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Idiot Alert: HSBC Analyst Thinks the Market is Being Held Back by Trump’s Tweets

This is what you call living in a vacuum.
Herald van der Linde from HSBC believes the market’s hesitance to go up, uninterrupted of any pullbacks, is due to Donald Trump’s twitter account’s revelations. For the life of me, I cannot grasp how this high level retard deduced that annualized returns of 25-30% on the $SPY equates to a market struggling to find its footing. More to that point, the market is higher by more than 10% since election night — with numerous sectors (financials, commodities) higher by 30% during that time frame.

Donald Trump’s honeymoon with investors may come to a premature end as his frequent Twitter outbursts help kill off the initial burst of euphoria, according to Herald Van Der Linde, HSBC’s head of equity strategy for the Asia-Pacific region.
While leaders such as Japan’s Prime Minister Shinzo Abe and India’s Narendra Modi enjoyed comparatively lengthy periods of market strength after taking office, the U.S. optimism that welcomed Trump’s surprise victory in November shows signs of fizzling less than a month into his four-year term.
“You’re seeing the internal workings of the White House on Twitter, so you’re seeing the struggles going on in their Twitter feed,” Van Der Linde said in an interview at HSBC’s Hong Kong office. “When somebody comes in with a new agenda and the country seems to be moving in a new direction, that excites markets. With the Trump administration, we’re going to have a reality check and it might come sooner than you think.”
Investors are now adopting a wait-and-see approach to give Trump a chance to follow through on his post-election hype, but that will also be short-lived, Van Der Linde said. The HSBC strategist is one of a number of investors and analysts to question if the post-election rally was too fast and furious.

Classic care trolling.
The Trump rally was never sensical, as it was predicated upon the hopes and dreams of vast amounts of fiscal stimulus bills being passed by the GOP shilling congress — as well as regulatory reform and a commitment to lowering taxes. In spite of the fact that Trump’s policies threaten to menace China into a deleterious trade war, investors have given him the benefit of the doubt and have perpetuated a massive short squeeze for the ages.
With the S&P higher by ~3% for the year, and massive gains found in a sundry of sectors (nuclear +39%, aluminum +33%, gold +27%, copper +18%, hospitals +14%, semis +12%, autos +8% etc.) Mr. Herald Van Der Linde should open his eyes to the fact that markets have done nothing but exude optimism since the beginning of the year and pullbacks are a normal occurrence in any market — especially during one’s that shoot higher on the specter of an economic renaissance that is nothing more than a working theory.


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Students From 26 New York City High Schools And Colleges Skip Class To Protest Trump

Armed with the infinite wisdom they’ve managed to garner in their ~14 years on planet earth, hundreds of New York City high school students decided to ditch class yesterday to protest Trump and his “fascist” policies.  Carrying signs comparing Trump to Hitler and calling on fellow protesters to “Punch a Nazi,” the AWOL youngsters, emboldened by a cute, if delusional and naive, sense of grandeur compared their efforts to youth involvement in the civil rights movement and Tiananmen Square.  Per the Gothamist:

When 17-year-old Bronx high school student Hebh Jamal decided to organize a city-wide student walkout to protest President Donald Trump’s policies last week, the idea was to focus on the recently-instated travel ban, barring refugees for at least four months and non-citizens from seven majority-Muslim countries for three.


Jamal, a Palestinian-American Muslim and seasoned activist, wasn’t deterred when Seattle Judge James Robart ruled to temporarily suspend the policy. “I think we need to capitalize on this momentum,” Jamal told Broadly in a recent interview. “I think protests and the total outrage were what made the judge and parts of government realize it may take sacrificing your job. I want more of that: people willing to risk something for the greater good.”


“Everyone should have a voice, especially us,” Jordan, a 14-year-old freshman at Beacon High School in Hell’s Kitchen told Gothamist. “We are the next generation and it will be up to us in the future to run the country.”


“It was the youth who walked out during the civil rights movement. It
was the youth who tore at the Berlin wall with their bare hands. It was the youth who stood in front of tanks at Tiananmen Square,
said 17-year-old Youssef Abdelzaher, a high school senior from Astoria.



Of course, the disaffected juveniles were quick to explain that they couldn’t possibly hold their protests after school because it just wouldn’t “have the same significance” and because their conscious just wouldn’t allow them to “continue on normally with our lives and do it after school”…how convenient.

In the same Broadly interview, Jamal explained why she felt it was important not only to protest Trump and his policies en masse, but to do it in the middle of the school day:


I always hear from people, “Why can’t you just do it after school?” It doesn’t have the same significance. I always frame it in the terms of labor. When you’re a worker and you want to strike, you’re doing it as a disruptive force of your labor. “I’m not going to continue as if this is normal right now because it’s not.” I feel like it’s the same for students. We’re part of this kind of workforce. So if we’re going to protest something it makes sense to disrupt it and be part of a movement. We can’t just continue on normally with our lives and do it after school.



Meanwhile, it didn’t take long before the students realized, with the help of a couple of complicit teachers no doubt, that they should also be pissed off by the confirmation of Education Secretary Betsy DeVos due to, among other things, her investment in a debt collection agency that had the audacity to try to collect on student loan debts.

Then, just as hundreds of high school and college students left their classrooms on Tuesday to rally in Foley Square, Betsy DeVos was confirmed as Education Secretary after a history-making 50-50 vote (Vice President Mike Pence broke the tie). The scope of the protest quickly broadened, as students decried DeVos’s lack of experience and conflicts of interest, including investments in Performant Business Services, Inc., a debt collection agency that collects student loans.


“They [the students] are really woke around student loan debt, watching the generation in front of them not be able to pay their loans or find jobs,” 28-year-old organizer Carlene Pinto, campaign manager for the New York Immigration Coalition, told Gothamist. “It’s like, ‘Oh you guys are paying attention to all of the Sallie May memes on Instagram.”

Yes, heaven forbid these poor snowflakes be denied the opportunity to get their $150,000 Anthropology degree at a college of their choice and on the taxpayer dime…the sins of Nazi Germany will not be repeated on their watch.

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Senate Confirms Jeff Sessions As U.S. Attorney General In 52-47 Vote

The Senate has voted to confirm Sen. Jeff Sessions (R-Ala.) as attorney general in a 52-47 vote that went along party lines, following days of rigorous discussion and capping a vicious debate that left Democrats and Republicans seething, and Elizabeth Warren barred from speaking.

Sen. Joe Manchin was the only Democrat to break party rank and vote to back Sessions. Independent Senators Angus King of Maine and Bernie Sanders of Vermont voted alongside 45 Democrats in opposition to the nominee.

The fight over Sessions’ nomination infamously escalated last night, when Sen. Elizabeth Warren read a letter that Coretta Scott King had written in 1986 that accused Sessions, a U.S. attorney at the time, of using the power of his office to prevent blacks from voting.  As we reported last night, Senate Majority Leader Mitch McConnell objected to Warren’s speech, saying she had impugned another member of the Senate. Then, in a 49-43 vote, the Senate agreed, blocking Warren from speaking on the Senate floor on Wednesday.

Angry Democrats accused McConnell of silencing a woman on the floor, and Warren went on a media blitz against the Republican senators and Sessions. The tensions were on full display during the debate over Sessions’s nomination. “We all know our colleague from Alabama. He’s honest,” McConnell said. “He’s fair. He’s been a friend to many of us, on both sides of the aisle.”

Democrats defended their criticism of Sessions’s record on issues of race and civil rights.  “When we make a big issue of the position of Alabama Senator Jeff Sessions on the Voting Rights Act, it’s with good cause. It is historically an issue which has haunted the United States since the Civil War,” Sen. Dick Durbin (D-Ill.) — the No. 2 Senate Democrat — said ahead of the vote. 

“Senator Sessions is not a man apart from this agenda. He is not independent of [Trump’s] agenda,” said Sen. Dianne Feinstein (D-Calif.), the top Democrat on the Judiciary Committee.

Republicans meanwhile decried the Democratic tactics, arguing they were going to new lows to smear Sessions. Sen. Orrin Hatch (R-Utah) — a long-serving Senate traditionalist — said Democrats are treating Sessions like a “terrible person,” urging his colleagues on Tuesday night to think of Sessions’s wife.

As The Hill points out, the fiery words in the last days of the debate over Sessions were somewhat surprising.

While the issue of race had always hung over the debate, Sessions is well-liked personally by many senators. That made the stinging words all the more noteworthy — and raises questions about the ability of lawmakers to work together going forward. 

Sessions will now take over the Justice Department’s defense of Trump’s controversial order barring people from seven mostly Muslim countries from entering the United States. A former aide to Sessions was instrumental in the order’s writing, and Democrats argued the Alabama senator would not be a firm defender of an independent Justice Department.

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Assad ready for direct talks with opposition – says Russian official

Syrian President Bashar Al-Assad has confirmed his readiness to hold talks with representatives of the opposition, including armed opposition groups, Russia’s Sputnik News reported on Wednesday, quoting the Russian lawmaker Dmitry Sablin. “The Syrian president assured that he was ready to maintain contacts with all opposition representatives, including armed opposition”, MP Sablin said, following talks with the Syrian President in Damascus. Earlier in the day, Assad held a meeting with a group of Russian lawmakers in Damascus. According to the Russian State Duma lawmakers who participated in the meeting, Assad has expressed his readiness to engage in dialogue with the Kurds to discuss their vision of the country’s political order. But Sablin pointed out that the Kurdish issue was rather complicated, adding that the US side also had influence on settling the problem, though […]

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Electric Car Showdown: China And Tesla Scramble For Supply

As China moves stealthily on the world’s cobalt and lithium supplies to feed an unprecedented US$360-billion renewable energy push, watch what happens next in Chile, where Chinese investors are talking about a mega $2-billion battery factory to rival Tesla. Tesla in January switched on the power at its Nevada battery gigafactory—and we’re just getting started here. Battery factories are popping up all over Europe as well. SGF Energy is planning a gigafactory in Sweden. Later this year, two are expected to open: BMC’s in…

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Here Are The 7 Rules Bank Of America Uses To Decide When It Is Time To Sell The Market

With the Trumflation rally fizzling with every passing day, the only question asked by traders is “Is it time to sell the market?” According to Bank of America, the answer, at least for now, is no.

That’s the conclusion of BofA’s chief investment strategist Michael Hartnett who looks at the bank’s 7 favorite, proprietary market-timing indicators, and finds that, at least based on historical patterns, the major selling is not imminent, adding that “we remain bullish risk assets; “3P’s”, Positioning, Profits & Policy, drive our tactical & cyclical views; our latest Rules & Tools piece shows Positioning has become more bullish but not yet dangerously euphoric.” He finds that according to his market-timing indicators, the next step is the opposite, and the current rally will end “with one last 10% melt-up in stocks & commodities in 2017.

Here is how Hartnett lays out his “rules” to quantify market fear and greed: 

“Our rules can help identify major inflection points in market cycles. We track a broad array of positioning, sentiment, and flow data that signal when global equities are likely to peak or trough. For example, our Global Breadth Rule measures oversold conditions across global markets, and our Bull & Bear Indicator tracks 18 different indicators of flows and positioning.”

Harnett summarizes the 7 rules and indicators he uses as folows (more details below):

  • BofAML Bull & Bear Indicator is our broadest measure of investor sentiment; readings range from 0-10; currently at 6.1; indicator still shy of “sell” trigger of 8.0.
  • Global FMS Cash Rule measures institutional cash levels as gauge of fear & greed; currently at 5.1% (above “buy” threshold of 4.5%), i.e. indicator in “buy” territory.
  • Global FMS Macro Indicator augments our existing Cash Rule with a filter for macro momentum; currently in “buy” territory as macro momentum trending higher past 6 months & cash levels higher past 2 months.
  • Global Breadth Rule has flipped from net 89% of equity markets being oversold in Jan’16 (“buy” signal triggered) to net 76% of equity markets being overbought today; breadth rule closest to exuberance.
  • Global Flow Trading Rule uses flows to global equity and HY bond funds as contrarian indicator of risk appetite; currently neutral territory (flirted with “sell” signal in Dec’16).
  • EM Flow Trading Rule uses flows to EM equity funds as a contrarian indicator of risk appetite; currently neutral.
  • BofAML MVP Model is a long/short strategy that selects countries based on the three factors of Momentum, Value & Profits; currently “long” France, Sweden & UK, paired with “shorts” in Brazil, Norway & Singapore.

Harnett notes that BofA’s indicators also give tactical signals when fundamentals are silent, such as within range-bound markets or during periods when economic data paint a conflicted picture. Table 2 offers a quick summary of the latest signals & readings:

Before we dig into the details behind of the 7 indicators, here are the three take home lessons from applying the bank’s timing rules:

  1. Structural market changes are more important than ever. Flow and positioning data help identify the impact of new market entrants, newly active participants (e.g. risk parity and quantitative funds), and the increasing prevalence of cross-asset mandates.
  2. It’s better to be buying. Our research shows that measuring fear is easier than measuring greed, and that market tops tend to be a process, whereas market bottoms form quickly. As a result, “buy” conditions are often more visible than occasions to “sell short” in our view.
  3. It’s okay to assume some normality. Measuring overbought and oversold conditions works best when markets behave in line with history. For example, our meanreverting Global Breadth Rule functions better for trading conditions within one standard deviation than with >2 deviation conditions, e.g. conditions associated with the global financial crisis.

So with that said, here are the details, together with the current reading:

* * *

BofAML Bull & Bear Indicator – Neutral

The rule:

  • Sell risk assets when the Bull & Bear Indicator exceeds the “greed” threshold of 8.0.
  • Buy risk assets when the Bull & Bear Indicator falls below the “fear” threshold of 2.0.

What is it?

The BofAML Bull & Bear Indicator is a proprietary cross-asset barometer that uses fund flows, positioning data & market technicals to quantify investor sentiment. The indicator is max bullish when it reaches 10 and max bearish when it reaches 0.

Latest signal

BofAML Bull & Bear Indicator climbs to 2.5-year highs (6.1 – Chart 1) as equity/credit market breadth improves & inflows return to EM debt & equity funds. But indicator is still shy of “sell” trigger of 8.0. Last contrarian “buy” signal for risk assets triggered on 6/28/16 when sentiment fell to an “extreme bearish” reading of 2.0. Global equities rallied 8.1% over the subsequent three months.


  • Flows: investor risk appetite as indicated by flows to EM equity funds, EM debt funds and high-yield bond funds
  • Positioning: investor risk exposure as measured by long-only fund manager cash levels, equity vs bond allocation, cyclical vs defensive sector allocation and futures positioning across fixed income, commodities, FX and equities
  • Price action: market technicals implied by global equity market breadth & relative performance of credit to US treasuries

* * *

BofAML Global FMS Cash Rule – Bullish

The rule

  • Buy equities when the FMS average cash balance rises to 4.5% or higher
  • Sell equities when the FMS average cash balance falls to 3.5% or lower

What is it?

The BofAML Fund Manager Survey (FMS) is a monthly survey of 200-250 primarily long-only investors. One of the key questions in this survey asks for cash balance as % of assets under management.

A low cash balance indicates investors are vulnerable to negative market shocks, while a high cash balance means investors could be under-invested & vulnerable to positive market shocks.

Latest signal

Cash inched higher to 5.1% in Jan’17 from 4.8% last month. Current reading remains elevated vs its 15-year history and overall FMS does not yet show “peak greed”. Rule stays in “buy” territory.

A critical look at the Global FMS Cash Rule

The Global FMS Cash Rule has been a reliable barometer of risk appetite since we first introduced it back in 2011. After a contrarian “buy” signal is triggered, the median return for US equities is 1.0% over the next month, 1.4% over the next two months and 2.9% over the next three months. Likewise, after a contrarian “sell” signal is triggered, the median loss for US equities is -0.5% over next three weeks, -3.5% over next four weeks and -2.6% over next five weeks. In short, the simple “buy” (>4.5%) and “sell” (<3.5%) thresholds have provided us with faithful tactical recommendations over the years.

But cash levels have remained elevated ever since the May’13 “taper tantrum” with cash rarely dipping below 4.5%. As a result, the rule has been in persistent “buy” territory since Nov’13, behaving less like a tactical indicator and more like a cyclical indicator over the past three years.

Over the past few months, we have asked survey participants for reasons why they are holding consistently higher levels of cash in recent quarters.

  • On average, 53% simply cited their “bearish views on markets”
  • 47% listed either structural factors (regulatory/industry changes, higher derivatives costs & margin requirements) or preference for cash over low-yielding equivalents

We believe that the May’13 “taper tantrum” has awakened investors to the risk that the central bank-induced “long duration/yield” trade is vulnerable to violent unwinds from either a “bond shock” and/or faster-than-expected policy normalization. As a result, investors are holding higher-than-normal cash as an insurance policy even though their inflation expectations are high, capex demand is strong and positioning in cyclical vs defensive sectors is rapidly improving (Chart 5)

In light of the structural/technical factors noted above, we present an alternate rule called the BofAML Global FMS Macro Indicator to complement our analysis on cash.

* * *

BofAML Global FMS Macro Indicator – Bullish

The rule

  • Buy global equities when Global FMS Macro is improving and cash level is rising relative to past two months
  • Sell global equities when Global FMS Macro is deteriorating and cash level has fallen by at least 50bp relative to past two months

What is it?

The BofAML Fund Manager Survey (FMS) is a monthly survey of 200-250 primarily long-only investors.

The FMS Macro Indicator is a year-on-year measure that comprises five components: investor inflation expectations, capex demand, risk appetite, cyclicals vs defensive^ sector positioning and equity vs bond positioning. ^ cyclicals = industrials, materials & tech; defensive = staples, telcos & utilities

Latest signal

The Global FMS Macro Indicator augments our existing Cash Rule with a filter for macro momentum. It is currently in “buy” territory as FMS Macro has been trending higher for the past 6 months and Jan’17 cash level is higher than it was two months ago. This is a bullish combo for risk assets because investors have been reluctant to deploy cash even though FMS Macro is positive and clearly on the upswing (Chart 6).

* * *

BofAML Global Breadth Rule – Neutral

The rule

  • Buy global equities when a net 88% of markets in the MSCI All Country World Index are trading below both their 200-day moving average and 50-day moving average.

What is it?

The BofAML Global Breadth Rule is a contrarian indicator of equity market breadth. When an overwhelming majority of equity markets around the world become oversold, we turn bullish as equities tend to trough and rebound on the back of overdone pessimism.

Latest signal

Our BofAML Global Breadth Rule shows that a net 76% of equity markets are currently trading above both their 200- & 50dma. Market breadth is at 5-month highs and edging closer to exuberance. This is a dramatic flip from Jan’16, when a contrarian “buy” signal was triggered after net 89% of global equity markets had tumbled below their 200- & 50-dma (Chart 9). Back then, global equities declined another 5.5% initially, before rallying back to +3.5% within three months.

The Global Breadth Rule is our favorite indicator for timing market-entry following a sell-off in global equities. As with most tactical trading rules that rely on short-term mean-reverting tendencies of asset markets, it would not work during sell-offs that are >2 standard deviations in nature, i.e. 2008 Global Financial Crisis.

Notwithstanding the Global Financial Crisis, we examined the return distribution of MSCI ACWI at different “buy” thresholds. Chart 10 suggests that the probability of an outsized 3-month return is much higher and the probability of negative return is minimized when at least a net 88% of equity markets are already trading below their 200dma and 50dma.

* * *

BofAML Global Flow Trading Rule – Neutral

The rule

  • Sell global equities when average inflows to global equity funds and global HY bond funds exceed 1.0% of AUM over four weeks and ISM is trending lower.
  • Buy global equities when average redemptions from global equity funds and global HY bond funds exceed 1.0% of AUM over four weeks and ISM is trending higher.

What is it?

The BofAML Global Flow Trading Rule combines cross-asset flows with a validating filter for macro conditions to generate buy & sell signals for global equities. When flows into global equity & HY bond funds become overly bullish especially against a backdrop of weaker PMI, risk assets become vulnerable to short-term tactical pullbacks and vice versa. Data source: EPFR Global, which tracks institutional & individual investor flows to mutual funds & ETFs domiciled globally with $24 trillion in total assets

Latest signal

Our Global Flow Trading rule is in neutral territory as 4-week inflows to equity funds & HY bond funds = 0.6% of AUM. The rule flirted with a contrarian “sell” signal in mid- Dec’16 as 4-week inflows reached 1.0% of AUM. But ISM and PMIs globally were all trending higher (strengthening) then, allaying concerns over exuberant fund inflows. The trading rule also came very close to a contrarian “buy” signal for global equities in Jun’16 when 4-week outflows reached 0.9% of AUM (Chart 11).

* * *

BofAML EM Flow Trading Rule – Neutral

The rule

  • Sell EM equities when inflows into EM equity funds represent more than 1.5% of AUM over four weeks.
  • Buy EM equities when redemptions from EM equity funds are greater than 3.0% of AUM over four weeks.

What is it?

On a weekly basis we analyze data on total flows into and out of EM long-only funds and ETFs. Flows tend to coincide with (rather than lead) performance and are therefore well-suited for use as a contrarian indicator. When investor flows into EM funds become overly bullish, EM equities become vulnerable to short-term tactical pull-backs and vice versa. Data source: EPFR Global, which tracks institutional & individual investor flows to mutual funds & ETFs domiciled globally with $24 trillion in total assets.

Latest signal

Our EM flow trading rule is also in neutral territory as 4-week inflows = 0.3% of AUM. It last triggered a “buy” signal for EM equities on 9/3/15 when 4-week outflows reached 3.0% of AUM (Chart 12). MSCI EM fell another 2.5% initially, before rallying 5.6% on an 8-week basis.

* * *

BofAML EM Flow Trading Rule – Neutral

The rule

  • Sell EM equities when inflows into EM equity funds represent more than 1.5% of AUM over four weeks.
  • Buy EM equities when redemptions from EM equity funds are greater than 3.0% of AUM over four weeks.

What is it?

On a weekly basis we analyze data on total flows into and out of EM long-only funds and ETFs. Flows tend to coincide with (rather than lead) performance and are therefore well-suited for use as a contrarian indicator. When investor flows into EM funds become overly bullish, EM equities become vulnerable to short-term tactical pull-backs and vice versa. Data source: EPFR Global, which tracks institutional & individual investor flows to mutual funds & ETFs domiciled globally with $24 trillion in total assets.

Latest signal

Our EM flow trading rule is also in neutral territory as 4-week inflows = 0.3% of AUM. It last triggered a “buy” signal for EM equities on 9/3/15 when 4-week outflows reached 3.0% of AUM (Chart 12). MSCI EM fell another 2.5% initially, before rallying 5.6% on an 8-week basis.

* * *

BofAML MVP Model

The model

Our new long/short BofAML MVP model selects equity markets based on the three factors of Momentum, Value & Profits (Chart 14). We believe a long/short strategy targeting minimal market risk (beta), lower drawdowns & higher risk-adjusted returns can outperform in a world of low expected returns. For more details on backtest results & methodology, please see link for the launch report.

Latest signal

On a 1-month basis, our BofAML MVP model recommends going “long” an equalweighted equity basket of France, Sweden & UK paired with “shorts” in Brazil, Norway & Singapore.

Model framework


Our model is based on a 16-country universe comprising MSCI US, Canada, Germany, France, Italy, Spain, Netherlands, Switzerland, Sweden, UK, Norway, Brazil, China, Australia, Japan and Singapore. The 16 countries are chosen based on data availability.


  • Value is represented by price-to-book value from MSCI. Book value is lagged by a month to ensure data availability and the most recent month-end market values are used to compute the ratios.
  • Momentum is measured via country flows, a derived dataset from EPFR Global that estimates the overall money flow into different countries by multiplying the net flows for a given fund by the fund’s country allocation. The process is repeated across all funds with relevant investment mandates and then aggregated into a final number. Country flows are lagged by a month due to data availability.
  • Profits are proxied by Purchasing Managers’ Indices (PMI) from Markit Group & the ISM, both of whom track sentiment among purchasing managers at manufacturing firms. The index is based on five major indicators: new orders, inventories, production, supply deliveries and employment environment. PMI data are lagged by a month to ensure data availability.

Momentum x Value x Profits

It is well-documented1 that “Factor Investing” – namely, Value, Growth, Size & Momentum – can capture risk premia and outperform the broad market over long periods. But less appreciated is the cyclicality of factor returns to different phases of the business cycle. It is therefore unreasonable to expect a single factor (say high bookto- market ratio) to generate persistent excess returns across the business cycle. We focus on the synergy that exists between Value and Momentum, whose negative correlation with each other acts as a natural buffer against “value-traps” and abrupt “mean-reversions.”

* * *

And two extra bonus long-term market timing signal:

BofAML Global Financial Stress Index

What is it?

The BofA Merrill Lynch Global Financial Stress Index (BofAML GFSI™) and its constituent indices are designed to be a comprehensive measure of financial stress, covering: 1. cross-asset risk measures of volatility, solvency and liquidity (the Risk Index); 2. hedging demand implied by equity and currency option skew (the Skew Index); and 3. investor risk appetite gauged by trading volumes and flows into equities and high yield bonds and out of money markets (the Flow Index). The GFSI and its 11 sub-indices can be followed daily on Bloomberg using the code: GFSI<GO>.

* *  *

Sell Side Indicator – Neutral

The rule

  • Bullish signal: when Wall St is bearish…Sell Side Indicator >1? below the mean
  • Bearish signal: when Wall St is bullish…Sell Side Indicator >1? above the mean
  • Index target: the indicator can be used to predict +12-month S&P 500 total returns and is one of five input models used by our US Strategy team for their S&P 500 target

What is it?

Our US Equity & Quant Strategist Savita Subramanian’s Sell Side Indicator is based on a survey of Wall Street Strategists that submit asset allocation recommendations to us and/or Bloomberg. The indicator shows the average recommended equity weighting in a balanced fund. A contrarian Buy (Sell) signal is triggered when the indicator is more than 1 standard deviation below (above) its mean on a rolling 15-year basis.

Latest signal… equity sentiment was unchanged in January

In January, the Sell Side Indicator is unchanged at 52.8, staying in “Neutral” territory for a second consecutive month. This follows the biggest two-month increase in optimism since 2013. While sentiment has improved significantly off of the 2012 bottom — when this indicator reached an all-time low of 43.9 — today’s sentiment levels are still below last summer’s high of 54.0 and where they were at the market lows of March 2009. The recent inflection from skepticism to optimism could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been  glaringly absent so far in the cycle.

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The End Of The Dollar Standard

Submitted by Charles Gave via,

I find myself in the strange situation of cheering Donald Trump’s nascent program of economic renewal for the US, while worrying deeply about the domino effect that may topple a dollar-based global financial system whose health has relied greatly on benign neglect by the United States.

The good news is that since the fall of the Berlin Wall I have never seen a president or prime minister of the right come into power with an agenda that so squarely opposes the doxa of left-leaning elitist circles. Whether in education, regulation, taxes, ecology, energy production, culture, justice, military strategy or national security, most of the president-elect’s cabinet nominees have for decades fought a flabby intellectual orthodoxy.

Yet, while I welcome Trump’s attack on a credo which has done much to enfeeble the Western world, I am not blind to the violent economic and financial dislocation which may mark the transition from one reserve currency order to another. At the end of this paper, I offer a modest suggestion for avoiding a scenario which has the potential to morph into a 1930s-style beggar-thy-neighbor episode on steroids.

The starting point is that the US dollar has been the world’s reserve currency since the end of World War II, with 1971 marking the transition to a pure fiat regime. Markets, institutions and investor habits have developed according to this basic building block. Yet there is nothing immutable or inevitable about the US sponsoring such a currency arrangement. Indeed, Trump’s core economic platform of trade protection points to the US pursuing an objective which is guaranteed to kill the existence of the US dollar as the sole reserve currency – namely the US’s apparent pursuit of a current account surplus.

The Double Pyramid of Credit

To explain my point, I will use Jacques Rueff’s powerful framework for thinking about the US dollar’s international relationships, namely the “double pyramid of credit”. Rueff was an economist and senior civil servant who between 1923 and 1969 was France’s chief negotiator at international monetary conferences, and a sophisticated observer of the international payments system. Rather like his archrival John Maynard Keynes, Rueff was both a theoretician and a practical man of action who was involved in actually building the global financial system.

One of his key ideas was that in the post-gold standard era, a side effect of one country controlling the reserve currency would be an end to the zero sum game of credit expansion associated with an independent specie-based system. Instead, Rueff’s double pyramid of credit idea described a new order that would likely be characterized by inflation, over indebtedness, capital misallocation, and episodic financial crises.

By way of a simplified example, consider a Rueffian take on the relationship between the US and Japan under the post-1971 US dollar reserve system. Say the US went through a big credit expansion, causing it to run a large current account deficit with its East Asian trade partner. The corresponding current account surplus in Japan would spur creation of new Japanese bank deposits, and with them a credit expansion.

Under the gold exchange standard, such credits in Japan would have been offset by reduced money supply in the US due to the physical transfer of gold from the US to Japan by way of deficit settlement. As a result, the global system of payments was a zero sum affair; and credit expansion did not, on balance, change over time.

This was upended in 1971 when the US stopped settling its current account deficit in gold (Charles de Gaulle, on Rueff’s advice, catalyzed this shift by demanding that the US settle with a physical transfer of gold ingots). Subsequently, US dollars earned by Japanese firms have not been exchanged against gold, but rather “redeposited” at the Federal Reserve via a process of foreign exchange reserve accumulation. As a result, the US has not faced higher interest rates from its deficit with Japan and by extension from its habitual global current account deficit.

It was this ability for credit to keep growing in both the US and its creditor nations that led Rueff to coin his double pyramid moniker. In the above example, both Japan and the US were able to sustain credit growth, although the ultimate source for both was “excess” US money supply.

This money creation machine has only properly broken down during periods of high US inflation which have necessitated sustained tightening by the Federal Reserve. Experience has shown that the US central bank has kept obsessively focused on consumer price inflation and disregarded events in asset markets, even if stocks were surging, the dollar exchange rate was plunging and property prices were going stratospheric. The Fed has proven willfully blind to effects from the double pyramid of credit by responding only to US price and growth data. In short, it may be the world’s central banker, but the Fed has resolutely only followed US rules.

The Problem of Divergence

The problem with this double expansion of credit is that it tends to compound economic divergence, rather than convergence, which for all its faults was the logic of the old gold exchange standard. Consider the experience of Japan and the US over the last 30 years. The former proved unable to manage twin objectives of limiting yen appreciation and keeping control of its money supply. The upshot was a huge asset bubble in the late 1980s, which turned into a bust from which Japan has never fully recovered.

Fast forward to the early 2000s when two new beneficiaries of this double pyramid of credit started to take off. One was China and the other, what we have called “platform” companies, or firms which outsource much of their production and working capital needs to dispersed supply chains in places such as East Asia, Eastern Europe and Mexico.

The rational actions of these two “actors” following Rueff’s double-pyramid-of-credit logic has resulted in violent asset price cycles – Chinese financial repression led to surging property prices, oil experienced an epic boom-bust cycle and US equities have been pumped up on the promise of permanently cheap money. The flip side has been acute deindustrialization in the US as firms have shifted production to China and other low cost production centers. Put simply, the double pyramid of credit phenomenon hugely exacerbated the hollowing out of the US industrial sector, and so is the proximate cause of Trump’s rise to power.

Indeed, it is ironic that US automobile firms are making cars in Mexico for sale to US buyers who can’t – by any normal measure – afford to buy them, as they don’t have a proper job. Luckily US auto firms have organized credit lines for their buyers, even though it is obvious that much of this debt will never be repaid.

As with the US-Japan relationship, the US automobile ecosystem has been on a trajectory of divergence rather than convergence. The double increase in leverage (both in Mexico and through vendor financing offered by US auto finance firms) has replaced demand that comes from an organic rise in US living standards. The logical end result would be for car production in the US to be eliminated, and displaced “workers” given government handouts so they can buy Mexican-made vehicles from firms that can declare splendid earnings guaranteed by Uncle Sam.

I exaggerate for effect, but this example shows that the US’s “exorbitant privilege” has little to do with free market principles as it means the US (i) lacks a foreign trade constraint, and (ii) can force other countries to accept payment in dollars. Should either of these conditions end then the credit pyramid would implode. And indeed for decades commentators have fretted that the rest of the world may one day lose confidence in the US dollar as a store of value, resulting in soaring US interest rates and an economic crash – the Japanese, Chinese and a Brazilian supermodel have, at different times, all been touted as potential liquidators.

I never believed such scare stories so long as the US remained a superpower capable of corralling international respect. What worried me was a situation where the US, for domestic political reasons, pulled up the drawbridge and chose to pursue a current account surplus. Such an outcome was always going to be driven by Americans at large concluding that the global production system was being run against their interests.

The Emergence of Trumponomics

This was the backdrop for the emergence of “Trumponomics” and the fact that the US apparently wants to challenge China and Germany to become a surplus economy. To this end, US policymakers hope to tax imports at 20% and subsidize exports by a similar amount (i.e. what many export-focused economies do through VAT systems). Returning to Rueff’s monetary construct, Trump may just as well have said that he wanted to destroy the double pyramid of credit, which has grown relentlessly outside of the US since the mid-1960s.

Whatever the rights and wrongs of the global economic status quo, dismantling such a huge pyramid of credit threatens havoc for the financial system. Should the US return to a current account surplus, the rest of the world will move to an aggregated current account deficit. Since all other countries have a trade constraint, the system will inevitably start to contract, led by those nations already running a current account deficit. Such economies will have to tighten policy almost immediately, resulting in a big decline in domestic demand and so reduced imports.

The consequence will be that even “surplus” economies will move into a current account deficit and be forced into a tightening cycle. Those with an eye for history will have recognized a pattern as this chain of events was roughly what happened in the 1930s when another big pyramid of external credit collapsed – in this period, Britain was unable to regain its primacy at the center of the old gold standard system and the US was not willing to assume an economic leadership role. When the US sought a reflationary devaluation of the dollar in 1934 by constraining the sale of gold, it did so despite running a current account surplus. That decision aided the US’s economic recovery, but helped tip the German and French economies into a depression, ensuring the onset of World War II.

Fast forward to today and in some ways the ambition of US policymakers exceeds that of the 1930s. In addition to trade protection measures, Trump wants to ensure that dollars held outside of the US, especially those controlled by US multinationals, are sent back home. On the basis that history rhymes rather than being repeated, it is worth recalling that in the 1930s US banks aggressively recalled German loans, leading to the collapse of the German banking system.

There Is Nothing Immutable About a Dollar Standard

It is worth remembering that seemingly fixed elements of the global credit system developed in a haphazard fashion and can easily be reversed. For example, the Eurodollar market evolved after 1963 when John F Kennedy acted to reduce a growing US balance of payments deficit by taxing US investors who took dollars abroad to buy foreign securities. Subsequently, US dollars held outside of the US were mostly taxed at a lower rate than onshore dollars, and it was this “arbitrage” that allowed the City of London to develop and the external pyramid of credit to grow. If the tax system which encouraged US dollars to stay outside of the US disappears, then the US$1.2trn or so owned by US multinationals – the backbone of international credit markets – may be about to move back onshore. For the City of London, where most external dollars are managed day to day, the blowback could end up being far more serious than the loss of European Union passporting rights due to Brexit.

As a result, the future of international capital flows looks pretty gloomy. Indeed, on a flow basis the US dollar may increasingly become a collector’s item. This matters because many countries rely on US dollars being readily available to plug balance of payment deficits – according to a Bank of International Settlements report from 2015 the preceding decade saw non-US entities borrow some US$10trn.

Since the US can seemingly no longer be relied on to play the global shock absorber by expanding its current account deficit, the key headache for emerging economies may become servicing their stock of US dollar debt. So long as US short rates stayed low and the dollar exchange rate did not appreciate unduly (i.e. the situation since 2008), this was a manageable task. Yet in the event of the US current account starting to improve markedly (or even going into surplus), borrowers will find it impossible to repay principal as the US currency will have effectively been cornered, and there will not be enough dollars available to satisfy demand.

This situation will be exacerbated if the borrowed dollars were used to build factories whose output is sold in the US. The threatened imposition of a 20% surcharge on foreign-made imports to the US will render such factories unprofitable, but the debt will still have to be repaid. In short, the external part of the double pyramid of credit could involve subprime-type write-offs, only much larger.

Postscript: A modest proposal to save the world

If somebody were to ask my advice on how President-elect Trump should pursue his perfectly legitimate objectives without wrecking the global economy (and thereby ensure failure), I would suggest the following:


• The US should adopt market-friendly policies that boost the economy’s structural growth rate as is clearly the case with the program being put forward by Trump and the House Republicans.

• More difficult, but far more important than the first goal, Trump needs to pursue policies for which he was not elected; namely to prevent a collapse in the growth rate outside of the US.


The transmission mechanism for a bad cycle to unfold will be a far stronger US dollar; the inevitable result of ROIC in the US rising sharply. Such a situation will quickly hurt those fellows detailed above with heavy dollar debts as they never expected the US to actively reduce ROIC in the rest of the world. Should an acute dollar squeeze develop of a type last seen in the early 1980s then the exchange rate will soar, and ultimately the US will suffer due to US firms experiencing a sharply lower return on invested capital. For their part, US lenders will face huge defaults by stressed foreign borrowers.


To avoid such a scenario, the US should stand ready to buy, outright, the currencies of those countries facing payment difficulties. This will leave the US with huge foreign exchange reserves and the rest of the world with enough dollars to service their debts and meet payment obligations. As such, an implosion of the foreign pyramid of credit need not mean a collapse in the non-US money supply. Put another way, the US authorities should stand ready to build reserves in foreign currencies equivalent to the sum that vanishes through the credit contraction it has engendered.


The new US administration should thus launch a strategic fund ready to buy any foreign currency each time it becomes two standard deviations undervalued as measured by the OECD. Funding should come from the Federal Reserve at a market rate of interest and a stipulation should be made that the program is wound up as soon as the “new” foreign exchange reserves reach a level equal to about six months of  US imports. The profits that will almost certainly accrue from such a program should be used directly to offset budget deficits that Trump’s fiscal expansion is likely to deliver.

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No Picture

Iran Launches Another Ballistic Missile

So much for hope that Iran was prepared to de-escalate military tensions with the US.

As we reported yesterday, when we asked rhetorically “did Trump scare Iran“, according to satellite photos obtained by Fox, Iran had pulled a missile from a launchpad, despite prepping it previously for launch, in a sign perhaps that Tehran was willing to make the first step in de-escalating tensions with Trump.

Alas, that was not the case, and as Fox News reports moments ago, citing a US official, Iran has launches another missile from launchpad where it conducted ballistic missile test last month.

NEWS ALERT: U.S. Official: Iran launches another missile from launchpad where it conducted ballistic missle test last month. #SpecialReport

— Fox News (@FoxNews) February 8, 2017


According to Fox, the Semnan launch pad was the same as the one where recent satellite photos showed Iran had placed a Safir rocket poised to put a satellite into space before it was taken off the launcher. The reason Iran scrubbed the previous launch is not yet known. The missile used in Wednesday’s launch was a short-range Mersad surface-to-air missile, which impacted 35 miles away, according to a U.S. official.

This latest test comes less than a week after the U.S. placed new sanctions on Iran. There’s been a flurry of activity at the Semnan launch pad, located about 140 miles east of Tehran, in recent weeks, officials have told Fox News.

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While we are merely speculating, the launch may be in response to last night’s report from Reuters that President Trump’s administration was considering potentially designating Iran’s powerful Islamic Revolutionary Guard Corps (IRGC) as a terrorist organization, according to U.S. officials familiar with the matter. According to officials, such a proposal, which if implemented would add to measures the United States has already imposed on individuals and entities linked to the IRGC.

Members of the Iranian revolutionary guard march during a parade

The IRGC is by far Iran’s most powerful security entity, which also has control over large stakes in Iran’s economy and huge influence in its political system. To be sure, Reuters admits that it had not seen a copy of the proposal, which could come in the form of an executive order directing the State Department to consider designating the IRGC as a terrorist group. It is unclear whether Trump would sign such an order.

The Revolutionary Guards answer to Iranian Supreme Leader Ayatollah Ali Khamenei, whose power far surpasses that of Rouhani.

Naming Iran’s single most powerful military and political institution as a terrorist group could have potentially destabilizing effects, including further inflaming regional conflicts in which the United States and regional arch-rivals blame Iran for interference. Iran denies those allegations. It would also likely complicate the U.S. fight against Islamic State in Iraq, where Shi’ite militias backed by Iran and advised by IRGC fighters are battling the Sunni jihadist group. 

According to Reuters, some of Trump’s more hawkish advisors in the White House have been urging him to increase sanctions on Iran since his administration began to take shape. After tightening sanctions against Iran last week in response to a ballistic missile test, White House officials said the measures were an “initial” step.

The United States has already blacklisted dozens of entities and people for affiliations with the IRGC. In 2007, the U.S. Treasury designated the IRGC’s Quds Force, its elite unit in charge of its operations abroad, “for its support of terrorism,” and has said it is Iran’s “primary arm for executing its policy of supporting terrorist and insurgent groups.”

A designation of the entire IRGC as a terrorist group would potentially have much broader implications, including for the 2015 nuclear deal negotiated between Iran and the United States and other major world powers. Sanctioning the IRGC could also backfire in different ways, this official warned, as it could strengthen the hardliners and undercut more moderate leaders such as Iranian President Hassan Rouhani, and encourage Iranian-backed forces in Iraq and Syria to curtail any action against Islamic State in Syria and Iraq and perhaps even sponsor actions against U.S.-backed or even American forces battling Islamic State in Iraq.

“The Iranians will not take any U.S. action lying down,” said the official. “They may not act quickly or in the open, but there is a danger of an escalating conflict.”


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