JS Global Macro Notes

My Favorite Wired Article of All Time

For your reading pleasure -- note the deep similarities between parimutuel betting systems and global financial markets:

http://www.wired.com/wired/archive/10.03/betting_pr.html

 

Nice... It's good to know that if everything does turn Japanese and fixed income stops moving, I might have a future in the horse biz.

 

Macro Comment: Is Protectionism China's Achilles' Heel?

In The Hobbit by J.R.R. Tolkien, there is a mighty dragon named Smaug -- one of the last dragons of Middle Earth.

Smaug, hundreds of years old, sits on a vast pile of golden treasure in the bowels of the Lonely Mountain. For all intents and purposes he is invincible -- except for one flaw.

A single weak spot on the dragon's underbelly leaves him vulnerable, and Bilbo Baggins reports on it. The next time Smaug ventures out, he is killed by an archer's arrow aimed at this one improbable place.

If you'll forgive the analogy, China, too, is a great old dragon sitting atop a vast hoard of wealth. And, like the mythical Smaug, the real dragon (China) has one potentially fatal weak spot -- the protectionist threat.

full comment available here

 

Global Macro Notes: Long Gold Stocks, Short Retail

In April of this year, I penned a think-piece titled "Keynesian Psychology With Austrian Tails," detailing the latest upgrade in my philosophical growth path as a trader.

The gist of the piece was that, while the Austrian school offers the more true and correct view of economic reality in the longer term, Keynesian psychology -- "the triumph of hope over experience" -- can and does dominate the short term.

The net result, in terms of market action and consistently repetitive cycles, is drawn out Keynesian ramp-ups followed by infrequent yet inescapable "Austrian tails," in which the hope-jaggers face a violent comeuppance.

The bulls are thus in danger of being "rocked like a hurricane" -- because the scorpion sting in the "Austrian tail" is upon us.

View Full Global Macro Notes Here

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Weekend Comment / Links Roundup: Forget Bernanke, Think Nikkei

The big news for the week that was? Ben Bernanke's Jackson Hole Speech.

It's all a bit silly, really. The Fed Chairman waffled and hedged and said pretty much what was expected of him: "We'll support the recovery, yadda yadda, unconventional measures, blah blah blah."

To the extent Wall Street reacted, it was a light day in an exceptionally light month in a market feeling short-term oversold. It's looking more and more like the Fed is running out of ammo and "QE" is a bust... investors are just dragging their feet in slowly coming round to that realization.

My two cents? Forget Ben Bernanke -- who is growing more irrelevant by the day -- and start paying more attention to narratives like this:

No matter what happens, the action in the Nikkei may well prove instructive for the next few years.

A long-term Nikkei chart (click to enlarge) is posted this week to make a point: During extended periods of credit writedowns and private sector deleveraging, markets can experience EXTREME swings… in both directions.

As the Nikkei went about shedding more than 75% of its value (!!) in two decades time, it did not do so straightaway. Instead there were numerous fantastic multi-month rallies of 60% to 100% or more, followed by grueling, gut-wrenching declines.

Just try to imagine the hope, greed, fear, and general stomach lining erosion of Japanese investors in those years. Just try to imagine how many "false dawns" and "all clears" were proclaimed after months and months of upside -- just before the roller coaster took another sickening lurch downward once again.

We could be facing the same -- which, on the bright side, could be great news from a trading perspective. (Paul Tudor Jones on his five year outlook, as noted in 2008: "The macro space will be great. I think we’re going into one of those slow or zero-growth periods in the U.S., which will give us a lot of volatility.")

Go here for 08-29 Links Roundup

 

You forget about the fact that we have four major central banks around the world fighting deflation. USA, ECB, BOE, BOJ.

Fighting alone on the deflation front is not as "funny" as with some partners on board.

At some point China needs to decide what it wants - further playing the "fool" card or finally lettin the yuan appreciate in a truly "free" manner.

 

Nothing of the sort has been forgotten.

It's not really a question of how many central banks are "fighting." It's a question of whether QE really works at all at the tail end of a leverage and debt supercycle. So far the evidence points to "no."

As far as those four central banks go, the BOJ doesn't really count (as they have been fighting and failing for decades) and the first three are increasingly hamstrung by austerity issues.

Namely, when you are already loaded up on debt, you can only create so much more debt before there is a strong political backlash. This is exactly what Britain, Europe and the USA are now experiencing.

-- Ireland (one of the first countries to commit to heavy austerity measures) was just downgraded by Standard & Poors as their economic outlook continues to look bleak.

-- David Cameron of Britain was recently on the cover of The Economist, headline "Radical Britain," highlighting how the UK is pushing through some of the harshest austerity measures of all.

-- There has been a deluge of stuff on austerity measures in Europe and the danger that determination to belt-tighten will wind up killing off any recovery there (the gap between Germany and the rest of the EU growing terminally wide).

-- In the United States, the Dems have lost their political momentum, Republicans are set for significant gains, and the Repubs are dead set against future stimulus spending, arguing that it is wasteful and dangerous.

-- The now-failing stimulus shot in the U.S.A., which only juiced things for a little while, argues strongly that stimulus is lousy medicine anyway once an economy has gone beyond a certain point of no return, re, accumulated debt and public and private deleveraging pressures.

Bottom Line: Not only do we have ample reason to doubt stimulus works, we have reason to doubt the political will is there for another massive spending push in the first place, the alternative being anemic efforts that just barely keep growth above the zero line. (The Fed, a la the BOJ, can jawbone all it wants as talk is cheap.)

The classic catch-22 of a leverage and debt supercycle, as clarified way back when by Von Mises, is that in the end there is just no way around the debt blockage. You wind up either letting the economy pass through a long and painful period of adjustment, or alternatively you "push on a string" so hard that you wind up destroying the currency.

It remains to be seen, of course, whether the four central banks all ultimately decide to push on the string with a great heave, all at the same time. If this happens, economic revival is still not a likely outcome in comparison to the hard-assets price spiral scenario as all major fiat currencies get uniformly debased, combined with further compression in PE multiples as the global economy faces even greater amounts of confusion and malaise.

As for China, it's a wee bit more complicated than the mandarins in Beijing just "deciding" something. The dragon is being squeezed into a very tight box due to the accumulated fallout of irreversible past choices -- it was rather foolish of them to aggressively emulate the "extend and pretend" bubble-creating policies of Alan Greenspan for one -- and the odds of crisis in China (both economic and social) rise by the day.

 

Macro Comment: Double Dip Talk Misses Forest for Trees

My ad hoc comment from a double dip conversation thread on Barry Ritholtz' Big Picture blog:



To some extent the “double dip” talk misses the forest for the trees.

In this case the “forest” is the fact that we are at the tail end of a leverage and debt supercycle, having just endured the bursting of a massively destructive financially engineered asset bubble, even as the long-run impacts of accelerated competition via globalization and scarce natural resource allocation start to hit at the same time.

Look at a long-term trend for the average consumer savings rate (cents saved per dollar earned). I think the St. Louis Fed has good stats on this. The consumer savings rate was above 10% way back when, a long time ago in a galaxy far away, and then just kept going down, down, down until it finally went below zero in 2005. This “eating our seed corn” trend was exacerbated by the fantastically destructive rationalization that “I don’t need to save for retirement because the perpetually rising value of my home will take care of that.”

And oh yeah, speaking of retirement, I believe (per Rosenberg) the median age of the baby boomer generation is now about 55. That means you have an army of folks, tens of millions strong, heading into their golden years with bupkis in the bank. Most boomers are woefully underfunded relative to retirement needs. An insanely high percentage have next to nothing socked away. In the next few years we are gonna hear a lot more about boomers throwing nickels around like manhole covers.

And then, of course, the bad assets problem with the banks was never really fixed — just papered over. And attempts to fix the structural unemployment problem via more “stimulus” will fall flat for many reasons, not least among them a training mismatch. The skill-based jobs showing increasing demand today, such as opportunities in high-end manufacturing, are simply not matched up with the untrained American worker. A multi-year boom in the real estate and construction trades temporarily covered over the growing skills mismatch between employer requirements and employee skillsets in the U.S.A. Now that tide is receding.

So basically, the “old normal” is toast. It’s gone, dead, kaput. This should not be such a big surprise. What was always unrealistic was the notion that a window of time in economic history, running 20-30 years or so, could perpetuate indefinitely. That’s no[t] how the world works. It never has been.

And so, to a certain degree, many of the hand-wringers and “double dip” ponderers are operating from a completely broken framework. They keep wondering how we get back to the good old days. The answer is, we don’t. The future for America may be bright again, at some point down the road, but right now we’ve got a dark patch to work through and a tough row to hoe that will last for quite some time. This is just pragmatic observation of reality and applied common sense imho.

 

One way to consider it - is a move with price + other factors in favour a better odds play than one with price alone; or price with the other factors against it.

 

Darkhorse - what are your views on how much % of equity to risk on trades? Both from entry, and for running open positions once they are in profit.

Also, I have a thread discussing ideas on how to "sit" on a position (http://www.elitetrader.com/vb/showthread.php?s=&threadid=205566 ), this seems something that would apply to your style of trading - it would be interesting to hear your comments either here on on that thread.