Correction.
Am told by Joe Brusuelas, of Brusuelas Analytics, that the market sell-off worldwide these last days was the smart money deciding to cash out of the longside bets on a worldwide recovery in order to prepare for the possibility of a slowdown in commodities and the attendant emerging markets and consumer-led rich economies. In sum, the big boys got caught on the wrong side of a bet and are going defensive. The plunge in oil is the metric that suggests trouble ahead. The disdained euro saw a bounce from 1.21 to 1.25 because of short-covering -- and also the anxiety caused by a rumor that central banks were going to intervene. The turmoil is widespread and violent.
Treasuries and November.
Surprising to learn that US Treasurys are now the haven of last resort. Even gold sold off, after the smart money took profits from the recent run-up. Treasurys had been the stuff to sell as the markets prepared for a climb, but now Treasurys are Mother Earth. Translating all this for political gain, the White House just watched a line crossed. The markets are correcting for the first time in the bull run since March 2009. The correction is now 10%, and it can go lower. Markets go up and down. What this also means is that employers will hesitate yet again to hire into the fall. Hiring attached to prospects for trade is what the White House needs for a bounce into the summer. Without hiring, the dreariness of the numbers will dominate the re-election narrative of the Democratic majority. There is also a small chance that the sell-off can get worse. Europe is a long way from certain of its future; and the euro looks to head to 1.10 by Election Day, making even the optimistic hesitate about the first half of 2011 and global trade. China is also out of ammo and falsehoods about its real estate driving GDP. Grim tales for the White House. It happened on May 20, the line was crossed, the market started the correction. Like November?
short covering in the euro- it's getting crowded
1..21->1.25 known in street talk as a dead cat bounce
(even a dead cat will bounce if you drop it)
some of the fall in gold, copper and oil is just due to dollar gains since they are denominated in dollars. i am too lazy to calculate the residuals.
btw
if i am not mistaken naked shorts are a violation of sec rules in the us. perhaps not stringently enforced but on the books.
Markets, no matter what you think of them, are a sounding pole or line that measures future economic activity. The markets in and of themselves are not the problem. The problem is political volatility. Traders make money whether the markets go up or down. It is the movement of markets that generates money. Iraq's market reached its highest point just before America invaded. This was not a sign of confidence. It was a market in its death throes.
We all assume that the next election will solve everything for us. We eagerly await November. It is possible that the markets will rally in anticipation of a Republican sweep. This rally has the potential of being like a prisoner, having just been released after a long confinement, now standing in front of his house. He rushes across the lawn, his heart overflowing, eager to see his wife and kids. As he opens the door, he trips the wire that sets off the explosion that levels the house.
Inflation could be the charge, or social unrest, or a war. Too many fuses have already been lit; too many surprises converging yet ahead. I believe the only thing that's keeping us afloat today is our sluggish economy. Once it takes off, God help us!
These people will not give up. They’ve come too far. Isn’t it strange how they don’t seem to fear elections?
http://peterkoelliker.blogspot.com/
some of the fall in gold, copper and oil is just due to dollar gains since they are denominated in dollars. i am too lazy to calculate the residuals.
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I'm too lazy to calculate them too, but gold is down about 4.5% since its peak late last week, and the dollar has not made anywhere near those kinds of gains to explain the 4.5% drop. This is something I'd like to hear one of the experts on JB's show address: until this week, it has gone unchallenged that a weak euro means strong precious metals and vice versa. But the correlation has completely gone away this week - in, fact, if anything they seem to be now positively correlated rather than negatively correlated. Haven't listened to last night's podcasts yet to see if there's an explanation for it, but cc, with due respect, yours doesn't explain it (IMO).
true lou-
dollar does not explain all the commodity move
I heard an explanation (maybe it was on the JB show, not sure) that makes sense but is somewhat unsatisfying to me because it can't really be proven or disproven, but here goes: Many fund managers were in positions where they had gone long on risky investments and short on Treasuries. When it became evident that the recession would take another downturn, this meant that interest rates would remain low, meaning treasury futures would go up unexpectedly. The investors were skittish about getting trapped in an ever widening spread, so they cashed out some of their long assets so they could use the proceeds to buy back in the Treasury shorts. The question is, how much cash will they have left after covering the shorts? If the answer is "some" or "alot", the bullion markets will recover quickly; if the answer is all the cash has gone into hiding like it did in December of 2008, we may see a sluggish commodity market for a while.
After hearing Taleb's comments on the "Redundancy" thread I feel a little less alone that this has taken me by surprise. His strategy to short the S&P and go long a basket of precious metals may or may not be a money maker - the jury is still out at this point. He got the short part right but maybe not the long part.
Provocative question for you all to consider: What would you go long on if you wanted to short the S&P, but somehow knew that precious metals were going to hold steady or drift downward?
there are etf's that short s&p i believe.
i am skeptical of negatively correlated pair trades.
a wise man said "in a panic all correlations go to 1."
another term for the concept taleb is reaching for is "staying power".
i think he overstates the case for deleveraging.
i do not want the us to have zero debt.
us sovereign debt - the full us yield curve- is very important to the world economy.
what governments need to preserve is not treasure- let the citizens keep that.
the government needs to preserve borrowing capacity.
in crisis it can borrow from its citizens and then later repay the borrowing, preserving a level of public debt that the economy needs.
one thing makes me very nervous about gold generally.
where are the big gold stockpiles and where is the big production?
central banks and russia?
do you really want to bet on them to be rational?