Monthly Archives: December 2013

What’s the Risk?

A few things that worry us into Spring:

1.Nutjobs with nothing to lose. The Russian bombings are a stark warning that Putin will be challenged at Sochi. Blurred lines will take on more meaning than when last in the news.

2. Drought. Last year we marked several of the characteristics for potential problems. Weak Peruvian anchovy harvest, rain on PGA Tour southern swing and strong surf at Maverick's. Early Spring flooding proved plenty to avert a catastrophe. We will be watching, however, the situation in California is already dire. Reservoirs that should be filling are still dropping. Many are barely at 30% capacity and the Tahoe snow pack is thin. If the variable missing from inflation traction has been capacity reduction (as we Abundance Theory crazies have suggested), then fruit, vegetables and cattle may change the data.

3. Loss of market function. Buying along with the Fed is much easier than returning to participant backed funding, especially after regulatory gutting of the desks. An orderly downdraft in Notes could quickly morph into a "no bid" slide that harms confidence and damages global capital markets. The "Street" the Fed is exiting to is not the one it set out to save in 2008.

4. The polarity of the Sun turns out to be the major determinant of S&P prices.

Happy New Year

Classical Tuesday

30 minute atr

daily pivots

weekly pivots

upside retracements

downside retracements

regression channels

price support and resistance
On the economic calendar:-
 
07:45 ICSC-Goldman Store Sales
08:55 Redbook
09:00 S&P Case-Shiller HPI (Consensus 1.0% v Prior 1.0%)
09:45 Chicago PMI (Consensus 61.3 v Prior 63.0)
10:00 Consumer Confidence (Consensus 76.8 v Prior 70.4)
          State Street Investor Confidence Index
14:00 SIFMA Recommended Early Close

 

Classical Monday

30 minute atr

daily pivots

weekly pivots

upside retracements

downside retracements

regression channels

price support and resistance
On the economic calendar:-
 
10:00 Pending Home Sales Index (Consensus -0.6% v Prior 1.5%)
10:30 Dallas Fed Manufacturing Survey (Consensus 4.0 v Prior 1.9)
11:30 3 Month Bill Auction
          6 Month Bill Auction
13:00 4 Week Bill Auction
15:00 Farm Prices
POMO:-
 
None

Best Advice

The WSJ Weekend asked the Titans of the Finance Industry what the best advice they'd been given, or gave was. The usual suspects provided a Whitman's Sampler (GIK) of common sense couched in economic over speak. The post is a fun mixture of anecdotes, Sally K-shank vapor and Bill Gross mushroom flashbacks.

Here is my addition: The shape of the yield curve and 6 to 9 months time tells you everything you need to know about the world.

That's it. That is the foundation of all that I have learned after 25 years in the Money Market Pit and almost a decade of trading. The Yield Curve is the puppeteer that pulls the strings and makes all the characters dance. As regular readers know, I've distilled this "knowledge" down to tweetable moments like: Steep is Good.

So there you have it. That's my Best Advice.

The Year of Living Nominally

 

"The future is no place to put your better days"

- Dave Matthews Cry Freedom

 

Tuning in for a few of the many "Year in Review/2014 Projection" shows, I caught the undertow of a theme. "Move away from risk", "Reduce exposure", "Shift allocations" all new euphemisms for "Take profits." That the taking of the profits and the increasing of the cash was also the recommendation in 2012 and Spring of 2013 was not brought up by the anchors. To be alive in the world is to take on risk.

We continue to marvel at the idea that the best of America is behind us and what lies ahead balances precariously between modest and tragic. The "Reduce Exposure" crowd hangs its  (cone shaped) hat on the idea that tapering LSAPs equates to tapering risk. The portfolio channel effect fine tuned in an age of optimal control. The objective of monetary policy is economic traction, however, not asset allocation.

QE in the era of high speed computing power and low (no) transaction costs has promulgated the idea that money and capital are the same. The interesting take away from the QE experiment is how little money morphed into actual capital. The price of the equity increased dramatically but capital investment has been small because there's so damn much of it. Thus, the idea that participants can/should request their money back (at the serendipitous higher rate of exchange) has become the theme of the institutions whose revenues come from an abundance of those low cost transactions.

We see this as living in a Nominal World. The quantitative regime is the cornerstone of nominal living and its not ending, yet. The Nominal Economy exists in name only, in economic terms, its "not real". We think 2014 will be the year that re-establishes the distinction between the two. The Fed's perverse goal of higher inflation will set the course. Living nominally (inflated) has proved difficult in a world awash in excess capacity and productive abundance. The forgotten variable is time. We believe that time is upon us.