* Danger Signs
75 out of 88 economists currently forecast a tight 2.5-3.2% range for US GDP in ’14.
21 out of 21 strategists expect the S&P500 to end the year above 1850. Stocks are
at all-time highs; bond and FX volatility at one-year lows. What could go wrong?
1. From 666 (SPX) to 6666 (Nasdaq)
Too much money starts chasing too few goods as excess global liquidity to
medicate European/Asian deflation causes excess valuations in global tech and
health care, small cap, junk bonds and “safe haven” real estate. Watch stock market
breadth.
2. Italy 10-year trades below 1.5% by 2015
Capital ruthlessly gravitates to wherever easy money and tough reform is enacted…
Spanish yields are now just 30bps away from 200-year lows. Until EM or Japan
offer more compelling catalysts, we believe the reflation-reform duet in Europe
threatens an overshoot in periphery bond prices.
3. Japanese land prices rise
A $100,000 house/plot of land in Japan in 1991 is now worth $42,000. We think new
pessimism over Abenomics would be quickly reversed if Japanese land prices
(down 1.8% in 2012) start rising. We believe this would be good for banks. Watch
the Japan land price release on March 18th.
4. Some EM’s outperform
China appears plagued by “bad Goldilocks” and Brazil is yet to enact reform. The
EM “pain trade”? Investors waiting for the classic asset class capitulation miss
select winners. Greece & India are winning the “race to reform”; Indonesia is
winning the “race to surplus”. All are outperforming.
5. Gold outperforms Banks
Banks are the barometer of The Great Rotation. Gold is the barometer of The New
Normal. Investors do not appear positioned for policy mistakes. If “tapering” in the
US and anti-speculation tightening in China retards global growth/increases
deflation, we think both longs in banks and shorts in gold will be disappointed.