On the Global Markets Outrlook for 2016; the 2015 Dietary Guidelines!

From: aditya rana
Date: Sun, Jan 10, 2016 at 12:29 PM
Subject: On the Global Markets Outrlook for 2016; the 2015 Dietary Guidelines!


The past year has not been kind to financial markets, with only two of the twenty one major global stock markets posting positive returns in US dollars (Japan up 8.5% and Shanghai up 5%). Global equities returned 2% in local currency and slightly negative in US dollar terms, while global bonds returned a measly 1%, making for the worst year since 2011. The new year has so far provided no respite, with some of the major indices down almost 10% over the past week. So does 2016 herald another difficult year for global financial markets? Perhaps not, as argued by veteran market observer James Paulsen, Chief Investment Strategist, Wells Capital Management. It is noteworthy that Paulsen had turned cautious on at the beginning of last year, after being consistently bullish on US stocks since the financial crisis. To summarise:

-The persistently disappointing subpar US economic growth stands in sharp contrast to numerous positive features of the economy: the recovery is the fourth longest in history; the stock market bull run in the fifth longest as well as the fifth largest in history (up three-fold); nominal GDP , personal income, household wealth and corporate profits are all about 25% above their previous highs; and the unemployment rate of 5% stands lower than two-thirds of the time since WWII.

-While economic growth this year is likely to continue being below par, the global economy could enjoy its first synchronized bounce since the financial crisis, led by a recovery in energy, materials and manufacturing from a lagged response to the large scale global stimulus of 2015.

-Global stock markets are likely to benefit from the positive global growth surprise, though its impact on US stocks will be more muted as the US faces numerous headwinds – rising inflation, a surprisingly weak dollar, stronger commodity prices and increasing wage pressures possibly causing the Fed to accelerate the rate hike cycle over the course of the year.

-Over the last 12 to 18 months, three powerful stimuli have been at work in most parts of the world – an almost 50% collapse in commodity prices since 2014 resulting in the equivalent of a large fiscal tax cut, significant monetary easing causing a decline in long-term bonds yields, and a 20% cheapening of currencies versus the US dollar. The lagged impact of this should result in stronger global growth this year.

-While the US currently faces headwinds from a stronger dollar, it should be offset by the sharp drop in commodity prices and lower long-term bond yields. In addition, four factors should support the economy: 1) faster credit growth since 2014 (increasing by 8%); 2) rapid recovery of the household sector from low unemployment, a 50% increase in household wealth from its lows and faster growth in real wages; 3) recovery in the housing sector; and 4) a rise in capital spending as global growth recovers. However, the growth trend in the developed world will remain subdued to adverse demographics and poor productivity.

-Most people believe that the US dollar has strengthened due to monetary policy differences between the US and rest of the world – however, currency moves are likely to be driven more by economic growth differentials than relative monetary policy. The US dollar strength during the second half of 2014 was driven by slight improvements in the US economy while foreign growth declined, but the dollar has stalled since last February as the US slowed slightly and the rest of the developed world recovered. The US dollar strengthened against EM currencies as growth in the China and the EM world slowed. It is important to note that since 1970, an increase in the Fed funds rate has actually led to a weaker dollar

-A synchronized global recovery combined with more muted US growth should force the dollar lower this year against developed as well as EM currencies. Increase in growth in the US should be less than the rest of the world since its slowdown was less pronounced thereby limiting the rebound, it is closer to full employment and therefore has less resource slack, it has a less accommodative monetary policy and the lagged impact of a stronger dollar will hurt growth.

-Commodity prices should benefit from a reversal of two factors responsible for the decline in commodities since mid-2014 – weaker global growth and a strong US dollar. It is noteworthy that every major commodity decline since 1970, has experienced a sharp V-shaped recovery rather than stay at lows for an extended period. It is possible to see oil prices at $65 to $70 sometime in 2016.

-Following the sharp fall in energy prices, inflation had slowed significantly globally – however, core consumer price inflation has clearly begun to increase – particularly in the US, with the core inflation rate rising from 1.5% to 2.0%. Annual 3-month average US wage inflation has risen to 2.5% and core services inflation has spiked to 3%. After declining for several years, Europe has also seen a rise in core inflation from 0.5% to 1.0%, Japan has had a rise in core inflation to 1% and even China has seen core inflation rise by 0.5%.

-Core inflation in the US could surprise on the upside this year by increasing to 3%, a level inconsistent with a Fed funds rate of 0.25-0.5%, 10-year UST yields of 2.25% and a stock market trading at 18 to 19 times earnings.

-The current Fed tightening cycle could pose some challenges as it has embarked on a tightening cycle much later than in past recoveries. Typically it has started the tightening cycle with profit margins and earnings still recovering from the last recession, but this time they have both likely to have peaked. In addition, previous tightening have taken place while the job market was still growing rapidly, but an unemployment rate of 5% would limit the pace of future job growth. Lastly, the buffer of high productivity growth against higher interest rates no longer exists. So a mild “stagflation” environment could be in store for the US.

-Contrary to the popular mantra of “lower bond yields for longer”, 2016 could prove to be a turning point for bond yields. The world collectively has embraced the notion of ending deflationary pressures, with even the Fed reluctantly embarking on a rate rise policy while emphasising a gradual pace. As global policymakers succeeded in the early 1980s in fighting inflation, they could now perhaps succeed in ending deflationary risks and usher in a period of higher inflation and higher bond yields as a result of the various stimulus policies in place globally?

-2016 is likely to be as challenging for the US stock market as 2015 was, with similar factors in play at the start of the year – relatively high valuations, complacent investor sentiment, rapidly aging earnings cycle, eroding profit margins due to higher wage growth, and a need to raise rates. The focus of the market in 2016 will shift from “when” to rise rates to “how fast” to raise rates. In addition, mild stagflationary pressures could pose a headwind.

-Since 1870, the US stock market has rarely risen much above or sustained P/E multiples in the 18 to 19 times range. The few times P/E multiple rose above current levels was due to a collapse in earnings, with the sole exception being the 1990s when P/E multiples sustained at levels between 20 and 30 times for several years, driven by a massive leap in technology resulting in higher productivity which neutralized the impact of rising rates and allowed valuations to rise. If this is repeated then the US stock market does have considerable upside, but 140 years of market history says otherwise.

– However, if P/E multiples drop to around 16 times (either due to August type correction or higher than expected earnings) that might be a good entry point for an expected return of 7% driven by 5% earnings growth and 2% dividend yield over the next several years.

Investment recommendations:

1)Keep a core weighting in equities, despite a continued correction in the market, as the alternatives of near zero cash return and downside risk for bonds are less attractive. A buy and hold strategy might prove to be challenging this year but should provide decent returns in the years ahead.

2)Keep modest cash reserves to take advantage of sharp pullbacks in the stock market.

3)Increase weighting to other developed and emerging markets as they will benefit more from a synchronized global recovery given their attractive valuations and accommodative policies.

4)Position for a stock leadership change away from consumer stocks to producer stocks in industrial, materials, energy and technology sectors.

5)Favour mid cap and small cap over large cap stocks, as mid and small cap stocks typically have more operating leverage with rising inflation.

6)Shift away from US dollar assets to international assets as the dollar is likely to be weaker.

7)Increase exposure to commodities driven by a weaker dollar and a bounce in global growth.

8)Remain underweight in fixed-income assets as global bond yields are likely to rise.

A thought provoking piece which questions the prevailing consensus view of continued low growth, low rates, a strong dollar, weak EM and commodity markets. While I don’t expect inflation to rise significantly, it could surprise on the upside, together with better than expected growth in EM, Europe and Japan. So stay long EM assets, Europe, Japan, high yielding EM and European credits and begin to add commodity exposure gradually. In addition, with continued volatility in markets (as we have painfully experienced in the first week of the year!) it would be prudent to raise some cash during rallies and redeploy it on sell-offs.

At the start of the new year, It is a useful exercise to looks the top and worst performing markets for the previous year, via the ETF market:

The Best:

CNXT Market Vectors China AMC SME-ChiNext +52.62%

DXJH WisdomTree Japan Hedged Health Care +36.16%

ASHS Deutsche X-trackers CSI 500 China-A Shares Small Cap ETF +35.98%

SBIO ALPS Medical Breakthroughs ETF +26.17%

FDN First Trust Dow Jones Internet +21.75%

EIRL iShares MSCI Ireland Capped +21.75%

KWEB KraneShares CSI China Internet +20.95%

PNQI PowerShares NASDAQ Internet +20.26%

PGJ PowerShares Golden Dragon China +20.24%

And the worst:

FCG First Trust Natural Gas ETF –59.5%

YMLP Yorkville High Income Energy MLP ETF -57.5%

OIL iPath S&P GSCI Crude Oil Total Return ETN -50%

XME SPDR S&P Metals and Mining ETF -49.4%

EWZS iShares MSCI Brazil Small-Cap ETF -47%

UNG United States Natural Gas Fund -45%

IDXJ Market Vectors Indonesia Small Cap ETF – 42.7%

Looking forward to 2016, the ETFs which have posted the worst declines-i.e. in the commodities and EM space – are likely to outperform if the global synchronized economic recovery does takes place. The China ETFS should also do well if the underlying Shanghai index continues to provide a positive return, supported by an improving economy and policy stimulus. As noted in previous newsletters, the key monetary variable to monitor will be the growth in China’s M2 money supply (to gauge growth prospects in China and EM) which is now growing at a healthy 14% level (see graph below).

-China is currently firing on all three of the key stimulus cylinders – monetary policy, fiscal policy and the exchange rate. As the graph below (until Nov, 2015) illustrates, the current adjustment is to correct a massive appreciation of the currency over the last year or so which has some way to go.

2015 Dietary Guidelines: A Plate Full of Politics:

An important note on the latest release of the US dietary guidelines by Dr. David Katz:

David Katz, Director of Yale University Prevention Research Centre, Jan 7, 2016.

-I won’t mince words: In my opinion, the 2015 Dietary Guidelines for Americans, just released today, are a national embarrassment. They are a betrayal of the diligent work of nutrition scientists, and a wilful sacrifice of public health on the altar of profit for well-organized special interests. This is a sad day for nutrition policy in America. It is a sad day for public health. It is a day of shame.

-I want to make clear that the scientific report on which these new Dietary Guidelines for Americans (DGs) were allegedly to be based was outstanding.

-First, I want to make unmistakably clear that my criticism here is of the political adulterations of the excellent work of scientists, and not one iota about the work of those scientists. Second, the 2015 Dietary Guidelines Advisory Committee (DGAC) Report has been subject to unprecedented abuse since the day it was released. Many in the vanguard of those assaults have pretended it was an effort to challenge, and thus improve, the quality of the science. It was not. It was foreplay for this. It was softening up support for the work of true public health scientists so that politicians could stick it to the American people and line the pockets of their influential friends.

-Where the DGs are good, and there aren’t many places in the lengthy document, it’s where they preserved key components of the DGAC report. For example, they respected recommendations about key nutrient thresholds, such as limiting saturated fat intake, not limiting total fat intake, and perhaps most importantly, limiting added sugar. They also preserved the idea, if not a sensible representation of it, of healthy dietary patterns, and provided examples to show that these are variations on a theme. I can give this very little bit of credit where so little credit is due.

-Otherwise, as compared to the DGAC Report, the DGs represent a disgraceful replacement of specific guidance with the vaguest possible language. A term that recurs often, clearly intended to sound like something while saying next to nothing, is "nutrient dense foods." That replaces reference to specific foods that populate the original document. It might mean broccoli, it might mean Total Cereal. I guess it might even mean pepperoni. We can’t tell, and that is clearly by design.

-There is an astonishing effort to shoehorn in advice to keep consuming "all food groups." When is the last time we have even heard that term? Not only is this document a display of complete submission to special interests, it is a submission to special interests stuck in 1950! Seriously, eat from all "food groups"?

-There is a disgraceful backtracking on clear recommendations to eat less meat and more plants. The report advises particular age groups of men and boys to cut back somewhat on meat intake, but all this does is highlight the abandonment of the recommendation in the DGAC Report that "less" meat was advisable to the general population for the sake of people and planet alike.

-There is overt hypocrisy on display as well. The DGs explicitly, even in the Executive Summary, emphasize the importance of physical activity. I am entirely in support of this recommendation, make no mistake. But how is this a "dietary" guideline? Congress decided, some months ago, that sustainability would NOT be included in these guidelines because it was beyond the mandate of the DGAC. Really? The ability to keep supplying the food recommended is not considered relevant enough, but a topic that isn’t about food at all — is? I really don’t think you even need to be able to spell hypocrisy to smell it here.

-While the report talks about foods being emphasized over nutrients, recommendations about what NOT to eat (or, even, what to limit) are entirely cast in terms of nutrients. We are advised to limit our intake of saturated fat, for instance — but there is virtually no language, and none featured prominently, indicating what foods to avoid to achieve that. Much the same is true of added sugar. Clearly advice about eating less of anything conflicts with the interests of some big industry sector the federal agencies and their bosses in Congress don’t want to upset. So, somehow, we are left to cut back on our intake of saturated fat and sugar while washing down our corned beef with Coca-Cola. Good luck, folks.

-The DG document is not even internally consistent. There is a specific recommendation FOR eating meat and poultry, as well as fish, ostensibly in the service of achieving a "variety" of protein sources, and eating from all food groups. Nonetheless, the DG does offer a vegetarian pattern as an example of healthy eating. This made perfect sense in the context of the DGAC Report, which made it clear that less meat was a good idea. It looks like lip service and in the context of a document specifically recommending meat intake. The DG, shockingly, even carves out space to say it is "okay" to eat "processed meats and poultry" provided that nutrient thresholds are respected. This is absurd in the aftermath of a WHO report identifying processed meat as carcinogenic, in addition to its many other established liabilities. It is also another example of hypocrisy in these guidelines, since we are told the emphasis will be on foods rather than nutrients, but then told it’s fine to eat bad foods as long as certain nutrient levels are vaguely… good.

-The 2015 Dietary Guidelines for Americans is, alas, a virtuoso display of linguistic contortionism to remove from the nation’s official nutrition policy document the actionable clarity of the DGAC at every opportunity. Specific advice about what to eat more of, and especially what to eat less of, has been replaced with the vaguest possible language about food groups, nutrient dense foods, and the idea that everything is OK provided a few nutrient thresholds are minded. The DGs include the topic of "shifts," allegedly how to trade up by replacing foods in our diets with better choices, but here, remarkably, the language itself "shifts" again from food to nutrients, so we have no hope of knowing what we shouldn’t eat. Perish the thought — that would be money out of someone’s pocket. We are left with a very clear, and genuinely helpful notion that we can probably just eat whatever the hell we want, and all will be well.

-Except it won’t. We are awash in preventable chronic disease. We are eating away our own health. We are eating our children’s health, and their food, and drinking up their water. We are, into the bargain, devouring our very planet. Yet we are told here to keep on keeping on. That’s what you get when it is politics, rather than science, on the plate. Bon appétit.

Here’s to not letting our health be influenced by special interest groups and relying on scientific evidence as well as timeless healthy eating habits from cultures across the world!

Wishing all my readers a very happy, prosperous and healthy 2016!



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