Deadly discount rate

We're reading more and more about research being done in low to negative real interest rate environments.Viewing the remainder of this article requires a Subscription

Cash on the sidelines? Not as much as before.

Equity mutual funds have one of the lowest cash reserve levels since the recent rally began and money markets have less cash than a year ago.Viewing the remainder of this article requires a Subscription

India Food Inflation

It's interesting what gets picked up in the mainstream news and niche publications. Often, stories like the government selling its Citi stake spread like wildfire and drive the stock up.Viewing the remainder of this article requires a Subscription

The Silver Lining to the Debt Crisis

Here's the by line from the article in Barron's: "Could a Japanese debt crisis help spur a rally? Perhaps, if it fuels the yen carry trade."

But rather than precipitating a panic, a decline in the overvalued yen would serve as a tonic in two ways. The most obvious would be to give a lift to Japanese exporters, which have been hampered by the yen's strength, not only against the dollar but even more so against other currencies.

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The problem of quiet

Do you feel the tension in the air? Most of the people I've been speaking to the past few days are feeling more bored than tense. With the VIX hovering near 17, and markets creeping up despite everyone, there seems to be a sense of boredom making its rounds.Viewing the remainder of this article requires a Subscription

VIX has just been hanging out and declining

From our perspective, the VIX is reflecting a surprising complacency.Viewing the remainder of this article requires a Subscription

Connecting the dots 2-25-2010

Or at least trying to keep track of everything... I want to first give you an insight into what I've been reading this morning, then we'll see where it leads us. As many of you know, I'm a believer that excess profits flow through to the real estate sector and have referred to Fred Harrison's book on the subject often (http://www.amazon.com/Boom-Bust-Prices-Banking-Depression/dp/0856832545/ref=sr_1_1?ie=UTF8&s=books&qid=1267115867&sr=8-1 - it's a must read).Viewing the remainder of this article requires a Subscription

Fed raises discount rate

Yesterday, after the close, the Fed raised the discount rate from 50 to 75 basis points.Viewing the remainder of this article requires a Subscription

What we’re watching unfold…

Warning: This post has nothing new for readers of our newsletter.Viewing the remainder of this article requires a Subscription

Watch the 10-Year

Everyone is talking about Plosser discussing selling off the Fed's MBS hoard. It's obviously necessary, but completely unfeasible given a still shaky housing market and no lending. Additionally, it would fly in the face of the Fed's QE campaign.Viewing the remainder of this article requires a Subscription

China, Yuan, and Bubbles

I have never been a big fan of the Chinese story, not because I doubt that there is growth there, but rather, because I doubt any numbers coming out of a command economy.Viewing the remainder of this article requires a Subscription

Emerging Markets Exposure

I wanted to pass along the following article examining the differences between EEM and VWO. I'll admit that I use EEM extensively and have traded and hedged and used options, although I currently have no position in either.Viewing the remainder of this article requires a Subscription

China – a must read

For a long time, I've been a China naysayer. For starters, I don't believe that a command and control economy can last, nor do I believe that it will make optimal resource allocations.Viewing the remainder of this article requires a Subscription

It’s always easier to give advice…

We were great at giving advice to Japan throughout their lost 2 going on 3 decades, and we're great at giving advice to Europe on whether and how to deal with Greece.Viewing the remainder of this article requires a Subscription

Bank of England Halts Bond Purchases, Obama Supports Free Trade, where we went wrong, and more

The carnage from yesterday masked a lot of interesting news bits, some good, some bad, some just plain confusing:

• For starters, CBS Marketwatch ran a story about Bank of England Halts Bond Purchases. As central banks around the world face up to the reality that even they are not bigger than the markets, quantitative easing programs are likely to be pulled back. We’re seeing it in England, but as the PIIGS come under continued fire, they’ll also be mandated to cut back fiscal spending. Unlike the US, the PIIGS are closer to states in that they have limited leeway on deficits and printing. It might actually end up being their saving grace if they can get their PR story straight.

• On our side of the pond, President Obama made a step in the right direction by going against his party, and coming out in support of free trade. The NY Times ran the following story: White House Unveils Plan to Double U.S. Exports. While encouraging, the language did not contain the commitment that we’d prefer to see, and I’m afraid that this is all just talk.

But in announcing the new strategy, the commerce secretary, Gary Locke, did not say when the administration might send Congress three completed free-trade accords — with Colombia, Panama and South Korea. Many trade specialists say that is essential to prod other countries to negotiate with the United States. But the move is likely to cause a rift with Mr. Obama’s liberal supporters in the Democratic Party, as well as free-trade opponents in the Republican Party.

So we’re left holding our breath. I don’t think the Obama administration will have the political will or power to go against their base of unions and left and right wing protectionists. In fact, I wouldn’t be surprised to see protectionist measures implemented over the course of the year.

• Obviously, Australia left it’s interest rates unchanged. Screwed the carry trade for a lot of people yesterday, but was not that surprising to us. Remember, we’re long USD vs. JPY and vs. EUO. We just believe that USD will still be the beneficiary of the unwinding of risk as must happen. We should have been like Wells Fargo, who shorting the carry trade on the yield curve, and taken more aggressive positions in long USD.

• Where we went wrong: We’ve allocated a small portion of our portfolio to a metals portfolio. We built a position in gold and maintained it. We increased our exposure by building positions in SLV, PALL, and PPLT. We got in too late and should have diversified some of our gold holdings earlier. We are down between 8-18% on the positions. While it’s painful, we continue to hold these positions. First, the individual positions are small. Second, the entire position in metals is relatively small. Third, we maintain that the reasoning behind owning exposure to physical metals continues and we’re happy about the diversification into metals other than gold. We’re not in copper at all. Additionally, today we added a small exposure to GDX as the spread between GDX and GLD seems to imply that there is more potential for outperformance in the miners than in the physical. Here’s the chart from StockCharts.com:

This is the ratio of GLD:GDX. It’s not at the hyperextended levels of Oct. 2008, when the ratio was over 4, but it still looks like the valuation of the miners is low relative to the price of gold.

• Lastly, I want to discuss Treasuries. In 1992, as Soros was breaking the Bank of England, the trade was a simple understanding that no entity nor government is stronger than the market on a long term basis. We have been getting comments and notes about how we can see a continued debt deflationary environment, with a stronger dollar, and lower Treasuries. In the 1970’s, the thinking was that inflation and growth went hand in hand. Stimulate inflation and you’ll get to full employment (sound familiar?). Instead, we had a previously unimaginable situation where we had inflation and no growth, and with it a new term: stagflation. In my mind, we can enter a period where people will want to hoard dollars and not lend it out to the government. It’s the worst possible world for the Fed, whereby they will face higher borrowing costs without stimulating any inflation since the velocity of money will go down. If fiscal policy doesn’t cut government spending, we will be in a very weak position with very few places to hide. Once spending does start, we will face the specter of inflation that will continue to put downward pressures on Treasuries, this time on the short end. We are stuck and the losers will be the holders of long-dated Treasuries. For the Treasury market to rally from here, an investor would have to believe that the Fed, Treasuries, and government can orchestrate a “soft-landing” where domestic savings rates inch up, foreigners continue to want to finance our deficits, trade balances magically and incrementally improve, etc. I’m not a big believer.