Wednesday, 4 February 2015

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.


Anonymous said...

Buy Aust gold miners. You're welcome.

PatrickG said...

My neighbor brought me some moonshine distilled with honey the other day. Excellent for reconciling dissonant time horizons. Otherwise, you're make perfect sense.

cig said...

Isn't it a bit early for the short Bund trade? Not enough bodies on the side of the road... JGBs though...

Polemic said...

cig, probably.

As for JGB's I normally say that if you fail on on trade don't refuse to ever trade that asset ever again. HOWEVER shorting JGBs should be renamed 'JGB Abattoirs, established 1990'

As my grandfather would have said 'There is many a man walking around the markets without a shirt on his back because he shorted JGBs'

Nick said...

With respect to commodities super cycle: grains are down part of it and down a lot but S&D considerations are slightly different to other products in the complex. Provided there is no weather event the trend is still lower, China as a driver of demand is levelling off, there is not going to be 50% increase in meat consumption over the next 10 years, or the level will be above developed markets.

Bamboo said...

Sounds like u need to be flat & wait

Polemic said...

Bamboo when you have ADHD thats a toughie. Miraculously the short dax short bund is performing on both fronts

Nick TBH i hadnt thought about grains. But as I think that a lot of agro is turning oil into food via teansport, machinery and fertiliser costs, a collapsing energy price should dramatically cut costs. So on a cost base push prices down.But as you say, weather drives all. Costs only come into play if marginal production dynamic changes. But if its weather and land availability and lagged then that is secondary.

ntwsc said...

Hope this helps
a) I know a weatherman - he's off skiing shortly, so might have to wait for a report
b) Ok short DAX - so far so good - been waiting for a decent oppo to look in
c) I've been thinking along the lines of 40 year cycles, give or take - any time soon
d) I hate it that Osborne stole your ructions