The Path of Pain

After a football dominated weekend, the only solace England supporters have is that God's Sporting Nation got even more thoroughly taken apart by the clinical Germans. The Robert Green Jokes are running wild around London markets today and the England Joke/Real News ratio is indicative of a market that really is gazing into a pretty macro data free week.

And no news = good news. So without any Tape Bombs from Europe the "risk on" squeeze can continue. However the Tape Bombs are a big IF , with today's meeting between Sarko and Mangler being a veritable minefield. Fun to note that the "home" of Europe, Belgium, is now governed by a parliament whose party with the most seats is in favour of a break up of the country. Belgium is a little model village of Europe.

So in markets land, equities continue the grind upwards but, though prices have been marked higher, there isn't any conviction and the market is lacklustre. Technically there are buy signals in the Spooz as the downtrend is broken and the MACD is a "buy". But overall Macro team cant help but think that German exporters are the ones laughing all the way to the bank cash pile and so "should" be the best area to play a squeeze.

Gold, though is not expressing any relief in risk as the BGWDI (buy gold, wear diamonds, innit?) effect continues to more cheering in the ranks (taxi ranks). But considering the Euro function is the stress point then Gold/Euro is where the signals should be coming through. And that is taking more of pause. Can Gold/USD go up on stress and also up on less stress? If GGUF is the new DGDF ( Dollar Goes Down Forever) then it is a tad worrying as we saw how the DGDF ended in a large WTF...

Interestingly, the CFTC data in EUR/USD looks like shorts have INCREASED to almost record levels (see first chart below) despite its crawl back higher while, on the other hand, risk-reversals have bounced (second chart)- something of a divergence. Looks like we are lining up for a bust up between the Fundamentalists of Euro Sceptics and the Extremists of positioning. The path of pain is the usual route, as system trend-followers are forced through the exit.

But the macro background, though cloaked in policymaker shrouds hasn’t really changed. The argument about deflationary vs inflationary pressures continues with the vast majority calling for massive deflation in Europe. But this really depends on how self sufficient Asia is. Can Asia cope with a big slowdown in European demand and manage to maintain prices? We have seen Chinese minimum wages push higher, we see the inflation in China stay high and Chinese export data continues to be strong (Long Beach Container data show largest y/y growth on a seasonally-adjusted basis in imports since 2002 (see chart below). On a nominal basis, the largest number of imported containers since Nov08).

So, if the rest of the world is ticking along just fine and this is a Eurocentric problem then is the analogy something like this - If Team Macro Man get fired, yet the rest of the country is just fine, does Team Macro Man experience deflation? No, prices around them won't change, just their level of relative wealth.

Team Macro Man don’t suffer deflation. They suffer poverty.