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It is time for a brief macro update – I had spent the week reading a serious amount of research of which I would recommend a few:
Albert Edwards: Always worth a read and one of the few more bearish than me…..Talks about the seasonality of the improvement in the US data – which also gets him on to the view that this year Groundhog Day – same swings, maybe for different reasons, but he is very determined US rates is going to new lows:
http://ftalphaville.ft.com/blog/2012/03/21/932261/albert-for-all-seasons/ & http://www.zerohedge.com/news/treja-vu-albert-edwards-expects-new-lows-bond-yields-equity-rally-turning-dust-just-it-did-2011
James Montier of GMO – explains very elegantly how everything mean-reverts (where have we heard that before) and that the massive improvement in MARGINS is due to government consumption – yes government consumption. Take 15 min to read it. Important macro lesson for all to have:
Finally, Goldman Sachs is out with massive recommendation for buying stocks called: Long-Good-buy. I am tempted to say…. No, I will not…. J
My in-house Audi-dealer (I call all equity analyst' Audi dealers – as if you walk into a Audi store – what car will they sell you? Yes, of course an Audi) was all excited about the report, and it is always good to test your own bias vs. a well-researched opposition:
http://www.scribd.com/doc/86194691/Long-Good-Buy
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Away from the academia, which all of above is, the real market is in state of confusion. All clear – Alles klar Kommisar! Europe has turned a corner(Sarkozy told us so…), but… hang-on what's going on in Spain?
What? How can they? Spain has seen higher 10 YR rates and higher 5 YR CDS most of this month – can you spell – R-E-T-R-O-A-C-T-I-V-E-L-Y changing Bond terms?
This is the price for bailing out ECB(and pretending they made a profit!) and for Spain for ignoring the fiscal compact and real reforms.
The Spanish Labor law is not a real reform – it's political posturing: 40% of working force in Spain is in temporary jobs . The 60% have fully protected jobs. Rights which dates back to Franco's time and reducing the lay-off period from 45 days to 33 days is not going to change that. The Spanish labor system is one of two separate systems. One with too many rights, and with no rights, and the worst ting being there is no new jobs being created in either side of the system, as austerity, lack of reforms is continuing to inflict a vicious circle of higher unemployment, more social costs, and lower growth.
I hope, and it's hope like in a church, that Spain will pull through but I do not see the political mandate in place. The general strike on March 29th is not a good sign for reform and change is it?
The big discussion though remains that of how far in the "normalization" of interest rates. I wrote piece last week which talked about outlook that this was a reduction of the tail-risk for the world overall, this leads to less propensity to buy bonds, which unwinds some of the overboughtness of fixed income:
– That's all fine and plausible. Where from now? There are two or three paths from here:
- Much lower interest rates going forward(60%) – based on infinite monetary expansion. The reflation trade. This is the one option favored by politicians as it is of balance sheet and off accountability for them (Stealth crisis help from central banks). These facts makes this the most likely scenario and if you look at charts also very appealing. Ever lower interest rates in downward channel. Albert Edwards, Soc. Gen in above link makes a very elegant case for this: More of the same. World needs growth and low interest rates to deal with the debt crisis. It may get the later but probably not the first …hence….the winner is….
- Lower in a channel but all-time low in place(30%) – rates have seen the low overall. The "unconventional measures" needs to exited. The biggest policy mistake historically has always been staying too low for too long. The politicians are clearly getting "hand shy" for continuing the "unconventional measures". Another game stopper could the law of stock versus flow. The policy makers have printed in excess of 3 trillion US dollar globally to keep the financial market and government afloat. This means to have additional impact the net new issuance of money needs to be much bigger in nominal terms(10% of 1.000 is 100. – 10% of 7.000 is 700 – so to get 10% impact in this examples you need to print 600 more for same impact). This is my present thinking
- Crisis 2.0(10%). Our old theme which is really the loss of faith in government and its ability to repay its debt. To some extent we have had Crisis 2.0 in Club Med, but it is yet to pass on to major economies like Germany, France, US, Japan and the US. This is the least probable scenario, but IF… we break the higher channel in the above chart if would signal a start to a whole new paradigm where FIAT money no longer is sustainable.
Strategy
We are shortly introducing a more detailed strategy where we will have pro-active positioning with track-record in order to be more accountable. The positions presently in our model is:
Short AUD.USD. China story. Slowing growth. RBA looking to cut rates. Curve is steeping.
Short Coffee. Better and better harvest.
Short Natural Gas. US just became biggest exporter in the world.
Short EUR.USD – strategic trade we think end of April is crunch time with ESM votes, French election, Spanish strikes, and probably forecast cuts across Club Med.
Long S&P vs. short STOXX50. Our model is long S&P – we are short STOXX50 against it.
Short IEF – as proxy for US rates.
Short Gold – our model have gone short, but risk is option expiry next week which generally leads Gold much higher.
Short CRUDE (May) – our model sold Crude today @ 105.68
Long EUR.SEK- we still like EURSEK long-term but respect the model.
Overall strategically we have: 50% cash, 30% in corporate credit, and now 20% in macro bets above.
Safe travels,
Steen
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