Posted in Client Conference Calls, Samples

Conference Call Replay – Contagion Risks on the Rise

The handout, audio replay and webinar replay of our May 31, 2018 conference call titled Contagion Risks on the Rise can be found below.

The handout can be found here (starts with the second post).

The audio replay can be heard below:

The webinar replay is below:




Below is a list of topics we discussed and our conclusions:

Global synchronized growth has ended

  • Eurozone is leading the slow-down to below-average growth rates.
  • Historically, drops below 60% of economies producing above-average growth are followed by MSCI World ex-US under-performance and U.S. treasury (long-end) out-performance.

Google search trends reveal rising stress (e.g. bankruptcy) and slowing spending

  • These real-time measure of consumer activity are in stark contrast to still euphoric traditional surveys (e.g. UMich Consumer Sentiment).
  • Credit card delinquencies among the top 100 banks are expected to rise toward 3.7% from 2.5% over the next year.

Federal Reserve is as certain as ever in their path for interest rates

  • Fed speeches and communications:
    • Powell et al are more focused on inflation than financial stability by the largest degree in history.
    • Lowest usage of ‘uncertainty’ or ‘confusion’ since May 2006.
    • Highest frequency of words concerning economic strength in history.
    • Most hawkish rhetoric since December 2006
  • FOMC rate hike timing refused to budge until Italy induced uncertainty, putting the Sep and Dec 2018 hikes on the fence.
  • FOMC is relying on the ultra-positive surveys for inflation, wages, and economic growth even though hard data has failed to keep up in pace.

Central banks outside the FOMC, ECB, and BoJ are seeing heightened uncertainty

  • Emerging markets like Argentina and Turkey are pushing news trends for ‘uncertainty’ above levels synonymous with above average global financial stress
  • Emerging markets alone are accounting for well in excess of 50% of new stories concerning central banks and uncertainty

Italy produces a contagion risk just similar to all Euro-induced political strife in years past

  • Spain and France beginning to join in spread widening to Germany.
  • But, euro has seen little action as investors unsure how to price exit discussions.
  • Uncertainty news trends concerning Italy are leading Italy/German 10-year spreads.
  • Central Italy where native-born mostly reside should be watched closely (Google trends).








Posted in Client Conference Calls, Samples

Data Change and Google Search Trends

The chart below shows Citigroup data change indices by region since 2015. These indices measure the relation of current releases to one-year averages. 

The Eurozone is leading a return to below=average growth with nearly all other regions rolling over into the summer of 2018.



Unfortunately, the Eurozone typically sees economic data changes peak to start the summer. The chart below shows the average year-to-date path of Citigroup economic data change indices since 2004.



The chart below is a favorite of ours showing the percentage of economies producing data surprises (orange) and above-average realized data growth (green). Only 28% of economies are producing data beats. The percentage of economies producing above-average data changes has dropped from a peak of 92% in August 2017 to 56% as of today (May 30). 



Drops below 60% of economies producing above-average data changes have marked jumps in volatility and trouble for risk assets. The chart below shows the aftermath of these past events for major asset classes. 

All but emerging market equities (gold) produced tepid returns over the following quarter (first 63 days below). However emerging markets, developed equities ex-US (red) and U.S. high yield (blue) all quickly ran into trouble the following quarter (through day 130).



The next chart breaks out cumulative returns produced by developed equity indices found within the MSCI World ex-US index. European equities have historically performed worst, while commodity-heavies like Australia and Canada outperform.

The Eurozone’s swift tumble to below-average economic data changes have led to the end of global synchronized growth. Whether or not the U.S. and emerging markets follow suit will very likely dictate flows through year-end.



What about the consumer?

Our focus has also transitioned to assessing consumer stress and spending using Google search trends. The chart below shows the six-month changes in search trends for bankruptcy, default, food stamps, and payday loans. The rebound in these stress-revealing searches recently reached the highest since 2008.

We believe a lack of wage growth and consumer spending may become the biggest impediment to the Fed’s hopes for consistent tightening through 2019.



Similar changes in Google search trends are shown below, but this time for larger ticket items ranging from appliances to new homes. Consumers had shown strong spending potential from late 2014 through 2017. However trends have shifted significantly lower to frequencies not seen since early 2014.



We have lambasted traditional surveys in recent months, while placing greater weight on the alternative data of search and news trends. The chart below shows changes in Google search trends for an array of policy-related themes: national security, public policy, spending policy, trade policy, and monetary policy.

National security, trade, and monetary policies have taken a back seat to public policy. We continue to believe central banks outside the U.S., especially the peripherals like Argentina, are facing rising uncertainty. The Federal Reserve likely has wiggle room for further tightening policy barring an abrupt rise in uncertainty.



The chart below shows delinquency rates on credit card balances for top 100 (blue) and outside the top 100 (red) banks. Recent worsening in stress and spending search trends have driven delinquency rates higher for smaller banks having likely loosened credit requirements. On the flip side, larger banks have attracted customers by providing greater incentives like money back and other rewards.

These smaller banks saw delinquency rates of 6.2% in Q1 2018, the highest since October 2003.



The next two charts offer forecasts for charge-offs and delinquencies for these top 100 banks. The models (elastic net regression) are fed the consumer search trends shown above and time series of charge-offs and delinquencies. 

Charge-offs are expected to modestly rise over the next year toward 4.2% from 3.7%.


Posted in Client Conference Calls, Samples

Peripheral Central Bank Uncertainty

The top panel in the chart below shows news trends of “uncertainty” for each central bank. We calculate percentiles of news trends, meaning higher toward 100% implies greater uncertainty.

The bottom panel shows the average percentile across all central banks currently rising toward 40%, which we believe is a key hurdle.



The scatterplot below shows the average uncertainty across central banks versus BofA’s Global Financial Stress index lagged one month. We convert news trends for each central bank into percentiles based on history with higher percentiles reflecting higher uncertainty.

The average central bank uncertainty as a percentile of history has risen to near 40%. The relationship to global financial stress takes a very bearish turn at just above 40%, meaning risk assets suffer and volatility rises. The dotted vertical line marks this critical threshold.



The chart below shows the share of news trends concerning ‘uncertainty’ for each central bank. This analysis sums the frequencies of stories on a rolling three-month window with both words of ‘uncertainty’ and the central bank’s name. 

We have highlighted emerging market central banks sans the PBoC, which have broken to a new high of 55%. The last episode of emerging market central banks producing the lion’s share of uncertainty in May 2014 was followed by plummeting currencies near -16% through January 2016. 

Turkey may be on hold through the June 24th election, but tightening policy will likely recommence shortly thereafter. Tensions continue to boil over in Argentina with large business owners contesting the central bank’s abrupt rise in benchmark rates to 40%.



The seas are much calmer across the key central bank of the U.S., Eurozone, and Japan. In fact, the seas are as flat as glass. The next chart shows the same share of uncertainty news trends, but this time we have highlighted the FOMC, ECB, and BoJ. These central banks are a minuscule 5.8% of the global total, meaning uncertainty cannot really get any lower.

Mester, a devoted hawk, just recently indicated inflation will not likely overshoot, reflecting a comfortability with current policy. Draghi and the ECB may have room to push out rate hikes given slowing Eurozone growth.


Posted in Client Conference Calls, Samples

Does Italy Pose A Contagion Risk?


In a March 4 Italian election, the anti-establishment/Euroskeptic parties did well. Two of them, Five Star and the League attempted to form a government and name Giuseppe Conte as the new Prime Minister.

Over the weekend Italy’s President Mattarella rejected that attempt at a government and named a “caretaker” Prime Minister, a former IMF official and non-political technocrat Carlo Cottarelli, and called for new elections. This has been followed by protests and calls for impeachment of the President. From an AP story above:

The 5-Stars and League responded to Mattarella’s veto with a chorus of criticism that Italy had ceded its sovereignty to the European Union and international financial markets. Essentially, campaigning for the next election is up and running regardless of when the voting is done, promising a heavy dose of euro-skepticism and “Italians First” slogans, especially from the League. Nicola Nobile, lead economist at Oxford Economics, predicted the “the next elections could become a de facto referendum on Italy remaining in the eurozone.”

While the story of the Eurozone imploding is one which has played out fruitlessly many times before, there may be reasons to take this episode a bit more seriously.

First, in the post-Brexit/Trump world, populist movements are not to be dismissed. These movements have the support of a much larger crowd than in the past. Simply put, Mattarella’s decision is angering much more than some fringe crowd.







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