Daily Note – The Jesuits take over Threadneedle Street


China: Growth picks up but we reduce our long stock position.

United States: Initial claims suggest a robust jobs market.

UK: The Vatican takes over Threadneedle Street.

Eurozone: French jobless rate rises again as growth disappoints.

 Good morning, from a damp Enniskillen, Co Fermanagh.

Do you know who Francis Xavier was? I am not asking you a religious question because I am in the North of Ireland, but it does seem apt here in this religiously divided town.

St Francis Xavier was the man who set up the Jesuits.

When my Belfast Protestant father-in-law, who went to school here in Enniskillen used to berate me for my style of arguing, normally after several bottles of red, he would accuse me of being “Jesuitical”. Being Jesuitical was obviously in the eyes of a Northern Irish Protestant, a diabolical crime because all Protestants knew that the Jesuits twisted words, schemed and never addressed issues head-on but hid behind theology, ritual and clever, ultimately conspiratorial, philosophy.

Francis Xavier and Ignatius de Loyola are the main movers behind the Jesuits and they were profoundly influenced by the work of the great theologian St Augustine of Hippo. Augustine’s interest in the human condition distinguishes him from many others, summed up by the following great Augustinian quote about the frailty of humans and our weakness for temptation;

“Oh Lord make me virtuous, but just not yet”.

The Jesuits spread their view of the world through elite schools all over the Catholic world, educating many of today’s leaders from Pope Francis to Mark Carney, the Irish-Canadian boss of the Bank of England. Clearly the young Carney was listening to the priest at the Francis Xavier Catholic High School in Edmonton Canada because yesterday he unveiled a new policy on mortgages that was straight out of St Augustine’s handbook of making me virtuous, but just not yet.

Mr. Carney unveiled a new approach to the UK housing market last night. He indicated that he will tolerate UK house prices rising by 20% over the next three years but if they rise any more, he will impose some limits on mortgage borrowing.

This is classic Jesuit thinking. We want to be virtuous and stamp out a housing boom, but just not yet. Why would he kick out the day of reckoning for three years? Could it possibly be to allow the Conservatives – the lads who gave him the job – win the next election and give him another term? Never, how could you possibly think in such a conspiratorial fashion?  Maybe it’s the Jesuit in me!

The implication of this is get long UK houses for now and see where you are two years hence.

In the markets yesterday, it felt like a replay of Wednesday as equities quickly dipped after weaker-than-expected US personal spending. But, in fact it was comments from regional Federal Reserve Chair James Bullard, who suggested rates might rise (shock horror) faster than expected, that were the main downside driver (see below).

European stock got walloped; check of out the DAX below. We are watching support levels here very closely.

Figure 1: German Dax Stock Market

1_Daily Note 27th June 2014 - Fig 1 German Dax

Elsewhere we took some profits on our long China and short Euro investment, we continue to look for tactical short-term investments, but these markets are hard to navigate.

China: Growth picks up but we reduce our long stock positon

Table 1 27 June

In recent months, following weaker than expected data, policymakers in Beijing announced a number of monetary policy easing measures.

The measures are designed to increase lending and sustain economic growth above 7%. These measures have started to take effect. Activity data in May (see table above) is up sharply, driven by investment.

The PBOC has specified that in order for banks to avail of the reduced interest rate loans, they must satisfy the condition that 50% of new loans and 30% of existing loans must be to SME or the farming sector.

This is having an effect.

Overall monetary conditions have eased. You can see this by the May loan and M2 growth figures (see chart below) and ultimately, this should drive up industrial production.

Figure 2: China New Loans & Industrial Production

2_Daily Note 27th June 2014 - Fig 2 China New Loans + IP

Our anti-consensus forecast in January that policymakers would “do what it takes”, has come to pass. This was the primary driver of our long China investment idea.

At this point, we are cutting our exposure because, to the slightly counterintuitive logic that better economic data is bad for the market. Let me explain this to you a bit more.

Investors’ apprehension about a Chinese Lehman died down as growth stabilized and the PBOC announced their easing policy. However, as growth rebounds, the Chinese Lehman fear won’t go away.

Credit risk remains rampant in the corporate sector, so in order to trade China you have to try to see where the market is. If it’s too pessimistic, go long and once the market gets comfortable get short. Basically do the opposite of whatever the investment banks are telling you!

United States: Fed Bullards hints at rates rising

Federal Reserve Bank of St. Louis President James Bullard, predicted yesterday that the central bank will raise interest rates in the first quarter of 2015, sooner than most of his colleagues think.

Asked about his forecast for the timing of the first interest-rate increase since 2006, he said:

“I’ve left mine at the end of the first quarter of next year. The Fed is closer to its goal than many people appreciate. We’re really pretty close to normal. The Federal Open Market Committee is debating how long to keep the benchmark interest rate near zero after completing a bond-purchase program that’s set to end late this year.”

This is somewhat more “hawkish” from a normally, middle-of-the-road member of the Federal Reserve.

United Kingdom: The St Augustine of Threadneedle Street.

The FPC today announced two measures designed to insure against potential risks emanating from the housing market.

First, there will be an interest rate stress test which assesses affordability if, at any point during the first 5 years of the mortgage, bank rates were to be 3 percentage points higher than the prevailing rate at the origination of the loan. This is classic Jesuit thinking because it’s hard to see a 300 basis points move in rates from here – it sounds good.

Second, no more than 15% of new mortgages are for borrowers with loan-to-income ratios greater than 4.5.

In short, these mean nothing more than the Jesuits have taken over Threadneedle Street.

Eurozone: French jobless rate rises again 

Table 2 27 June

Finally today, the message out of Paris is don’t look for a job because there aren’t any.

Figure 3: French Jobless Figures

3_Daily Note 27th June 2014 - Fig 3 French Jobless

Table 3 27 June

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