May 2013
4 posts
Market update for a friend
I spend more time than I probably should exchanging views with other market participants, most of whom are friends. It can take up a lot of time. My exchanges with one guy in particular, a macro guy with a strong background in economics, usually capture best where I’m at. I’ve posted my side of these exchanges a few times in the past. The similarity in backgrounds usually leads to a very...
There is zero correlation between the Fed printing...
There is zero correlation between the Fed printing and the money supply. If you don’t believe this, you owe it to yourself to study up on monetary policy until you do.
This is an issue that brings them out of the bunker like no other in economics. But if you are an investor, trader or economist, understanding—and I mean really understanding, not just recycling things you overheard on a trading...
2s-10s, the update
I’ve written a couple of times already about the yield spread between 2s and 10s being an excellent contemporaneous indicator of risk appetite in equities. Macro guys look at a variety of “flattener/steepener” indicators, but this one is the granddaddy. It is something stock-jockeys often overlook.
The downdraft that started in March presaged the April volatility. It is a...
You Don’t Really Understand the Carry Trade, Do...
This is the question I always fantasize an insightful CNBC interviewer will ask of his/her guest after the guest offhandedly mumbles something about ‘the yen carry trade’.
Odds are, though, it’ll never happen.
What is a carry trade and why is it so pervasively misunderstood?
First, a quick bit of history (Quick. I promise).
Back in the mid-90s it became increasingly clear that the BOJ was going...
April 2013
3 posts
Everything you think you know about the Fed is...
by Mark Dow and Michael Sedacca
Few would still argue against the assertion that the Federal Reserve has been central to the financial stabilization and economic recovery from the 2008 crisis. They fixed the plumbing and are now trying to incentivize animal spirits to pump water through the pipes. The debate has now migrated to exit strategies and whether growing side effects from exceptional...
Video: Introspection - 2010 vs. now
Every once and a while you have to go back and see how your views have held up. Good traders do this as a matter of course. Economists, well, not so much.
This interview, with @aarontask from July 2010, covers economic views ranging from QE to fiscal austerity, to deleveraging, growth and comparisons to Japan.
Bottom line: I underestimated the psychological impact of QE2, but the rest holds up...
Gold and Silver – where do we go from here?
Before I start, I want to send wishes and prayers to Boston and my many friends there. I went to graduate school in the area, and my wife and I lived seven years at 780 Boylston Street, on the same block as today’s fateful blast. There are no words…
There’s another preliminary point I want to make. It is my view that gold is a deeply flawed investment vehicle that will hurt a lot of retail...
March 2013
3 posts
2s-10s: be vwery, vwery afwaid
Remember this post back in January? It said, inter alia, to watch the spread between the yield on the US 10yr note and the 2yr. It suggested something good was happening (US healing) and that we should all take note.
Here’s the chart today:
It doesn’t look so good for risk taking. It doesn’t mean the world will end, or that you have to join the Policy Bears in the bunker, but...
Looking to add equity risk but are afraid at these...
What we are seeing in the commodity complex is the drip, drip, drip of orderly liquidation. Commodity funds are losing assets and/or being shut down. Tourists who ventured into commodities to protect against macro fears that didn’t materialize have started to sell. And the sell-side commodity hype machine is now behind us. This is why commodities have stayed so oversold for so long with high...
AAPL and Gold: Still all about Bubble Psychology
Apple and GDX, the ETF for gold mining stocks have very little in common—or so it would seem. One is a major technology stock, the other, a leveraged play on precious metals. Apple has tangible value, which at some price point will matter; Precious metals have whatever value we assign to them—the ultimate greater fool trade.
But the chart below shows a striking similarity. Both have...
February 2013
4 posts
Framework for Thinking about the Buck: It's an...
This was originally written for a blog over at the CFR. The framework is still useful today, IMO. At least you can compare it to how things have kind of turned out. Here is the link to the original.
The Dollar: It’s an Overhang, not a Hangover
By Mark Dow July 6, 2009
Few things are more confounding to economists and traders as forecasting currencies. However, as I have come to realize, the...
The Case against Commodities and Emerging Markets
Commodities as a group have been underperforming equities for about six months now. The correlation between the two groups has been grinding lower. Even more important, I think the underperformance of commodities—and by extension emerging markets—will persist for some time.
Hang on. If the backdrop is improving growth expectations and continued, if not increased, global central bank base money...
Cash Hurts--but so does Crash: Market update
A friend of mine from London (a currency-oriented macro guy) with whom I regularly exchange ideas asked me my views this morning. I’ve posted my side of these exchanges before. Here’s the latest:
I think the story with gold/silver is the same one we’ve been discussing since May 2011. The fever peaked (with the parabolic silver spike), and now we realize that (1) monetary easing isn’t...
Update of the Structural Bear-killer post
Late in January I was worried about having been too cautious since end-December yet too late to the party to add risk. I posted some charts showing that the odds were decent that the shift afoot was structural in nature, unlike the stop and go markets of the past two years. These charts made me more confident to go with the flow. Here is an update of those charts. And, sadly for the Policy Bears,...
January 2013
3 posts
Four charts tell a powerful story of where we are....
Four charts tell a powerful story of where we are. They all say “It’s Structural this time”. Safe Haven Exodus.
Yes, I know a correction could happen at any time. I myself got caught out jumping off the train a little too early back in late December. But longer-term, if you do the impossible and look out over the news cycle, these four charts below tell us a structural shift in risk allocation is...
Surprise! (index): Update
On December 16th I posted some trading views, in which I referenced the economic surprise index Citigroup publishes for the US. Here it is, from that date, below:
And here is the update from today:
Remember, a positive reading of the Index suggests that economic releases have been, on balance, beating consensus. So a lower positive number means less positive surprise. It doesn’t mean...
The Effects of QE on UST Yields—Now the Answers...
The debate about the impact on US treasury yields from the Federal Reserve’s LSAP programs—often referred to as Quantitative Easing—is raging into its fourth year. In fact, now that the time series are getting long enough for more robust number crunching, I suspect academics are going to really start diving in and begin the writing of history.
Practitioners, however—both policy makers and those of...
December 2012
5 posts
Trading note on Silver and Gold (A quick post from...
The only asset that can embarrass you faster and more brutally than silver (and to a lesser extent, gold) is natural gas, the nitroglycerin of the futures trading. With that firmly in mind, and in light of the recent price action, here are my current thoughts:
My fundamental views about silver and gold are, gulp, on record here and more recently here. What has changed recently is that the...
Sentiment and trading views, feat. Gold, Silver,...
I am not a consumer of the big, bold predictions and the surprise lists that roll in this time of year. They mostly serve marketing purposes, or as a call option on self-aggrandizement, or our desire, at some level, to be told what to do. But many people like them. Uncertainty—the kind investors face daily—is draining and unpleasant. These things help fill that void. And they give us a reference...
The Other Big Lie
The majority of the financial industry is built on the proposition “if the investor just had better info, he/she/they would make better decisions”. Think about it: financial media, newsletters, online brokers, — hell, CNBC’s Cramer has built an entire platform on it. It’s a big lie. Investors want to believe this because it is empowering. The financial industry wants to sell it to us because...
AIG/TARP/Stress Test: C’mon, say it. Thank you Tim...
The US Treasury this morning rid itself of the last piece of exposure it had to AIG, the insurer at the center of the 2008 financial crisis. Both the Fed and the US Treasury intervened heavily during the crisis, with the ostensible objective of stabilizing the system and circuit-breaking the self-reinforcing fear that was already rippling through the financial system.
As of today, taxpayers have...
Berlusconi: Why He’s no Donald Trump
It is easy to see Silvio Berlusconi as an egocentric and ageing clown figure desperate to stay relevant—especially when looked at from outside Italy. But this would be a mistake. He is no Donald Trump. His message is real and should be heeded, both in Rome and Berlin, even if his odds of winning are nil.
Let me be clear: It would be a disaster if Berlusconi were to return to power. Even if you...
November 2012
1 post
Our Next Treasury Secretary
The chatter over who will the next Treasury Secretary has heated up now that the election is behind us. Given that the position will likely be—as things stand right now—central to the nation’s next four years, the attention is understandable and warranted.
Much of the talk seems to focus on the traditional discussion about the attributes a Treasury Secretary should typically have. Wall Street or...
September 2012
1 post
Note to a friend on the market
I just wrote this note to a friend of mine on where I stand. I don’t talk that much about my trading, and I tend to post a lot less when I am in California (opportunity cost is very high here), but I thought the note below might be a useful follow-up to the Toxic Migration case I made a few weeks ago.
Dear X,
I am riding the equity calls I bought a week or two back, and actually added to...
August 2012
4 posts
Toxic migration and the bull case
It’s not as fun to be bullish. Bears are smart. Bulls are wide-eyed optimists. Bears have data. Bulls tell stories. Bears make money when everyone else is in pain. Bulls make money when everyone else already claims to be a genius. In short, many of us get more satisfaction being bearish because the psychic payoff is greater: we calibrate our own self esteem not by our victories in absolute...
One thing about Paul Ryan’s nomination that really...
I am reluctant to wade into the polarized waters of politics. But there is an important point about Paul Ryan’s nomination I haven’t seen made (hard to believe, I know).
We all know the next four years will be about fiscal issues. And the sense, increasingly, is the Democrats could be forced at gunpoint to compromise on entitlement spending. There are no indications, however, that the Tea Party...
Why are Global Macro hedge funds struggling?
The first hint: everybody is now a global macro investor (or wants to be).
Here’s the backdrop:
1. Global Macro hedge funds performed poorly since about mid-2010. Performance continues to be lackluster (paragraph nine);
2. The category is now in net redemption mode;
3. Some, like Moore Capital, are preempting investor discontent by returning money to them;
4. Most seem to be doing...
Back in the Saddle
Apologies to interested readers for the extended absence. I have been self-indulgently enjoying the longest vacation I have ever dared to take, in my favorite place on the planet earth. And, guess what? It didn’t suck.
I did, however, continue to accumulate things I want to write about, and hopefully I will start to pump them out in the coming days.
I will start today with a piece on why...
July 2012
2 posts
1 tag
ECB, PBOC and Global Wheezing
A lot of heavy breathing for very little oxygen intake. This should be the take away from this morning’s flurry of central bank activity from the ECB, the BOE and the PBOC.
The market is finally coming around to the realization that risk appetite is more important to sustainable monetary stimulus than central bank actions. Absent risk appetite—and it is absent—there is little risk of inflation and...
June 2012
9 posts
Europe Is “Like the Drowning Man,” Dow Says:...
Someone just asked me if this interview on Yahoo Finance from December still reflects my views. Sadly, it seems every bit as relevant today. Click here
A quick example on base money and money supply
A lot of people have a hard time understanding why base money growth (i.e. Fed printing) doesn’t necessarily lead to money supply growth. I’ve been beating this drum for a few years now, and I get the question a lot. So here’s a quick, non-technical answer:
Say base money is 10% of the money supply (close enough for illustrative purposes). Then, if the 90% portion is contracting because...
A Framework for thinking about Gold and Silver
Gold and silver have become very popular investments in recent years. I’m sure you’ve all seen the ads pitching it. The reaction to this last Fed policy meeting and press conference makes it a good time to go over the main reasons people have had for owning it, and how those factors have been evolving.
Low real rates. Commodities in general tend to do well in environments of low real interest...
What if the Fed doesn’t throw a party and everyone...
I don’t write very often about market views, especially short-term ones. There’s excess supply of that already in the system, and my comparative advantage should be melding policy, economics and behavior to try explain things that I think are misunderstood. At least this is what I try and stick to.
But I am a trader, and I follow markets very closely, even when I am running low risk. And I have...
The takeaway: Germany is pot committed
The short-term market reaction to the Spanish bank deal should not blind us to the important longer-term implications: Germany is now pot committed.
Most of you know the poker term, I suspect. Pot committed is when you have bet such a large percentage of your chips that you cannot fold your hand. You are not all-in yet, but you eventually will be unless the others fold. (“Crossing the Rubicon” has...
Quick market comment on the Spanish rescate
The Spanish loan and the statements around it are a big deal, IMO. That a deal for Spanish banks was in the works has been clear. What the statements and official comments have brought into sharper focus for me is how much commitment there already is to build a banking union and, in the more distant future, fiscal union.
The takeaway, however, is not that I now think they are going to make it, at...
Bernanke, breakevens, and volatility
I was surprised when I saw Tim Duy’s post, via Mark Thoma (Tim Duy is a blogger and economics professor at the University of Oregon) that took Bernanke to task for his poor management of market-based inflation expectations since the 2008 crisis.
This is what he says:
“Bernanke doesn’t appear to see that the inability to hold market-based inflation expectations at a consistent level as a...
How you can go broke taking profits. Really....
How many times have we all heard the line “You can’t go broke taking a profit”? Jim Cramer says it all the time on CNBC. Unfortunately, it’s dead wrong. Perhaps the dirtiest of secrets amongst professional money managers is that ideas—the primary basis on which they sell themselves to clients—come in third behind risk management and portfolio construction in generating replicable returns.
It...
Euro. It's a Design flaw. And it's fatal
Eduardo Porter captured the sentiment of many in the run up to the launch of the single currency when he said this the other day in The New York Times:
“Virtually every economist on this side of the Atlantic – and most of those on the other – figured out that the euro would be fatally flawed. What took economists some time to understand was that Europe’s leaders didn’t much care what they...
May 2012
13 posts
The Book List
I’ve been getting a lot of requests for a book list on behavioral economics, finance, etc. I promised a few of you I would post one.
Here are what I find to be some of the best books on these subjects. I picked books that are aimed at the intelligent reader who does not necessarily have specialized training in economics, sociology, or evolutionary psychology.
But I would also suggest you start...
IMF and Spain - putting on the face paint
A quick note on how the IMF works with its member countries (in this case, Spain).
The IMF is always monitoring its members. There are teams with desk officers assigned to each country. They track all the data, news, policy measures and political backdrop. As times get tougher in a particular country, or set of countries, the resources allocated to tracking increase. Communication with the member...
More Greek Cognitive Illusion: What they really...
A quick update on the post about Greece and cognitive illusion when under stress from Tuesday. I mentioned one of the most powerful attributes of human nature is our insidious, and often subconscious, ability to shift blame to others when things aren’t going well. Another thing we do is take shots at others’ success.
For example, here’s a slide from the results of a recent Greek survey of “Greek...
Reagan’s gone. You’re old. Get over it.
“We might as well require a man to wear still the coat which fitted him when a boy as civilized society to remain ever under the regimen of their barbarous ancestors”, inscribed inside the Jefferson Memorial
Though it is hard for anyone to take their eyes off of Europe these days, I came across blog posts from Kevin Hassett of AEI and John Taylor of Stanford that really jumped out at me, for the...
1 tag
“We have explained in previous notes that interest rate cuts may not help, but...”
– SocGen’s Wei Yao. (via ftalphaville)
Big, Fat Cognitive Illusion (and all of us are...
Joe Wiesenthal at Business Insider put out a quick post this morning on the Pew Research Center study, “European Unity on the Rocks”, released today. It is an eye opening read.
To start with, it strongly supports the working hypothesis of many that the political forces now unleashed in Europe are centrifugal, not centripetal. This reality makes betting on solving the crisis through a deepening of...
1 tag
Chinese growth: of Panda Huggers and Muggers:
People seem to be settling into the view that China is slowing down. How much, how fast, and whether it is cyclical or something more secular like the lower-middle income trap or a Lewis turning point is still very much the subject of debate.
I find it at odds with this growing impression, therefore, that so many investors and analysts seem to be clinging to high growth forecasts. The Chinese...
MARK DOW: Another Grim Year for 2012–Even For...
(cc: @aarontask, @hblodget) For anyone vapid enough to be interested in my longer term views, here’s a good snapshot of them, from a December interview done on Yahoo Finance with Aaron Task and Henry Blodget. They still apply. http://finance.yahoo.com/blogs/daily-ticker/mark-dow-another-crappy-2012-even-commodities-124819564.html
In a world dominated by equity traders and ETFs, this is why credit guys are the ones to listen to on these issues. This is plausible. Nice work, @credittrader
https://twitter.com/#!/credittrader/status/202041371442421761
Sad that when I look over this article from last September I see so little has changed. Too much of it is still relevant. Okay, a little more firewall, a little more runway foam, but growing problems and apparently inexorable descent into disintegration of the single currency… http://blogs.reuters.com/great-debate/2011/09/06/the-solvency-solution-for-europe-time-to-do-the-unthinkable/
Was JPM hedging, unhedging, or speculating?
No one yet knows exactly was JPM was up to in the credit derivative markets. But this hasn’t stopped a lot of people from linking the loss to their pre-existing views on the Volcker rule, TBTF, moral hazard, and the Fed’s low interest rate policies, etc. There was also more than a touch of Schadenfreude, as the golden boy of finance revealed his new black eye.
We will ultimately get the...
