In the Psychiatrist's Chair.

I’m getting my head in a twist. I need to write down the thoughts and hopefully someone else can tell me what I should do with them or where they don’t add up. So here are the patient notes. Apologies for their schizophrenic nature but they are just an outpouring. 

Supercycles  -  I have always held in the back of my mind are that asset classes tend to work in 7 year cycles - on that basis as commodities ended in 2008 and so should be due a return. And the reverse for bonds.

Commodities are the dead man of asset classes so fits with the above. 

Growth is returning to the world - JPM global PMI picked up for the first time since last June.

Central bank policy is hugely stimulatory (adds to the above).

Oil is 'tabloid' as a story and is beset by the whims of producers and has enormous slack in the steering wheel due to speculative positions as evidenced by a 20% swing over the last few days. That was NOT due to changes in pulling it out of the ground or rate of burning the stuff. It doesn’t change that much in 3 days. So +20% swings on specs make the thing hard to play. So I’ve got out of my long plays and will watch for a bit. 

Metals are a different story. Bombed out and worth looking at for the next big cycle. Africa has taken a hit on EM USD Funding, collapsing oil, poor metals and adding in West Africa ebola and Boko Haram means that Sub Saharan and Pan African funds have been dogs. Tend to think all the functions above will or have abated. So looking at Africa again? Or what about Peru and Chile?.. hmm

China re the commodity story. Have been long for ages against the Mobius style doom-mongers as I believe that that simple stories are too simple in a command economy. But, policy under the new regime is to take power back from the speculators and so long term slowing of investment performance as local leverage is taken out will mean not such a sure bet. But this doesn’t mean that commodity demand from China will slacken as policy is still for growth.

With the commodity story above and mood on Aus being so poor it should be a buy now/soon (see yesterdays post).

EU - Still overdoomed and growth is more likely than more slowdown. Greece will pass and though there may be political ructions and debt shenanigans the populace will be quietly getting on with the growth side. So still hanging on to long term EU growth positions. 

Deflation story is overplayed. Looking for trades that profit most from a sharp reversal in expectations from this front hence Bund trade idea yesterday. And considering what happens in CTA land when low vol trends break the bund market reversal could be really sharp ( even without the ‘you have to pay to hold them story’). Anti-deflation leads back to commodities. 

US - Can’t see equity performance ripping higher. Moves in USD (both ways) will offset performance for the non-US investor. Rate story there is too hard to play as it self adjusts to changing backgrounds.

Japan - avoid. Abe story run out of steam vs expectations and it's treading water so nothing obvious.

Short term - Some big moves that can lose momentum. Oil, wouldn’t be surprise to see it slip and same for equities. Yet looking for equities down in the next couple of days pollutes the bund view. And though I still see the ultimate bond sell off to be sharp enough to hit equities, that is the big move. Before that happens we will keep the equities/bonds reverse correlation. It's also the end of start of month, in other words month start allocations done and we can settle down. 

January has lived up to normal expectations. As suggested here, Everything is a mess in January and not worth setting your direction for the year by. yesterday oil was back at dec 31st levels, Eur/usd was back to pre ECB range, SPX was back around its 2040-60 range and all you needed was EURCHF to be at 1.2000 and you could have imagined that January was just a bad dream.. 

So what to do? I’m actually short Dax and bunds. Sort of self hedging until both go down. If they correlate but both move widely apart  I’ll chop one leg when news changes. Short FTSE for a correction, but that goes against my longer term commodities up thought. 

I hate it when short term and long term views clash and would welcome any suggestions as to what you prescribe for such conditions.