The title of this article come from a comment Saxo Bank CIO and chief economist Steen Jakobsen said in his latest email: “We have no growth, no reform, no productivity, no inflation, and low-to-lower policy rates from central banks across the board.”

Steen labeled this the “New Nothingness

What follows is a guest post by Steen Jakobsen. His title is ….

Steen’s Chronicle: The Narrative is Changing: Steen Jakobsen

At the moment, it seems as if policymakers and political elites have begun to depart from the “new nothingness” consensus with the recent G20 summit in Shanghai seeing a promise not to manipulate exchange rates and the International Monetary Fund’s annual meeting in Washington even playing host to an attack on low interest rates.

What has scared such bodies away from their previous consensus?

Macro Overview: The Noise

$SPX Range

Of course, this is hardly surprising considering that we have no growth, no reform, no productivity, no inflation, and low-to-lower policy rates from central banks across the board.

Over the weekend I read a considerable amount of “research” and most of it concludes, as per usual, that we will continue to climb the wall of worries. This may be so, but not for the reasons most people cite: inflation returning, central bank support, higher commodity prices, and more growth on its way.

One net consequence of no top line growth and soft earnings is that we pay more for every (US) dollar’s worth of falling earnings that we see.

SJN 2016-04-18A

Reported earnings have been flat-to-negative in the S&P 500 since mid-summer… and less earnings equals higher multiples (17.35, to be precise).

SJN 2016-04-18B

This means, of course, that investors believe that “in the future” there will come better corporate results; there exists a belief that we will eventually draw away from the earnings recession we see at present.
So how about that “future”?

Well, a look at the JP Morgan global PMI versus copper price chart does not indicate that any such change is coming. In fact, further downside is forecast. Here we see that copper leads the JP Morgan global PMI indicator by six months.

SJN 2016-04-18C

At least inflation is picking up, though – no?
Not really, as it turns out. What really matters for companies is the producer price reading.

SJN 2016-04-18D

The gap between the dark blue line (higher) and the light blue line (lower) represents a negative margin… right now, unit labour is rising higher than PPI, which is actually falling.

It also seems as if US industry is slowing down significantly. Here, we can see a sharp drop-off in inbound US container traffic to the port of Long Beach (the second-largest US container port, and the key gateway into the US economy from Asia).

SJN 2016-04-18E

This batch of data leaves much to interpretation; all momentum-based models are long risk here, but they remain on very thin ice. In the long term, let’s remind ourselves that S&P 500 returns simply correlate to earnings, and to increase earnings you need to increase margin.

As we can see above, of course, margin is under severe pressure as the PPI is negative and unit labour costs are slowly rising.

The most likely response from policymakers will be “more of the same”, but it seems as if the political class no longer fully stands behind “manipulation”.

The new agenda: not FX, not low rates, but… what, exactly?

First we had the Shanghai G20 summit where US Treasury secretary Jack Lew delivered a promise “not to manipulate the FX rates”. Now, when we look at the IMF’s annual meeting, we have the Financial Times reporting that low interest rates themselves are coming under attack.

More interesting, perhaps, than the headline issue of low rates is the list of key topics listed by the FT further down the page:

“In a series of potential obstacles, they cited weak productivity, the lack of further firepower from monetary policy, China’s difficulties in rebalancing its economy, strains in oil exporters, disorderly capital flows, a continued impasse in talks over lending conditions to Greece and Britain’s potential exit from the EU”

This means that in the fourth month of 2016, we have very nearly come full circle. The Federal Reserve has lowered the number of slated/planned rate hikes from four to zero(?), the Bank of Japan took a (very unsuccessful) shot at a zero interest rate policy, European Central Bank president Mario Draghi whipped out his “bazooka” and implemented yet another handout to the banking sector, and now we are being told from summits in Shanghai (G20) and Washington (IMF) that none of this even works!

SJN 2016-04-18F

Has the uncertainty of the world economy finally swayed the seemingly rock-solid certainty of elite policymakers like IMF head Christine Lagarde? Photo: Wikimedia Commons

The narrative, it would appear, has changed.

The world economy, as seen from the perspective of policymakers, is on the edge of a further slowdown. Yet another crack is developing (if not being discussed) in the banking sector, but we are now being led to understand that the panacea, according to G20 leaders, is not weaker currencies or low interest rates.

So what is it?

According to the IMF, the solution is to boost employment and productivity while continuing to maintain low interest rates and draw down austerity in those countries that can afford it. Ultimately, this is the usual “half-pregnant” approach – how can one give productivity and employment a shot in the arm under such conditions?

From my perspective, we are seeing an increased awareness among world leaders that simply applying “more of the same” will take the political system down.

The “change” here is not that policymakers are acknowledging the mistakes of the past, but that they are displaying a near-desperate need to align themselves with the “broken social contract” argument, which is to stop “helping the 20% of the economy that produces 0% of the jobs and productivity” and to focus on jobs.

Whatever the “new paradigm”, it’s clear that politicians and key G20 policymakers are busy distancing themselves from their central banks (as seen, for example, in German finance minister Wolfgang Schäuble’s assertion that Mario Draghi is behind the rise of the right-wing Alternative für Deutschland party) .

This is bad news for markets. The “central banks to the rescue” model is fading – not disappearing, but fading – and if confirmed, this could the shock that wakes up the “long-only” crowd who are not only fully loaded again (the most overweight in years, actually) but who are also increasingly paying through the nose for stocks, as was demonstrated above.

Macro overview: A tactical view

I have long argued that there are three major catalysts to keep an eye on:

1. Banks’ performance relative to overall indices (US, Europe and Japan).
2. USDJPY as a proxy for risk-on/off and USD strength.
3. China/oil as proxies for global growth itself.

The noise remains omnipresent, of course, in the form of global risks from the Syrian refugee crisis to the downfall of Dilma Rousseff’s government in Brazil; from South Africa to the Brexit; and from the “central banks to the rescue” model to less central bank leverage…

…and all of this adds up to more uncertainty, not less.


I have moved to very defensive stance on allocation – I remain long mining and Gold, some HYG for carry, and now with 50% cash…. The price action/momentum makes market long, but for me too much doesn’t add up – the gap between perception and reality is about to be closed – hence defensive.

Short US$, long Gold, JPY and AUD – long HYG, GDX and GLD.

Safe travels,

Edited by Michael McKenna
Steen Jakobsen is chief economist and CIO at Saxo Bank

End Steen – Begin Mish

Thanks Steen.

This market has gone nowhere since late 2014. All the while, earnings have dropped while PEs have risen.

Things are a lot worse than Steen posted. His chart shows the S&P “reported” PE is about 17.5.

In actuality, the S&P 500 reported PE (trailing 12 months) is 24.15.


The forward estimate for the S&P is 18.50. The reported P/E a year ago was 20.87. The reported P/E is now a whopping 24.15.

I don’t know what “forward estimate” Birinyi pegged a year ago for today, but it was not 24.15.

Birinyi’s forward estimate of 18.50 is likely to be equally as ludicrous. This is one hell of an expensive market.

For my take on inflation, please see Diving Into the CPI: What’s in Your Basket?

Mike “Mish” Shedlock