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The option of buying time is running out of.....time?
I had the pleasure of meeting some very smart shipping people last week and it got me thinking, yes major surprise I know, about the inflation vs debt quality issue on rates.
The 2011 call I am most confident about remains that 2010 was the CYCLICAL LOW for interest rates. Period.
This is a combination of technical studies, but more importantly also a fundamental reasoning:
The policy makers are constantly trying to 'buy more time' - Thinking they can restart a positive cycle of confidence through cheap funding, put guarantees on stocks, refinancing of debt(now indirectly through syndication as market does not want to play this game anymore) and a strong almost abusive talk to investors which reminds me of scolding a child(to no avail as we parents very well know).
The problem with buying time is that it's pretty similar to being long an option, the decay in time value, the Theta, is cheap in the early phase(you have almost full length of time value, i.e you have 1-month option 22 tradings days out of 22 ergo 21/22 ish.....) but towards the expiry(In terms of Europe it's March 24-25 EU Summit & the US the imploding Local- and State Debt) the time value is 2/22)......
With the decay in time the price of DEBT will rise unless there is STRUCTURAL SOLUTION to the ever rising debt, otherwise any solutions becomes substituting debt for more debt.
The new game in town is now the idea of moving debt obligations from a national/ECB level to a new vehicle EFSF. This is supposed to impress us despite all the logical shortcoming in its design, which is much better described by this article from Minyanville: European Debt Crisis Redux by Mr. Das
Looking at different gauges for "pressure/boiling points" in marginal cost of capital I find it's certainly the case. Take 30 Year CDS for California - it's now trading at yield levels only seen during the peak of the 2008 Financial Crisis, a market with no liquidity and no outlook to solutions. Desperate? Looks like it to me:
From technical point of view I found an interesting major indicator this morning: The so called Death-Cross:
As the chart shows the moving average cross over has been an excellent indicator of cyclical trends around a stable mean-reversion game - if this chart is correct we could have a test of 4.00% shortly.
The impact from higher yield/rates is path dependent: The Ivory Tower Banks will be positive as they see rising rates as a confirmation of HIGHER GROWTH in economy (although everything being equal: Cash flow re-based at higher rates should be negative)
OR - if this is due to my conclusion: The time decay is working - faster and faster, we have now had almost two years of time buying by policy makers. The general public is now SUPER CONFIDENT on economy, their earnings, the world, despite the fact there is LESS IN WORK today than before financial crisis, much less and despite their REAL EARNINGS seriously eroding as food- and energy prices are showing more and more upward pressure.
A concept of inflation / rising prices can be gained through using Google Trends, despite all its shortfalls a statistical indicator:
The conclusion is inconclusive although clearly there is more and more talks about 'rising prices' and 'inflation'. EMG on the other hand is clearly experiencing increased both prices but more troublesome social tension as can be seen by this link: Indian Riots on Petrol Prices
Conclusion:
I'm bullish on the prospect of policy makers continuing to play: 'buy more time' and I'm getting increasingly bearish on their ability to fight the Theta(time decay) of their option, as the marginal cost of capital continues its slow but steady rise higher across the world.
Investment Outline
Clearly all models are GO! Long RISK ON across the board.
FX:
Models are short US Dollar in size (almost every single market)
JPY - seeing signals for weaker JPY...... long EURJPY
AUD, CAD - Long
Metals:
Difficult, very. Gold and Silver is playing up-down-up consolidation game - the failure to break above 1400 in GC February contract is troublesome, and Silver inability to trend across 29.50 likewise. It does not change that this is MERELY CONSOLIDATION before the final phase of speculative fever takes the market to new highs...
Commodities:
Easy! Long everything and I mean everything: Grains, Energy et al.
Fixed Income:
Cautiously short US market and German Bunds
It's time to reload investment scenario from here - I'm fading this Monday-Tuesday move to go neutral on most markets awaiting confirmation for top in place.
Good luck,
Steen Jakobsen
I had the pleasure of meeting some very smart shipping people last week and it got me thinking, yes major surprise I know, about the inflation vs debt quality issue on rates.
The 2011 call I am most confident about remains that 2010 was the CYCLICAL LOW for interest rates. Period.
This is a combination of technical studies, but more importantly also a fundamental reasoning:
The policy makers are constantly trying to 'buy more time' - Thinking they can restart a positive cycle of confidence through cheap funding, put guarantees on stocks, refinancing of debt(now indirectly through syndication as market does not want to play this game anymore) and a strong almost abusive talk to investors which reminds me of scolding a child(to no avail as we parents very well know).
The problem with buying time is that it's pretty similar to being long an option, the decay in time value, the Theta, is cheap in the early phase(you have almost full length of time value, i.e you have 1-month option 22 tradings days out of 22 ergo 21/22 ish.....) but towards the expiry(In terms of Europe it's March 24-25 EU Summit & the US the imploding Local- and State Debt) the time value is 2/22)......
With the decay in time the price of DEBT will rise unless there is STRUCTURAL SOLUTION to the ever rising debt, otherwise any solutions becomes substituting debt for more debt.
The new game in town is now the idea of moving debt obligations from a national/ECB level to a new vehicle EFSF. This is supposed to impress us despite all the logical shortcoming in its design, which is much better described by this article from Minyanville: European Debt Crisis Redux by Mr. Das
Looking at different gauges for "pressure/boiling points" in marginal cost of capital I find it's certainly the case. Take 30 Year CDS for California - it's now trading at yield levels only seen during the peak of the 2008 Financial Crisis, a market with no liquidity and no outlook to solutions. Desperate? Looks like it to me:
From technical point of view I found an interesting major indicator this morning: The so called Death-Cross:
As the chart shows the moving average cross over has been an excellent indicator of cyclical trends around a stable mean-reversion game - if this chart is correct we could have a test of 4.00% shortly.
The impact from higher yield/rates is path dependent: The Ivory Tower Banks will be positive as they see rising rates as a confirmation of HIGHER GROWTH in economy (although everything being equal: Cash flow re-based at higher rates should be negative)
OR - if this is due to my conclusion: The time decay is working - faster and faster, we have now had almost two years of time buying by policy makers. The general public is now SUPER CONFIDENT on economy, their earnings, the world, despite the fact there is LESS IN WORK today than before financial crisis, much less and despite their REAL EARNINGS seriously eroding as food- and energy prices are showing more and more upward pressure.
A concept of inflation / rising prices can be gained through using Google Trends, despite all its shortfalls a statistical indicator:
The conclusion is inconclusive although clearly there is more and more talks about 'rising prices' and 'inflation'. EMG on the other hand is clearly experiencing increased both prices but more troublesome social tension as can be seen by this link: Indian Riots on Petrol Prices
Conclusion:
I'm bullish on the prospect of policy makers continuing to play: 'buy more time' and I'm getting increasingly bearish on their ability to fight the Theta(time decay) of their option, as the marginal cost of capital continues its slow but steady rise higher across the world.
Investment Outline
Clearly all models are GO! Long RISK ON across the board.
FX:
Models are short US Dollar in size (almost every single market)
JPY - seeing signals for weaker JPY...... long EURJPY
AUD, CAD - Long
Metals:
Difficult, very. Gold and Silver is playing up-down-up consolidation game - the failure to break above 1400 in GC February contract is troublesome, and Silver inability to trend across 29.50 likewise. It does not change that this is MERELY CONSOLIDATION before the final phase of speculative fever takes the market to new highs...
Commodities:
Easy! Long everything and I mean everything: Grains, Energy et al.
Fixed Income:
Cautiously short US market and German Bunds
It's time to reload investment scenario from here - I'm fading this Monday-Tuesday move to go neutral on most markets awaiting confirmation for top in place.
Good luck,
Steen Jakobsen
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