Hope is tomorrow's veneer over today's disappointment. Evan Esar

Dear Investors,

Todays blog - a small note preparing me for guest hosting CNBC on Friday morning from London.

• Equities has entered 5th wave down - We have now completed what looks to be the 4th wave up in the S&P - and we are now preparing for the "final descent" into 666-00 and then below to 550.00 - if failing to find support then even potentially 450.00 (Yes, it is minus 40% to 50% from here)
• Europe - I'm very bearish of Europe both equities and foreign exchange....meaning DAX and STOXX50 should "outperform" on the downside which is already seen now as DAX is down 12% from top vs. the US down about 5% - this will continue. Be net short DAX and STOXX50. Europe will enter recession and see unemployment on the wrong side of 10.0%
  
• US Dollar - a need to balance between the long-term weaker US Dollar - and the issue of "competitive" devaluations where the US dollar as balance sheet, funding and transaction currency will strengthen (add much better current account to positive) - means my biggest position is short EURUSD and overall long DXY (US index)....
• Growth: World growth in 2009 will dip so low - that the road back to no output gap will take longer than even the pessimist thinks - the output gap still widening despite demographics positive and productivity (function of firing people) - but it is similar to negative compounding.. the deeper we go in 2009 we longer the road back to trend growth .....I project 5-10 years of below trend growth as the world fights: state-isme, regulations, consumer deleveraging, protectionism....
• Balance sheet recession expert Richard Koo from Nomura talks about how Beige Book have often proved right - right now asset return indicates return to norm, while latest Beige report from June continues to see deterioration .....There is also from the media a huge focus on banks not lending (see below), but what most people tend to forget is that the greater "pain" comes from unwillingness to borrow - as the economy contracts, the consumers de-leverage the net demand for loans falls.......
• The US consumer suffered loss of 15 trln USD - yes read it out loud! - and the real question should be: How do you fix a consumer economy when the consumer is out of work? (source: Bob Herbert)..........The UNEMPLOYMENT is leading not lagging - when people lose their jobs, the world changes...let me tell my story from New York again: I met with head of research from major us investment bank, and he tells me: "Steen, we are 100 people here, we know 50% needs/may have to go (sacked), so right now 100 people adjust their consumption/life to the probability of losing our jobs" - this is key, key and key.. The world is right now consuming and behaving as if 100% of all people will/should lose their job - the real "Green shoots" will come when the 50 people have lost their job, and the remaining 50 return to their normal life.. but right now.. and throughout 2009 we will be in the 100 people behaving as if they will lose their job.... ironically this only accelerates the same process, which is Game Theory dilema.
• Commodities: The break even extraction value for most commodities risen (funding & investment costs up.....) meaning there is "bottom" below - the demand/supply all positive, but we could be in for a "clearing up" of overhang position in commodities... I see real risk of massive sell-off in gold, crude, and ind. metals......
• The key problems areas remains the same: Banking and mortgages. Banks repays TARP and raise capital. Why don't the US government make it condition that they lend out? The whole exercise has become futile. There are 8.200 banks in the US - The 19 banks who received TARP constitutes 50% only of lending - this means there 50% of the lending being done by banks, mainly regional banks, which DID NOT receive TARP - they need to cut balance sheet and raise capital ratios....! I.e This is getting worse not better. Mortgage - the amortization foreclosures ran out June 1st, now some states like California wants to extend "grace period" but.... time is running out - the whole exercise of "buying time" -- worked for the three month I was in the long-only world, now it increasingly looks like there is set-up up for nightmare 1970s style growth, big government and lack of market returns.
• Asset managers having the most difficult time ever - and I mean ever: Pension managers caught long wrongly allocated to bonds and equity, Endowments caught long illiquid investments (commodities, Private Equity, real estate), the banks are caught long credit, and the consumers caught long housing..... this means volatility - or more precisely: Certainty of path is the smallest ever - visibility is down to a feet or two - even the long-term managers need to adjust for short-term political non-sense of which most of it comes from a ruined Gordon Brown, from the "talking head" Obama and then spiced with the typical french "pragmatic" nonsense of dirigism.....
• EMG The fundamental case is excellent - but.... it is marginal risk capital at work - there is dangerous trend of less and less FDI into the EMG market - while ETF's and other synthetic instruments has overextended the exposure for many investors- again it looks to me like there is imminent correction coming - and I'm considering broad based short in in EMG through August.

My present positioning:

1. FX: Short EURUSD and short USDJPY..... Conviction on 1-10 scale - 9.......
2. FI: Very long 5 y Govies sector in Denmark - with 75% of my old cash..... Scale - 9 - Long Bunds @ 121.50 break... trailing stop...
3. EQUITIES: Short DAX cash and long August 870 puts -- All initiated around my 29th June blog call for cyclical change around 3-4 July (Steen Jakobsen Blog w. cyclical change date)
4. COMMODITIES: short Crude since 68.50..... and looking to short Gold....

Macro themes:

1. UNEMPLOYMENT main indicator to watch. Not understood correct. How do you restart consumer economy when the consumer is losing his job?
2. China - wrote big piece on how decoupling will impact growth - marginal valuations: Long-term outlook
3. Long-term growth is will be sub-standard for longer....

YTD (Since early June +125 bps)

Safe trading,

Steen