onsdag den 30. januar 2008

Inflation jumping castle - and what to do

Message in a bottle, message in a bottle - The Police

I most humbly apologies for not updating as stated, but let me explain my overall issues right now:
1. On one hand I think the biggest mispricing right now is the decoupling story. How Europe is not going to be hurt by the US cold. That's simply naive both academically but also based on history. The market has increased the probabilities of ECB cuts despite the Trichet talk. Right now market is pricing 65 bps (based on swap spreads). The European rate adjustment downwards has been a quick and steep as the US.

If this is your main driver for theme, then the logic would be to be long short end Europe, short European growth companies and certainly short banking/real estate........ This is my prime focus right now. Point being: The world is dissecting bad US news as their life depended on it, meanwhile the European data continues to deteriorate.

2. Long or short fixed income overall? The base argument, and my belief, that the credit crisis is bigger than market perceive it to be (more on this later) should make we want to be long and stay long fixed income across the curve.

The fact the banking industry can not leverage their balance sheet will make the central banks go even deeper than needed (and setting off inflation alarms!)........

On the other hand can I ignore monetary data, inflation core and gross, high gold prices, high commodity prices overall? Hardly, the day-to-day inflation is through the roof and works as direct tax on the consumers. The US been early in giving tax hands-out, but the fact is the 500 $ disappear into higher energy, food and loan payments.

We may be, as stated by George Soros, at the end of massive credit cycle, and getting ready for a wash-out. A wash-out which will be hugely positive. Imagine if the banks started allocating capital at highest marginal utility and not to highest greed factor!!!!!!!!

I have 100s of other issues on top of the two above, but seeking the answer to the equation makes me sway from bull to bear, and back. A situation I am increasingly getting feeling I share with even the super minds of this industry.

Why is it so important?

When fund managers like myself try to map out the world we like logic, mostly linear outcomes, what the world is giving us right now is a complex matrix of potential answers. The root of the problem not really the complexity of the problem, but more the dynamics of it.

Normally, as in since 1982, the central banks have applied more drugs for the sick patient - but has the patient become immune to this medicine by now?

Does the lack of banking edibility create bigger issues? The answer here is yes, the central banks (despite their short comings) have learned from the 1920s-1930s where policies were the reason for the crash. However, to me this begins to look a lot like the 1970s, where the central banks, main Fed, was to expansive fuelling inflation..........

1970s was about big business, big government, and if today's Sovereign Wealth Fund are not big government, I don't know what is. The Bush administration have made gigantic hole in the coffers to spend on wars....also big government. Inflation is REAL TERMS is rising, faster and faster... food prices is at all time high, and only going higher due to demographics, growth and eating habits....

So to cut a long story short, I am slowly, and as always step by step getting to the end conclusion that this time its different, it really is. It is at the end of a Super Credit Cycle, and should the Mononlines become downgraded before the rescue package is in place, then the banks will roll over and put aside an additional 50-100 bln. USD of risk.


Moving from day by day, to week by week now, main themes:

FX: Strong believer in cyclical US strength coming shortly - the US export alone will add 1.5% to growth in the US this year, and with Europe catching some of the US cold, the relative performance of the two currencies EUR and USD should line up better.

The bottom line on EURUSD is as follows: A EURO above 1.5000 for 1 or 2 years is equal to closing EUROPE.

FI: Going into Fed meeting with Puts on T-bonds. Market will probably see this as reflation...

EQUITY: Long some out of money CALLS for the sake risk diversification.

Commodities: Flat.

Running very flat book overall... as I make my next move.

So if you got strong ideas, please... send me a message in a bottle..

Good luck tonight.


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