Nope, no US recession just yet, say Credit Suisse’s Andrew Garthwaite and his global strategy team:
That chart’s from a note doing the rounds on Tuesday, in which Garthwaite and team have gone to overweighting equities again, though by less than the last time they were overweight, back in February. It’s more or less predicated on the argument that the recent fall in the ISM is (in what’s becoming a slightly ominous phrase) a mid-cycle correction. Also, the collapse in sentiment on equities, the negative shift in earnings revisions, and so on, all represent troughs rather than abysses. Well, there are plenty of charts in the full note in the usual place if you’re interested in the bank’s workings here.
OK. But about how long is all this bullishness supposed to last..?
We remember that this same analyst team incongruously argued back in December for both an equities overweight, and the return of a bear market next year. The reasoning was based on a serious Fed turn to negative real rates — what is modishly being called ‘financial repression’ these days. So we’re a bit curious about the big global macro views behind this new bullish stance.
And while it’s a very interesting Credit Suisse tour d’horizon of global macro, it does feel a bit like bearishness deferred…
Chinese property markets:
Housing may be in a bubble – but we believe that this bubble will not burst until there are alternative inflation hedges for individuals, and there are unlikely to be any as long as deposit rates remain below the rate of inflation and the capital account remains closed…
US fiscal crisis:
We believe that US fiscal policy will stay loose until the bond market tells politicians to tighten…
So, the question becomes: when will the 10-year TIPS yield rise to 2% (for at that level, on our calculation, the fiscal tightening needed to stabilise government debt-to-GDP would rise to 7% of GDP, a level that would threaten the macro outlook and would also be politically hard to deliver forcing the US debt into a vicious circle of rising rates leading to a greater loss of fiscal credibility). Our answer is simple: it happens when either US banks are overweight government securities (when they have 20% of their assets in government securities, compared with 13% currently) or there is a sharp acceleration in private sector loan growth (forcing banks to lend to the private sector, not the government).
(Currently returning a princely 0.73 per cent, 10-year Tips last yielded 2 per cent in March 2009…)
“We think both events are unlikely to happen until late 2012,” according to Credit Suisse. See what we mean?
The remaining macro calls aren’t really so much deferred as severely brave, we feel. US housing:
….we no longer see it as a macro threat
Affordability is extremely attractive, NAHB is bouncing along the bottom of its trend (and most observers agree that housing starts, which are just 500K units versus a trend rate of 1.8m, are unlikely to get much lower). Admittedly, inventories are rising again. However, combined shadow and actual inventory amounts to just over two years of supply, which is still lower than the peak…
And the eurozone periphery:
We believe that there will be a ‘sticking plaster’ approach to peripheral Europe: ‘voluntary’ roll-overs of debt, the ECB funding more bank repo operations (which, in turn, makes core Europe pay the bill for peripheral Europe as most of the recapitalization of the ECB would have to be paid for by core Europe). Meanwhile peripheral Europe will likely end up deflating much more than consensus economic forecasts assume…
Even the generally convincing arguments about equities valuation (around 19 per cent below their previous peak, whereas US GDP has surpassed its previous peak) contains headlines like this:
‘Financial repression – BUY’
Related links:
Help! We’re all being financially repressed! – FT Alphaville
‘A new era of Treasury price volatility’ – FT Alphaville