Monday, February 07, 2011

Left for doom or right for normality?

Do we turn left and take the short thought path which takes us to the Middle East blowing up big time and a global energy winter that will make the 1970s look like nirvana? Or do we press ahead down our current path of analysing the normal diet of Eurowoes, US QE3/growth/Asia/inflation/trade etc? Because it just feels like a complete waste of time trying to micro-adjust our views on the world if within 3 months we have the Egyptian Eurovision song contest group, the Brotherhood of Man, doing an Ayatollah Khomeini and taking Egypt all Iranian. Have you seen the stock of weapons that Egypt has? 1000+ M1 Abrams's. And who knows how many jets etc. We hope the US remembered to fit them with some sort of remotely activated immobilisers. If they can do it with cars, it would make sense to do it with the weapons of death and destruction you hand out around the world.
- Hey Mo, call your Albanian mate to get me M1 goin', cos it's immobilised, innit
- Sure mate, as soon as he's finished on this AMG S65 in Chelsea, innit

The market appears to be in a similar position having got bored of the short term Egyptian story. TV pictures from Tahrir Square are showing crowds of friendly people waving at the cameras, which is more like a cross between a Live Aid concert and your local farmer's market than the path to Middle East Hell. So short term we are back to the basics.

The first thing we note is the MRSA like resistance of the equity markets. They appear to be thriving, unscathed by the recent anti-equities dousings of Egypt, the NFPs and bond yields. Which makes us think they will scream 2% higher today as the negative news flow pauses. And what of the UST yields? They are now looking a little bit toppy and though we are not donning the Kevlar hand protectors just yet, we are unlocking the glove box. The strangest pair to start motoring has been XAU/EUR. Of course, we could argue that the Middle East picture means that Gold goes up AND USD goes up on safe haven play, but these sorts of moves in Gold AND Euro, rather than being reserved for Eurowoes as normal, look more like a direct response to European rate moves. As for those Eurowoes, the STFU policy is working well and we still don’t see any specific worries appearing for at least another couple of weeks (apart from those German factory figures) and we hold on to our summer of 2010 theory. We have to say though, even though that model of ours says eur/usd looks cheap, recent moves in rate differentials and marginal credit widening make it less attractive. Darn...

So as for calls for today, we leave it up to you... Please pick a number form list A, a time frame from list B and an asset class from list C.

A - 1.3890, 3.7%, 12.98, 35bp, Parity, 8678, 3.1415, 0
B - Tonight, never, 3rd may, 4th July, St Swithins day, the 85th of Julember
C - EUR/USD, SPX, Indonesian palm oil, French spreads and pates, Pi

Of course you are welcome to add your own. Good luck and see you at the top.

Oh, and one last thing... It appears that our views on Zimbabwean Economics and The Merve's Gaucho Grill have been taken up by UK football


Leftback said...

Today's post reeks of "Exhausted Skeptic", which is pretty close to where I find myself, with a slightly frayed pair of Kevlar gloves.

Currently pursuing a strategy of long dividends/short emerging markups and assembling a pile of increasingly defensive fixed income punts. Meanwhile we see the value of social networking sites for pit bull puppies (iBones) and other forms of navel examination rise inexorably..... all a bit '99, really.

Valuation is simply a function of liquidity here. People are really starting to chase now, they must want to lose money really badly. But then many investors don't want to make money, they want approval, crave inclusion, to run with the crowd. Of course it it's OPM, life goes on.

Somewhere Chuck Prince is dancing.

Anonymous said...

Type of equity market that can run up and then lose 6 months gains in a 2 weeks. Some defensive fixed incomes doesn't sound bad to me either ,but I think they we can get even better prices in March than we can here.

Anonymous said...

wall of liquidity still up and upright

Anonymous said...

one can keep it upright for hours with the appropriate stimulation, but after the liquidity comes out it's always the same - mr floppy comes to town.

Anonymous said...

Why would you choose to beleive that this market requires "liquidity" - assuming reference to QE ? It's not the first time there was an asset bubble. It's not the last one. This one was mainly due to mark to market provisions upon banking sector (brain dead idea to make a firm report MtM on 30y plus trades to start with). You say a bit like 99 really ? Mmmm, i dont know. i mean history books out there are cheap. take a look at 1992-1997 period.

Leftback said...

Funny you should say the 1990s, I can see that but not in the way you intended. Can't really see much parallel to 1992 in the US, apart from a Democrat in the WH. I mean, once you hit the Zero Bound it's all Alice in Wonderland isn't it?

Good data are bad and bad data are good, but as long as there is QE you can sit and intone "Goldilocks" as the market goes up. But when does the market price in the end of QE? Does it look 6 months ahead? 3 months ahead? Or does it wait until the night before and hope for a QE3?

We are on the other side of the rabbit hole here. Not sure you can use analogies with other US asset bubble periods because we have never been in ZIRP before. The only real example we have is Japan.

One has to differentiate between successful management of public perception and reality. Reflationary interventions can mask an ongoing depression by preventing the most obvious signs of deflation, namely, falling asset and commodity prices. But since these interventions do not stimulate demand, the likely result of sharply accelerating commodity prices is margin compression for producers and retailers and demand destruction from many consumers who are experiencing flat or lower incomes. If you knew any actual lower to middle income people you would see this first hand.

The only difference between the BoJ actions and the Fed's interventions has been the scale and the speed of the QE. As a result, the Fed induced rally has been larger and longer in duration than any in 1990s Japan. But the end result will be the same. Housing, employment and personal income will be stagnant or declining.

When it becomes economically necessary to support the US Treasury market and politically impossible to reflate equity markets, the air will be let out of the balloon and all the circus tents will be quietly folded up, with the banks holding long-dated Treasuries and retail investors holding the bag once again.

Polemic said...

Well LB .. it may appear to reek of an exhausted skeptic but not quite. Its more of a weary bull. Weary that I've had the run up in equities on for some time but am finally thinking its time to take the money off the table and see how things pan out for a bit. The argument that "no one has it on" is still valid and has been a cornerstone to me holding on to the rally. But right now.. ? I think the swing higher after egypt meant a few more towels came into the ring, but there is actually a chance that its TOO bullet proof and starts arsing around with loaded guns. So, out and on the sidelines.. a P is a P .. if i miss a bit more up as things pan out then so be it. its only Feb.
As for Euro -- yes more exhausted skeptic squared.. (thought it should go higher again) .. but rates swings and Eonia falling and liquidity returning are bringing the thoughts back to "smalls".

Exhausted in General - Yes .. But thats because I've been having too much fun ..!

PS bloody Gold.

Anonymous said...

Well, for the sake of original blog's guidelines, lets concentrate on opportunities and not dogmas. This is not a think tank but a bunch of guys who make money.

Leftback said...

Point taken. But even guys who make money are allowed to think from time to time....