JS Global Macro Notes

Discussion in 'Economics' started by darkhorse, Aug 1, 2010.

  1. Howdy folks,

    Old schoolie here... haven't posted on ET in many years. Shout out to all the peeps who remember (I see some of you are still here)...

    Anyhow, the desire to conduct a little experiment has brought me back.

    I'm going to try posting my regular market notes in this thread -- with an emphasis on global macro -- for the sake of comment and discussion. I also do a weekly roundup of macro-related news links that some may find helpful.


    p.s. To avoid confusion, "darkhorse" and "Jack Sparrow" are the same guy (me).
  2. Weekend Comment / Links Roundup: Let Them Eat iPads

    As legend goes, when Marie-Antoinette was told that the poor were starving for lack of bread, her acid response was: “Then let them eat cake!”

    History denies Marie-Antoinette ever said it. Nonetheless, “Let them eat cake” — translated from the French expression ‘Qu’ils mangent de la brioche’ — is widely known as shorthand for “screw ‘em… who cares what happens to the poor.”

    One could argue the modern day version of this phrase is “Let them eat iPads,” in honor of the serious and frightening divide being thrown up between the economic haves and have nots.

    This is more than just a social lament. It’s the foreboding prelude to an ominous macro conclusion. In the short run, Wall Street is actually celebrating economic weakness because the same factors that contribute to a sluggish economy also serve to stay the hand of the Fed.

    Think of it as a kind of “Goldilocks malaise:” As long as economic conditions are bad enough to keep ZIRP intact and inflation pressures absent, yet not so bad as to get in the way of short-term corporate earnings gambits and leveraged layup stimulus exploits, it’s all good in the neighborhood… which is a big reason why markets have seemingly flipped (as of this writing) to a “late Summer rally” posture.

    This “great divide” is THE story of this bizarro artificial recovery — along with the great inflation vs deflation / austerity vs stimulus debate — in which the U.S. economy is like a delirious wounded animal that is attempting to nourish itself by eating itself.

    Click here for the links roundup

  3. Today's Market Action

    When pictures speak louder than words...

  4. Welcome Back ^^


    The question is what was the last meal of the last Queen of France ?une brioche ?:D Slak. . .head rolls... Low probability event with an ultra high impact... deadly.

    I would add two name to her... the 1st one being Alexander Tsar of Russia... Shot in a basement with his familly...

    and the First Cesar who was stabbed by his "son"...

    From a statistical point of view, ultra high impact ultra low probabilities happen... !! Would have though about this one year earlier in Versailles, the Kremlin or Rome...
  5. Cheers mate. We're devils and black sheep, really bad eggs...
  6. Corporate Cash: "The Big Lie?"


    A look at the facts shows that companies only have “record amounts of cash” in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don’t look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?
    — Brett Arends, The Biggest Lie About U.S. Companies

    One of the powerful memes floating around this confused market environment has been cash-rich companies versus cash-poor consumers.

    The notion of companies sitting on huge piles of corporate cash has also been a bullish staple. For example, from the July 19th WSJ:

    In The Biggest Lie About U.S. Companies, Arends — keying off the legwork of financial analyst Andrew Smithers — essentially calls bullshit on this “getting ready to spend” idea, accusing the mainstream financial media of latching onto an optimistic story line that isn’t supported by the data. To really get the full picture, you have to look at assets and liabilities.

    “Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP,” Arends says. “That’s a postwar record. In 1945, it was just 20%.”

    So if corporate cash levels have hit their highest since the 1950s, as WSJ and Bloomberg have previously reported, so too have corporate debts.

    But what’s it mean, Gene? Are corporations still in good shape to spend? What of the global corporate bond boom? And does this increase the odds that big business is on the cash-hoarding, hunker-downing, deflationary deleveraging train just like the little guys?


    p.s. Off topic but related, how bizarre is this?
  7. Global Macro Notes: Watching the World Burn


    It's all... part of the plan...
    - The Dark Knight

    There is a scene in The Dark Knight where the Joker commits the ultimate act of nihilism. After amassing a huge pyramid of cash, he simply sets it on fire, making a clear statement as to his take on material wealth.

    I am reminded of that scene by current market gyrations and the likely end game for the epic inflation / deflation battle.

    In the short run, deflationary forces continue to build as Fortune 500 corporations and money center banks hoard the gusher of liquidity directed at them by the Federal Reserve.

    In the long run, however, the liquidity trap realities of "pushing on a string" will eventually force the Fed and their European counterparts to go nuclear in their emergency deflation-fighting measures -- at which point the intrinsic value of those pharaonic cash pyramids will go up in smoke and ash, just like the cash in the Joker's warehouse.

    Goldilocks Malaise

    The here and now of the situation is a sort of "Goldilocks Malaise," which has in turn morphed into a late Summer rally. We are coming off a sweet spot in the equity cycle where corporations are able to continue ringing profits out of brutal cost cuts, while at the same time investors are snapping up corporate bonds like crazy and otherwise acting in "risk on" fashion to avoid the pain of near-zero returns on cash and cash equivalents.

    This rally has also been enabled by the results of the European "stress tests," which, it seems, were more an exercise in smoke and mirrors than anything serious. Nonetheless, the stress tests did their job in giving those with a deep desire to be bullish the perfect excuse to justify that desire.

    Though possessed of a very strong sense this is all going to end in tears, we are positioned on the long side of this market (as will be noted shortly).

    In recent updates (and prior to the current breakout), we noted the following:
    • (From July 31st comment) As long as economic conditions are bad enough to keep ZIRP intact and inflation pressures absent, yet not so bad as to get in the way of short-term corporate earnings gambits and leveraged layup stimulus exploits, it's all good in the neighborhood... which is a big reason why markets have seemingly flipped (as of this writing) to a late Summer rally posture...
    • [From (July 28th comment) The really enticing scenario, at this point, would be a sort of Soros-style "false trend" broad market rally that gets itself good and extended headed into the fourth quarter -- giving time and room for delusions to dissipate and harsh reality to reassert itself most fully from overbought levels.
    The China Tell

    Going over my notes and charts Sunday night -- and as Mike McD hit on earlier today -- the striking piece of weekend news was the manufacturing slowdown in China.

    "China's manufacturing grew at the slowest pace in 17 months in July," as Bloomberg and others reported, "as the government clamped down on property speculation and investment in energy-intensive and polluting factories."

    News of this type is "bipolar," in that it can be taken as bullish OR bearish as sentiment dictates.
    • The bearish interpretation: China is slowing down, so the entire global economy is at risk of slowing down -- more reason to be concerned about deflationary pressures, misallocated capital, bank loans gone bad, post-euphoria credit collapse, and so on.
    • The bullish interpretation: China is slowing down, which means inflationary pressures in China can ease, which in turn gives Beijing more room to inject a round of fresh stimulus. If the patient's heart rate is falling (i.e. the pace of growth is slowing), the doctor then becomes free to inject a little more juice.
    Markets clearly and indubitably went with "Door No. 2" on Monday, as the major China ETFs went flying out of the gate (as did copper and crude oil). This was a strong "tell" in respect to general sentiment and pent-up buying power.


    That said, the bullish action in China now seems a classic example of a George Soros style false trend.

    The intermediate-term fundamentals for China are terrible, and actually quite frightening. There is a whole litany of woes the dragon faces now -- not life-threatening, necessarily, but most certainly of market-crashing caliber.

    But none of those concerns need apply in the near term -- "a rolling loan gathers no loss," as the Wall Street wags like to say, and markets have shown a persistent and uncanny ability to ignore ominous warning signs for extended periods of time. (This is nothing new; the markets have always been thus.)

    Riding the Rally

    As detailed in recent comments, this rally is not to be trusted.

    With that said, the habits and sentiments of long only managers and yield hungry investors are so entrenched, and so well-backed by fire power, that the hopes, dreams and manifest tendencies of the permabull crowd have become important fundamental inputs in and of themselves.

    In trying to make sense of any market movement, it is thus critical not just to 1) heed the price action, but also to 2) remain keenly aware of the potentially "irrational" and "illogical" biases of the market participants themselves.

    Given the above, the two areas where my opportunistic long exposure is concentrated at the moment are fertilizer and uranium.


    The ferts have seen breakout type movement in recent days as the threat of Russian wheat shortage concentrates hearts and minds. Aside from fertilizer, agriculture in general will be a very lucrative area to look for upside opportunity in the coming quarters and years, as the protein-craving dynamic of emerging market appetites is well established.

    On the uranium side, uranium mining is an industry that has been re-ignited by signs of China stockpiling and aggressive plans for nuclear power plant construction around the globe. As with agriculture, there are fair reasons to see uranium as an area of renewed speculative activity, with nuclear re-establishing itself as a growing and respectable alternative to fossil fuels.

    Waiting For the Fall

    Though net long at the moment, bullishness does not come with any great sense of comfort or conviction. If anything, this rally feels like a giant Soros-style false trend as mentioned -- one to be ridden to the point at which it is discredited, and then abandoned or reversed.

    It is my humble prediction that those investors who use upside market movement to renew their long-term faith in hope jags -- "maybe everything is okay because the market is going up again" -- will again get what they deserve as payment for being naive.

    Given the nature of the macro-economic backdrop we face and the serious "top down" problems that "bottom up" practitioners so desperately seek to ignore, it is only a matter of time -- though it is hard to say how much time -- before another jolt of sovereign-related crisis drops this market like a hot rock.

    And yet, and yet... the general positioning as of this writing (August 4th) is long-oriented and will remain so until there is clear sign that animal spirits have maxed out, setting the stage for another raid on the bear side.

  8. Weekend Comment / Links Roundup: Drinking With Vizzini


    So what’s it gonna be, inflation or deflation? ZIRP fueled optimism or double dip air raid sirens? Bottom up sunshine or top down terror?

    Sussing out this market is a bit like drinking with Vizzini — the Sicilian nutball from The Princess Bride.

    For an example of this back and forth, consider the latest agflation threat.

    * On first look, rising food prices (via rocketing grain costs) are inflationary. (“Clearly I cannot choose the wine in front of you.” )

    * On the other hand, rising food prices act like a direct tax on discretionary spending — hitting consumers square in the wallet — which is deflationary. ( “Clearly I cannot choose the wine in front of me.” )

    * And yet the Fed will surely recognize the deflationary “consumer tax” impact of sharply rising food prices — if it comes to that — and hit the emergency panic button in response. ( “You’ve made your decision then?” “Not remotely!” )

    At the end of the scene, of course, Vizzini was doomed no matter what. Both cups were poisoned, as Wesley had “spent the last few years developing a resistance to Iocaine Powder.”

    In similar fashion, we as traders can “develop a resistance to Iocaine Powder” by navigating the vicissitudes of sentiment and coming out on top either way. Inflation, deflation, triple reverse stagnation… just break out the surfboard, pick your spots with skill and precision, and ride those waves.

    Go here for the August 7th links roundup
  9. Macro Comment: Strip Mining the U.S. Economy

    Strip mining is a nasty, dirty business.

    Basically you rip up the land, haul away tons of rock, and then use noxious chemicals to separate out a small quantity of targeted material. What's left behind resembles a vast denuded moonscape, or perhaps a giant open wound.

    Most rich-world inhabitants don't give a second thought to this process, for a very simple reason - we don't have to see it. There is no reason for the man in the street to feel concern, except when resource prices rise or environmental tragedy unfolds.

    The focus of this missive is not environmental, though, but economic. Because now it is the U.S. economy that is being "strip mined."

    In the same way that mining companies will descend on a region with heavy equipment and chemicals, brutalizing the land until nothing is left, corporations large and small are doing the same thing - with the goal of extracting profits rather than minerals, to the long term cost of the U.S. economy itself.

    Read the rest of the comment here
  10. Banjo


    !! Welcome back, your discourse was always an interesting read. I seldom visit ET these days as it has significantly morphed over time. Looking forward to some interesting discussion. Don't forget to wash your feet every time you leave the new ET. :p
    #10     Aug 10, 2010