On a Liquidity Driven Global Stock Rally in 2016; An Ending of the Dollar Rally?; Dietary Guidelines by the Experts!

From: aditya rana
Date: Sat, Nov 28, 2015 at 2:15 PM
Subject: On a Liquidity Driven Global Stock Rally in 2016; An Ending of the Dollar Rally?; Dietary Guidelines by the Experts!
To:

Hi!,

With the Fed’s likely rate hike announcement next month (December 16) , the question facing global markets is whether this widely anticipated event will bring to a close the almost seven year rally in global stock market (providing a 15% annual compounded return since March, 2009). Research published recently by Barclays (via Ambrose Evans – Pritchard of the Telegraph) argues that this is unlikely, and suggests that global stocks are poised to continue their rally into 2016. To summarise:

– Global equity markets are likely to build further on the rally over the last six weeks driven by amongst the fastest growth of global money supply in thirty years and an accelerating recovery in China. This force of liquidity will more than counter the likely Fed rate hike.

-Global equities have risen by 15% subsequent to the first rate hike by the Fed, on average over the last three tightening cycles.

-In addition, global equities are cheaper now with a CAPE of 18 , compared to 25.5 at the start of the last rate hike period in 2004 (see graph below). They are also 14% below the average CAPE since 1980, though arguably earnings are currently inflated to stock buybacks by companies.

-The growth of global M1 real money supply (cash and checking deposits) has risen sharply by 11% (see graph below) , led by China and the Eurozone. Historically, this has led to a rally in global stocks 9 months later on average, with only a false signal during the tech boom of the mid-nineties when stocks rose while money supply declined.

-US stocks are trading at a 30% premium to the rest of the world, and this gap is likely to narrow as EM equities rebound, after a 28% decline from their peak this year and fund outflows of $260 billion.

-The key factor here is China, where money supply is surging at the fastest rate since the 2009 stimulus, with housing prices stabilizing and floor space increasing by 20%. In addition, fiscal spending has surged by 36% from a year ago, and bond issuance by local governments has risen sharply. This all points to a rebound in the economy into 2016 based on past experience (see graph below).

-Rising rates in the US should be a boon for global financial stocks, with global banks being severely under-priced. Real estate and utilities should underperform (see chart below). In addition, materials and commodity stock, which are trading at a 36% discount to “bond-proxy” sectors, should benefit from rising rates. Lastly, value stocks, which have underperformed growth stocks, should make a comeback in the years ahead.

-Investor sentiment towards markets remains very pessimistic, with the bull/bear ratio being far below late cycle peaks, allowing market to climb the proverbial “wall of worry”.

Interesting analysis which makes a persuasive case for global liquidity overwhelming any Fed tightening. While we may experience some volatility around the Fed rate hike next month, it is unlikely to be protracted and the downturn should be considered to be a buying opportunity. In addition, the Fed is very likely to emphasise the subdued pace of subsequent rate hikes, and market focus will subsequently shift to the timing of the second (and later) rate hikes. So as emphasized in previous newsletters, the appropriate strategy would be to lighten up on rallies (while keeping a core long), freeing up cash to buy-back on downturns.

Ending of the Dollar Rally?

-Fears about the adverse impact of a Fed rate hike (and a rising dollar) on EM countries abound, but as Anatole Kaletsy points out (as summarized below) , empirical evidence seems to suggest otherwise.

-The Fed rate hike is widely anticipated making the market impact muted, unlike in 1994 and 2004 when the Fed move caught the market by surprise. Even in those cases, stock markets were barely impacted and the initial volatility in bond markets died down quickly. In addition, the consensus view on a stronger dollar is likely to be wrong for three reasons:

-a) The divergence in monetary policies between the US and Europe/Japan is universally accepted and priced-in; b) other factors besides monetary policy like the trade account, stock market and property valuations, outlook for corporate profits, economic growth and inflation surprises also matter. In this regard, the dollar has been the most attractive currency since 2009, but as growth recovers in Europe and Japan the currency focus should shift away from the dollar; c) the correlation between monetary policies and currency values has been mixed – with the yen weakening in the aftermath of QE by the BOJ, while the Euro and the pound strengthening after commencement of QE. In the case of the dollar, it strengthened substantially prior to the rate hikes in 1994 and 2004, but weakened by 8% in the 6 months following the first rate hikes and remained below the level prior to the hike over the next 2 to 3 years. Markets could be surprised by a weaker dollar in 2016.

On Dietary Guidelines:

An interesting conference was held recently by a group of leading nutritionists from the US and Europe with diverse specialties, ranging from the Mediterranean , to plant-based, glycemic index and paleo diets. Excerpts provided below:

– Oldways (a non-profit organisation, http://oldwayspt.org/) held an extraordinary, cutting-edge conference on November 17-18, 2015. Troubled by the public perception that the nutrition experts all disagree and that there’s no clear message on how to eat well, we gathered some of the world’s top nutrition scientists in one room – and shut the door until they found common ground, and came up with a consensus detailing their points of agreement:

-Collective support to the food-based recommendations of the 2015 Dietary Guidelines Advisory Committee, and to the DGAC’s endorsement of healthy food patterns such as the Mediterranean Diet, Vegetarian Diet and Healthy American Diet.

-The overall body of evidence examined by the 2015 DGAC identifies that a healthy dietary pattern is higher in vegetables, fruits, whole grains, low- or non-fat dairy, seafood, legumes, and nuts; moderate in alcohol (among adults); lower in red and processed meats; and low in sugar-sweetened foods and drinks and refined grains.

-Additional strong evidence shows that it is not necessary to eliminate food groups or conform to a single dietary pattern to achieve healthy dietary patterns. Rather, individuals can combine foods in a variety of flexible ways to achieve healthy dietary patterns, and these strategies should be tailored to meet the individual’s health needs, dietary preferences and cultural traditions. Current research also strongly demonstrates that regular physical activity promotes health and reduces chronic disease risk.

-We emphatically support the inclusion of sustainability in the 2015 DGAC report, and affirm the appropriateness and importance of this imperative because food insecurity cannot be solved without sustainable food systems. Inattention to sustainability is willful disregard for the quality and quantity of food available to the next generation, i.e., our own children.

-We support a transparent process where the evidence-based report of the scientists is translated directly into policy without political manipulation.

-Food can and should be:

• Good for human health

• Good for the planet (sustainability; ecosystem conservation; biodiversity)

• And simply…good – unapologetically delicious.

-We express strong concern for the high level of apparent confusion prevailing, and propagated among the public about what constitutes a healthy eating pattern. Despite uncertainty about some details, much of this confusion is unnecessary, and at odds with the understanding of experts and the weight of evidence. We affirm that experts with diverse perspectives and priorities can find common ground.

-Fundamentals and current understanding do NOT change every time a new study makes headlines. We emphasize the importance of basing understanding of diet and health on the weight of evidence, including ALL relevant research methods. Biology (adaptation, evolution, plausibility) is a relevant source of evidence. Heritage (cultural traditions) are an additional, relevant source of real-world information on long-term feasibility and health effects of diet. Accurate reporting is the responsibility of both scientists and the media.

-To make recommendations for dietary changes meaningful, we strongly endorse the general principle of specifying practical dietary substitutions – a “compared to what” approach. e.g, Instead of simply saying, “Drink less soda,” for instance, say “Drink water instead of soda.” What we consume and what we don’t consume instead, both contribute to health outcomes.

-We support the cultivation of widespread “food literacy” and believe that individuals benefit from becoming knowledgeable about the origins of their food, the conditions under which it is produced, and its impact on their health and the health of the planet. A knowledge of and respect for food traditions and the cultural context of food – health through heritage – is also beneficial, and can be a powerful motivator for better eating, as well as a means of imparting crucial life skills (e.g., cooking).supply.

-The group was chaired by: David Katz, Founding Director, Yale University Research Center, Yale University and Walter Willett, Professor of Epidemiology and Nutrition, Harvard University and cited as “one of the world’s most recognized and highly cited nutritionists and clinical scientists. And included luminaries like:

Dean Ornish (leading proponent of a low fat plant-based diet to prevent and reverse heart and other chronic diseases); Joan Sabaté (Loma Linda University and a lead researcher behind the city being designated as a Blue Zone by National Geographic’s Dan Buettner); Boyd Eaton (widely acknowledged as the founder of the Paleo diet movement); Antonia Trichopoulou (described as “the mother of the Mediterranean Diet”), Miguel Martínez-González(heads up the PREDIMED team, running the world’s largest clinical trial on the benefits of the Mediterranean Diet); David Jenkins (known worldwide for creating and documenting the concept of Glycemic Index); Alessio Fasano (perhaps the world’s leading expert on gluten and celiac disease, and how our microbiome may be at the root of many auto-immune diseases); Neil Barnard and T. Colin Campbell (two scientists very well-known for advocating plant-based diets. Dr. Campbell is celebrated for carrying out The China Study).

Am attaching a 16 minute inspiring Ted talk by my college maths professor – Dinesh Singh: https://www.youtube.com/watch?v=TMAM_sA3VEc :

Here’s to “eating whole food, mostly plants and a bit less” – the weight of evidence continues to mount!

Regards,

Aditya

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