JS Global Macro Notes

darkhorse · Feb 6, 2011

Weekend Comment: "The King of Oil" Review

Is there any prospect as frightening as a political show trial in the court of public opinion?

Reading about the 17-year government witch hunt for Marc Rich -- the global commodities trader credited with inventing the spot oil market -- I was reminded of an old quote attributed to Cicero:

A bureaucrat is the most despicable of men, though he is needed as vultures are needed, but one hardly admires vultures whom bureaucrats so strangely resemble. I have yet to meet a bureaucrat who was not petty, dull, almost witless, crafty or stupid, an oppressor or a thief, a holder of little authority in which he delights, as a boy delights in possessing a vicious dog. Who can trust such creatures?

In the early 1980s Rich became a prototype for the celebrity show trial, having been accused of 1) the largest tax fraud in history and 2) "trading with the enemy" through the duration of the Iran hostage crisis...

Read full comment here

darkhorse · Feb 13, 2011

Utilizing the RENO Process, Part I: Range, Equity, Narrative, Odds

Want to be a better trader? Learn how to play poker.

And I don't mean internet poker. I mean real, honest to goodness, brick and mortar poker, where reading emotion -- and controlling emotion -- are key aspects of the challenge. (If there are no public poker rooms in your neck of the woods, a well-run home game will do.)

The parallels between trading and poker are uncanny... For yours truly, a love of poker sprang forth from a deeper passion for trading. One literally led to the other.

Seven years ago or so, I had a big client who took me out to lunch once or twice a week. This guy, a sharp entrepreneur and still a good friend, had become obsessed with poker as a hobby. At many of our lunches it was all he could talk about.

After listening for a while, and interjecting / asking questions here and there, I began to think:

"Hmm. Patience... emotional management... a blend of psychology and mathematics... calculated aggression and risk control... this sounds a lot like trading."

Read full comment here

darkhorse · Feb 15, 2011

Global Macro Notes: The Great Compression

Where is all the spending coming from?

We know where the liquidity and the "animal spirits" are coming from. Those are courtesy of Ben S. Bernanke, the golden god of stocks.

But from whence the spending -- specifically, the consumer spending (circa 70% of the U.S. economy) that powers earnings and recovery stats and makes this market relentless?

Look at the above chart of XRT, the SPDR S&P Retail Index. XRT has been a juggernaut -- a tank. This reflects the strength of retail names, and of U.S. consumer spending in general (at least on the high end).

The refusal of the consumer to roll over has driven bears up a wall (pun intended). You've heard the arguments. You've heard them pounded into the table, hard enough to make it break.

And then there's the data: The persistent unemployment; the still-deflating housing bubble; the clear evidences of wage reduction and stagnation; the lessons of financial history; the need of a serious and prolonged deleveraging that keeps getting put off.

Thus far, none of it has mattered. The consumer has powered through, with the ample help of the most reckless Keynesian monetary experiment the world has ever known. And thus, animal spirits have prevailed. But how?

Read full notes here

darkhorse · Feb 24, 2011

Global Macro Notes: A Hard Look at Risk

Mechanical systems trader Larry Hite has a great quote in Market Wizards: "Risk is a no-fooling around game; it does not allow for mistakes. If you do not manage the risk, eventually they will carry you out."

In one of the greatest rock and roll songs of all time, Led Zeppelin puts it another way: "When the levee breaks, momma you got to move."

Why bring this up? Because, as you may have noticed, risk is back on the table in a very big way this week...

In a recent Barrons interview, the new "King of Bonds" Jeff Gundlach predicted the S&P is going to 500. Quite a contrast with Laszlo Birinyi's call for S&P 2,800 by 2013.

Which one is right? If you're a trader, it really shouldn't matter. Seriously.

As the old saying goes, bad traders don't actually make profits. They just take out short-term loans from the market. If you let your capital ride on a big gaudy market call without managing the risk, then it doesnât matter your orientation -- bull or bear -- because sooner or later the market will clean you out. (Or bleed you out, one of the two.)

A fluid and flexible trader, meanwhile, can adjust their main hypothesis -- or even temporarily discard it if need be -- in order to flow with prevailing trends. There is no excuse for a bearish trader to lose huge chunks of capital in a bull market, or vice versa for a bullish trader in a bear market. As a worst case scenario, your risk management protocols should keep your drawdowns under control and the vast majority of your capital intact -- even when your deepest convictions are wrong!

Read full notes here

darkhorse · Feb 25, 2011

Machiavelli for the 21st Century: "The Next Decade" Review

George Friedman's "The Next Decade" could alternately be described as Machiavelli 101 or a crash course in realpolitik.

Friedman's central thrust is this: America is an accidental empire -- like it or hate it, the world must deal with it -- and it is thus in the United States' best interest to maintain the "balance of power" at all costs.

The balance of power is predicated on status quo. When you are at the top of the heap (as America is in Friedman's view), any major shifts threaten to destabilize the top dog's position. As the British and Roman empires did before it, the American empire must anticipate and prevent such shifts, blocking up-and-comers from excessive power accumulation...

Read full review here

darkhorse · Mar 6, 2011

"Spreading infection" -- quick thoughts, re, euro and $USD

Excellent embedded graphic from the Economist (below) in a daily chart piece titled "Spreading Infection"-- the infection, in this case, being the euro (or rather euro-related troubles).

The inner contrarian in yours truly can't help but look at ongoing euro strength -- and corresponding $USD weakness -- and salivate. The prevailing logic driving euro strength seems utterly backwards, or at the very least subject to rapid time decay...

Trichet and the ECB are willing to raise rates almost irrationally, regardless of periphery weakness and the deflationary overhang of untenable sovereign debt; the Bernank and the Fed, meanwhile, are willing to keep monetary policy loose regardless of an improving U.S. economy and budding "non-core" inflation threats. Therefore, buy euros and sell dollars, yes?

And yet...

read full comment here

darkhorse · Mar 11, 2011

Global Macro Notes: Did PIMCO Mark a Bottom in Treasuries?

In a very news-heavy week, a notable item was PIMCO's decision to purge U.S. government debt from its flagship fund.

As Bloomberg reports,

Bill Gross. who runs the world's biggest bond fund at Pacific Investment Management Co,, eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Pimco's $237 billion Total Return Fund last held zero government-related debt in January 2009...

Gross, the original "bond king," has taken up the cause of the vigilantes in his monthly investment outlooks. He has warned repeatedly that debt levels are too high, and has openly wondered who will keep buying USTs when the Fed finally stops. Now PIMCO has put its money where its mouth is...

But is this "alarming sign" (as many have deemed it) really a harbinger of looming armageddon for Treasuries? Or is it the mark of a medium-term bottom? Quite possibly it is neither, of course, but the "bottom" case is intriguing...

read full notes here

darkhorse · Mar 13, 2011

Milking the Consumer Cash Cow -- How Much Longer?

There was an eyebrow-raising piece in the WSJ on Friday, "Families Slice Debt to Lowest in Six Years."

The opening sentence contains a rather laughable leap:

U.S. families -- by defaulting on their loans and scrimping on expenses -- shouldered a smaller debt burden in 2010 than at any point in the previous six years, putting them in position to start spending more.

How marvelous. Through the hard work of throwing around nickels like manhole covers -- plus a whole lot of defaulting -- consumers have succeeded in dialing the clock all the way back to, wait for it, the salad days of the MEW-fueled consumption frenzy, just before the personal savings rate went negative.

(MEW, lest we forget the acronyms of the boom, stands for "mortgage equity withdrawal.")

Via the Fed, average household debt-to-income levels peaked around 130%. Now down to 116%, the suggestion that families are "in position to start spending more" is akin to a morbidly obese man -- who has just come off a heart attack -- feeling he can celebrate the loss of a few pounds by eating whole cheesecakes again.

Read full comment here

darkhorse · Apr 14, 2011

Global Macro Notes: Sizing Up The Bull

The old trading wisdom says that "the less observed, the better the trade." As Bruce Kovner pointed out in Market Wizards, market moves born of speculator activity have lower odds of being the real deal.

This makes for an exceedingly strange environment, as the psychological power of QE2 and the "Bernanke Put" (successor to the Greenspan Put) have made for one of the most gamed markets ever.

One can see the degree of gaming via the [above] eye-opening CRB correlation chart, which has made the rounds from Bloomberg to Minyanville to The Big Picture...

Read full commentary here

darkhorse · Apr 18, 2011

Instant classic:

<object width="560" height="349"><param name="movie" value="http://www.youtube.com/v/iDmJcDvaBGU?fs=1&hl=en_US&rel=0"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/iDmJcDvaBGU?fs=1&hl=en_US&rel=0" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="560" height="349"></embed></object>