Wednesday, 4 May 2016

I don't know.

I have been hoisted with my own petard, or rather Hari Kari'd, by my view that Japan would do the predictable. I broke my own trading aphorism of 'if it starts with J it will have your arm off'. Well there you go, at least the stops on the positions were clean and the JGB trade didn't cost me anything. USDJPY, however, was a samurai sword severing my short 'UsdJpy put' arm, or rather leg,  just below 109.

Right, enough remorse. Let's look out there for the next great trade. Err....

I am afraid I really don't know. Momentum points to a roll over in commodities and equities and we are in May, traditionally a season for Euro-strife, but growth in the EU is good so it will be 'structural vs economic' which intersects at the ECB. Again. With regards to the EU, I am surprised the furniture fits in the room with all the crap being swept under the carpet in the run up to Brexit. Turkey extorting EU over migration, Greece deals, credit ratings on Portuguese bonds.. oh the list goes on.

BoJ Going all 'Carney' on us with a 'no change' gave a green light to Jpy buying and, considering the amount of jawboning about JPY being mispriced from the Japanese when we were just under 108, leaves them with a self inflicted own goal or implies that something has changed. Something big has changed or something big is about to happen at the next meeting. There has been talk that Shanghai G20 agreed to weaken the USD to allow CNY to devalue vs most trading partners but keeping the USD/CNY peg intact. This theory goes on to suggest that it involves Fed staying lose and ECB and BoJ tightening and BoJ last policy non-move proves it. Hmm. I don't buy it and still think there is room for Japan to act hard at the next meeting. Hence my currently worthless 115 USDJPY calls remain on the book. Never sell an option for 0.

My real problem is that I just don't know where there is value, though I can see plenty of places where there is no value. Everything I look at is priced rich on some measure or other. Long ends of yield curves look expensive in Japan and Germany, with steepening most likely, though of course shorting 30yr JGBs involves a 'J' and should only be touched with kevlar gloves and a fully noddy suit. But in the end, bonds are just a vassal of Central Banking madness.

Equities are back to 'meh' levels of equality between old fashioned valuations and comparative bond yields. Commodities have put in a hell of a retracement out of ubershort territory but the world hasn't changed enough for them to put on a real supply/demand led rally from here. Raw material metals are still a key input but it doesn't look as though there is much reason for seeing either up or down bias from here.

I am left wondering what the heck to do. Prices are telling me that everything is in risk off mode with little new to stop it. Positioning and bull/bear reports appear pretty neutral and just add to my confusion. Why am I not shorting everything in sight? Because the last 2 years have shown me so many false financial market collapses that I have faded, I don't want to be caught the wrong way around in another.

Is this the big one? The great Armageddon of market collapse where a return of inflation finally sinks the whole ship via a bond confidence shock? No idea. It's May and easy to strap a "sell in May..." term to it and we have the China bear story out of the cupboard again.

Maybe I'll just stay flat but buy some "Leicester City"s*

*A Leicester City is a the ultimate tail trade. Buying something at stupidly low odds that may well pay off. Macro Man mentioned gold touching 2900 within a year is a 1/2500 odds bet. I'll take a look.


Corey said...

My take is that the comd rally was based off the expected demand from whatever fiscal stimulus the chinese put together. It seems that's ended for now and until there is another one or signs of inflation popup that one is beat. So begins CNY panic take two as it seems necessary for them to continually ease to keep things moving forward.

I dont know about the Japanese. Perhaps they didnt act bc they were coerced not to or perhaps they are not really sure what to do after their last iteration. They themselves have said that they will act in size, but it will be a surprise. So surprise, they didnt act, but they will prob some time shortly after G7. I'm not quite sure whether this will be beneficial though and may just prove the rogue wave that sinks the ship.

Looking at long term equity charts makes me nauseous. Strange how every risk off move the last two years has felt like it was the big one. I dont think you're the only one who feels clueless and reluctant to take on any/much short exposure. Call it CB fatigue and eventually it will become entrenched enough where the majority feels that its not worth it. It's then of course that things are likely to go south as players dont know where they put their old playbooks. Reading your post and some of the comments on the other board make me wonder if we aren't getting very close.

Corey said...

I mean how bad must the shut be over there for them to come to any type of agreement/understanding/whatever?!