“The dow was up 21 points today as confirmation of yesterday’s 200 point move higher in equities. The US has decoupled from the world both in terms of economic data such as PMI and equity prices. The US stock market has been able to decouple from financials for over two years. The US stock market is decoupling from the EUR. The EUR is due for a massive short squeeze because non-commercial traders are net short.”
That pretty much sums up the nonsense headlines out there. By nonsense I mean false and meant to lead you to believe all is well. A simple glance of the SPX wedge playing out since the July 2011 highs shows a clean breakout while the AUD/USD reversed off the lows and closed down just .1%. Certainly sounds bullish right?
From new normal to paranormal. What if the World is bimodal? Implications on risk, asset allocation.
It wasn’t long ago we were introduced to the “new normal”. This expression by El Erian is now widely used. The new normal, is going paranormal, as those tails are “fatter” than we believe, and guess wgat, it is not a perfect bell curve we follow.
The Trader covered the topic last year, “what if it is a bimodal world?”, but PIMCO’s Gross is out today again , telling us about the new normal. Just a reminder;
- The New Normal, previously believed to be bell-shaped and thin-tailed in its depiction of growth probability and financial market outcomes, appears to be morphing into a world of fat-tailed, almost bimodal outcomes.
- A new duality – credit and zero-bound interest rate risk – characterizes the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion.
- Until the outcome becomes clear, investors should consider ways to hedge their bets, including: maximizing durations, U.S. Treasury bonds that may potentially offer capital gains, long-term Treasury Inflation Protected Securities (TIPS), high quality corporates and senior bank debt, and select U.S. municipal bonds.
New Year, new challenges for Greece. It is easy to forget about Greece, just because the DAX has been running up on no volumes. Greece is feeling the heat from austerity implemented. The market has once again started talking about the Greek Drachma. Greece will ultimately need to leave the Euro according to us. With poverty sky rocketing, people will soon turn desperate, and blame the Eurozone for all the problems Greece currently experiences. Expect new protests, as Greek problems aren’t vanishing just because somebody is printing ES futures. From Ekathimerini;
Greece’s most important objective for 2012 is to shed fears of a eurozone exit. Until last summer, most foreign analysts would talk about “country risk,” meaning political instability and the ability of the political system to introduce the much-needed reforms and trim deficits.
These days analysts now talk about “currency risk.” The change has very serious implications. No one including foreign banks, small and big investors, and people who like to keep their savings at home — is going to make decisions while the currency question remains unanswered.
Guest post by Steen Jakobsen,
I have been wrestling with that latter question here in the first few days of 2012. What if we are wrong to presume that the perfect storm coming? Have we overlooked something in our analysis, some significant driver that will continue to drive markets higher for a time?
Anybody expecting the SEC to regulate the HFT will likely be rather disappointed. In order to regulate the HFT industry, you first need to gain the expertise on the field. Implementing effective regulation is the second part of the process. The question is whether the SEC has even started with part 1? From Huffington Post;
For those who want the Securities and Exchange Commission to fulfill its mission of protecting investors, the New Year brings more bleak reality. It’s bad enough that the Justice Department never indicted a single Wall Street executive for the fraud associated with the financial crisis, leaving it to the S.E.C. to wrist-slap a few financiers. Now, after a year in which the Dow Jones Industrial Average gyrated drunkenly, it’s obvious where lax enforcement is taking us.
During the last five months of 2011, the average difference between the Dow’s intraday high and low was a stomach-churning 260 points. New research suggests that high frequency trading (HFT), which accounts for about 60 percent of daily U.S. stock-trading volume, exacerbates volatility. Jim McCaughan, CEO of Principal Global Investors, agrees. But whatever the causes of the Dow’s daily rollercoaster ride, millions of Americans are getting off it. Ordinary investors withdrew more than $135 billion from domestic stock mutual funds in 2011.
The WSJ ran a “reminder” article yesterday on what the world’s biggest hedge fund, Bridgewater, and it’s boss, Dalio think about the Economy. Nothing new from Dalio, who is still very bearish on the debt, leverage, economy etc. We would like to remind our readers of a great piece on Dalio and his fund, by The New Yorker last year.
Dalio is a “macro” investor, which means that he bets mainly on economic trends, such as changes in exchange rates, inflation, and G.D.P. growth. In search of profitable opportunities, Bridgewater buys and sells more than a hundred different financial instruments around the world—from Japanese bonds to copper futures traded in London to Brazilian currency contracts—which explains why it keeps a close eye on Greece. In 2007, Dalio predicted that the housing-and-lending boom would end badly. Later that year, he warned the Bush Administration that many of the world’s largest banks were on the verge of insolvency. In 2008, a disastrous year for many of Bridgewater’s rivals, the firm’s flagship Pure Alpha fund rose in value by nine and a half per cent after accounting for fees. Last year, the Pure Alpha fund rose forty-five per cent, the highest return of any big hedge fund. This year, it is again doing very well.
And the conclusion;
It is easy to get carried away in this no volume melt up. Let’s just quickly review what actually drives the Economy, beyond the central planners. The extremely leveraged system we live in is not sustainable, and we must de leverage for many years to come. Running the Economy (and mainly ES futures) on steroids, is not creating the sustainable growth we need from “real” economic growth.Yes, the ES futures might squeeze further, but are we creating another monster, which eventually needs to fall apart? The US is playing very delicate games, while assuming the superpower will always be the no1. Don’t forget, you are the most vulnerable while at the top. From the Tribune;
Instead of seizing the opportunity, all policies implemented after 2008, were geared towards maintaining the status quo. These polices have exacerbated the magnitude of a crisis that will take effect anytime after 2012.