If two men agree on everything, you may be sure that one of them is doing the thinking (Lyndon Johnson)

A quick Saturday blog from me: I have finally figuered out what Obama/Geithner/Bernanke modus operandi is based on: http://en.wikipedia.org/wiki/2012_phenomenon  or more dramatic: http://survive2012.com/

The only way to explain their actions and policies must be based on knowing its futile anyway!

I found the Mayan prophecy when reading a thriller and it struck me as the only sensible explanation for the comment/actions/policies enacted under what surprisingly to me now look an even more incompetent administration than that of W. Bush!

Another far more elegant commentator who is having a hard time not only with Geither et al, but also the never ending praise of China is Hugh Hendry: http://scribd.com/doc/22520780

His latest monthly report is so well written had there been a Nobel Price for financial market commentaries he surely would have won it for 2009 - unless obviously Obama runs away with it as he has once considered writing a commentary, which these days seems enough to win a Nobel price, but PLEASE READ IT. It is concise and raises several issues which I myself agree with:

• The non-demise of the US Dollar
• The non-believe in the Chinese miracle (where is the consumer for their production?)
• Deflation - double-dip

Last week was big range trading - there was some "noises" that the "too big to fail means to big to live" could see regulation next week as the lobbyist fails to make their voice heard: http://www.bloomberg.com/apps/news?pid=20601087&sid=az7AcisnxsCA&pos=6

It seems Dimon agrees (or playing the game?): http://wallstreetpit.com/12093-jamie-dimon-too-big-to-fail-must-be-excised-from-our-vocabulary

The charts for banks should cause some concern:



Meanwhie the good old Dow Theory still not decided whether to confirm Primary & Secondary Bull Market or to make divergence indicating top in place for now....:



On the markets I have increased LONG US dollar exposure - and added slightly to option downsides - the odds of "see no evil - hear no evil " long environment is rising ... Even the bears now embrace this line of thinking as Goldman Sachs and others are now proclaiming more incoming STIMULUS is coming with the Job Summit in December -

Intentions are good - action better (Steen Jakobsen)... It seems to me that the last Deficit Summit brought nothing - I expect Job Summit will bring... Nothing ... The Obama policies are the worst nightmare this world have seen - when the Chinese engine have filled the last few storage facilities with useless products no one wants to buy - the day of reckoning is in ........This is 1999 all over - no values, no metrics for fair-value.....maybe the Mayan Calander is right ? :-)

Safe trading,

Steen Jakobsen

PS: I will be in London for most of next week, but will try to update... nice week-end...

FED's biggest problem is that the economic data is improving too fast - Macro Blog

On the eve of the FOMC meeting I will dare to suggest that the 'real issue' for FED is the fact that the data is better than expected!

Yes, lending is still weak, yes all in all housing is still dismal, and most of the improvement is in sentiment index', but... that the whole plan of Obama or the Harvard School of Economics as some people with tendencies for compartmental disorders.

Yes(again), you are reading this correct!

Obama has been successfull in creating the illusion of doing something, not unlike him winning the Nobel Prize on intentions alone!

He has now succeed in getting everyone to buy-into his 'hope' (Do not worry - it is ALL hope - no substance).

This leads me directly to todays FOMC meeting - the mere talk of EXIT STRATEGY gets people nervous, but it is hard for Fed to not change their communication:

1. Because its too tempting, always, for politicians and bureaucrats to take claim for something they nothing to do with (See chart below where US PMI surges past China and Europe)



Source: Societe General Cross Asset Research

2. It is paramount for Fed to create another illusion, the illusion that they have a plan for how to take the easy monetary policy back, for how to sell their old bikes, ladies hats on their balance sheet in the future.

This should be tied in with the massive shortening of term debt-structure which has been happening in the US: (see link below)

• Maturity of outstanding US Debt is down to 50 mth from 70 month
• Almost 50% of debt is due in the next 12 month (Will Fed hike making it more expensive for themselves to refinance?

http://fabiusmaximus.wordpress.com/2009/10/30/maturity/

It seems that the thinking in Fed is to 'pre-alert'the market, to communicate is the tool. Some observers Financial Times, and other insiders feels this meeting is too early - but that is it imminent.

http://blogs.ft.com/money-supply/2009/11/04/the-fed-and-its-extended-period-language/
 

Another interesting aspect as pointed out by the excellent research done by Societe Generale Cross Asset Research is the fact the world has a potential for a "decoupling"  (See PMI chart above)

Where early on it seemed the US was lagging China and Europe, it is now clearly the US which is in the lead as seen by recent surge in PMI data!

This would be major game changer - as the US Dollar has become the funding currency of choice.

Imagine if the market would/should/could starts repricing a rising rate structure in the US (it sort of makes sense the US needs to pay more...) while Europe lags - that seems to call more for 1.10 EURUSD than 1.70/1.80 which the consensus in the market.?

At the end of the day the market is in my opinion unprepared for the next move(s) in monetary policy, fiscal stimulus & geo-events.

In other words: Across all products VOLATILITY IS TOO LOW relative the uncertainty of path, which is the true volatility curve.

FOMC tonight I have no clue about - the way the market is setting itself up indicates to me there is 60/40 chance of major disappointment for the RISK-ON people, but as it is always the case with central banks, politicians and people in general: It is not what they say but what they ACTUALLY do do which decides......

Strategy:

Still same positions - massive P&L swings - but will await tonight & most likely Friday Non-farm before moving from aggressively short this market back to neutral. Justice will prevail! :-)

Safe trading,

Steen

Chasing the end consumer....where is he? Have you seen him?

Todays investment meeting was short, but productive:

We ended up chasing the end consumer of all the "good" and goods that this fiscal stimulus has and will produce.

It is all well and good to analyse things getting better - it's even correct, from the stand-point of corporate earnings, but.... who is this end user? Where does he/she live?

Clearly the US consumer no longer wants to be part of the game of chicken, as their "balance sheet" is in such a bad state: lower house prices, eroded pension funds, and outlook to lower real earnings & potential unemployment

The money is on China and Japan to create more domestic demand - and I am sure it will produce more final demand, but the problem being... their saving rate is 40% or more, so it takes a lot of Chinese to replace just one US consumer.

Chart China - getting bigger GDP but spend less as percentage of GDP (source: David Rosenberg, Gluskin Sheff)

(Click on chart for larger version)

Fortunately China is factor rich on people, but I doubt the local peasants, celebrating the 60th year Anniversary of PROC (http://tinyurl.com/ycorzmo) this week is too concerned about these matters, but the cheerleaders of the world keeps talking about the amazing Chinese story....but may I ask again? Who is buying their stuff.

Looking at the incoming data it is becoming clear that the velocity of improvement is at best stagnant and at worst falling - the past two weeks has not done much good on the upside, except maybe for the 20K better jobless claims last week. The worst being the renewed slow homes sales...

It is also very interesting to note that the main benchmarks of bubble/euphoria/China: Copper, Gold and Crude are all "correcting" their up-move - this could be merely a small correction inside major cycle, but being the concerned chap I'm - I got feeling market is long, very long.....all of the above assets.

Chart 2: Copper, Crude & Shanghai

Our main conclusion remains this:

• Market trades on momentum (nothing wrong with that per se..... although it is EXTREMELY tiresome for old man like me.....)


• It's impossible to define top in place presently (You can do all sorts of analysis, but from technical and valuation perspective it remains a two sided story)


• We note data & commodities does not like last two weeks(see chart)

In the equity space, our resident equity guy, Mr. Carsten Høgh, claims: Nothing is cheap any longer, and that caused some tactical talks on whether stock managers would move to "defend" their positions as we enter Q4?

The fact that most of their "profit" this year has come from low quality stocks with no or small earnings - and from increases in multiples (S&P has moved from P/E of 10 to 18 today.....) would indicate some willingness to scale-down their holdings based on Carsten premise: If it's not cheap, it's close to being expensive - We have expectation that there will be move away from cyclicals and into Big Cap again (Tesco, Wal-Mart, Colgate, Coke, H&M, Diago etc.).

The overriding strong argument for buying stocks remains: cheap funding (read: liquidity), cheap US Dollar and cheap talk in Washington (Obama promises alto - but have much of the items on the G-20 can he ACTUALLY get through Congress?).....which are all good arguments, we have some idea, still, that the next two weeks will be the peak (Read old blog: http://steenjakobsen.blogspot.com/2009/09/next-big-trend-shift-comes-in-october.html)

We are getting close to this END DATE.... and our cyclical model indicated going in to Monday that the markets was slightly oversold, but the key for the next two weeks becomes how much further we can move up before the market finally puts in medium-term top........ We look at Fridays number as as a potential "game breaker" - but as always... it's not a science but more of guess.

STRATEGY:

We remain light in risk and we will be looking to increase negative play as Non.farm is out........for now... the momentum rules..

Safe trading,

Steen Jakobsen

Politics is war without bloodshed while war is politics with bloodshed.Mao

The week-end macro blog today with guest commentary by my friend Yoshi.

Yoshi wrote me nice e-mail last night and the content is the first real "new" research/analysis I have seen in years - you can always trust Yoshi for clear and concise thinking, but first to the order of G-20 communique:

Full text: http://www.pittsburghsummit.gov/mediacenter/129639.htm

Commentaries:

http://www.reuters.com/article/businessNews/idUSTRE58P04Z20090926

The statement was longer than normal and full of promises... the headlines was as expected but the sub-text left me with feeling that the exit strategy is further ahead than market presently perceive it to be...

The financeminister was instructed to work on a transparent plan for exit strategies in their November meeting - and the world "leader" (sorry I can't write it without putting " " around it as it's joke to call them world leaders....) believes growth is back at 3% plus - and certainly the year-on-year numbers vs last year looks good......

Which way to play this? I don't know but.....good friend of mine commented: "... the only way for this to be done in good order would be to let all of the programs run out of time.....".. so the way to monitor this will be to make table of "initiatives" and watch last "sell-date".. if this is THE PLAN, then we are losing a lot of stimulus over the next 3-6 month, and this I think is main point to take away..

Enough about my thought here is Yoshi e-mail to me (which I took the liberty of making public before getting Yoshi's approval - but I deemed the email to be in the interest of the national security :-)

Nice week-end and safe trading,

Steen

===========================================

Hi Steen,

I'm fine and amazed at how foolish this mkt is. We are on the verge of
protectionism and in the beginning of the end to the foreign capital
to the US (the Asians are serious about developing their domestic
consumer mkts, which will be far less open than the US).

I really think Obama will go down as even more corrupt than Bush and
his biggest mistake is Geithner who is closer to the powerfuls since
Summers will not pass any confirmation hearing in the Congress.

Right now, my biggest immediate concern is the CFTC's position
restriction on the futures when the interest rate differentials (one
of the major reasons the Asians would hold the USD) are gone. The USD
denominated commodities were acting as the balance to offset the
declining interest income and weaker USD. When the US increases tax to
eliminate the tax rate difference, then fait accompli to the USD.

I am amazed they are even talking about Tobin tax as if someone is
making sure the USD will be dead unless the US wants a new currency to
fraud its way out of the impossible USD liability.

Now, the Europeans are joining in on the protectionism (tariffs on the
Chinese aluminum foil and seamless steel pipes). There is a real
chance the Japanese (they have been quietly reducing the UST holding
for the last ten years) will sell the UST since their trade surplus
with the US is declining and Japan will need any available capital
including its reserve to pay for their domestic needs: free high
school education, the serious pension shortfall for the fastest aging
population and the DPJ's "Welfare Economy" policies.

The serious point regarding China and Japan is they are shifting their
economic models to more domestic oriented economies because they've
given up on the US consumers. If Japan, with the only 10% of the
Chinese population and much smaller land and even smaller natural
resources, would say they accept a strong yen, more domestic
consumption and Asian Economic Comunity, it would only mean one thing.
The US is becoming a liability to them. Look around in Asia, the
Chinese yuan & the Japanese yen swap lines with other central banks
are being extended like a spider web and they are talking about
establishing the Asian Monetary Fund.

As soon as Japan accepts China should take the leading role in the
Asian Economic Comunity and Asian Monetary Fund, I believe they will
becme a reality. It is natural that China leads Asia and would be more
acceptable to other Asian nations because of the stigma atached to
Japan like Germany in the EU.

These developments in Asia are not a part of the Team America. It's a defence mechanism to prepare for the harsh world to come. That's why I think we are near the flexion point in this mkt.

Yoshi

A hero is no braver than an ordinary man, but he is braver five minutes longer. Ralph Waldo Emerson (1803 - 1882)

Our family office had its first real macro meeting in a long time... with following conclusions......(or lack of it....)

Economics:

The incoming data continues to be good although we have noticed some deteriation recently relative to expectations.

We are simple people and use the rough guestimate delivered on Bloomberg by Citibank as benchmark. (CESIEUR and CESIG10). The better-than-expected data topped around end of August and into early September.

This week have seen very disappoing ZEW but very good US numbers continuing the a trend of
"cyclical" difference between the US and Europe, where the US is perceived to be further ahead on the curve and hence should perform better. (S&P over STOXX50)

This week is full of data and it will be interesting to monitor the development post this week and going into the G-20 meeting in Pittsburgh 24-25. September (http://www.pittsburghsummit.gov/)

We should note from 10.000 feet, the paradox of better economic data still does not rhym with the high Jobless Claims and the rising unemployment.

The lead-lag factor does not explain why this "recovery" which many ivory tower economist in investment banks are busy calling much better than in 1930s (due to Industrial Production presently doing better -maybe slightly overlooking the fact there is NO MANFACTURING left in the US)......

Conclusion:

The data still improving - but the velocity is dropping and a few "dark clouds" have been seen.

We need another fiscal stimulus, a new cash-for-clonkers, further expansion of Fed's balancesheet to keep the boat afloat....... but bottom line: No reason to fade the economics .....yet

Foreign Exchange

We had quiet a lengthy discussion on the US Dollar and it's direction. Jesper playing devils-advocate saying the pro-cyclical aspects of the US Dollar should be supportive (Improved balance of trade, Current Account and the US being ahead in the pro-cyclical loose monetary policy.

I, on the other hand, argued for the POLITICAL ASPECT being key driver- and here I have to add that one of the "macro mistakes" I have made over the summer has been to let my "hate" - and yes it is hate for politicians and central bankers cloud the decision making - the fact
they are implementing wrong policies, delaying the inevitable has NOTHING TO DO with our trading approach.(At least theoretically)

Politicians are simple people (Just look at Porno Berlousconi) - they try to do what they tell you! The London G-20 Summit roadmap has been followed to the point - the next main agenda being regulation .... and a hard one.

Back to the US Dollar here is my argument for weaker, a much weaker US Dollar:

The recycling of capital from the CONSUMING America to the EXPORTING Asia meant:

Lower yield, stronger US Dollar and a temporary equlibrium condusive for stock markets (bubbles). Now the US consumer is DEAD and gone.

The logic (I hear you laugh at me for using logic in this market :-) should be for rates now to go up, for the exporting Asia to increase their home bias and for the US to increase its domestic saving (which is happening)...... This is first part of the argument.

Then you add the geopolitcal aspect of China, Taiwan and now Japan increasingly trying to go it alone without the US on the foreign policy. Asia corridor policy I call it.

This week-end the new Premier indicated Japan no longer is happy to just bow and say: Ai,Ai.. Mr President.

They want their own footprint - own standing forces, which is new dimension.

Extend this to their allocation framework, their sovereign wealth funds, and a pattern of "less export of surplus" capital in the US markets and an increased investment in Asia region (Through stock and natural resources) and the US Dollar financing begin to look.... nervous....

We continue to believe China will "buy" Taiwan rather than fight it. It's cheaper and easier!

Well, we ended nowhere really on the discussion.

Being the FX guy I think both 1.5000 and 1.6000 maybe even re-testing last year highs is possible...but not in a straight line. The US dollar index could test new lows with the highs in the stock market coming end of September / Mid October.

We also monitor EURNOK and EURSEK. Selling EURSEK below 10.20 and EURNOK below 8.6000.

Conclusion:

Accepting sliding US Dollar - but also acknowledging the MASSIVE negative sentiment in place.

Equity

We define this as the 9th ining. Our projected cyclical top will be end of September / Mid October. The Euphoria is bigger than the volume in the market presently, but never the less, it is paramount to sit tight on long positions in this market while the market overextends itself.

Looking for catalyst for top in place- I, personally, think it will be political or event based, but on the calendar there is several other options: Non-farm payroll, G-20 meeting, Chinese Communist Party Anniversary...... (add to the list yourself).

We also take due notice of the DIVERGENCE in almost all stock markets. Prices higher, but momentum indicators are not following, and the relatively low volume, but bottom line: We respect the upside.

The price target is roughly 1080/1120 on a overshoot. The present envelop top is around 1062.00 (as of Friday) rising 10 figures per week, ie. 1072.00 by Friday or two points a day...... Adding three weeks obviously takes us to 1090-00 region..... and the you add some VAT and you got 1080-00 / 1120.00 expected top.

It is important for us to stress that the top coming up most likely will be a correction inside this mini-bull market as we do no expect the polticians/central banks to back away before we move into 2010. In other words we are looking at 10-15% correction in October/early November, with a rebound having probalities.

Fixed Income

Jesper made key comment: Relatively to where equity is trading its to expensive (price) - Relatively to how we see the world in Q4 and 2010 it looks fair......

The point being - the US Administations wants/needs rates to be low to mitigate the the recast in ARM loans and the replacing of bank loans by issuance of bonds. The key dominator/measure for succes of US Administation is the 10y yield!

There are good Taylor-rules reasons why we could see 3% break....low inflation expectations, slow job recovery......(although we feel the 3% threshold will only be broken in tandam with a correction in the stock market)

The EXIT strategy was cancelled at Jackson Hole, and confirmed CLOSED at the finance minsters G-20 meeting recently - the upcoming meeting will be more of the same and some public a..-covering with tough talks about bonus' et al.

Commodities

Considering the amount of "liquidity" floating in the system it is disappointing that commodities can not get a bid. The reason for this is relatively simple - China has stopped buying and storing - hence the small demand. Shipping rates confirmes this.

Gold - the team likes gold, but are slightly disappointed in lack of follow through above 1.000 US Dollar - I remain extremely sceptical, but need to reasses this view is US Dollar becomes crisis currency.

We note the extreme condition in Natural Gas - and the continued bid in Sugar.....

OVERALL CONCLUSION:


Allocation:

Beta allocation: @ 75%

The Alpha part needs to look at downside protection.

The strategy being to slowly take Beta down to 25% over the coming
three/four weeks...
Currency allocation: Short US Dollar, long SEK, long small JPY

This is no time for heroes..... be long, be happy....

Safe trading,

Steen (Jesper & Carsten)

Time flies like an arrow. Fruit flies like a banana. Groucho Marx (1890 - 1977)

Well it's now September...and market is busy trying to figure out which is more important:

The negative falling Chinese market (down more than 20% from peak...Chart: http://tinyurl.com/n784hw Hang Seng divergence vs. S&P ...

or the rising FEEL-GOOD-FACTORS as seen in the economic data....

Now let's start with the "improving data" :

First, data is late, very late relative to the decision making of a macro speculator - so late that they are largely uninteresting, this does not mean there is not people and investors looking over each and every data point - but let's face it: if you inflate an economy with TRILLIONS of US dollars the data will improve - the surprise is to some extent that they are not even better - the fact sentiment indicators now shows the economy is out of recession, is...at best useless - at worst confusing.

Bank lending and housing market is still falling, yes the fall is slowing, but there is NO CAPITAL incentive to neither increase balance sheet of the banks or.....for the home buyers to increase their bids - even 1-timers tax credit is hard sell, and when the first level of sales is done, the banks have plenty of homes on their books to sell.... please do NOT let yourself get carried away with this nonsense.

The sentiment data is now the most bullish in years..... my friends, neighbours and their dogs are all telling me how much money they are making in the markets (you seem to have forgotten the fact they lost 70% last year...but short-term memories are good for "investors"....)

Check this blog on the very issue: HTTP://www.tradersnarrative.com/will-september-kill-the-rally-2912.html

I can't say we are printing money, but somehow we are keeping an even keel in this market, waiting, waiting and waiting for some final direction to play out.........The fixed income market is stubbornly bid - and lately we have noticed FI carries more weight than other markets... we also

note how Crude is leading forex/equity: HTTP://twitpic.com/fz41k/full

The commitment is relatively low, but here is the present positioning:

Short S&P, Short DAX, short shipping, short Norway Index... - all with medium conviction. Entry levels relatively ok - leaving room for......stop loss --- Stop Loss.. two closings above high..

Short GBP/USD - short since 1.65ish - target 1.35/1.40 minimum - The UK is falling out of bed - as confirmed by PMI today..... also long DXY (US Dollar index)

Commodities: Short Crude since 64ish....

Fixed income: Long 90% of cash in short-term Danish Government bonds and small long Bunds...

August performance was small down......The Puma Macro and other funds will launch later this month with daily pricing...

Safe trading,

Steen

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

The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty. McCarthy

Dear Investors,

First half of 2009 is coming to close and it was much better than most people anticipated, but also more volatile with the 666 low in S&P in March being the low point for many people.

I have been wrestling with some medium- and long-term macro pointers to set against my daily trading and my friend Yoshi has put some excellent views on the table for me, but from my angle I am somewhat "concerned / sceptical" on the decoupling of Asia - although I do recognize the major power shift from the US to Asia which is on going - but can the world move back into non-Global capital flow? If so what precedes it?

One recent theme I saw from Arthur Kroeber of Dragonomics was on China trying to go from labour productivity to capital productivity........meaning more efficient and open capital markets, increased foreign ownership through IPO's and bonds issuances, relaxed currency control ..........relevant?

I do not know yet, but clearly China had a Plan A, but no Plan B, now plan B seems to become to use their capital more efficiently, in other words, until this crisis "capital was something they took for granted" - now that they are spending close to 15 pc of GDP on fiscal stimulus (which will run out in 2011) they clearly have set themselves up for using the capital differently and more efficiently.

The problem is the old physics theorem of: An action creates a reaction, in this case...if China wants to use capital more efficiently they need to open their markets - something which ALL of the emerging markets need to do to go the next "efficient frontier".....this is no easy task especially in Asia where Governments are still recovering politically from the Asian currency crisis of the 1990s - but I expect many of the deals being done behind the scenes to have been done in the "name of the above change" - if you from a game theory perspective look at being an Asian investor with the above goal, then a few things springs to mind:

1. You need to align the regions currencies closer - something I have written about extensively and China is now actively and openly persuing this policy. This means more open access but also lower trade barriers - a net net positive for growth in Asia.
2. Capital markets. In order to replace a US market you need to have bigger capital markets - this means increased IPO and debt issuances on the international market........
   
3. Capitel efficiency. How effective long-term is it to maintain and pay for the US Consumer - if you are Labuor Efficient - then it makes ALL the sense in the world, but when your focus changes, you does you willingness and ability to recycle surplus' to the US - hence we will see less and less investment in the US, which will ultimately lead US Dollar much lower and US interest much higher - DO NOT IGNORE this natural gravity of the market as it may be the strongest "slow" theme going on in the market..........
4. Demographics and real estate. Both are bid to the hill in Asia in this scenario - if international investors freely gets to convert their profit & investment - something totally controlled by governments right now, then real estate should take of in Asia - also the demographics are so strong that it is a book in itself (rising middle class, rising education level, increased meat consumption etc.. )

This is just the quick version, but the end game is one which my American friends in not going to like - the US share of global GDP will fall, year after year, as the bill for over-expansion created by both Bush and Obama needs to be paid through lower growth and higher taxes - The US is doomed from logical point of view - maybe it is time to look for the "Hail Marry" throw from the quarterback? http://www.youtube.com/watch?v=r-qkpsygNYo

The Hail Mary is ALSO the overall risk to above scenario - the US administration is not stupid, only wrong, so there is so many behind the scenes things going on trying to secure long-term debt financing.........

Well this became a bit long-haired - forgive me, but it may be the most important blog from me this year, as it certainly got myself thinking. I have enclosed a few charts which shows part- or the whole of this reasoning.


Table 1: Fed balance sheet has stabilized: Means now the administration can start looking at the above issues of long-term financing and what they believe is the "exit strategy" - I call it the Hail Marry project.




Table 2: Courtesy of my friends in BoA - this shows clearly how the potential
for de-coupling is happening - mainly in risk taking environment ...




Table 3: As the world normalize - the inflation expectactions dictates the US Dollars
future - right now it looks like our expected inflation is again coming in...




Table 4: From IMF latest report - this charts clearly shows how the US is lagging, and NOT coming back, while the rest of world and EMG performs again...





STRATEGY:

FX: Short EURUSD - as above inflation expectations down = stronger US Dollar - also there is almost competition from other central banks in the G-10 to tell the world their currencies are overvalued (NZD, GBP, AUD, partly EUR, CAD.....)

FI: Neutral - adding risk tomorrow..

COM: Short crude and Gold.... http://www.marketwatch.com/story/iea-revises-down-global-oil-demand-forecast

EQUITY: Short S and P...

Safe trading,

Steen

The greatest penalty of evildoing - namely, to grow into the likeness of bad men. Plato (427 BC - 347 BC), Dialogues, Theate

Dear Investors,

It is only appropriate to quote the great Plato on the morning Madoff gets gets 150 years in prison: http://tinyurl.com/lcfozs

If it was not for all the victims of Madoff - I would not get why we even bother to give the limelight to the one person who makes Charles Ponzi look like an amateur?

On the subject of Ponzi Schemes and Amateurs: Geithner and Obama is up to no good. I am increasingly getting information about deals behind closed doors in China, Japan and the Middle East - no wonder trading Macro is full-time agony these days.

The point being - there is no doubt the US administration is very concerned about the "low delta probability" of their great revival plan not working - Maybe deep down even they doubt the modern day version of Alchemy being produced in front us - hence their need to secure some long-term commitments from overseas lenders - and here China and Japan comes to mind.

Let us not forget the game has changed - until very recently the US and its capital markets (read: Banks) where the only game in town - You want leverage ? I got special offer only for you my friend.... - you know the song.... but now with global trade flows down, GDP down and the outlook for higher taxes being an almost certainty China mainly, but also Japan is looking to spend along the lines of: Think local, buy local ...

Simple mathematics dictates that demographics, growth and savings are higher in Asia than anywhere and the impact long-term will be Asia "charging" higher and higher rates to recycle their capital......and the rightful political power... something very few people seems concerned about.....this is TRUE paradigm shift - this is the end of US hegomonic powers....

For the deals behind the scene orchestrated by Geithner, Bernanke and Summers it looks increasingly like they are using play-books from the early 1980s(Volcker time...) - but more on this when I got some more research done - but clue for you: This last happened in front of major US dollar bull period ending in 1984 - (Yes, I know most of you were not even born then ....but I paid top dollar for shopping groceries in New York as a visitor- I clearly remember the 3,45 USD/DEM back then).....





The position and strategy is unchanged - it is a game of awaiting July 2/3 - or the end half-year and quarter-end which seems to gravitate markets higher - the price is to paid in July and August, at least according to my and others models for cyclical changed...

I am short EURUSD, S&P, and Crude.... none of it really working MTD back to +5 bps .....

More tomorrow.....safe trading ...

Steen

The game of undermining the US Dollar is under way...

I note, through friends of mine, how the Shanghai Group backed Russian proposal on using national currencies in mutual settlements and introducing a commen currency. Mededev own wording: "The current set of reserve currencies and the main currency - the US Dollar - have failed to function as they should" ... http://en.rian.ru/business/20090616/155268544.html

The meeting included China - so the China/Russia link is showing up more and more, and it again goes to my point on how Asian and EMG countries overall are focused on getting their proper share of political and economic power - they want to keep the flow "local" - which will have material impact on unemployment levels in Europe and the US. (Increasing "natural unemployment").....

The more short-term critical aspect becomes one of how this "Think Local - Buy Local" will derail all the global intiatives in G-7, G-10, G-20 as the economic impact will be one of less recycling of current account surpluses, meaning less financing for the indebted US and Europeans......

The growth rates in Asia, EMG will outperform G-7 by more than the norm going forward, although I suspect the REAL DATA will be that Asia + EMG will barely grow while the USA+ EUROPE will be in recesison for far longer if this game Think Local- Buy Local continues.

The other topic is again one of the FED trying to "talk to/leak to" the market that they are not even close to raising rates....

FED weighs FOMC statement: http://www.bloomberg.com/apps/news?pid=20670001&sid=arWqPRMOr14A

This combined environment of Fed "not" going to hike - surprise, surprise, plus continued talk of diversification away from US dollar- got me long: EURUSD and S&P again .... (took profit yesterday on short S&P and short EURUSD).....

Puma Macro MTD: + 27 bps (3 trading days).

Safe trading

Steen Jakobsen

Mean... Mean Reversion is my name......

Dear Investors,

Triggered a few short dated trades this morning:

• Bought EURUSD @ 1.3840 and
  
• Bought S&P mini June @ 930.00 -
  

It is Monday and market does not like Monday's as the news flow is rich and big..... the "Plunge team" will be in later do not worry at all:...Obama is there to safe us all with his "smooth talking " which mostly reminds me of Sade' early hits ;-)

http://www.last.fm/music/Sade/Greatest+Hits

The FED meeting this week is kind of interesting as market it trying to focus on how Bernanke will talk down those long-term rates - not long ago ALL OF THE SUCCESS of Bernanke was based on his ability to maintain and keep 10 year rates low - now when the rates are trading close to 4 pc I guess the success is something else, little do I know....

Is it me or does the eternal talk of "exit strategy" which dominates CNBC, Bloomberg and other media annoys you much as it does me?

Exit strategy from what?

The biggest manipulated "demand-pull" in history? Or the biggest "cheap talk" about improvements ever in history? Or the 50 ways to cone the investor and electorates?

You make your choise - the problem is that the "dumb" money - read: pensions funds, government agencies, SWF and the like are ALL desperately chasing the return of MSCI, their glory benchmark, which they will trail forever as the MAIN DRIVER right now is China, China and then some more China.

MSCI is simply constructed wrongly for this type of Asia biased rally

The new agenda, which I have written about a few times from the road in Asia is one of China trying to use this crisis to link other countries and currencies to their currency band - creating a "domestic Asian" market which they ultimately channel more and more of their excess saving towards securing excess growth relative to Europe and the US, but also use politically to call more shots - which is the bigger macro issue: Asia is on the road to establish a stronger, deserved role - one of the by product will be one major adjustment of MSCI weights which is so out of touch with the reality that it makes fund managers almost scream......

The Chinese seems to believe, not unlike Obama, that they alone can pull the world out of recession - maybe one day, when they get to understand the true meaning of Say's Law: Supply creates its own demand -- or in Wiki version: http://en.wikipedia.org/wiki/Say%27s_law - they will understand the consumer of the US of A and Europe are toast and I mean toast.....


Did you notice how Russia almost single handedly today made sure the US Dollar saw some strength by virtue of Kudrin comments. It is a joke..... http://www.bloomberg.com/apps/news?pid=20601085&sid=aEVT7Gx4jFpI - and hence my buying of EURUSD this pm....

I had lunch with my good friend Andreas Junge, who I rate for his expertise on freight - he says pretty much ALL of the improvement in freight presently comes from China and dominantly in Iron Ore and in the lines supplying China, whereas many other lines are running with excess capacity ..... in other words: There is presently in freight, as in the financial markets ONE forceful demand factor and plenty of suppliers......

Bottom line - as little as I know, I still "hang with" the program of chance of 1050 only because Asia (China) is determined to give Obama a run for his money on being the most INTERVENTIONIST adminstrations around and unlike Obama, the "rulers" of Asia actually got some money to burn!!!! Hence my conservative expectations of a "good summer" only to be substituted for nasty, nasty Q3 and Q4, but as always I will keep my "postive" attitude in tact.

Strategy:

All markets: Day trade the range - using the most general concept of mean reversion - without drift.

FX: Like weak US Dollar despite Russia saving them today.... Obama is playing with matches and as the old nanny rule goes: Playing with fire makes you pants wet.....

Like SGD and JPY longs.... and own them both....

FI:

60 pc chance of FED hiking? Are you kidding me? FED will ANYTHING to take yield of 10 year notes down - I'm soon buyer of 10y on mean-reversion...

Major buyer of Euro-dollar December.....

Commodities:

Like gold here @ 930.00
Will short Crude soon..
Love grains

Stocks:

Long S&P - with no firm believe but accept the randomness

Safe trading,

Steen Jakobsen

China, China pants of fire......

My Chief Economist David Karsbøl has produced short piece on China growth - I remain extremely sceptical of the illussion of 8% even 5% growth in China - a lot of hope is built on China being able to pull demand with it and infrastructure et al... I will be surprised to see 5% growth, even 3% .... I think, unfortunately that China is going to have tough times ahead and as David points out the similarities with the US in the 1920s are more than relevant.

David Karsbøl, Chief Economist, Saxo Bank:

China, China, China. China has been THE story in the past five years. Who would not be invested in a country with minimum 10% growth per year, with a strongly growing consumption (at least sometime in the future), thousands and thousands of new millionaires and a voracious appetite on commodities? Everyone depended on China – both to get a return and to explain how the global growth could and would continue. Everyone wanted to go there, either physically or by investing.

Well, isn’t this exactly how investors were perceiving the United States in 1929 (albeit US growth was only averaging 4% p.a. before 1929, but it was still somewhat higher than in the rest of the world)?

There are more parallels: Both China and the US in 1929 experiences extremely strong growth rates (roaring twenties in the US) for almost a decade, which completely blinded observers. Both have had some of the world’s highest savings and investment rates in their boom periods. Both had significant current account surpluses that they tried to cope with (China by buying US Treasuries, the US by buying gold). Both were trying to uphold pegs to faltering and unsound assets: The US tried to prop up the GBP at a ridiculous rate after the re-peg to gold caused by WW1 inflation and China is now trying to peg to the USD, which despite the newfound strength is still trending lower and will end in catastrophe. For both of the countries and their boom periods, monetary policy was extremely expansive at the same time as the general price levels were flat to only moderately increasing, which led observes to erroneously conclude that monetary policy was “neutral”. Therefore, very big bubbles were allowed to evolve and burst.

In the 1930’s, the US was one of the economies worst hit by the crisis, because their monetary policy was taken to the farthest extremes. Chinese monetary policy has consistently been most extreme among the G20 countries. Over the past 10 years, annual M2 Money Supply growth in China has averaged +16%. That should be very frightening for the eternal China bulls. They will be lucky to see positive growth in the next three years.

David Karsbøl, December 11th, 2009

G20, G7, G-ee this is waste of time...

Dear Investor,

I could write yet another blog on my views, but "fortunately" for me, and "unfortunately for you, I was guest on Bloomberg with Roger Nightgale from Pointon York - not that I said anything interesting but.....:

http://www.truveo.com/Protecting-Your-Portfolio-Global-Economic-Outlook/id/3968209245

The Interview include present market themes, China, G-20 outlook.

Safe trading,

Steen