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

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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 bank is a place that will lend you money if you can prove that you don't need it. Bob Hope

Dear Investor,

Admitted! I could not help using the above qoute from Bob Hope. ;-)

This is a Saturday afternoon mental cleaning for me, this week proved to me - and it seems also the market that this crisis will be here for a while. Losing more than 500.000 jobs have only happend eight time since the series began in 1940 and we have had four of them now!

31 mio. Americans needs food stamps http://snurl.com/dbxwo ....

The AIG story continues and it seems as per usual the more you look into this failure the more it becomes clear that the administration is pursuing a policy which at best can be called: "keeping financial system a live at all cost", and at worst: "incompetence and action on the fringe of corruption"...I will let you be the judge, but do read this link: http://snurl.com/dby0f

I had long conversation with my hedge fund friend from the US the other day, let's call him E.....and during the conversation it became clear that small part of information we had gathered over the last quarter are coming together into a relatively intimidating outlook for the world economy between now and April 2nd. (Why April 2nd I will come back to...)

This is the time....to be long cash

Time is running out for the policy makers and the politicians. They have now again and again tried to get the confidence and the economy going by printing more money and making promises.
Too high debt to equity ratio's was the reason for us being in trouble in the first place, so using more debt to deal with debt is hardly going to work!

Now they pursue a policy which my friend E likened to a beautiful analogy: It is like putting a parachute on a rock going towards earth! - in other words.. gravity will work - you can slow the process but not the ultimate result.....

Everyone, no longer not only me, is disappointed in Obama, and more to the point about the economic/business "dynamic duo" of Geithner/Summers.

Geithner is having such a bad karma, that even showing his face on TV makes the market go down immediately - one has to think this is either engineered by Summers, i.e making Geithner fall-guy, or we will see rotation around mid-term election..both ways Geithner has lost not only Wall Street's trust, the politicians but also it seems Federal Reserves, his old neighbourhood.

The new "hope" in town is the Chinese miracle - China is now pumping money into commodities and strategic alliances in order to maintain their job levels- what is the point of being Planned Economy if not to create jobs, however futile some of them are ?.....but people forget that this is no real plan B.

China set themselves up as the world factory - the US was the world consumer - now the "customer", the US consumer is bankrupt - this means production capacity will have to go down in China - China simply did not have a plan B.

They are now drawing down their SAVINGS creating infrastructure jobs - which coincides with US stimulus, leaving the impression something good is happening to global demand - but.....this is a pocket of momentum only to be replaced by the rock making a landing.....

The US saving rate is rising and fast - this means the US current account is improving at quickest pace in decades, but on the other side of the US deficit sits the Chinese equivalent surplus, so...the US consumer having gone bankrupt means China will have less export growth.......

This is one of the main reason for my outright bullishness of the US dollar - yes it is FIAT based but so are all the other major currencies, but the velocity of US current account disminishing is a very constructive component on its external value....

Now to April 2nd - the London/Gordon Brown G-20 meeting http://snurl.com/dbz0k
Combining almost 10% unemployment in the US, with a Europe where the P.I.G.S (Portugal, Italy, Greece & Spain) but also EEC countries are having problems rolling over their debt makes for one interesting meeting where everyone NEED TO FIND A SOLUTION.

I, for one, do not ever expect anything from these kind of summits, but for once the stakes of NOT MAKING - Plaza Accord (http://snurl.com/dbz4y) like solutions will be dramtic (minus 25% on the market and total break-down in EEC currencies)....
The CDS market plus Lehman have crystalized the failure of the EU system, where its biggest flaw being the lack of a European Treasury to coordinate fiscal- and monetary implimentations of policies.

The sovereign CDS market have increased the funding cost of the PIGS, which takes away the "only" real advantage of being in the EU (For everyone to have pretty much same credit rating, and hence funding cost)

So.... where does this leave me, my funds and the world? Well, there is NO REASON in the world to do anything ahead of April 2nd

Either they finally get some real decisions which is focused on not slowing the rocks path to earth but for blowing up the rock (Merton out with some rather "controversial ideas: http://snurl.com/dbzai) or we will have "blood in the streets".....the final melt-down before markets find a new better equilibrium.

I recommend maintaining the 75% cash (if not more)- and to deploy the rest in optionality - risk reversal on equities-- (Im short STOXX50 & S&P) selling equivalent of 650 puts buying zero cost upside just in case...)

Shorting EUR seems almost a certainty to me - but buying some short-term proctection around April 2nd makes sense...

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Targets:
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EURUSD: 1.2000, then 1.1000 and if April 2nd failed then sub 1.000

S&P: Our revised target of 690 now reached - new target remain insisde 625/650.....for cyclical low.....

10 Y notes: Below 2.000 still

Central banks: All going to ZERO and Quantative Easing.

Europe will feel the worst pain, and the EEC currencies without April 2nd solution is doomed, and could be followed by PIGS.....

Yes, it is not a nice note this one, but in a time where all we have had is HOPE, HOPE and more HOPE I wish to explain why this is bad and could get worse, but then again trading around 690 this week-end another 100 points of downside is not big.......

There are great deals to be done on the back of this crisis, but they are ad-hoc in nature and not based on a market generally offering value.....


We are fairly priced for the first time in years, if not decades, but we need to get to the FIRE SALE levels for the money to leave the safe place of state guarenteed saving accounts.

Time remains the great healer...but for now.. cash is king...and I will bet you safe trading and a nice week-end.
Steen

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