Wednesday, December 12, 2007

Who takes the most drug Fed or the long only equity types?


I am sorry but I have to copy and paste this from the highly entertaining Fintag commentary:

Bernanke: Here, take some more drugs. They are on the house.
Dow: But this stuff isn't good enough. I want my money back.
Bernanke: It is all I have for another couple of months.
Dow: We need strong stuff. The kind that sets our hearts fluttering.
Bernanke: If I gave you more, the USD would collapse.
Dow: Stuff the dollar.
Bernanke: And Chinese inflation is reaching a decade high and we are importing it too.
Dow: I want to get to 14000 again. What is wrong with you?
Bernanke: I am doing the best I can to get 3M libor down but it won't shift.
Dow: Bring back Greenspan. Bring back Greenspan.

Yes, both Fed and market is on drugs, the action this morning in New York, merely shift the addiction from one type of drugs to another, some people would say they(The Fed) moved from heroin to methadone, but the real issue and what people tend to forget is that methadone ADDICTIVE as well!

Helping the bank industry by printing yet more money is going to do ZERO, ZILST, NIL, NOTHING to the overall climate - sure the banks should "theoretically" do better, but note the brackets around the T-word!

The massive up and down volatility is a clear indication of complete and utter lost ness on behalf of the market and to me, and I am prone to the negative analysis of the world that I do admit, its tell sign of far worse things to come.

Today, the day after Fed and this morning’s major ‘surprise’ liquidity injection, you know where the markets went?

Nowhere - we had a lot of noise, lots of loses I am sure, but at the end of day it is exactly where I found it this morning before opening the blinds to the beautiful ocean view in my Copenhagen office.... so in other words "much ado about nothing"......

If I was Bernanke, and not I am NOT a school teacher like him!, I would be extremely disappointed in the market reaction, at the time of writing S&P is lower than before the announcement 1492.00 vs. 1489 right now.

Stepping back - I have been "gone" from the blog for a number of reasons, the main being I have done a few air miles of travels in the last month or so - dominantly to the Middle East region. Being an expert on nothing and novice on most things in life, I was struck by the firmness of the development in Middle East and Israel.

The vibes I am getting is similar to my early days as a trader in London. Yes, there is challenges but we can do anything, we are here to change things, to move towards a better place - something I find utterly missing in the US and certainly in Europe, in both places everyone and anyone is busy maintaining status quos, and should you think I am rambling about politics you are wrong.

I am talking about markets, businesses, growth, demographics. Ignore Middle East and Asia going forward and you doomed to underperform.

There is decoupling in the world, but it is not US versus the rest of the world, it's US+ Europe versus the rest of the world, and this will have major implications for our investment strategies going into 2008.

My good colleague Mr. John Hardy made an interesting analysis for me; The expected inflation adjusted return from 1919 to now is: +23 excl. dividend (per 5 years) - BUT... when the past 5 years performance has been greater than 50% - then the expected return drops to ZERO, ZILST, NIL, NOTHING...

I call it mean reversion - yes, stock market have positive drift, no it will not always go up, up and up! In order for long term returns to regress we need sub-par return. Now most people think I am lining up for major negative on stocks, I am not, what I am trying to say is:

1. Mean reversion needs to be respected. I.e. Excess return will be followed by sub-par return.

2. 2008 will be about stock picking - just circling 5 stocks in the F.T and then buy them to keep for 12 month only to cash in minimum 25% is gone and done.

3. The world will see slowdown in growth created partly by the credit crisis and partly by laws of maths, which will makes 2007 numbers hard to beat in 2008.

4. There is "forces”, and no they are not evil, in play, i.e.; the Sovereign Wealth Funds, SWF. This is a theme I have talked and written about all year:

Note that EVERY SINGLE time the markets need saving, who steps in to help? SWF! Elementary Dr. Watson....

So bottom line on stocks for me;

Fed is doing everything they can to mess this up. Today action was interesting, I am reminded of smoke and mirror tricks performed by illusionists!

Fact is NO ONE believes a word of what Bernanke says and does! (Am I the only who have noticed that EVERY TIME Bernanke is in the limelight the market reaction is negative?)

There is SWF bid below these markets.... 15-25% below - and add to this that most asset allocators are desperate to increase the weights of EQUITY relative to FIXED INCOME and we have firm bid tone, but... market will still come down 25% from the top, but in today market volatility that’s merely 2-3 days of trading range!

Another note for 2008 - AGRICULTURE, AGRICULTURE - the prices keep rising - today’s confirmation that Fed will continue to print money, secures the asset revaluation of tangible assets aka commodities. Fed is creating so much inflation overall and food inflation specifically that one has to consider getting these guys a calculus for XMAS present!

The food stock is lowest in decades, the totally un-scientific approach to alternative energy means most farmers rather plant to meet demand on ethanol than to feed the world.

Nice going Mr. and Mrs. Politician around the world. Let's see: Saving the eco system or making sure big parts of the world can be fed what's more important?

And…..drum roll…. the winner is? The Eco system....

Al Gore's Nobel Price makes the Nobel Price as credible as Bernanke makes the Fed the same - (Hint: this is ironic in the highest factor possible!)

Note this ticker down: DBA! Buy it keep it.....forever.....

Foreign exchange? Who cares really? US dollar should be stronger right now, but Bernanke insists of trying to make life difficult with his DEVALUATION of everything American - soon the market may show him the REAL LIVE version of life outside the classrooms in Princeton’s, by giving him serious US Dollar crisis.

My take is simple; The US Dollar outlook right now is BINARY - either Fed, and the US administration stops pretending to have strong US dollar policy or they will have REAL DEVALUATION with Middle East and Asia depegging in quick successions.

In worst case I will be taken back to my early trading days in London during ERM crisis in 1992, but this time The Bank of England will not have staring role, but the Fed, ECB, UAE, Saudi Arabia, Singapore, China will.

The time zone for these currencies not good for my health so let’s hope the path of least resistance leads the FED to announce a FULL STOP on printing money and Bernanke returns to the classrooms in the Princeton area.

My predictions have zero value in making money, my views are merely personal notes, and I hope at least I can provoke some responds.

Nice life...

Steen Jakobsen, Copenhagen December 12, 2007

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