Global Macro Trading Journal
- Thread starter Daal
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If the PCE avgs 2% for the next 7 years then CPI will likely be higher than 2.15%, I don't know why would one think otherwise. The fed is targeting the PCE thats why I mentioned
You would be right if the relationship between the PCE and the CPI are likely to break down but I'm not sure why it would unless they change the formula
Well, firstly, I would argue strongly that Fed's real mandate has a lot more to do with core PCE, rather than the headline. We all know that the core/headline spread in both CPI and PCE is driven mostly by energy, historically. That's why inflation mkts arnd the world, especially TIPS, are so sensitive to energy (you can confirm this by doing a simple regression). As an illustration, see the spread between core PCE YoY (de facto Fed tgt) and headline CPI YoY (relevant for TIPS cashflows).
It seems that what you are saying is that because the fed might ignore short-term fluctuations in the most volatile components like energy that will leave the investment very exposed to energy fluctuations. I'd agree with that. I don't agree that it "becomes increasingly more so with time". I'd argue the opposite, the long-term expected return in commodities is probably 0%
http://1.bp.blogspot.com/__Exl9-i4m...640/Total+Real+Returns+1871+-+2010+SocGen.png
So the tendency is for the core PCE and PCE to converge over the long-run
Well, I can't really predict the relationship going forward... However, from the graph of the realized core/headline spread, does it look like we've experienced any sort of convergence during the 1992 - 2012 period? Here's the stats for the headline CPI/core PCE spread:
1992 - 97 mean 0.5%, stdev 0.4%
1997 - 02 mean 0.7%, stdev 0.7%
2002 - 07 mean 0.7%, stdev 0.7%
2007 - 12 mean 0.5%, stdev 1.6%
You may disagree with the view that the relationship is likely to persist, but I am telling you that the TIPS market operates with the assumption that energy is what matters. Today, for example, 5y TIPS breakevens are getting mullered and it's mainly because of oil, rather than anything else.
Quote from Debaser82:
There is a Romanian miner called Gabriel Resources.
Paulson and others hold it.
It has big permit issues and the stock has fallen from 9$ to 2$ today.
If it drops below 1$ or further I might buy some.
If the permit issue gets resolved it could easily spike massively.
Other miners have had simmilar issues, some went bust, others went huge.
And everyone knows in Eastern Europe you can just buy your permits right...
http://www.winnipegfreepress.com/bu...-review-of-open-cast-gold-mine-150169825.html
Toronto-based Gabriel Resources Ltd. (TSX:GBU) has been waiting 14 years for permits to go ahead with its Rosia Montana gold project in Transylvania. It says the project is believed to contain 14.6 million ounces of gold and 64.9 million ounces of silver.
President Traian Basescu, a strong supporter of the mine, urged the previous government to speed up the process to grant permits, saying the mine would provide vital foreign investment and jobs in an impoverished region.
The project has been strongly criticized by environmentalists and historians because it uses cyanide in the extraction process and the mine is located in an area where there are Roman remains.
Down another 10% today.
I think this is pretty much accurate.
It's of course possible for everyone to be right, in that EURUSD plunges in a capitulative move during the first days to several weeks of panic, followed by an extremely strong rebound over the subsequent months.
So it'll go down, or up, or down then up and sideways overall... I'm not planning on wading into this muck. IMO there will be much better trades out there.
I agree, I think the odds are <5%. But my post was about what happens IF a country exits, not what happens before then. A euro exit by a member state will massively increase risk and cause loans to that country to drop 50%+ in value. That will cause capital flight, regardless of how well Germany's trade surplus and CPI is going.
Besides, if I'm wrong, I will know within 1-2 days of the announcement that a PIIGS country has exited, and I will lose 2-3% at most. If you are wrong, you will not know for weeks or months, and you will drop 10-30% or more. Buying the Euro the day that someone exits is a classic over-opinionated trade with terrible risk/reward. If you are a contrarian bull, waiting a mere 1-2 days later is the play.
Eh? Capital flight from where? And capital flight TO where?
If there is an exit, then the country doing the leaving is revoking its status as a euro user.
Italy, Spain or whomever would effectively be saying "our massive future fiscal liabilities are no longer denominated in euros." That is euro-bullish.
The exit scenario is a twilight zone concept anyway, with huge unknowable unknowns.
For instance, were, say, Spain to plan an exit, how would they do it? They certainly couldn't preannounce their intentions. That would cause a run on all the banks. They couldn't say "we're thinking about it," or even hint as much, because that would achieve the same effect.
And what about the local exit economy? Bank accounts would have to be frozen prior to the announcement, with outside currency conversion restricted and even cross-border capital flows restricted. Otherwise, the instant the exit was announced, so much remaining local capital would flee that the exiting country's economy would collapse. Cross-border business transactions would collapse regardless.
And where would the flight money go?
Into gold? That's not really practical. Into the U.S. dollar? Really? Why?
It seems more likely to me that the panicked depositors of an exit country -- including large business depositors who still need liquid capital for doing business in Europe at large -- would want to transfer their assets to accounts in some other euro-denominated jurisdiction.
There are other options, but none large enough to absorb the huge capacity at hand. Swiss and Swedish banks would have to turn depositors down flat, or charge them a crazy amount of negative interest.
But on the whole, thinking this through even just superficially, I don't see
1) how an exit could be pulled off w/out capital controls, and
2) how the capital activity of the surrounding countries would not spur a euro-bullish reaction in aggregate. Portugal and Italy see Spain leaving with accounts frozen, Portuguese and Italian capital flees to... where? Business capital that continues to have European obligations flees to... where? Germany and the Netherlands et al are suddenly looking damn good, not just as a credit-quality macro speculation but as an emergency bolthole.
Furthermore, the thorniness of the capital flight problem from within the exit country would probably require some kind of instant conversion, on the order of "Attention citizens: Your euros are now lira / pesetas / drachma etc. The conversion is irreversible and already in effect." How else would they do it? And how would doing it this way be anything but bullish for EURUSD?
Hahaha, what? How in the world did you calculate that?
First of all, the original mention of using a 1 ATR trade stop -- I believe you argued for a 1 ATR stop specifically -- is absolutely nutty in this instance.
The initial reaction would create wider elbow swings in EURUSD than a king-kong-sized Kareem Abdul Jabbar; in the event of an actual exit, the euro could drop 10 handles in 10 minutes and then rise 25 handles just for the hell of it.
Furthermore, you wouldn't know shit in "1-2 days." Remember what it was like when congress was debating whether or not to give Hank Paulson the $700 million? Did that resolve itself in 48 hours. I don't think so. Now think of the political clusterfuck that is Europe, with politicians from 17 different countries shouting at the top of their lungs.
Secondly, when I said I would "take the other side of the bet," I didn't mean in a Forrest Gump type of way that would be guaranteed to get my teeth knocked out on a predictable volatility explosion.
"Taking the other side of the bet" would more reasonably be interpreted within the context of a logical wager, not an insane one, involving either a limited risk options spread (with sufficient time to play out) or a gentleman's bet as to what the over / under on the euro higher or lower would be in X weeks / months' time and so on.
And yeah, if I'm wrong I would "be down 30%." How in the world... where in blue blazes did "down 30%" come from? Is there an imaginary version of me conducting an imaginary trade?
You have this habit of erecting straw men without brains in their heads, or otherwise assuming your counter-debaters are lobotomized. Maybe I'm being confused with one of those premia-collectors who assume portfolio allocation and risk management are the same thing?
There's actually quite a few papers out there discussing the possible mechanics of a monetary union breakup and all the lex monetae stuff. People have been trying to come up with scenarios for this for a while now. Not that there's any more clarity as a result.