Tuesday, March 15, 2011

Meltdowns and Tipping Points.

TMM are really busy this morning trying to juggle falling knives with their hands whilst helping the market kick other things off cliffs with their feet. This is a good old fashioned position liquidation day with all the associated nightmares. For RV players, things that should correlate suddenly don't and for macro players things that shouldn’t correlate suddenly do.

Whilst the debate rages as to how the Japanese disaster will manifest itself as ripples of the, now financial, tsunami refract around the world, TMM are left in money management mode. Thinking about the next big trade is being swamped by protecting what we have.

Despite the temptation to look at the Japanese situation and directly extrapolate every function to justify meltdowns in everything else, we would rather see this event as a tipping point. We have been concerned for some time (and started playing for) a global growth shock, but were never really sure what would catalyse it. So perhaps the Japanese disaster is that tipping point in a super-critical market that has been leveraged via sentiment towards the inflationary growth story funded ultimately by cheap QE.

TMM have just finished reading a book by one of their mates and find the subject so very apt for today. As its forward pointed out:

"We live in a bewildering world of change, which splits naturally into steady progress punctuated by sudden disruptions - the two speed world. Steady progress ensures the survival of our species, but it is the disruptions that move us to a new level. Both types of change, slow and rapid, are important, because they mould and shape our lives, but because of their widely divergent characteristics it is sometimes difficult to recognise a major life-changer until it is too late. Even if we do spot the upheaval, we cannot deal with a change unless we understand it".

Loath as we are to be seen promoting books "Two Speed World" is an interesting view of the behavioural issues involved in explosive and gradual change.

It's been a long night and we have yet to see the US response to this sell off, so if we were to don Kevlar gloves then it would have to wait until tomorrow at least.

As for trades? You could go Long Tuna, Short Zirconium !

25 comments:

Anonymous said...

Oh yeah, I read Ashley's first book, highly recommended.

Price action today is quite something. Thanks for taking the time to share your thoughts guys

Good luck all

Anonymous said...

Actually the past 2 trading days are the most profitable days for me so far this year. All the patience paid off.

One lesson from these days: you really cannot trust Japanese politician on life and death issues.

Right Field said...

Larger Inflection Point Than Most Willing to Acknowledge --- The majority continue to argue that natural disaster or geopolitical events are still not strong enough to force real money to negatively adjust factor inputs with respect to growth expectations, Europe has seen very little real money selling today despite -3-5% index levels. Despite the deflationary asset price reaction post the Japan monetary and fiscal announcements, many are still holding the weekend’s view that as a G3 nation, Japan will fill the Fed and ECB void for worldwide liquidity and provide a needed adrenalin shot. This tone is echoed primarily due to positioning as many yesterday closed hedges rather than rolled them down and others attempted to play the event driven situation from the long side on an opportunity view, both of which has either caused overnight or will today a fair amount of P/L duress. This argues today is not about buying weakness but instead about adjusting risk premiums higher, position readjustment and P/L preservation, especially since Bernanke is not until 2:15 pm today.

Conclusion: Consensus believes that Bernanke is a non-event and will hold his long standing language leaving asset prices to adjust on their own to other events. The risk is the barbell, the left side being inflation that leads to a stronger USD and an ECB Trichet like policy mistake and the right side being dovish due to Japan or potential deflation outcome that leads to positive Equity prices (buying dip). The former would be significantly more violent because the majority of professionals hold some type of long dated tail risk hedges related to Japanese Yen or JGB’s. Point being, people are making money on short-term long vol positions but for long-term structural trades to kick in a real move in JPY/JGB is needed. A dollar bid post Bernanke is a catalyst for a JPY/JGB move and would a real concern should it materialize. Odds are it’s a non-event as Bernanke believes it is criminal for the SPX to weaken and being close to 100 handles off the SPX highs in the last month with US data rolling over forces him to lean dovish.

FX said...

TMM, the investment houses around town have run out of armchair thingymebobs......

http://ftalphaville.ft.com/blog/2011/03/15/514731/a-nuclear-primer-from-barcap/

Tell me is this part of the "expert networks", all can we just tell the judge is was all in the "price action" your honor.

Godspeed Nippon.....I owe you one.

Anonymous said...

"Japanese politician on life and death issues."
One redundant word in that sentence and you get a Mars bar for guessing which one.

Nemo Incognito said...

FX having sat on one particularly useless GLG Group call today at the behest of management with some supposed reactor expert I can only say: screw them all. Best guys are impossible to get right now (Thomas Neff) and the average Joe is better off buying some books than paying some part time uranium trader to read him a wiki entry.

Anonymous said...

Well, I think the US market is oversold, but I neverthless will not stand in front the wave for now.

Longer term, commodities should be the first to recover, considering Japan is going to rebuild and literally it has to import everything.

Leftback said...

LB concurs completely with RF on Bernanke. Anyone who thinks that BB will utter anything other than the purest essence of distilled dovishness during this period of TEOTWAWKI liquidation is out of their tiny minds and deserves to receive a painful squeezing.

We are wondering if this "Black Swan" event will have turned out in retrospect to be the trigger for the long-expected rotation out of the many amazingly over-valued reflation and recovery vehicles and into undervalued dividend-paying stocks.

LB hopes that TMM have enjoyed their U miner shorts these last few days. Seeing UEC plummet from 5.50 to 3.00 at today's open suggests that this may have proven quite profitable. Back in the crash we bought some of that for 23c... those were the days.

The apocalypse trade seems overdone here, let us all hope that things improve in Japan, and it's probably time to fade TEOTWAWKI.

Anonymous said...

LB, I think one should not underestimate the level of destruction in Japan and the effect of negative growth in top 3 country on the so-called recovery.

First, the trade balance shock is going to be enormous given the exporters down-time, massive imports in everything and the fuel balance hit.
Second, a number of regional banks in Japan are insolvent as we speak given that at tops 30% of households/businesses are covered by any kind of major disaster insurance. So the banks are in second loss structure after insurers and have much higher exposure. Third, who is going to finance this rebuilding effort - you think Japan can afford a 3-5% GDP stimulus package with local banks and corporates liquidating JGB left/right for their own cashflow needs?

If major revision to GDP of Japan isn't worth 10-15% down on S&P at least, I don't know what is. And given the looming major uncertainty as to what happens after QE2 is over in June (hint - down until QE3 is announced) current TEOTWAWKI maybe not that short lived.

Tyler said...

Shouldn't the apocalypse trade be accompanied by a rally in gold? something seems off.

Citi observes heavy short covering.

k1 said...

Greetings TMM and everyone. I've been trying to look beyond the immediate fear and drama toward things that happen next. In particular I'm starting to wonder how Japan will replace the electricity formerly generated by those nuclear plants.

A bit of googling produced this page with charts from 2006: http://www.uow.edu.au/~sharonb/japan.html

This chart in particular: http://www.uow.edu.au/~sharonb/images/Japanbar.gif

Considering the disaster, some portion of nuclear generation is gone for the near term, to be replaced by...what? Coal? LNG? Oil?

Just wondering if the selloff in Oz provides an opportunity in thermal coal. Anybody?

Anonymous said...

It's not gone for near term - it's just gone completely when they started pouring the sea water. Now it's only deactivation and site clean-up left for the next 5 years.

I estimate 11 out of 55 Japanese nuclear plants will be shut-down- including the other GE-engineered old plants of TEPCO which are not in Fukushima but will remain shut because of safety issues. Other plants will undergo massive safety check downtime this year - this actually includes not only Japan but all other plants like this.

k1 said...

Anonymous @5:28 - no argument. My question is: of the remaining power generating facilities, which are most likely to have spare operating capacity that can be called on?

It seems to me that some power generators will be allowed to make "extra" profits in this time of need, and some fuel sources will be drawn upon, heavily.

Anonymous said...

Anon 5.28
Indeed, I think we might have some mentality here that thinks,oh bit of a sell off,catch it tomorrow on the bounce and that's all there is to it.
The actual scale of where this goes form here for the 3rd largest economy in the world is not going to be a one night oh it's oversold on my thinggammajig indicator which means buy buy buy.

Supply and demand on trade is going to be shook up for a lot more than a couple of days.

Leftback said...

Anon 4:43 makes good points, indeed. It will be a while before we get a clear view of Japan's growth prospects, and we can expect to see some debate in this space.

We are taking our trading cues mainly from the Treasury market, which looked at a 10y at 3.23% and promptly turned around. Maybe the markets should indeed reset to a slower growth forecast (we were not on board with the mainstream anyway), but as of now we don't see the slowing economy and the resultant risk-off trade taking the reins in earnest until later in the year.

Of course, I could be talking complete bollocks, we all get it wrong from time to time. Did reduce fixed income and exposure to USTs quite a bit today and also started to put a bit more risk on, which we didn't have a huge amount of last week. We didn't touch Europe or emerging markets, however.

CV said...

Well LB (and others); I fully agree! With the Beard almost surely pissing his pants already seeing that the SP500 is breaking down, the good ol beta play in the US may still be a winner.

I like India and Chile too with the former seemingly consolidating. My rationale is that slowing global commodity prices is bullish for India since it means less need for RBI hikes (let us see their communication this week) and India has plenty of self-sustained momentum. But it may be too soon for EM exposure, but I am getting trigger happy from looking at the charts ... dangerous, I know :).


Unless we are looking at nuclear holocaust (which I doubt) this is just going to be a blip in the risk on race. Remember, no fiscal or monetary tightening yet. And no, I actually do not see the ECB raising rates even it is pretty much telegraphed. Also, the day of reckoning where the BOJ monetizes almost the entire marginal flow of JGBs is moving closer by the minute ... indeed, they are already buying the flow of JGBs in the secondary market from pension funds that need to sell to fund pension payments (or so at least I read the tealeaves of the Bloomberg reports), please do correct me if I am wrong!

Indeed, the fact that the liquidity fuelled melt-up is getting a breather due to the double whammy of revolutionary fits in MENA and the Japs' misery, it could solidify the rally (if of course the dams hold).

As an aside, I wonder how many of the pros feel like big swinging d'cks today after having put on the long solar/short uranium trade yesterday.

TMM?

Claus

Anonymous said...

Judging by the news breaking AFTER market close we are going to get to see the overnightmarket power of Ben B v the Japanese nuclear reactor.
I'm sure here are times to catch a falling knife,but I'm not sure this is it.I prefer my knives to be much nearer the floor.

Anonymous said...

opion on replacement nuclear by nuclear in japan

http://www.cringely.com/2011/03/is-anything-nuclear-ever-really-super-safe-small-and-simple/

Leftback said...

The arguments about nuclear power and safety are very reminiscent of those about airplane travel. We have to remember that our news is produced and delivered to us by those who think with the amygdala and not with the cerebral cortex. Remember that all of our politicians and media people are where they are because thinking about physics and engineering was too hard.

From time to time a plane crashes and everyone screams about flying being dangerous, but the data don't support that contention at all. The same people screaming are quite happy to be in a coach on the M6 or I-95 driven by a jolly Scotsman or a recent immigrant from China who may or may not have imbibed to excess the prior evening, or indeed that morning.

Coal fired power stations kill people in China every day, but it's not visible, so nobody screams about the hazards. We are going to have to think a lot more clearly and be less hysterical about energy issues. Let's be rational, in this, and all things.

CV said...

People in Denmark are running to the pharmacies to buy ionised tablets ... indeed, the civil emergency center has opened a hotline to take care of the storm of calls they are getting in Denmark people ... I repeat Denmark!!! Talk about a waste of public resources ...

But then again, "nuclear meltdown" on the frontpage sells more papers than a royal wedding in the UK ... hmm ok, but close!

Claus

Anonymous said...

CV
So do we buy Pharms

CV said...

Hmm no, not in DK at least because they don't have these tablets in store anymore ... :)

Anonymous said...

To get to the “rational” we’d have to remember first that we too are where we are, well, because thinking about physics and engineering was too hard.

Plus it didn’t pay.

In fact it paid much-more to kick those engineer butts out the front door for not agreeing to our “economical” design, back in The Days. It still pays more to make WG “recyclos” to light some of our civilian butts while happily omitting (the 1st) 24.000 years of risk (leftovers) …

In fact it pays a helluva lot more to stay irrational.

Jim said...

Bernanke has to remain loose forever because he has no options. With a duration of 5+ on the balance sheet and yield of ~3% he has little room to act in an inflationary/rising rates environment before the market realizes his balance sheet is hemoraging. To make matters worse, employment is not coming along as expected and ME, Japan and softer Asian (including NZD and AUD) growth data (which has been the leading indicator for the world recovery) is providing a headwind for his SPX to the moon hail mary... Look for a 10-15% decline in SPX before we see hints of QE3.

Jim said...

"My rationale is that slowing global commodity prices is bullish for India since it means less need for RBI hikes (let us see their communication this week) and India has plenty of self-sustained momentum. But it may be too soon for EM exposure, but I am getting trigger happy from looking at the charts ... dangerous, I know :)."

I agree and think the EM-> DM rotation trade is nearly over. Controlling inflationary pressures in an emerging economy for goods that are generally inelastic involves a general appreciation of the FX. For a country like China, the implications are clear for the US - higher core CPI as all imported goods gradually become more expensive.