Its been a while since i completed a personal update. As we seem to have passed through the great distribution of the last 6 weeks, here below a quick run through of my own book, feelings, comments, analysis. There is an emphasis, as always, to the future battles.
Things are good, life is good and we appear to be through the worst of the winter and spring, at least in northern Spain, is in the air. We even have new record highs for the Dow Jones 30 companies in the US which some are sighting as evidence of a new bull market for equities post their 13 year bear hibernation. The issue, of course, is, as always in this fiat currency world, the nominal rise vs the real rise. (In the new hedonic and substitiution adjusted statistic world the gap between the nominal and real realities are even more complex).
The Inflation adjusted, Dow index look somewhat different i note.
As we look around these indexes, sectors and individual instruments its worth noting that this recent risk on move has narrowed. EMs aren’t joining, the usd isn’t confirming, commodities are not joining, neither are the commodity currencies and neither is the euro. Materials, industrials, semi conductors are not playing in the great reflation game as yet. This is a narrower strong usd ‘risk on’ move as the US once again becomes the single engine of growth and the great US consumer consumes once again. (Albeit this time at a much higher level of debt to income and at close to record low savings rates. A completely different starting point that earlier ‘recovery cycles’. And also as real incomes continue their decline. Note).
As we know, timing is everything. As long time readers of this site, and prior sites, know, I’ve been long equities for the last 4 years and in the last 2 years heavily long with leverage for both the yield and capital appreciation via listed securities across the world’s major markets. The central banks have seriously debased their currencies vs assets engineering asset prices to rise. Clearly, this has provided great relief to the banking sector and their over extended balance sheets. Personally, FX has boosted returns and been kind in the last few years as has the bullion though not the bullion miners and or commodity sectors which has been in cyclical bear market for the last 18 months or so. Vs cash and even now bonds equities have been the asset class of choice over this last 4 years.
This is all in the past so i won’t dwell any more on these historic elements. We are where we are now. Lets deal with the specifics of the future now not the vagaries of either the ‘fish that got away’ nor the glories of past endeavors.
I entered this year with a great concern, as i published at the turn of the year, on fx side of things. I commented that i suspected it would be a difficult year on fx to navigate.
I thought the two fx currencies that seemed to offer the most were the gbp and jpy. And thus far it is playing out as i thought – tricky.
The gbp debasement has been swift and painful for those holding uk assets with uk cash. For those borrowing the uk cash to fund uk longs its been a golden time and like wise jpy assets. For my own book, jan was good and correct on both ie carry trade on both to fund the longs on equities in both domains. As jan turned to feb i took the over sold levels to fully fund the longs in Japan and the UK. The UK equities at least are international in flavor so any GBP debasement is naturally partially offset but the J-reit listings are a pure domestic Japan play and so are exposed to the full jpy debasement issue.
On this basis, I even considered letting a few longs go on the nikkie but held back and fortunately so as it turns out, thus far. Although i would comment here that the j-reits appear to topped out, at least for now. Which could be a sign the winder Japanese market is starting to run out of gas and is in an intermediate topping phase. Certainly the asian markets in general remain weak and are badly under performing western markets. If you trade weight them – badly under performing!
So, more importantly, where next? Forward, forward. For we are only as good as our next year.
I have to say, given the general euphoria (or is it free money induced greed!) i do think Asia looks relatively cheap, trade weighted even cheaper and the euro looks too cheap vs the usd given the ecb’s tight money policy and spread on the over night to the USD.
What of the gbp? The boe held her nerve this week, which is good. The gbp has run down a long long way. The equity indexes look to have a continued bid here from positive fund flows and so the usd safe heaven move that i suspected would come appears not to be in motion. Note the TLH has sunk back down and appears to be making a lower low. Indicator indeed of risk on.
So gbp vs usd i think we have support here and i’m expecting a little bounce. Note a little bounce! Sell into the bounce would be wise!! IMO.
EurGBP – Im not happy on this pair at all here. I see the breakout euro and ok she hasn’t formed a higher high but she is strong. And strong at a breakout level. Like wise can be said gbpusd but note the usd does not have a 12 yr secular bull vs the gbp as does the euro.
So of the two pairs the euro offers more upside that does the usd, for the moment in this on risk market.
There fore im concerned again. What to do? And its tricky here i must say on this pair. The gbp is confounding me at present and this is frankly annoying. I’d like to see direction even if it comes with crisis to be clear.
In times like these when no clear trade offers herself its best not to second guess and go as neutral as possible on the pair. I knew this year would be tricky or at least h1 on the major fx pairs and so no surprises i guess. Problem is that doesn’t assist with the bottom line. FX had been a positive tail wind to my account over the last few years. The loss of the tail wind (and partial head wind in feb due to the gbp weakness in the main) of fx and the loss of the tail wind of the bullion is having her effect on the bottom line which in feb and now the first week of march has flat lined as the wider market has performed.
So im not sure im really assisting here. Im running the book as it was with an added emphasis on acquiring short target stocks within weak sectors or under performing sectors in dm markets. Im doing this as a long equity hedge and as a way to keep down borrowing costs given the leverage to the long side.
Overall, a reasonable start to the year. Under performance which is bad but a recognition, as above, that the fx and bullion has been tricky and this has been the problem. Clarity will come on these areas im sure so im unconcerned as yet.
A few what ifs?
What if the market turned quickly due to some unforeseen geo-politic event. Iran, South China Sea. Middle East, etc?
More USD strength with strong bullion. Risk off and equities down. Cut leverage.
That wouldn’t be a pretty event for the bottom line. Especially if the already strong usd really surged which it could well do on hard risk off. This is partly why i really want to pick up short target stocks in usd listings. Im borrowing usds at present. Id prefer to be even weight so short sale stocks would even weight the fx which would be good. The carefully selected short stocks would also help on this event risk issue even if in the mean time they flat line. Flat lining as the market runs up here on the short book would be fantastic due to the mitigation of risk element and long usd issue.
What else? This Em weakness is not good. Really animal spirits? Or simply asset price inflation? Imo this is totally deja vu here. The sustained em weakness is not a good indicator. From Brazil to Shanghai things are not right here. How can this be a Renaissance in the west and a decline in the EMs? The only way that is possible is:
1) that a structural re-balance has occurred – we know that is not the case.. or:
2) That we have another pump up in the monetary side of asset prices leading to more consumption in the short term. All the data is suggesting this with trade balances weakening again and savings in decline and debt increasing again in DMs.
Overall, that’s a disaster in the medium and long term, for the west.
How can we predict the turn? Usually toward the middle/end of the pump up the capital starts flowing east again and very rapidly so. So the ems should rise again but as a lagging effect to the west’s money induced rally. Lets look for the topping out, not on em pmi’s but on western pmi’s as well as negative savings rates and widening negative trade balances, again.
Big picture stuff. The history suggests the cycles should hasten in speed. That, in effect, we are experiencing a 4 season intra cycle within the autumn/winter k-wave. With each turn of these cycles induced by the neo keynes arrogance capital will destroyed and the seeds of great inflation will be sown. Participants are seeing the pattern. They are internalizing the sequences of events on asset prices and sectors. This is very bad and suggests the speed of the cycles will greatly increase as money and or capital velocity increases.
Ask yourself; on this wave will capital sit in bonds for 5 years and a 250% equity move before it belatedly enters equity? I don’t think so as capital holders will have seen the neo keynes play book.
This is the problem and is why inflation should pyramid up in the coming years as the play book is known to all. Or rather know to those that care to examine these things.
So back to it. The summary priorities.
1) FX – major g7 pairs tricky overall.
i)GBP bounce but an opportunity to unwind the GBP cash position.
ii) Euro relative strength so long as the on risk story holds.
iii) Cad, nok, aud interesting again given the usd run up, at least as bounce candidates for q2 so long as the on risk story holds or at least flat lines.
2) Short selection stocks to mitigate risk and reduce interest costs – a work in progress.Watch those sector indexes and back to basics in terms of running the ruler over balance sheets to select individual targets.
What else to say other than repeat the age old wisdom’s from past masters in capital markets. If you are not feeling the feel good eurphoria on your own book don’t get frustrated and be “jerked” into making a fast allocation.
“Its a marathon guys not a spring” or “Its an all you can eat buffet”.
Nothing on the macro side of things has changed. Its pure text book stuff thus far. In the big picture its noise really.Inflation adjusted the secular bear is alive and well. Remember this clearly.
The neo keynes are in big mess of their own making. No data points or price action has invalidated this yet.
Below a chart blitz from the last two weeks of postings on the forum pages. I’ve been slightly purposefully holding back on posting too much to the latest news area of the website as this site is all about sharing information and semi pro PIS working together collectively for the greater good. That’s what this site is about. Its not about me and my own book. Its about us and that’s a great and powerful thing in my view.
Greatest respect to all. Lets pick up any issues comments on the forum pages.
Before I forget a timely reminder from the good Doctor today echoing Drukenmillar’s recent comments that we have picked up in the forum pages.
“Druckenmiller is “a very thoughtful person, and I share his views. It will end badly. But unlike Stan, I believe it will end badly this year,”
Dr Marc Faber March 2013.
All the best guys
Rich
Here below some charts and data from the last few weeks in no particular order:
Oil Price not confirming the improving economy but it is confirming the weakness in materials, industrials and semi conductors. Ie is the real economy improving at all? Spring k-wave theory suggests the spring phase can experience subdued commodity inflation as investment pours into production and keeps a lid on prices as productivity soars. But, as we saw this week productivity is at a 5 year low in the US. Is the dow transport improvement and truck tonnage growth a sign of debt (and lower savings) induced consumption or real spring investment?
If I’m correct and this is a debt and money printing induced false spring then commodity prices should soon spiral upwards again not due to demand but due to a hot money chasing real assets to avoid debasement as the real economy falls off a cliff.
1986 to 1987 sp500.
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