Global Macro Trading Journal

[Specterx]

Now that's something...

I dumped half of my spec gold/GDX position near the open due to the post-Fed action and then the gap down. Lucky break evidently. Also trailed out of silver (slight loss) and JPY (slight gain) yesterday.

The PM's selloff in line with 'risk' makes no more sense than the past month's stock rally: no easing for the moment implies an escalation of overall credit/monetary stresses, and the printing will obviously resume eventually. I would have actually given the stocks down, PMs down setup the lowest odds, behind either stocks up with flat PMs or both up.

At the moment I'm still wary that equities are actually starting another leg down, even though I'm positioned for one. Remain strongly bullish on PMs but the Fed has clearly triggered a negative reaction there of unknowable duration, and there's obviously the risk that recent lows are retested etc - so I'm ready to dump further holdings in the short run while also keeping a finger on the buy-back-to-full-size key.

 

[Daal]

I added to EWH and EUR shorts a bit today. Might buy more TLT soon if it continues to rise

 

[darkhorse]

Quote from Specterx:


The PM's selloff in line with 'risk' makes no more sense than the past month's stock rally: no easing for the moment implies an escalation of overall credit/monetary stresses, and the printing will obviously resume eventually. I would have actually given the stocks down, PMs down setup the lowest odds, behind either stocks up with flat PMs or both up.

At the moment I'm still wary that equities are actually starting another leg down, even though I'm positioned for one. Remain strongly bullish on PMs but the Fed has clearly triggered a negative reaction there of unknowable duration, and there's obviously the risk that recent lows are retested etc - so I'm ready to dump further holdings in the short run while also keeping a finger on the buy-back-to-full-size key.

PM selloff makes sense to me in light of two factors:

1) reduced inflation expectations

2) portfolio contagion

More and more the Fed looks to be in a liquidity trap.

Keep in mind that warnings of out-of-control inflation have persisted for years -- argument being that all that pent up liquidity injected into the system by the Fed will eventually cause monetary velocity to explode.

For monetary velocity (and thus inflation) to run wild, you need one of two things to happen:

Either a genuine economic recovery, in which case the lending and spending engine starts of its own accord, and then quickly overheats with the Fed afraid to nip a nascent recovery in the bud

OR

A full-on deflationary-downward-spiral panic scenario, in which case the Fed has the fear of God put into them and drastic measures are taken (even as drastic as charging banks negative interest rates on excess cash balances held, or purchasing equities outright).

Right now, though, we are far from the fire and ice scenarios. Evidence instead suggests an ugly muddle through, where things are just "okay" enough, on both the US econ front and the Europe front, for the Fed to hang back. Why shouldn't gold and gold stocks decline in such a circumstance?

"Well," one will say, "because inflation and the inevitable effects of monetary debasement MUST come eventually." Which is true, but shit, they've been saying the same thing about Japan for over a decade... so it's not irrational for the market to respond to short to intermediate term drivers and sell off PMs here and now as global slowdown looms with stimulus efforts failing.

Second factor, portfolio contagion -- there are enough hedge fund managers long gold and gold stocks, who are also long various and sundry equities, that when equities get killed they have to sell off their gold and gold stock holdings too, in an effort to reduce exposure and get smaller.

And then finally you have the Hugh Hendry / Gary Shilling contingent... those who believe this is all going to end with a spectacular blow-off top in US treasuries, the likes of which have not yet been seen -- a sort of deflationary freakout that is the inverse of the inflationary freakout that peaked circa 79 / 80.

Given the above, I still maintain it is possible -- not a prediction, but possible -- that gold falls far and hard, perhaps even to retest triple digits before all is said and done.

On another side note, how about that Aussie - reshorted this morning on 60 min trend break (posted chart premarket on another thread). Woot!

 

[flipside21]

Quote from Daal:

I added to EWH and EUR shorts a bit today. Might buy more TLT soon if it continues to rise

EUR is probably a good short. The threat of USD QE3 was the thing that kept EUR higher than it shoulda been all time, but now people realize it's later than sooner, whereas problems in Europe are sooner than later.

30 year is fairly tame today relative to the decline in stocks. I think there's a final run higher, esp if SPX goes down to 1200 level, but not that much upside relative to its advance from late March. JMHO.

 

[Specterx]

Quote from darkhorse:

PM selloff makes sense to me in light of two factors:

1) reduced inflation expectations

2) portfolio contagion

More and more the Fed looks to be in a liquidity trap...

...

And then finally you have the Hugh Hendry / Gary Shilling contingent... those who believe this is all going to end with a spectacular blow-off top in US treasuries, the likes of which have not yet been seen -- a sort of deflationary freakout that is the inverse of the inflationary freakout that peaked circa 79 / 80.

Given the above, I still maintain it is possible -- not a prediction, but possible -- that gold falls far and hard, perhaps even to retest triple digits before all is said and done.

The major element missing from this analysis is that any of the 'deflation/fear' scenarios imply an intensification of credit and economic stresses - another environment in which gold does well. Another way to think of it is that gold rises inversely to people's faith that the system is stable, and that the Fed et al have everything under control. This would explain why gold bottomed out in 2000/01 when there was of course no general fear of catastrophic inflation or deflation, but the onset of terminal instability (represented by the Greenspan fed having to slash rates to 1% and deliberately blow a housing bubble) didn't go unnoticed by prudent observers.

The catastrophic hyperinflation scenario explains why gold may one day go to 10,000 or something; systemic stress explains why it should at least remain in a long-term uptrend and hold established support levels, of course allowing for drawdowns of say 25-30% following occasional parabolic advances.

If we're left with 'portfolio contagion' and a sort of knee-jerk sell reaction as the headlines shift temporarily towards a no-stimulus environment (and we are after all talking a matter of months at most before QE3 or something similar is implemented, certainly not years), then the obvious course of action is to reduce exposure to the point where a selloff lasting a few weeks to a couple of months can be withstood, and be prepared to buy in heavily once the effect seems to abate. The last time this happened GDX rose by 25% in three weeks.

 

[darkhorse]

Quote from Specterx:

The major element missing from this analysis is that any of the 'deflation/fear' scenarios imply an intensification of credit and economic stresses - another environment in which gold does well. Another way to think of it is that gold rises inversely to people's faith that the system is stable, and that the Fed et al have everything under control.

But that was part of my point... we haven't reached a point of meaningful deflation fear yet. The Fed is not seen as 'out of control,' they are seen as hanging back and reluctant to act (for now).

Quote from Specterx:

then the obvious course of action is to reduce exposure to the point where a selloff lasting a few weeks to a couple of months can be withstood, and be prepared to buy in heavily once the effect seems to abate. The last time this happened GDX rose by 25% in three weeks.

Or, if you're a trader, to just not have a position here and wait to load the boat until the inflection point is just right. Taking the pain and risk of being too early for fear of missing the rocket ship ride is not my style. I like Taleb's advice at the end of Black Swan: Never chase a missed train (or let the excessively early anticipation of one drag down your portfolio).

 

[Daal]

The stock market decline from May to early July was quite contained in the sense that it was orderly, there was like 1 -2%(If that, can't recall) day during the whole move. To me the reason was that the Bernanke put was assumed to be there and people felt free to front run that(There was plenty of bad economic news but the dips were bought)

Now that people are realizing that the Bernanke put is not in the money and matter of fact it might require a decline in stock prices(along with iexpectations) in order to be in the money a great 'unwind' of the front running trade could take place, we could see an 5-15% decline in stocks(As people unwind it and get pessimistic leading them to interpret almost every news as bad, ala Jul/Aug 2011) over the course of a few weeks

This is just a theory. It has a good risk reward though, if the market picks up from here then I will decrease my bearish bets. If it doesn't and gets weaker I will increase it and expect a VIX 35+ spike(-2% or more days should come back)

 

[Daal]

Markets might realize that front running the policy response in a major way is counter productive for it to actually get the response, sounds like an obvious thing but for some reason equity markets kept doing it

This leads to a few things that could play out over the next 30 days
-Bad economic news go back to actually driving down equities
-People's pessimism rises, as a result no news is good news, people interpret it as bad
-The next fed meeting is only 44 days from now, as a result there is no body to put a floor on equities anytime soon. This is similar to early 2008 where the Fed cut rates by 25bps then equities tanked for weeks till the Fed was forced into an emergency meeting a few days before the official meeting to rescue the equity markets(Around MLK holiday)

Again, this is just a speculation that the market has 'changed the rules'. If I'm correct here the downside is large, if I'm wrong I will quickly decrease my sizing as people start to buy on bad data again

 

[flipside21]

Quote from Daal:



Now that people are realizing that the Bernanke put is not in the money and matter of fact it might require a decline in stock prices(along with iexpectations) in order to be in the money a great 'unwind' of the front running trade could take place, we could see an 5-15% decline in stocks(As people unwind it and get pessimistic leading them to interpret almost every news as bad, ala Jul/Aug 2011) over the course of a few weeks

This is just a theory. It has a good risk reward though, if the market picks up from here then I will decrease my bearish bets. If it doesn't and gets weaker I will increase it and expect a VIX 35+ spike(-2% or more days should come back)

I think so. The whole ramp up from after 6/6/12 started from the Hilsenrath WSJ QE3 leak. All that has to get taken away, and then some.
http://online.wsj.com/article/SB10001424052702303918204577448802287653684.html

 

[Specterx]

Quote from darkhorse:

But that was part of my point... we haven't reached a point of meaningful deflation fear yet. The Fed is not seen as 'out of control,' they are seen as hanging back and reluctant to act (for now).

Clearly this (loss of confidence in the monetary system, credit stresses etc.) is not an event so much as a process - and from gold's action it's also clear the process began around 2000. I do not see any reason to expect confidence in the Fed's management to suddenly improve, ditto for the country's broader fiscal and economic situation.

Or, if you're a trader, to just not have a position here and wait to load the boat until the inflection point is just right. Taking the pain and risk of being too early for fear of missing the rocket ship ride is not my style. I like Taleb's advice at the end of Black Swan: Never chase a missed train (or let the excessively early anticipation of one drag down your portfolio).

Gold weekly gave a technical buy signal on June 1st which is not invalidated until the May lows break. GDX is iffier but given the spread vs. gold, I'm willing to take more stabs at probing for value there.