised) an improvement on the 2014-2016 core drivers, including shares repurchases (chart below).

Next, consider P/E ratios:

As the chart above indicates, P/E ratios are expected to continue rising in the next 12 months. In other words, the markets are going to get more expensive, relative to underlying earnings. Worse, on a 5-year average basis, all sectors, excluding Financials, are at above x14. Hardly a comfort zone for 'go long' investors. The overvalued nature of the market is clearly confirmed by both forward and trailing P/E ratios over the last 10 years:

Forward expectations are now literally a run-away train, relative to the past 10 years record (chart above), while trailing (lagged) P/Es are dangerously close to crisis-triggering levels of exuberance (chart below).

In summary, thus, latest data (through end-of-May) shows continued buildup of risks in the equity markets. At what point the dam will crack is not something I can attempt to answer, but the lake of investors' expectations is now breaching the top, and the spillways aren't doing the trick on abating them.

16/5/17: Navigating the Bubbling Up Investment Seas

Here are the slides from my presentation at the IPU Conference 2017 two weeks ago:

30/4/17: The Scariest Chart in the World

The scariest chart in the world this week, indeed this month, comes from the U.S. and plots U.S. real GDP growth with 1Q 2017 print at just 0.7% y/y.

Yes, the print ranks 13th from the bottom for any positive growth quarter since 2Q 1947. And yes, the rate of growth is (a) preliminary (subject to revisions) and (b) seeming one-off (driven by fall-off in consumer demand, despite strong indicators on consumer confidence side). There are reason and heaps of arguments why this print should not be treated as huge concern and that things might improve in 2Q and on.

But... the really scary stuff is longer-term trend in U.S. growth. And that is illustrated in the chart below:

Look at the grey bars: these take periods of expansion in the U.S. economy and average rates of growth over these periods. Notice the patter? Why, yes, the average expansion-consistent rates of growth have fallen, steadily, since 1975 through today. Worse, controlling for volatile growth (average rates) in pre-1975 period, an exponential trend for average expansion-consistent growth rates (the yellow line) is solidly trending down.

The latest period of economic expansion is underperforming even that abysmal trend. And 1Q 2017 is underperforming that worse than abysmal average.

Now, let me highlight that point: yellow line only considers periods of consistent growth (omitting official recessions, and one unofficial recession of  2001). So, no: the depth of the Great Recession has nothing to do with the yellow line direction. If anything, given the depth of the 2008-2009 crisis, the most current grey bar should have been at around 4%, almost double where it sits today.

That is what makes the chart above the scariest chart of April. And will probably make it the scariest chart of May too.

28/4/17: The VUCA Markets

My regular column with the Cayman Financial Review covering the current development of the risk-uncertainty frameworks in the markets is now available here: http://www.caymanfinancialreview.com/2017/04/26/welcome-to-the-vuca-world/.

22/9/16: The most important charts in the world... BusinessInsider

BusinessInsider published their new set of "The most important charts in the world from the brightest minds on Wall Street" : http://www.businessinsider.com/most-important-charts-in-the-world-september-2016-2016-9?op=1.

My - as always contrarian and, hence, somewhat optimistic - contribution here: http://www.businessinsider.com/most-important-charts-in-the-world-september-2016-2016-9?op=0#/#constantin-gurdgiev-57.

31/5/16: Markets Outlook: Summer 2016

My latest contribution for Manning Financial covering markets outlook: https://issuu.com/publicationire/docs/mf_summer_2016?e=16572344/36072504