On the Great Rotation from Bonds to Stocks; China’s RMB Policy; Is it OK to Eat Butter?

From: aditya rana
Date: Sat, Jan 21, 2017 at 1:04 PM
Subject: On the Great Rotation from Bonds to Stocks; China’s RMB Policy; Is it OK to Eat Butter?


Global markets have continued their upward move this year, with the MSCI World index rising 2%, led by emerging markets (+3.5%) with Argentina (+18%) and Brazil (+9.0%) leading the charge. Is this momentum likely to continue as the year unfolds? Jeffrey Saut from the financial advisory firm Raymond James, and a 40-year veteran observer of markets, made some interesting observations in a recent note. To summarise:

-Market focus recently has been on the “Great Rotation” from bonds to stocks, following 30+ years of falling interest rates we are now reaching an inflection point which would herald an era of rising interest rates. The impact of this phenomena on markets is being widely debated, with one side arguing that it will unleash a massive flow of funds from bonds to stocks, while the other side holding the view that it will not have as big an effect on portfolio allocations as expected.

-The media has pitched the rate outlook as a battle between two bond gurus – Bill Gross and Jeffrey Gundlach. However, they are basically saying the same thing except for a minor difference in the key inflection points for rates – with Gross viewing it to be a 2.6% level on the 10-year Treasury and Gundlach at 3.0% (with a high certainty of it being breached this year).

-It is very likely that last July marked the bottom for rates, with the 10-year US Treasury breaching below its 2012 low, but subsequently rising by 125 basis points (a 100% move in percentage terms) by the end of 2016. While the long term trajectory does appear to be upward, the path is likely to be uncertain (just like the downward path over the last three decades was not straight down). While a simple long term chart of rates does show the downward trend being breached (see first chart below), a logarithmic (to account for the “base effect”) chart implies that a 3.5% level would need to be breached before a trend reversal is clear (see second chart below). These levels (2.6%, 3%, 3.5%) are likely to be strong resistance levels and rate could be range bound for the rest of 2017, until growth and inflation expectations pick up enough to cause rates to move much higher.

-The impact of rising rates on the stock market has sharply divided market opinion – on one end Charles Swab believing that the shift from bonds to equities over the past few months has added $3 trillion to equity values and educed bonds values by $2 trillion, and this shift has years to run. Meanwhile on the other end, Goldman believes that allocations of institutional investors to bonds are already at 30 year lows and there is limited room for further shifts due to mandate restrictions.

-The likely scenario is likely to lie somewhere in between these views. Rates are likely to remain low for the next several years making stocks relatively more attractive – and if earnings growth do pick-up (as they expect) during the course of the year leading to higher stock prices, retail investors are then likely to be enticed to chase prices upwards. At the same time, a big rotation from bonds to stocks is unlikely for the reason mentioned earlier. Ultimately earnings and economic growth will continue to be the main drivers for the stock and bond markets going forward.

-Markets are likely to have an upward bias this year, albeit with higher volatility given the policy uncertainty in the US and its impact on China and Europe. However, global economic activity is showing clear signs of stabilizing as evidenced from the chart below from Fulcrum below which track economic activity on a monthly basis. So stay long global equities in a diversified manner (with more weightage to EM) and use market pullbacks as buying opportunities.

-An ongoing concern about China is RMB depreciation and currency outflows. As the first chart below illustrates, the RMB has actually stabilized versus a basket of trade-weighted currencies since summer, and the depreciation versus the US$ is more about dollar strength than RMB weakness.

-FX outflows (reported as Yuan outflows – i.e. outflows arising from domestic conversion of Yuan into foreign currency) have also dropped to a trickle ($900mm) in December after a record outflow in September 2016 and a total of $310 billion for the year. It is likely that the Chinese government will continue to impose more capital restrictions if outflows accelerate again.

Is it OK to eat Butter?

Recent news in the media have highlighted a study demonstrating that butter (and other dairy products) are healthy foods. Dr. David Katz, Director of the Yale University Prevention Centre and founder of the True Health Initiative, looks at this in more detail to clear the air on the media hype.


-A PLoS ONE study examined data from several studies examining links between butter consumption and cardiometabolic outcomes.

-The researchers concluded that there were “relatively small or neutral overall associations of butter with mortality, [cardiovascular disease], and diabetes,” and that the “findings do not support a need for major emphasis in dietary guidelines on either increasing or decreasing butter consumption, in comparison to other better established dietary priorities; while also highlighting the need for additional investigation of health and metabolic effects of butter and dairy fat.”

-Of course, a study on butter was bound to make headlines. Some included “A Little Butter Won’t Kill You” (NBC News), “The Case for Eating Butter Just Got Stronger” (TIME), and “Butter Not Bad for Health … But What You Spread It On Might Be” (The Telegraph).

-We talked to Dr. Frank Hu, MD, PhD, THI member and professor of nutrition and epidemiology, as well as professor of medicine, at Harvard University, about how the headlines compared with what the review really found:

-“Most of the media headlines, I think, have exaggerated the findings, and some of the headlines were even particularly sensational and misleading. For example, TIME magazine had the headline “The case for eating butter just got stronger.” And I don’t know where that headline comes from, because the authors of the study in the paper said that their overall results did NOT support that butter is beneficial for health. [The researchers] said the results suggest that butter should neither be demonized, nor considered bad, as a route to good health. But the headlines are sensational and, to a large degree, exaggerated the main findings.”

-Dr. Hu also noted that it’s important to look at the healthfulness of butter in context with other foods. If you’re comparing the healthfulness of butter with the typical, unhealthy American diet — loaded with refined grains, soda, and red meat — then no, butter is not going to be a lot worse for you than this mixture of dietary components. “However, I think from a public health point of view, we don’t want to give an impression that we should settle on unhealthy dietary patterns,” Dr. Hu says. “We should strive for healthy dietary patterns, and then compare butter to something else in that healthy dietary pattern.”

-Previous research has shown, for instance, that “when you compare butter to stick margarine, which is loaded with trans fat, then butter is better,” he says. “But if you compare butter to liquid vegetable oils, like olive oil, and soft margarine, which contains canola oil or soybean oil, then butter is much worse. So the concept for a replacement food, or a replacement nutrient, is critically important when we convey the nutrition information to the general public.”

-While Dr. Hu noted that his eating habits would not change based on results from one study, he says that he does consume butter occasionally, mostly for flavor. Usually, though, he uses olive oil and canola oil for cooking or salads, and nut butter for a spread.

-“A small amount of butter is fine, it’s OK,” Dr. Hu says. “But it’s not desirable to include butter as a main source of dietary fat. We should use healthy fats, such as olive oil, soybean oil, canola oil, nuts, seeds, and seafood as main sources of dietary fat, instead of saturated fat. So again, the type of fat is very important.”

-At the same time, though, we should strive to reduce our consumption of unhealthy carbohydrates, such as refined starches and added sugars. That’s why “we shouldn’t just say the message is ‘if you eat unhealthy carbohydrates, you can also eat butter,’” he says.

Here’s to sticking with the tried and tested formula for a healthy diet and ignoring dietary fads – eat whole foods, mostly plants and a bit less!

-I will be travelling over the next two weekends for the Chinese New Year holidays (so the next newsletter will be sent on February 11) and would like to wish my readers a very happy, healthy and prosperous Year of the Rooster!




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