“Take time to deliberate; but when the time for action arrives, stop thinking and go in.” Napoleon

It has been a while since my last macro report, this is due to several things:  Having had to close my books/accounting in the family office, lack of directional sense, confusing price action and simple lack of something to write.

We are at major cross road for the markets here. The Keynesian way is up on points as low rates continues to feed optimisme and data manipulation out of China adds fuel to the fire.

China, BIS rules and divergence

The BIS III became so watered down it makes no sense - and I note with great interest how Soc. Gen this morning got excellent piece called: From Basel to Beijing - where the main points are:

• China is enacting tighther requirements which makes Soc. Gen conclude: "This is equivalent to a very effective monetary tightening, regardsless of what level the interest rates are"
• Chinese banks has major time bombs on their balance sheets: Loans to local governments and affiliated investment companies.  (LIC+ Local government loans stands at 7.4 trn CNY + 11 trn CNY or 1/3 of GDP or 300 pc of total fiscal revenues)
• Still time....before the local government loans turns bad, but the risk is very real. And to prevent the problem deterioating or re-emerging in the future, what China needs more than banking capital is a thorough reform of its fiscal system.

Strong words, but it seems "something" is going on in China:

• Divergence between US stock market & Chinese market: China vs US stock market
• Freight - through end of last week, the Chinese were busy contracting bulk ships, but all of the sudden the demand has dried up up! From good friends I hear market is about to come down hard....watch the Bulk-freight from here!   This is the broader Baltic Dry Index: Baltic Dry Index

Competitive devaluations

There new game in town - you only need to consult your local Financial Times to see this:

• JPY intervention
• SNB intervention
• Race to the bottom

We are now seeing serious "managing of foreign exchange rates" - the only lever left in the system which untill this year was left untouched.

The irony being Europe would probably, not correction, would have seen major devaluations during the ERM crisis in May, but did not - they are now slowly, very slowly trying to change the institutional system based on long-term goals of sustainable budget deficits and growth targets (there is still the issues of: demographics. lack of producivity, excessive tax but that's another story)

This is NOT the way we get recycling of global imbalances: We have China as the main culprit for now (with the US) fixing their rates. Everyone is playing game theory - doing what is best for themselves ignoring the total utility function is getting lower and lower due to this policy.

It is interesting to see how this develops, but the market response has been clear: Long Term gold chart and more importantly this time all commodities are bid at the same time:  Commodity overview

CORRELATIONS IS RISING ACROSS MARKETS ==> higher volatility and potential for MAJOR DROP - but the "Plunge Protection Team" is doing great job in keeping stock market bid, bid and more bid....but it time running out?

No one knows, as always merely simple European fund manager.

Good luck,

Winston aka Steen

Tempatations....Temptations.....the beauty of FIAT money (Macro May 13th 2010)

It's very tempting to join the fans of FIAT-money creation and go long the stock markets, but fortunately I have a few rules which keeps me from doing it:

• The extremely simple moving average model (as shown yesterday) called our Beta-model, as it is designed to tell us when to be long (or short) on strong trends.
• Analysis of money-flow into big assets classes: Gold, Bonds and Stocks. Todays three charts looks at this and find that somewhat surprising big inflow into bonds- and gold, while the move higher in stocks since April has been without "real money" buying.
• The risk indicators: USDJPY & EURCHF (as shown in Tweets yesterday EURCHF chart
• General news picture and macro assesment as per our Weekly Investment Outlook.

This week has been interesting in the sense that despite everyone 'intellectually' agreeing this plan failed to do anything about structure- and competitiveness in Southern Europe, they love the fact they now got free state guaranteed money for longer - Yesterday was a turning point in the research I receive from major banks of the G-20 - EVERYONE and I mean everyone embracing the FIAT money creation and to no big surprise either. Their livelihood is now 100% dictated by the whimps of central bankers and politicians. Long live the easy money, long live the FIAT regimes - their only issue being:

• EURCHF at all-time low - even lower than in 2009 on the low point in S&P
• GOLD at all-time high.... and it is very important to remember Gold is the only currency you can't manipulate and hence the real money of the world is flowing that way. Gold,EURCHF (plus USDPY) are the true STATE-OF-THE-WORLD indicators - as shown in the chart attached S&P goes up without ANY real buying- it is back to the algo-trading manipulation of the FIAT-banks buying programs.

Botttom line:

This could go on for another 24 hours or 24 days, but the gravity of the above observations is not to be neglected at least in my experience.

After having been short up to Friday- square over week-end I am now more or less back to same Gamma-short position in Equity and Gold, the only thing missing is a true conviction FX deal, but JPY strength is tempting for old macro guy like me.

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