Jobs report

Ending the week on a low economic note:

Nonfarm payroll employment rose by 120,000 in March, and the unemployment rate was little changed at 8.2 percent.

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Bonds Yields and Stocks

Why is everyone so convinced the low bond yields will push investors into stocks? Earlier today, I read about an interview with Mobius, the famous emerging markets portfolio manager at Templeton, where he highlighted:

“People are now beginning to realize that they cannot be sitting on bonds that are paying one, two or even three percent, when inflation is running higher than that,” Mobius said, adding that investors would look increasingly at equities as an alternative. “If you look at equities of course, the yields are much, much greater than the bonds.”

The sentiment has lately been a favorite of pundits on CNBC and everywhere else.Viewing the remainder of this article requires a Subscription

Sir, Yen Sir

The yen destruction is just beginning, and while it might have second thoughts, the eventual end is clear. It's got a long way to go to get to where it was five years ago and even further if you look at the currency (not the ETF): Regardless, everything priced in yen is shooting up.Viewing the remainder of this article requires a Subscription

On German Negative Yields

In a nutshell, this article summarizes the problems we are facing.Viewing the remainder of this article requires a Subscription

Bank Runs Are Deflationary First, Inflationary Second

It is Thanksgiving, so for most Americans an opportunity to spend time with family, go crazy, and use the excuse to purchase some frivolous electronics at half of what our neighbors paid last month - a truly feel-good holiday.Viewing the remainder of this article requires a Subscription

Lots of news, but what’s important?

There is a flood of data and headlines that seems almost spiteful to anyone trying to enjoy their usually-slow August. For me, it gives a good excuse to turn away and read even slower as most of the flood is meaningless for my portfolio. That being said, some of it is not.Viewing the remainder of this article requires a Subscription

A Contrarian Take On Oil

60 million barrels sure sounds like a lot, so thank you world governments for releasing that into the system and alleviating consumers' burdens.Viewing the remainder of this article requires a Subscription

It’s the End of The Euro as We Know It…And I Feel Fine

For a brief moment, the markets believed. For a brief moment, the Greek problem was solved. But then reality set it. Greece’s fiscal austerity and monetary headache is going nowhere and German’s are getting fed up with supporting their neighbors.Viewing the remainder of this article requires a Subscription

Black Swan

I continue to think about black swans – not the movie. It’s a bit of a tautology to say that we can only identify them in hindsight, that is, we can only tell that an unexpected event will happen AFTER we’re caught off guard. The corollary to that is if we’re caught off guard, then it must have been a black swan event. I think investors and market participants often use that as an excuse. Continuing with that line of thinking, then, the implications for the pundit, writer, or talking head (or anyone not actively making decisions) is to try to mention as many possible events or outcomes as possible. Then, when one hits, the non-decision-maker can always say that he predicted it. In that light, prognosticators have a distinct motivation to talk about the possible, without thinking of the probable.

In contrast, decision makers often base their decisions on the probable. At its root, most institutional money managers don’t want to take any career risk, and “no one gets fired for buying IBM” (although, these days, maybe they get fired for buying HPQ). The idea behind this mentality is one of momentum, namely what’s happened in the recent past is likely to continue.

The last group – I guess you might know where this is going – looks at expected return. This last group are number crunchers at heart. I hope I fall into this camp more often than not. This group relies on SUMPRODUCT. The idea behind this group’s thinking is that you need to know both the possible outcomes AND the probability of each outcome. The expected return crowd is comfortable making appropriately sized investments given the expected outcome, recognizing full well that the expected outcome will deviate from the actual outcome in any given turn BY DEFINITION. The key for this group is that there is always a possibility that they/we don’t anticipate; except, you can anticipate the unanticipated by making an “other” category. This other category will now be factored in and will only be limited by the assumptions you input into it. Other, remember, can go in both direction. In essence, it’s a haircut. The more investors lump into the other category, the smaller they should trade.

I happen to have a lot of things in my “other” category. I worry about the weather. I think about terrorism. I think about supply shocks in every commodity imaginable. I think new technologies will revolutionize the way we live. And on and on. The implication is that I invest more conservatively than I would without my “other” category. I think a lot of people I speak to invest bigger than they should. Great when your PNL is going up. Hurts more on the way down. How big should you invest? Well, it probably depends how many things you think should be lumped into your “other” category.

In anticipation of the rebuttal, I’ll provide it myself… Fear, and especially fear of the unknown, can lead to inactivity. You might decide that so many things are unknown and in the “other” category, that your positions become miniscule, or even non-existent. In that scenario, you should also be afraid of inaction and indecision, and weigh that option. Against the risk of loss through action. You’ll probably find that inaction is worse.

In that light, our decision to hold cash, while simultaneously holding securities that would benefit from inflation might seem at odds. It is. It’s part of our inflation barbell strategy, namely in our analysis, inflation will EITHER increase or decrease, we’re just not sure yet which one. The one thing we’re pretty confident in, though, is that it won’t stay here very long. Food for thought as we move forward in our tactical allocation research.

Relevant ETFs: XLU, CROP, GLD, TBT

Revisiting the Curve

Remember when the curve was getting steeper each day? Remember when we started warning that the steepness was going to catch a lot of net interest margin (NIM) players flat footed when it finally turned? Well, it might be turning. Even if it goes back to the former steepness levels, I’m not sure it will surpass what we saw at the end of 2010. Here’s the 2-30 spread. Sure it can double dip, but the real issue is that 2 year bonds are being sold quicker than 10 year bonds. That’s not inflation – that’s stagflation, it’s deflation, or it’s bi-flation. Whatever it is, it’s not pretty for the long only managers.

Bill Gross loudly got out of treasuries, and just as loudly started shorting them earlier this month. Now, others are coming out of the woodwork on the trade (Jim Rogers, Michael Steinhardt, etc.). I’ve been there for a while, with a flawed implementation vehicle, but not bad given the magnitude of the move I anticipate and some challenges with shorting TLT. An even better way would be to structure the outcomes with options given the binary nature of the current environment. I’ve also been researching the newer ETN’s, FLAT and STPP, flattener and steepener respectively. Both are flawed and not my cup of tea, but I see the appeal and the use. Here’s a WSJ article about them. I think there are other ways to play the beneficiaries rather than ETNs on derivatives (a credit product which is a derivative to begin with, on derivative underlyings – definitely not for me at this point).

Relevant ETFs: FLAT, STPP, TLT, TBT

On the radio…

Just wanted to send along last week’s radio appearance. The main theme was inflationary pressures in food and agricultural prices – a theme I’ve discussed and which we’ve implemented for clients for a while. This, coupled with our concentrations in precious metals and energy, has worked well and I continue to see opportunities in these areas.
http://www.thewallstreetshuffle.com/thursday-march-31-2011-seg-1/

Relevant ETFs: GLD, SLV, CROP, MOO, DBA, JJA

MacroView

A bit later than usual…

As always, MacroView is produced in collaboration with MacroMan. To show the extent of our need to SEEK conflicting data, today’s MacroView has a number of charts showing support/resistance for inflation triggers. I’m not in the inflation camp for the time being. I see no wage pressures, a consumer slowdown, increased savings rate, lower velocity, lower housing, excess capacity, etc. That being said, one must always let the data lead, and I’m open to re-interpretation…

macroviewmarch17

More on the end of the euro

I have discussing the fact that the underlying logic of the euro is under threat as fiscal, monetary, and political needs are in stark opposition. I still don’t understand how the euro is receiving ANY safe-haven bid as internal strains on the PIIGS are continuing and growing (note the spreads of Portuguese bonds as one example).

However, it seems that local monetary authorities can be created out of necessity. This is from The Economist earlier today:

Spain Prints Money

AXEL WEBER may not get it, but the villagers of Mugardos do:

A small town in northern Spain has decided to reintroduce the old Spanish currency – the peseta – alongside the euro to give the local economy a lift.

Shopkeepers in Mugardos want anyone with forgotten stashes of the old cash at home to come and spend it. It is nine years since the peseta was official currency in Spain. But Spain’s economic crisis has forced some to be inventive. The hard times have seen thousands of businesses close and more than two million jobs go.

More than 60 shops in Mugardos, a small fishing town in Galicia on Spain’s northern coast, are accepting the peseta again for all purchases, alongside the euro.

Read it here.

This is no different than local communities deciding to accept gold or silver, except that in this case, the village is accepting a paper currency explicitly NOT backed by any entity. It is a testament to how much eurozone policy is hurting the local economies that they are willing to accept a completely devalued currency in order to stimulate some inflation and economic activity.

Feeling like an outsider

Everyone is talking about inflation. All the time. Wheat. Everywhere I turn. Every chart that is burnished. Cotton. Newsletters. Bloggers. Traders. Inflation. Copper. So it makes me feel like an outsider when I don’t really think inflation is the problem we need to worry about. Or rather, it’s not a simple case of rising prices and depreciating fiat currencies.

Let me point out a few discrepancies I’ve noticed for the inflation camp. Prices of commodities are rising, which will be passed on to the end consumer. For me, that’s a maybe. I think there is a lot of room for substituting down and for limiting purchases. We see it in company reports – Dean Foods doesn’t sell the brand name milk as people switch to the generic. That’s trading down. I think there’s also room for stopping certain purchases much quicker than analysts anticipate.This leads me to worry about margin compression much more than a pick-up in inflation.

On a related note, we don’t see employment and wages going up. Where do inflation mongers think that the funds for increased prices will come from? I don’t see wage inflation picking up in the near future.

Housing is down, and it’s not coming back yet. Without housing (and I’m talking about global real estate in general) where will this mythical demand for such commodities as copper come from? China’s property bubble is bursting, the US housing market is going down, Japan’s demographics will soon lead it to destroy housing, etc. Other than fear and speculation, what’s driving the underlying demand? Silver and gold going up is not a sign of inflation. On the contrary, they are signs of fear and rightfully so. Fear can be fear of inflation, but it can also be fear of instability and deflation. Their price movements are certainly not a support for the inflation camp.

What makes my position even more difficult is the fact that I agree with a lot of the underlying issues these same inflation campers are mentioning. Printing is dangerous for the dollar. Housing has not been a store of wealth. Producer prices are rising. etc. On top of it, I agree with SOME of the implications. I am negative on long term treasuries and credit in general. I like gold and the precious metals complex. I like the energy complex. And more.  However, I diverge on some fundamental issues: I don’t think like retail and don’t believe the retailers will be able to pass along price hikes. I think a Chinese slowdown is already here and will ripple through the commodities space. I anticipate major margin compression and am very negative on equities. I think gold and silver are harbingers of fear that will cause people to hoard cash as well. I don’t anticipate wage inflation.

All of that was a long-winded way of saying I haven’t found a camp where I feel totally comfortable.

Relevant ETFs: JJA, DBA, COW, MOO, TBT, TLT, EEM, SPY, TIP

Just to confirm

Jobless claims higher than expectations by about 50K, durable goods orders continue to deteriorate (down 2.5%). We’ll see what that means for inflation expectations going forward, but without wage inflation and without orders to generate revenue and growth, the current inflation scare and commodity run-up might hit a wall.