JS Global Macro Notes

Global Macro Notes: A Massive Topping Process At Work

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"You look at every bear market and they’ve always basically occurred because of an up-tick in inflation and an up-tick in interest rates."

~ Paul Tudor Jones

We continue to operate on the thesis that, apart from one or two notable exceptions, there is a massive topping process unfolding.

This thesis is being steadily confirmed on three fonts -- news flow, price action, and portfolio P&L.

The up-tick in interest rates PTJ spoke of is present (as we will further note shortly). And of course, "non-core" inflation concerns are here too... as are the gray swans of China, Europe, and U.S. financial fraud...

And what of QE2? According to the bond market -- prices falling, rates rising -- QE2 is a dud. The 'vigilantes' are calling the Fed's bluff.

Meanwhile, rates are headed into a "raise, raise, raise" pattern for China -- and the Fed is not exactly heaping glory on itself with ever more desperate emerging market finger-pointing.

A year from now, QE2 may be viewed on the charts as a headfake non-event... an excuse for one last sprint up the hill, rather than the start of a new bull marathon.

After all, most of the love was priced in before the actual event -- pure psychology at work -- and the post-QE2 gap, quickly closed, wound up littering the landscape with broken trends galore...

Read full notes here
 
Weekend Comment: For Commodity Bulls, "Don't Fight the Fed" Becomes "Don't Fight Beijing"

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The big story in the week that was (besides the customary Black Friday trample-fests)?

"Greece Part II: Eurozone sovereign debt crisis revisited."

As such, the Captain Obvious award goes to the NYT for pointing out that a bailout of Spain -- were such even feasible -- would test Europe's finances.

(Nah, ya think?)

Funny, though, how the big driver often winds up being the thing less talked about. And right now, there is very little focus on what's happening in China.

The old Federal Reserve rule is "three steps and a stumble," meaning, when the Fed hikes rates three times, look out below. (Basic rationale: As interest rates go up, margin and loan service costs go up. Rate-of-return hurdles go up. Yields on safe haven debt instruments become more competitive. All this happens with risk appetite in a 'peaking' stage, and the bloom comes off the speculative rose.)

So if "Don't Fight the Fed" counts as time-tested wisdom, how about "Don't Fight Beijing?"

Read full comment here
 
Darkhorse,

Thanks again for your comments.

I note that you mentioned a short position in oil established earlier in November (not sure if you are still short oil).

Do you have any views on:

(1) the possibility of peak oil:
http://www.zerohedge.com/article/guest-post-its-official-economy-set-starve
http://www.elitetrader.com/vb/showthread.php?s=&postid=3018794

(2) possibly something more relevant to trading / investing in 2010, the strong correlation between the S&P 500 and crude oil:

http://www.elitetrader.com/vb/showthread.php?s=&postid=3021926#post3021926

Disclaimer:
Even though oil has done very well in recent days, I think that any further "risk-off" behaviour will see it fall together with a decline in equities.


Quote from darkhorse:

Weekend Comment: For Commodity Bulls, "Don't Fight the Fed" Becomes "Don't Fight Beijing"

http://mercenarytrader.com/2010/11/...ont-fight-the-fed-becomes-dont-fight-beijing/
More...
 
Quote from m22au:



I note that you mentioned a short position in oil established earlier in November (not sure if you are still short oil).

Do you have any views on:

(1) the possibility of peak oil...

(2) possibly something more relevant to trading / investing in 2010, the strong correlation between the S&P 500 and crude oil:
More...

Hi m22au,

No worries, glad you're enjoying the commentary...

We remain short China, copper and base metals miners among other things, but are no longer short oil.

After taking half profits at an established volatility target, we exited the second half of our profitable short oil position on 11-24 due to surprising strength (which was continued today, 11-29).

Re, peak oil, I don't have strong opinions but my instinct is to be skeptical.

I enjoyed "1,000 barrels per second" by Peter Tertzakian and consumed a fair amount of research on peak oil a few years ago, but have only been tracking the topic lightly since then.

The trouble with peak oil is there are so many damn variables. It is very hard to know what our technological capabilities will be 5 or 10 years hence, let alone 20 years hence (with technology factoring heavily into enhanced extraction methods as well as new 'alternatives').

It is also hard to realistically project global demand with any kind of trading overlay. I mean sure, demand will rise in the "long run," but what if China implodes in the short run? If Chanos is proved right about the ponzi nature of the China infrastructure boom we could see oil go back to $40 before it hits $200.

In sum, I don't have a strong long-term opinion on peak oil because the mass of variables is simply too complex.

In the short run, I do believe peak oil is a factor, but probably moreso a sentiment factor than anything else. There are plenty of money managers who love peak oil as a theory because it gives them permission to be gonzo bullish on their pet energy names.

Then too there are so many big drivers of a tangential but powerful nature... what happens to the $USD, for example, has meaningful impact on what happens to the price of oil, and of course the $USD is directly and indirectly connected to credit flows, sentiment, geopolitics et al in myriad sorts of ways.

Long story short, I guess you could say I defer to the charts when it comes to oil prices, with an overlay of inflationary / deflationary, risk on / risk off drivers depending on what's happening in the world at large.

Also, re, oil's correlation to the S&P, I think that may have been a side-effect of the Fed and China driven "risk on" super-stimulus period, in which all risk assets had a marked tendency to swing between 1 and 0 (or rather 1 and -1). We may see more of that in future depending on what actions various central banks take, but on balance I think we are entering a post-stimulus, post-euphoria tightening cycle in which the mass "risk on" effect will be fading if not wholly going away.
 
Global Macro Notes: The Worldwide Fiat Debasement Plan

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"We're talking about huge sums of money going to bail out large foreign banks... Has the Federal Reserve of the United States become the central bank of the world?"

~ Senator Bernie Sanders, (I) Vermont

This is an Ali-versus-Foreman type market environment. The operative mode is "float like a butterfly, sting like a bee." Quick steps are necessary to avoid getting hit.

In keeping with the impressive volte-face on Wednesday, in which risk assets surged, our thesis has evolved as follows:

While "Quantitative Easing 2" was a slow failure, with the gray swans of China tightening and European sovereign debt crisis weighing heavily on markets, risk appetite has surged back on a lusty re-embrace of the "Worldwide Fiat Debasement Plan."

In other words, we now have thematic reconfirmation -- via revealed word and deed -- of the conviction that ALL major fiat currencies subject to a printing press will be metaphorically 'lit with kerosene,' in a mutual support exercise of drunk governments propping each other up (with the Chairman of the Fed as bartender in chief).

Read full notes here
 
Thanks again for your notes darkhorse.

Good call on KR, I see it is down a bit this morning.

Also any thoughts on NYSE: DF ?

Quote from darkhorse:

Global Macro Notes: The Worldwide Fiat Debasement Plan

In keeping with the impressive volte-face on Wednesday, in which risk assets surged, our thesis has evolved as follows:

While "Quantitative Easing 2" was a slow failure, with the gray swans of China tightening and European sovereign debt crisis weighing heavily on markets, risk appetite has surged back on a lusty re-embrace of the "Worldwide Fiat Debasement Plan."

In other words, we now have thematic reconfirmation -- via revealed word and deed -- of the conviction that ALL major fiat currencies subject to a printing press will be metaphorically 'lit with kerosene,' in a mutual support exercise of drunk governments propping each other up (with the Chairman of the Fed as bartender in chief).

Read full notes here
More...
 
Weekend comment: Gold is a Credit Default Swap

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Gold is the ultimate Credit Default Swap. It's meltdown insurance taken out against Federal Reserve Inc. and the global financial system at large. And the best part is, with this CDS you never have to worry about your counterparty.

That simple observation is a worthy retort to all those who yammer on about how "gold has no intrinsic value"... how gold is worthless because "it offers no yield, no return on investment" and so on.

When was the last time you heard someone complaining about the fire insurance policy on their house -- the fact that it "offered no yield" etcetera?

When it comes to insurance, yield isn't the point...

Read full comment here
 
Global Macro Notes: Beware the Rip Currents

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On U.S. beaches, rip currents (also known as rip tides) are responsible for 80% of lifeguard rescues. They are hard to spot (especially if you aren't looking) and potentially fatal.

In an ocean or large lake, a rip current is "a strong channel of water flowing seaward from near the shore."

In markets, a rip current could be classified as a submerged theme or trend the market is ignoring, that yet could suddenly and violently return to the fore.

Just as ocean rip currents can drown careless or inexperienced swimmers, so too can market rip currents drown careless or inexperienced investors.

At moment the "rip current" potential for this market is very, very high, due to all the developing themes the market has chosen to (temporarily) dismiss out of hand:

* China inflation pressures out of control
* The potential for a global E.M. hiking cycle
* The blowback potential of rising energy costs
* The blowback potential of rising U.S. interest rates
* A brewing state budget crisis
* Europe's steady slide into monetization oblivion

We maintain that 2010 markets have been excellent for traders, but hazardous to those without fluid timing and a strong handle on risk control.

As Jon Kabat-Zinn observes, "You can't stop the waves, but you can learn how to surf"...

Read full notes here
 
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