Risk of - major moves in China - our new Global Leader...

Playing the QE2 card Bernanke et al confirmed that we now need to look at China for ALL future directions. The US has no further tools to use but are at the mercy of the international lenders and capital markets.

The reaction post QE2 must be major disappointment for FOMC and Obama, but the importance now is the "reaction" function of firstly China, then Europe(Euro crisis) and then back to the US.....We know the reaction function of policy makers:  1. It's not what they say but what the do which is important 2. They will always delay any decision to last minute 3. The response is ALWAYS creating more debt and mini-max solutions.

In this lights the REACTION FUNCTION should theoretically be:

1. QE2 ==> China and EMG will hike rates aggressively - it has already started note these comments from Goldman Sach this morning on RISK OFF: Chart on QE2 reaction

KRW: Renewed speculation that concrete capital controls will be announced on Monday (1mnth high 1129.5)
PBOC asking more local banks to hike RRR.
Chatter of Chinese state-entity selling commodity futures in Shanghai (Bloomberg reporting that China sold almost all zinc on offer from state reserves at below-market prices in the latest auctions, although this was out a few days ago)
Onshore Chinese traders and brokers speculating about another interest rate hike tonight.
Lack of concrete resolutions from G20 meeting in Korea

                                                                             
2. Euro-debt story gets back into the headlines

Germany will use their VETO leverage to negosiate even tougher hair-cut rules effectively setting up the division of EUROPE into to a two-tier system by 2013/14. The ones who wants to live by the stability rules, and the 2. division for those who needs time to get their finances in order.....

Expect Ireland to tap EFSF very shortly - the risk being there is contagion spread to other PIIGS - so maybe a longer than expected delay in using EFST but more countries than Ireland tapping EFSF from the start.

3. G-20  Communique or the Ministry of Propaganda - what is farce!

In other new the G-20 communique is a total joke! The old Polit-bureau in Russia would have been proud to issue this statement: It's all BS - big time BS... using words like: comprehensive, commitment, unprecedented coooperation, concrete steps - but... there is not a single modus operandi except for including the ever useless IMF in all things possible. There are now more working groups under G-20 than there are sand in Sahara! G-20 communique - by the Ministry of Propaganda for the Politbureau of G20


Strategy:

Seems yesterday chart-book has played out for now, but remember there is now POMO for a full month - the risk will be if POMO does not help the market then we have a real issue on the downside - watch the US action tonigt if 1190-00 breaks on close, then we have top in place - and more importantly the QE2 was REAL MACRO TREND event....

Nice week-end

Weekly Investment meeting (May 25th 2010)

This mornings meeting had several key themes but probably the best way to show how the world is split down the middle with one side continously qoutting "excellent fundamentals" as main reason for coming bull-market, while the price-action and the logic dictates we are at the end of the road. My partner Jesper came up with this chart:

The good fundamentals, the accomodative policy et al constitutes the tip of the iceberg, the sovereign debt, balance sheet destruction (of banks & nations) the part below the water.

I do not think I need to put further words to this.

On the S&P and equities overall we had close look at support levels and potential support level. Clearly the market is oversold now, but at the same time the SOVEREIGN SPREADS and CREDIT SPREADS continues to expand!

Above is the spread between Italian bond futures(BTP & the "insolvent") vs the Germant bond future (Bunds & the "solvent") - the spread exceed 13.00 again this morning - closing gap from the Monday past the 1 trillion EUR bail-out plan. It seems for now, that the ECB is losing this fight quickly. A slippery road.... is .......slippery Mr. Trichet!

but.. on levels.. we think the high in June of last year(2009) is important. 

The initial top moving of the low in March could constitute some support for the S&P - this level is: 930/940 in the S&P (Yes, it is a further 10% to the downside), but the interesting thing being that STOXX50 the broadbased European Index touched its - June high this morning (2445-ish) - showing the massive under-performance of European stocks to the US.

No wonder people are confused and wanting to believe in the mighty rebound; I think of one particular travel-writer, sorry economist, who wrote this week-end: "I learned as a young man not to fade the charts" - and then he goes on to why 200 dma this time will not work as indication of further loss' - He may end up being right, but for the wrong reasons, but I guess in "economist-land" it does not matter why you are right (or wrong) as long as you crack a good joke.

Our bottomline:

We are respecting and looking for some action from ECB, EZ or the US over this coming week - the Dirigism' is not dead, but even with our livid imagination we have a hard time coming up with a "encore" for saving the world as:

• Intervention - tried did not work
• 20 years of easy monetary policy - tried did not work
• Lax regulation - tried did not work
• Biggest one-off stimulus in economic history - tried did not work
• Biggest co-ordination on goals (with no operative measures) since Marshall-help  - tried did not work
• Transfering massive help to banks in order to keep the system going - tried did not work
• Tax cuts, house benefit, tax benefit - tried did not work

Well, we got feeling the 'fiscal austerity' will soon only be dreams of such measures, and we will see another major stimulus plan being implemented - probably in Seoul at the G-20 in November?

However friends,

We may be wrong - let's hope so, but for now please promise to keep your risk low, liquid - rather lose the first 10% of a rebound than risking 50-70% of your capital.

Winston

The Greek wedding turns into ugly divorce?

First we had the Greek wedding and then a very, if not, almost non-existing honeymoon and what is next? A quick divorce? 

This morning sees the Germany vs PIGS minus G(reece) widen again - it seems the market finally is getting the point: 'It is not what they say, but they do which matters..." - The number one tenet of anybody wanting to trade for a living.

We stick by our VERY GLOOMY outlook - I will even say that I am now more pessimistic than before my 2007/08 call for 666 in the S&P as the problem this time can not be fixed by more stimulus - although they will try - we are literally sitting on the edge of abyss - we have window of 3-6 month maximum before REALITY bites:

The gravity of the market remains:

1. Sovereign debt should increase in yield as risk premium will have to go in a world of less leverage and less confidence in Government and Nations to pay back the outstanding loans. Add to this the incoming Inflation - the whole inflation game is an illusion. The measurement and the facts but we are at the low point of the cycle in inflation (and top in terms of cheating with it) means cyclically we will be having head-winds for years to come.

2. Deleveraging is the big game. When South Korea host the G-20 in November there will serious regulation/bank tax on the table. On top of this BIS already have stiff tightening in the cards (BIS Chief say banking levy may not be appropriate (Click on link)

3. A move to tangible assets - As the world grows tired of supporting FIAT economies they will need tangible assets and currencies backed by natural resources. The years of "creating money" is over - the new paradigm is coming not later than end of 2010.

We are surprised the market was so unconvinced by EU and IMF - mostly surprised to find the market shares our point: This is the opening chapter of a long book with several plots.

In terms of practical market applications we are surprised to see our INFLATION portfolio has beaten the Benchmark portfolio over the duration of the year - this clearly indicates the topics above is in play and should be respected.

Finally,

I enclose my old colleague Macromans piece from yesterday - we all need some cheering up in this market (Apologies for those offended by the wording on Greece): http://macro-man.blogspot.com/2010/05/grease.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+MacroMan+(Macro+Man)

Winston

McCarthy, Drexel, Goldman and a distant 4th Greece

The 48 hours passed and some people would say nothing happened. A lot did happen:

1. Germany seems to have caved in and are now behind a much bigger IMF/EU sponsored deal which if implemented will kill Greece slowly... but at least it will take Merkel past the state-election on May 9th.

2. FED and Bernanke has by now secured themselves as even more incompetent than the mighty joke Greenspan by refusing to discontinue the easy monetary policy - one even get the idea that they will NEVER ever, whatever evidence, do anything to upset the politicians by removing the easy money. The joke being the market is on the edge of doing it for them - a FED behind the curve vs inflation and rating is not good news.

3. The Goldman Sachs saga is beginnning to look a lot like McCarthyism, is it not ironic the same committee which spend all of last week trying to take down the executives from GS, is the same committee McCarthy chaired hunting communist in the US? Further more, what few people seems to understand: The committee has ZERO legal mandate to anything but report and ask SEC or other institutions to look into the matter. In others words: It is a major exercise in GRAND STANDING. This does not make GS totally innocent- not at all, but if there is a problem with financial products and its sellability to the common public it is an industry issue, not GS specific. The risk here is GS end up like Drexel in 1990, not being able to stop the rumors and talks which is so effective as long as it has populus support.

4. Regulation is coming fast and furious. The only reason for G-20 not acting as of yet, remains in the fact Canada chairs the G-20 group- and G-20 will never enforce initiatives against the will of the G-20 chairmanship, but when South Korea takes over the leadership in July, it will become priority number one to enact bank levy and there is talk it could be up 25% of liabilities. This is the REAL DANGER now. The US will have some sort of bill in place ahead of midterm election and the G-20 will have global bank levy before we enter into 2011.


As we closed this week, there is to me few things which can derail this ridicolous "sugar high" ride higher - The FOMC is providing a put option on holding high risk - China is trying to steer the demand and growth without having to tighthen further (alhtough housing plus this week-ends PMI indicates this will be difficult)

There is now only 30% ish chance of the Greek rescue deal to fall through - but if so, it will have massive political and market costs if Greece end of the day says: 'Thank you, but no thank you' . They will take the money but inside the next six month both Greece and EU/IMF and maybe even the rating agencies will realise there is no way in hell, the austerity program can be executed in an economy which is full of subsidies, overpaid public servants.......

So, where do we end? Goldman became front-page again on Friday, closing a year-to-date low - and recently the fortunes of GS, for better or worse, has been highly correlated with the stock market.

This morning I read that the worst is over - the better times are here all is good and getting better and at the same time, this very morning, my old uncle, or let me say, experienced uncle, who started trading the markets when people did trade foreign exchange on telex' (I know several of you need to look up a telex machine!), and why CABLE is called cable (I will leave that as a cliff hangar for you) called me to discuss how nervous he has become of the future.

We are few people left who sincerely believe this is the end of the road for this type of markets, but in its bare essence my view is this:

1. Interest rates are at the very low and at the end of 30 years of lower lows. Real rates is negative in most places and the incoming inflation and commodity price rises will be shock to financing rates very soon. (when market loses faith in FIAT based sovereigns)

2. The stock markets is in its 11th or 12th of mean-reverting to lower levels. The market will probably not outright collapse looking over the next 10 years, but the return will at best be plus/minus 5% for all of the bext 10 years.

3. Commodities are in its 9/10th season of a 20/25 years bull market. We moved the whole economy to one of FIAT money, one of huge leverage and when we close 2010 the new normal will be less leverage, more capital restriction, higher trade barriers.

Trading these three themes sort of watching pain dry, and the risk is ultimately to fall by John Maynards Keynes famours words: 'The market can stay irrational longer than I can stay solvent". The irony being - mark-to-market the governments and banks are already insolvent, but for now it is more convenient to look the other way- yes indeed the Facebook generation is here. All is how it looks not how it works.

Nice week-end

Winston