Let the games begin! There are NO RESET buttons on an economy!

Dear Investors,

This rally is now entering an extremely dangerous phase - the cyclial turning point July 5/7th is near, plus the believe in a magic reset button for the economy is failing....in other words: I am going net short and looking to built maximum short exposure between now and end of first week of July.

www.steenjakobsen.blogspot.com

Nice week-end,

Steen Jakobsen

2 is not equal to 3, not even for large values of 2. Grabel's Law

Dear Investor,

We are in that dangerous phase where most people either wants to buy because its "cheap" relative to where it was - like this article: 10 stocks ready to rebound: http://tinyurl.com/d7c4qu or where we give-up on the downside due to ad-hoc events as I will call Bernanke & Obama speaking.....

Bernanke thinks they got all the right tool already: http://tinyurl.com/bmdosq -

May I ask why haven't they use it yet then? Read the article and if it does not make you want to throw-upI do not what will - Stress test apperently is really an academic exercise as Mr. Bernanke does not see any of 19-20 banks being "failed" on this test - It is probably similar to a few of the other calls he has made, mistakenly, over the time like: We do not see any spill-over from the Sub-prime market http://tinyurl.com/dhujl8

Anyway it is too easy to pick on Bernanke, he is irrelevant as his own tool box is totally empty and with ZIRP his ability to do anything is toast.

In strategy land we are contemplating this whole scenario in the light of prior bear markets (the prime reason why most people "wants" to buy the market being "hope" of bear market rally:

Click on charts for larger versions

The conclusion as always remains - this is different, this is deeper and this is not yet over, unfortnately, there is clearly pain in the economies, but there is also considerable "hope" - and as you know I "preach" - hope belongs in church on Sundays...and if in doubt read about home sales here: http://www.breitbart.com/article.php?id=D96IRKGG0&show_article=1

Positions:

Short EURUSD, long USDMXN, short USDJPY (from today), short Gold, short Stoxx50, short S&P, long bunds....and still 75% in cash/fixed income. Very "geared" portfolio right now....let's see where it takes us.

Normal working pattern resumes from Monday, where I will start by doing Bloomberg interview in London on "Analyze that".......

Safe trading,

Steen

All you need in this life is ignorance and confidence; then success is sure. Mark Twain

This week-end I "wasted" some time reading Bill Gross' (I like the double meaning of Gross!) newest writing on why we should bail him and his investors out: http://tinyurl.com/cjqxya

I will have to warn you its waste of time, but its kind of interesting to see how a well paid, "well respected" investor like Mr. Pimco seems to think that the solution to all the problems in the world is for the US Government to buy asset he is long - there is no talk of the small matter of funding this small exercise- only then notion that spending money is good.

I guess its the financial equivalent of "The boy with the Golden trousers (http://tinyurl.com/dnhqz3).......

I find its perplexing that in a time where we need everyone to think positively about solutions then Wall Street and its derivatives continues to look for ways of lining their pockets with state subsidised money. For the record Gross is even intellectually wrong: In order to stop the rot in the financial markets we need to reduce debt to equity not increase Mr. Gross.....

Only by governments taking the ultimate loss' on their plans/packages will we get the economy flowing again.....but do not let facts disturb your arguments.

I am just back from longer business trip to: France, Switzerland, UK and Dubai. Different parts of the business cycle obviously but everywhere there is now clear indication that the word CRISIS is well established, in the UK so much that in the local bookstore, they now have whole sections titled: Dealing with the Financial Crisis..sign of the times I guess.

From Davos I get same reports; everyone is reporting how negative everyone is but they are all taking this as an indication the low is in ? I never really understood these types of arguments: Why get the supposely smartest people in the world to meet up and talk openly about the economic affairs only to dismiss them ?

Anyway I am with Soros (as always). Read this great FT piece please, pretty please: http://tinyurl.com/cyq7rr - explains a lot of things even for simple people like me.

David Karsbøl, my Chief Economist, have updated his excellent leading indicator model for World GDP Growth per Capita and the result is NOT GOOD.. it looks like we could see - 2.0% this year - first time in history- so in other words - be my guest fade the facts and the smart guys, I hope it works - but as always hope belongs in Church.


(Click on chart for bigger version)

Why there may not be "bubble" in yields

Everyone and his brother is subscribing to the concept that yields are too low, especially in government bonds. (http://tinyurl.com/calo3u)

....but it's all based on the concepts off:

1. Fiscal & Monetary policy works


2. Inflation

My firm believe remains that in times of rising unemployment levels everything becomes binary: its all ZERO and ONES.

If you lose your job you do not care where interest are going, what Bernanke thinks, What Obama does - No you want your job back and now!

Effectively right now we are in the path of the cycle where everything is ZERO's:

• Consumer confidence - 0


• Unemployment - 0


• Business margins -0


• Faith in banking system - 0


• Ability to maintain your job - 0


• Interest in Fed - 0


• Faith in Fed - 0

I think you get the picture - we got excess capacity in all business sectors, we got government busy printing & spending money not dealing with the problem, but getting reelected .......this is the true ingredients for deflation large -... meaning inflation will be ZERO at best minus 1% at worst(?).......

So now if monetary & fiscal policy have less tracktion plus DEFLATION....... a yield of 2.5% becomes 3.5% after inflation - I think it will compete very nicely with the return on the stock markets will considerable less volatility.

This picture is even confirmed technically. Below is the 10y notes yield in the US - it looks to me like we are in the 4th wave - looking for 300 bps roughtly before we make it into new lows for bonds... this also finally matches the theory of Q1 being excessive in issuance. I have been wrong before and carry no predictability but for now I will keep most of my money in fixed income as the alternative cost analysis (i.e being long stocks...) still costs me money.

(Click on chart for bigger version)

Strategy:

85% in cash/FI - short eurusd and eurjpy.... looking for break of 800-ish to sell S&P... still target for S&P @ 650-690.

Safe trading,

Steen

Aren't we forgeting the true meaning of Christmas? You know, the birth of Santa. Bart Simpson. Weekly Investment Meeting

The three driving PREMISES remains:

1. Cost of funding drives market and valuations
2. Price of liquidity new unknown (tax on money)
3. No prior analogy historically will work (because this is different, very different)

Conclusion

Zero visibility from here - main topics for 2009 being:

Negatives:

• Unemployment - we see >10% in both Europe and the US (see more under overall conclusion) - and losing your job makes people STOP ...stop living, stop buying, stop thinking... making it binary - while in the Ivory Tower of the banks they talk like its continues process - its not! You lose your job, you lose it...
• Low oil prices - the impact could be massive on Social tension, geopolitcal risks and earnings power for EMG countries and companies. No one seems willing and able to imagine <20>
• China growh makes it to zero - A story I have carried around since my Asia trip - seems banks now overtaking me..all of the sudden China not growing is the new Black, but even with growth at 3-5% China will be losing jobs, millions of jobs...and the 2009 will be real test for the THIRD WAY (you all know what happened to the 3rd way of Clinton, Merkel and Clinton)

Positives

• Psychology so negative it can work positively for the market. If there is 100.000 jobs right now in Bank of America and 30.000 needs to go - then 100.000 are afraid and living like they will lose their job, but when job cuts are done theoretically the 70.000 will start spending again. (The risk being 30.000 jobs become 50 or 60.000 later on)
• Q1 2009 circumstantial evidence would suggest there is "plenty of cash" on the sidelines, some of this should be deployed when we go into 2009?
• Fed/Treasury plans does work. Unrealistic but let us put it up there. Fed takes rates to zero, start engaging in Investment Grade, they borrow not 3 trillion but 10 trillion of the future earnings of America... and it works!!! Hurrah!!!

I have put our target out before but for now we remain with key predictions of:

1. S&P500 will see 500.00 in 2009
2. Yield in Europe & US will go to zero
3. China growth will be less than 3%
4. Tension in the EU will increase
5. Oil goes below 30.00 maybe even 20.00 US dollars
6. EUR/USD will see both 0.9500 and 1.4000 in 2009?
7. EMG underperforms everything else...
8. Credit spreads will continue to widen.....

Investment meeting conclusion: There is some "nervousness" ahead of the FOMC on the text and its implications. It seems unlikely Fed will deliver more clarity if only because they do not have it themselves, but there will the usual: We will do whatever it takes to restart economy....market looking for minimum 50 bps. Meeting could disappoint.

We are still see incoming data being extremely negative, earnings likewise, and there is growing recognition of our own main theme: Unemployment - when this hit the "Street" it could take us down again to new lows.

Allocation:

This week: Unchanged 90% in cash, 10% deployed in negative stock markets.

Last week: Move from 70% to 90% based on lack of direction and incoming policy response being confusing.

Economics: (David Karsbøl)

• Economy in freefall
• Tankan worst in 30 years
• CPI drop today expected to +1.5% from 3.4% biggest drop ever (?)
• Empire Manu. contracting
• Every single indicator at multi year low, some of the indicators can not go further down due to the way they are constructed!
• Our weekly model remain low - staying low
• The US and Sweden the two most decelerating economies

Main themes: Lack of credit & unemployment rising

Fixed Income:(Jesper Christiansen)

• Where the Government is involved "value is being created"--- i.e lower spreads, but everything else is still showing pain, lots of pain
• Next move from Fed would be to enter Investment Grade and High Yield -- Q1 2009?
• Plenty of value prepositions. On-and-off-the-run Treasury gives you guaranteed 50 bps!
• TIPS underperforming
• US ABS almost unchanged - EUR ABS wider spreads
• Danish mortgage spreads more or less unchanged with refinancing over
• NOK and SEK putting pressure on DKK (deval in 2009?)
• US Government fixed income outperform EU on quantative easing, Trichet talks down rate expectations, massive supply in EU Gov. FI in January
• Credit spread making high after high - Deutsche Bank impact?
• Investment grade starting to do better - FDIC bonds included?

OVERALL: Our mechanical model maintains serious overweight, so do we: (check bottom part of this blog for models allocations) http://saxomacro.blogspot.com/2008/12/market-is-long-hope-hope-and-hopethe.html

Technical Input: (John Hardy - copy version available here: http://drop.io/itvld6d# password: saxobank

Stoxx50 and S&P: Waiting to Bearish stance. Failure to maintain upside break disappointing.

VIX: We need > 60% for bearish sentiment go gain tracktion.

10 yr US: Buy option for downside (price risk) ?

Yield curve in EU and US huge different. Europe is steepning while US is flattening.

EUR looks stretched.

Equity

• Market is historically fairyl priced, but based on forward earnings expensive
• Lack of credit remains key issue.
• Unemployment will hit earnings and consumptions.
• Commodity cycle repricing from recession to depression a negative?
• Low low physcology could lift the market.

Commodities

• Contango begs for being crude for delivery but no one got balance sheet to do so.
• Gold, Silver at breaking point failure would lead to big sell of.

OVERALL

End of the year, we are in wait-and-see mode, however almost as per usual we remain extremely negative on the outlook - believing there have not been a proper pricing of the impact on ACTUAL UNEMPLOYMENT ABOVE 10.0% into stock market and valuations of housing stocks.

There simply is not anything worse the losing your job, except death, and for some people losing their job would be equivalent of that!

When people lose their job everything stops for them. They do not care if stock market goes or down, that Wal-Mart has discount of 50%, that Bernanke talks positively, that the Government wants to help them, they need to be back at work that's it.........

Obama gives us(US) hope, but is it enough, is it too late? I think so - I would love to the positive guy calling for higher markets, lower unemployment, but I am paid to be sceptical, paid to deliver real return (unlike Madoff's)....so for now I will be concerned, more concerned than ever before, but then again, I am merely a poor farmer boy from Denmark.

Safe trading,

Steen

We should not let our fears hold us back from pursuing our hopes - JF Kennedy

Back in the land of 80% tax and winter depressions..........This does not make sense! I am a simple man by all accounts and I need things to make some kind of sense for me to enter into it, maybe that's why I never become filthy rich or make 200% returns, but somewhere deep in me I need transperency and I am none from the markets or the policy makers:

This morning starts with the Fed wanting to issue bonds- leave aside the fact Fed not authorized to do so, which havent stop them from doing things which is not kosher before, abd focus on the accountability: Who will oversee this? Who is controlling Bernanke ?

Bernanke is doing everything he wants - he feels like having a free option and he is using it - poorly........

Read Karl Denninger, Market tickers view: http://tinyurl.com/5dq93q

Market is on a bullish move and more and more people are joining the ranks of: End of year / Q1 rally ....... Be my guest. I need more than a few days of low volume trading to change my mind.....lets go through a few risk measurements:

1. 3 month T-bill trades below 0.00% -- wow, that's positive news....
2. VIX is @ 60% - wow, that's low...
3. Itrax > 1000 -- wow, that's surprisingly low...
4. Freight rates --- all of them floored-- wow, that's good news, then they can only go up...
5. Earnings is being down-graded daily - wow, cool, meaning it will go up soon....

I could go on, but clearly all of above is "good" news and I should be buying everything in sight......

Seriously the world is not analog as everyone in the US told me - it's binary: It's either Zero or 1... 1 is the condition in which fiscal policy, monetary policy, tax rebates, central bank BS works and ZERO is a situation where everyone is more concerned about losing their job than anything else....

1. Unemployment --- (0,1) = 0 --- No one outside Wall Street cares about the stock market - they want to know if they got a job or not. Everything else is irrelevant.
2. Mortgage rates -- (0,1) = 0 --- Bernanke/Paulson the Dodgy Duo, DD, is busy helping out the banks - no real help to mortgages holders.... AND even with a perfect credit score your JUMBO rate is 10.0%!
3. Pension return -- (0,1) = 0--- No one ever thought stock market would not go up forever!!!.... and now pretty much ALL public and private pensions are not only underfunded by they are also losing so much that many people needs to extend their retirement age by 2-5 years... nice job administrators..
4. Refinancing --- (0,1) =0 --- 22% of corporate debt in the US is bank debt (vs 58% for Europe)...meaning 22% of all debt needs to refinanced inside one year - I wish everyone a Merry Christmas on talking to their bank managers on extensions(maybe they can get hair extension instead?)
5. Balance sheets and real money ability to enter market --- (0,1) = 0 --- I went looking for ONE, just one bank or fund manager, willing and able to arbitrage some of the "free money" away in the fixed income market - I found none -- do you know any? This indicates that despite the rumors of big cash on the sidelines - no one willing to use it...
6. Hope (0,1) = 1 Major hopes all around - let's hope it works going to Church praying for a better day tomorrow.

Call me bitter, call me negative, call me anything but untill I understand EXACTLY how this Ponzi Scheme of printing money and moving loss' from private to public sector works out - or give me EXIT STRATEGY for the DD.....then I will be most positive guy in the world.....I am getting nervous that my S&P500 in 500 next year is too conservative... but as fortunately for you and the Hopers... I have ZERO PREDICTIVE POWERS.......

Strategy

We moved to 90% cash from 75% in the Investment Meeting yesterday - too much hope out there and too little analysis of facts..... the 10% is employed on negative markets.. we have been scaling short in S&P and Stoxx50 for the last 5% ......

It is soon Christmas... no need to risk the gains for this year.....

Safe trading,

Steen

Panic is near....

Had series of meeting in New York today and some things has become absolutely clear to me:

1. The incoming Obama will do ANYTHING-- including risking inflation and devaluation of US Dollar to restart economy.....EVERYTHING GOES - and Fed and Treasury agrees on this outlook even holding back their dire forecasts (They believe in +9 % unemployment)

2. The Fed, Treasury policy is driven by Entourage like - self-happy people who has no reality checks - It reminds me of Michael Jackson and his entourage Geithner being MJ....

3. The innner circle.. the entourage has been told to CUT ALL DERIVATIVE RISK before end of Q1 2009 or else.. they will lose their banking license... in other words.. there is going to be some SERIOUS UNWINDING in derivatives, which most likely will drive MARGIN ON FUTURES through the roof (the only leverage vehicle left when O's Dirigisme has left the station )...

4. Finally, there is NO balance sheet capacity left to do deals - in Fixed Incomeland there are so many arbitrage opportunities.. on/off the run 5/10s ... calendar spreads.. but NO ONE..and I mean no one willing to arbitrage it-- indicating to me.. there is massive downside risk and with some important calendar dates coming up.. 8/10 dec.. Jan 20/21..I am unfortunately more than ever convinced more trouble is coming......

More tomorrow for full report.... Over-and-out from New York,

Steen

Service in New York ? You kidding me?

Yes, it would have been a joke less than three month ago - but seems the crisis bites here - yesterday arriving in New York I had my taxi driver volentarily waiting for me while I checked in at the hotel before going to first meeting !!!!

I lived in New York for more than three years in late 1990s and never got anything but abuse day-in-day out!

Everything is 40/50% off on December 1st! Talk about crisis - and on top of that plenty of buy three pay for two deals ..... I am not the big shopper but this is close to bargain values.....

On the other hand something never change:I was "listening" to three New Yorkers discuss the world affairs and its striking how simple and full of themselves they are - Obama is "accepted" but only due to PC - political correctness - there is terrible jokes and one liners which not even I will commit to papers flying around - I must say all of the sudden I remember why I both hate and love New York.

It is great place to visit and the Americans are at large the nicest people but in a very strange way New Yorkers are the most "narrowminded" people I meet during my travels around the world. They make George from Seinfeld sound and look like a true globetrotter.....:

http://www.youtube.com/watch?v=1gjxnxKmaVQ

There is pain here, lots of pain, no one paying school fees, the Wall Street Trophy Wifes are unhappy - there is even rumors they are marrying for looks now! ----imaging sinking so low!

Paulson & Bernanke, aka The Muppet Show, goes on TV yesterday and the market sinks, and I mean sinks as they open their mouths - dealing rooms are "begging" and I mean "begging" them to shut up .........another new low for politicians and policy makers ? Absolutely! Please watch this old video:

http://www.youtube.com/watch?v=heBxMzSAuKY&feature=related

Meanwhile in Fixed Income Land - there is massive fight in on- and off the run 10 year notes, the market makers sitting tight(long the papers) while the hedge funds and bond funds sits shorts the deliverable - there is sooooo much cheap, risk free arbritrage available - but NO ONE and I mean no one to do the deals due to lack of balance sheet - there is so big deals to be had that it screams to me that this market is far worse shape than anyone even willing to earn up to...... Fixed income could catapult itself this week - yes even after 6 figures move yesterday.....watch as we move into futures roll.....

Also redemptions continues:

//www.efinancialnews.com/usedition/specialfeatures/content/3352639983/

Sitting next to senior executive in Pharma on the plane over - he was "desperate" in a positive way - saying there is NO WAY in Hell he could raise new money, but at the same time he was shown better deals than ever in his history as executive, so much so that he had hired senior banker to do his M & A - and that's fortunately the bright light here:

The well managed companies are starting to be shown the good deals - at least outside banking - meanwhile back in banking-land I keep getting pummeled for stating the obvious - banks should and will fail with or without protections from Governments - this is merely 6th inning (there are 9 innings in Baseball) - as my fellow traveler from pharma stated : I am a doctor I believe in evolution, the stronger must survive!

http://online.wsj.com/article/SB122818833059071519.html?mod=googlenews_wsj

Strategy:

Still @ 75% cash/short-term fixed income, and applying the remaining 25% into NEGATIVE market views: short eurchf, short Stoxx50, long Stoxx50 puts, short EURUSD(still), short NZD in options, still down-side in Gold.......

We remain with our S&P500 in 500 and all Westerns world interest rates in ZERO....this is the 5th wave starting - the worst one......I have been on the road extensively last one month and there is only one uniform message: This stinks ........

Safe trading,

Steen

Notes on Wednesday...

First the important stuff: Happy Thanksgiving to all my friends in the U.S - I wish I was in the US this week........

Friend of mine sent me these clips with our old friend Jim Rogers - he talks common sense, probably does not make him a lot of friends, but his thought process is crystal clear. Enjoy it: http://tinyurl.com/65r8wd

I must say I am more tired than at anytime this year - hopefully it is the travelling but the market goes on my nerves.

The policians keeps doing the same mistakes, the media keeps drumming the same drum, and it is all going in a big circle ..and leading us nowhere.

I am on the record saying I personally felt Obama at least would mean change - however it seems I was wrong, again, all his appointments smell of establisment and his policy indications feels like protectionisme and Dirigisme... in other words ..I will have to keep my negative outlook something I have come to fear as being "realistic" carries too much pain as everyone rather get the free option than face reality.

Talking inability to face reality looks like Bernanke is "dead in the water" post 2010 - maybe Princeton will take him back after all ? http://tinyurl.com/6427og

Maybe what's really bugging me is the fact I have spent far too little time on the market and thinking about them..... something I will change from next week.... but doing some small research this evening some things seems obvious to me:

S&P - consolidation and hope the main drivers - we had "patriotic call higher" into Thanksgiving (Am I the only noticing markets tends to go up on National days?) ..... 900/920 begs for perfect 4th wave correction before the 5th final wave down.... in other words.. neutral into 900/920.. watch if momemtum can carry us above if not... then full short......

Forward earnings still major league unclear as Ticker Sense indicates below (Thank you Jesper):
http://tinyurl.com/5cpol4

US dollar (EURUSD)- we may have seen the high in place for this 4th correction - inflation being called lower in Europe and Stark from the ECB even talked some common sense this morning......but Europe is on the verge of serious slow-down which will take all Euro-rates to ZERO...and fast....

Market is also dealing with Investment Bank year-end - or rather state owned Investment banks - sometimes in the past this had an effects - but for now US dollar got some fundamental potentials from waning Current Account Deficit and deleveraging of balance sheets - both of which makes short EURUSD the only real worthwhile deal to carry into month end.

Fixed Income- If I ever was in doubt I should listen my asset allocation model guys now is the wake-up call - despite US Yield being hysterically low - I still do not want to lend the US Government ..below 4 pct in 10 years - there simply is not any alternatives into year-end - more of the same - low after low in yields as "quantative easing" happens.....

Finally, we are, or rather my excellent team doing some research on our Outragous Prediction (into todays lingo: Our Black Swans)... without giving away the positions I note the calls themes are:

1. Hardly any US calls ... 1 of 10 - with Chinese calls having 3-4 of 10 - this to me indicates the clear paradigm shift - when looking into 2009 ... my analysts not really that concerned/bothered with the US - the policy lead will come from what happens and get done in Asia/China.

2. Dirigisme - Anywhere we look there is more State/public sector intervention in the markets - from Sarkozy to Obama- they all embrace the "hidden hand" of Keysianisme ---this time undercover as the 3rd way....and named: For the sake of greater goods (It will die as much as Tony Blair failed to find the 3rd way..) - Fiscal expansion will follow.

3. Social/political unrest - if commodities continues to fall there could be both political tension in some regions but also social unrest.... The impact too harsh to imagine, but in a Black Swane exercise this "mental mapping" could safe the investors a lot of money...

4. More of the same-- -as much as they want to find some sunshine - it quickly becomes as grey as a summer day in London...

On this positive note - I wish you safe trading and nice week-end

Steen

Weekly Investment meeting...

Finally back to order in the small investment world of Saxo Bank - we had long meeting where we touched on most of the intervention for this past week... - Is it not ironic that 20 bln. here and there has become something "normal" in this market?

I find it terrible and I must say I tip my hat to the brave people seeing this Citibank bail-out as something positive.

Looking at the lead into this week-end it seems Citi's DTA, or more precisely their 'Deferred Tax Asset' was the key issue - being more than 19% (vs. maximum ceiling of 10% of Tier 1 capital)....and 80% of all their tangible assets. I am not tax or accountant specialist but from what I read and being told Citi's Tier 1 capital was mostly........fantasy.... DTA can only be used as capital if expected to be used inside one year - Citi is hardly going to start making money inside this year, next, or even the next five years!

More troublesome for me being, I doubt C is alone using this arcane way of creating Tier 1 capital.

Hence despite being happy for my friends at Citi being saved(for now). I remain extremely bearish on financial stocks especially considering the new Mr. Dirigisme of America: Incoming Treasury Secretary Geithner, seems more than willing to "force" banks to comply with his and his Masters agenda. In other words: Bernanke is bad, Greenspan the worst, but the new Mr. G. looks, sounds and smells a lot like the old guys.

Having learned his craft with Kissinger, Greenspan and Summers it is hardly a surprise he does not represent change but rather mirrors his Master left-leaning interventionist agenda, which I understand from US electorate point of view, but one I can not recommend, not that anyone cares about my opinion in these "small matters". Mind you I will be in the US next week to take a more close look on things in New York and Alabama.

The Investment Committee remained at 75% cash- We clearly see some signs of oversold and crisis fatique, but the with volatility of VIX bigger than 80% the market has simply become one big lottery ticket, where you need 80 pct luck and 20 pct guts rather than models or even rational behavior.

The three driving premises for our research remains:

1. Cost of funding drives market and valuations
2. Price of liquidity new unknown (tax on money)
3. No prior analogy historically will work (because this is different, very different)
   

We note the markets are extremely oversold but we also find it hard to find ANY economic reasoning for turning positive or even neutral on the markets.

The 25% invested is being changed around slightly - we have abandon our short Gold, and we recognize our long TIPS not exactly on the roll, on the other hand our long Government Fixed Income and cash still makes our portfolio massively outperform our alternative models - at least for now.

We reached our minimum target of 765.00 and we are in the process of looking for new targets -We stick with a simple S&P500 in 500 -

Looking into 2009 we are preparing ourselves for furher deleveraging - it seems to us the world, slowly, very slowly is figuring out why this credit creation not only was excessive but also directly damaging for long-term growth and behaviour.

We see credit spreads and mortgage spreads widen further into month-end and certainly into year-end - this will become the negative gravity of the markets, while the oversoldness will be the postive force.

Strategy:

We are almost back to neutral:

FX: short NZD (1 month option put) , small short EURUSD from here (1.2892) - we are looking to buy EURDKK again as we do not see Denmark escaping the Norway/Sweden turmoil in environment of widening spreads across all fixed income classes.

EQ: We sold into the close today @ 851.00 ( 1/2 ATR stop)... long STOXX50 puts...

COM: We were long Gold puts now worthless...

We will watch the market for opportunistic moves, but we are in game of protecting our relative ok year rather than being aggressive - as said, this market is for gamblers not investors or even traders.

Be safe and must Dirigisme go away,

Steen

Dear Reader, not much time, but Ambrose Pritchard, the highest "ranked" economic journalists in our universe writes it better than me... READ IT or you are lost...

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3141428/Germany-takes-hot-seat-as-Europe-falls-into-the-abyss.html

From internal note:

Read this or you could be lost......

This is an excellent summary of the risk we face - note the very dire words chosen by experienced in-the-know journalists -

I believe the next few days is similar to the extreme volatility we saw before GBP devalued in 1992.... It could also, unfortunately, be similar to 1987

We in dying moment of a 10 trl. US dollar balance exercise which is costing many banks there livelihood, and we will see MAJOR RATE CUTS this week in our opinion......Germany, as per usual, is so behind the ball, with the loser Trichet, that it could cost Europe SEVERE RECESSION.......

We will keep u posted all day - remember morning meeting 845...on trading floor..
Steen

Germany takes hot seat as Europe falls into the abyss
We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.
By Ambrose Evans-Pritchard
Last Updated: 11:26PM BST 05 Oct 2009
Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.
Germany is now in the hot seat. The collapse of a rescue deal for Hypo Real Estate on Saturday threatens a €400bn (£311bn) bankruptcy that nearly matches the Lehman Brothers debacle for sheer scale.
Chancellor Angela Merkel has been forced to pull her head out of the sand, guaranteeing all German savings, a day after she rebuked Ireland for doing much the same thing. Reality intrudes.
During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis.
Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.
The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.
As the unflappable Warren Buffett puts it, the credit freeze is "sucking blood" out of the economy. "In my adult lifetime, I don't think I've ever seen people as fearful," he said.
We are fast approaching the point of no return. The only way out of this calamitous descent is "shock and awe" on a global scale, and even that may not be enough.
Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation.
The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas.
The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.
It could have offered "cover" to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave.
Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage.
The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.
Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible.
Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.
In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse.
Her comments echo word for word the "we're alright Jack" attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot. Thankfully, this EU stupidity is at last drawing serious criticism.
"We have to make sure Europe takes its responsibilities, like the US:
action must be taken quickly and in a concerted manner," said IMF chief Dominique Strauss-Kahn.
As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.
"The US government has a technology, called a printing press," said Fed chief Ben Bernanke in November 2002. (His helicopter speech).
In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards.
As Bernanke put it, the Fed can "expand the menu of assets that it buys."
There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action.
Japan entered its Lost Decade as the world's top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.
But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets "delevers" with a vengeance.
This is a "short squeeze" on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.
The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.
The Fed can now hope to pursue monetary stimulus "a l'outrance"
without being slapped down by the currency, debt, and commodity markets. Take comfort where you can.

A little learning is a dangerous thing but a lot of ignorance is just as bad.

A little learning is a dangerous thing but a lot of ignorance is just as bad.
Bob Edwards

I have decided to explain the crisis and why the plan is useless once and for all to myself - it is really an economy of scale issue as it is the question I get the most (Yes, I know you are wondering why people even bother to ask me anything being an European Elitist Arrogant High-horse something as a "friendly anonymous visitor to my site called me!)....these days....but let me try:

The background is this:

Imagine you have a bank - for arguments sake let us call it : Banque Paulson & Bernanke - their corporate motto's is: "We create moral hazards better than anyone else -faster".....

This bank BP&P got an asset side which really mimics a traditonal portfolio:

A little stock, a little government bonds(10%), a little (sorry a lot) of mortgages(30%), a little lending(40%), a little Real Estate(20%) and other on-and-off balancesheet vehicles...

- It is - obviously- all funded day by day in the money market.

The portfolio is leveraged 10 times - which happens to be the average leverage in commercial banks.

Now - the market (portfolio) is down 15% - meaning you are insolvent by 50% -- i.e 10 x 15% = 150% minus your capital = -50% - but your "bank" --- allows you to keep the portfolio because tomorrow they "hope" the market will be better.....(The Church going traders I call them..)

Then one day the Congress and its two parties called We-got-zero-clue and We-got-even-less-clue gets call from The White House - some geezer who doesn't know what an CDO is shouts: "Fire, Fire - pants on fire ......." Please send in the Mortgage Firebrigade..... fast!

Congress goes into panic and decides they will buy ALL MORTGAGES and ALL MORTGAGE INSTITUTIONS in the country.

Fine.....but hang on... lets go through this...

If the GOVERNMENT buys only the mortgage loss from my portfolio what happens next?

Well if we deal a market-prices the mortgage portfolio is off my book @ 20 cents in the dollar... so my cash goes up but the loss remains in place plus taking 30% of loss off still leaves me short a few bucks...but even if they bail-out out without loss' on my mortgages I am still short: (100 USD - 30% in mortgages equals 30 USD x 10 leverage = 300 USD x 15% loss = equals 45 USD loss....so I am getting 45 USD back - but I am down 50 USD net - leaving me 5 US dollars short (Yes, this is constructed portfolio but.. point is still the same....)

- and IF... the others parts of the portfolio continues to fall --- BP&B is still even more insolvent.

Why?

Because you are NOT dealing with the real issues:

1. Funding is done day by day - with massive mismatch in time - Bad business model is environment of scarce credit creation.
2. Leverage - in a perfect storm EVERYTHING becomes correlated. .meaning falling...
3. Mortgages - there are 4.5 mio. unsold homes, so whether government or private sector owns them does not matter - its all math.....
4. Solvency - portfolio of BP&B still insolvent - why should anyone deal with them?
5. Transperency - how do I know BP&B is honest?

The right solution would be to let everyone go bankrupt - but if you want to spend the tax payers money the government needs to think like a Private Equity Fund - buy on the bid, restructure balance sheet,give new management upside in equity, sack the old management, and buy equity upside leverage.

There was God forbid an excellent Swedish model for this before - Imagine that recommending anything Swedish is a first for me......but DO realise this is PURE SOCIALDEMOCRATIC policy and hence I can not support it, but it did work before....

So......if the deal adresss real issues it will work, but I doubt BP&B will survive longer than a few quarters more, and neither should they....

Strategy:

Calling it a strategy is an insult to the word itself, but.....

85% cash
Long USD vs EUR as we broke uptrend since 2000 - meaning lower EURUSD
Small short T-bonds
Small long upside stocks...

Nice week-end

Steen Jakobsen

The opposite of talking isn't listening. The opposite of talking is waiting.

The opposite of talking isn't listening. The opposite of talking is waiting.
Fran Lebowitz (1950 .)

So... what did I do? I talked ;-) to my friends at Bloomberg - I put this link in as todays text as it pretty much states what I think right now (I am really sorry you have to both listen and see me)...

http://www.truveo.com/Investment-Strategy-part-2/id/3216682401

Change is the law of life. And those who look only to the past or present are certain to miss the future - John F. Kennedy

When I was younger and more mobile I used to love the US - when you hit the ground in New York or any other place in the US you felt the vibe, the tempo and expectations you could be anything with your life!

Fast forward 20 years and I get the same feeling when I arrive in Singapore - although this time obviously I'm old and none the wiser. While just back from the US there is mood of surrender and for good reasons.

During the last 20 years the US got addicted to capital - and Asia addicted to creating jobs. The recent circuit breaker: lack of credit - has not only slowed down the globalisation but also created situation where major decisions needs to be taken.

The Asian decoupling theory is a life and well. I attended panel discussion this week-end, why on earth they wanted my opinion I still don't know, but the interesting part of the session was the focus and questions towards: Real Estate!

Why is it real estate is the 21st century version of the gold diggers of the Wild, Wild, West? My esteemed "colleagues" from Singapore's highest respected banks and brokers seriously suggested REITs in Singapore would be an excellent investment, and even Telecom should do well they argued on the premise of "valuation" - I on the other hand only had one real thing to offer the desperate investors: stop listening to idiots like us, as we have ZERO predictive powers, and at best we probably distort your investment process.

My point here being; if metrics like P/E and valuations are used to argue for stocks being a buy, then by virtue of mathematics if the prices falls another 10 pct then they should be even cheaper and an even better buy? Elementary Dr. Watson, although its probably too simple for the brokers to see.....

The credit cake is smaller and more expensive - this keep being my one remaining premises for the balance of 2008 and 1H 2009 the implications is to be seen everywhere:

• The bank continues their game of the chicken and the egg. MER writes of @ 20 cents in the US - clearly other banks needs to do the same? ==> raising more capital - diluting their already depleted investors even more.......
• In the Middle East meanwhile the banks can't lend out enough money, as they don't have the deposit to do so - this will turn out to be good luck for them, as I will quote Grouch Marx: I don't want to be part of any club who wants me as a member - Not having enough deposits should in REAL WORLD stop people from lending out money ......but I guess I am old fashioned?

Credit standards been tighten to standards which means the banks just as well could put out sign: WE HAVE NO MONEY!


Source: Wall Street Journal (click on chart to get bigger version)

So now we got: Weak banks at best, less credit, and high energy prices. The market is right now busy selling crude towards the 100 US dollars.

The Investments Banks economics departments (Always the Johnny-come-late)are fighting to have lowest predicted rates for EURUSD, GOLD, Crude and Commodities -- Is it not impressive how they go from 1000 pct bullish to 2000 pct bearish in the space a month?

Maybe they should look at some historic evidence: In commodity bull markets gold and other commodities tends to sell of both 30%,40% and even 50% before reversing - its the nature of commodities - boom-and-bust.

The fact remains: There has been 50 years of underinvestment in mining, and upstream/downstream production. The US has not built a refinery since the 1970s, Europe not since 1980s, so good luck to the crude bears - IF, and that's a big if, you can get the oil out of the ground, there is not enough capacity to make into petrol et al, but don't let facts get in your way....

The down move in commodities does tell us one significant thing though: It confirms the "world" finally has accepted we are slowing down - and in some places significantly.......I put it like this:


Click on chart to get bigger version

This is Alpe Huez - The US is in the lead close to the peak - Europe on the other hand is at steepest part of the mountain - where things are slow and tough, meanwhile the Middle East and Asia is still on the flat part leading into the mountain, but they are AT the mountain now - that's part one.

Part two goes like this: although the US is in the lead their rider is: obese and driving a old 1970s bike, and the chain is about to fall off- the European rider is: OLD, very old, driving a 1980s bike, although he is VERY ELEGANT, meanwhile the Middle East rider is young and aggressive, his bike is made of gold and he is slightly on the heavy side... the Asian rider is light, drives a state of the art bike, and is dressed somewhat in a style between 1970s disco and retro....(by now I am pretty sure I have pissed off pretty much ALL nationalities and religions, but do stay with me...)....

The point being, the US may be closest to the top, but with no breaks the downhill will be an issue, furthermore the European rider will probably run out of energy before the goal line, while both the Middle East and Asian riders will catch up to the two in front - The winner? Most likely being Asia with a close 2nd to the Middle East.

In a world where credit is scarce - currencies and countries with high savings, surplus on current accounts, high birthrate, intellectual capital (as in educational system), and capital incentive, and political stability will outperform the other: hence in my world: SGD, CHF, NOK, SEK and JPY the favourite currencies.

My favourite fixed income market being the ones with some inflation fighting credentials.... Japan (by virtue of deflation), Switzerland and to some extent core Europe........

The favourite themes will be ones which caters for the micro changes of the world:

• Falling birthrates in Europe and Japan (in 20 years more than 30% of the Japanese population will be 70 or older!)
• Energy component now 50% of production cost... i.e: production will become more local - China will face stiff competition from energy costs)
• Water (both Singapore and China extremely short water)
• Savings - positive cash-flow
• Supply side of mining
• Pharma - with obesity and starving numbers both rising - never been bigger need for pharma industry to produce pills..

In closing, again, crisis is good, very good - it reallocates capital to higher marginal return - if so we will enjoy continued growth in the world - but if Congress, Trichet, Bernanke, Paulson, ECB, BOE, and all the Western worlds politicians continue to ignore fact - we are in for worst crisis in my lifetime - however the path of least resistance indicates to me that we will see:

• 2-5 years of sub-par return in equity indices (but not in individual selective stocks)
• No inflation
• Fed will cut ...and not hike the next 2-3 years
• ECB will cut before year is over
• EURUSD will go to 1.45 max - before hitting 1.7000
• Crude could trade 100- 130 balance of year but will take out new highs in 2009
• If buying financial assets in banks buy their bonds not their stocks
• Fixed income will do fine - oil spikes are deflationary history tells us......
• Overweight selective Asia, but recognise the mountain part is coming
• Average yourself into positions, volatility is dead certain to increase...

Strategy

We are slowly building portfolio to reflect the above - finally thank you to all the people I met in Singapore - it was a long and hard week but it proved once again that Asian Tiger is roaring and it's now taking is rightfull place in the world in terms of resources, capital markets and the future.

Best wishes,

Steen Jakobsen

Liar Liar

Sorry, sorry friends!

Been travelling trading like a madman, so have not been able to "justify" my views on-line, hope to be back into it this week, so here is my 10 min QUICK-AND-DIRTY views:

Foreign Exchange:

Think market is getting ready to "attack" all-time high, based on a number of things but mainly the mere fact that ECB will hike and FED will not in 100 years risk anything by hiking.

The retractment of former hawkish comments from Fed in Was. Post yesterday and FT/WSJ today seems to confirm this.

We are long, again, EURUSD, EURGBP (from today on weaker than expected BOE outlook).....long GBP p JPY c, dlt 10 - from 2 figures higher - think this one could move to 180 over next 2 month - as market comes back down to earth.....

Fixed Income

Bought 2- and 10 years this morning as we had the above "leaks" but also due to divergence in 10 y contract. Market is SERIOUSLY ahead of themselves on yields.......

Mean reversion in 10 y notes indicate 4.30% as hard roof... 3.70% the next target....

Still LOVE individual corporate bonds - pharma, natural resources...

I note several leverage mortgage fund is under severe pressure both here in Scandi-land but also across Europe. Fixed income funds getting KILLED.........Yield curve inverting takes the European banks into serious earnings crisis......

COMMODITIES

Looking to see if 132.50 ish holds today in August contract, if so, I am going long into 145-155 range... next..

Iowa floated - major issue for production in the US - NBC News got segment EVERY day this week how to SAVE money on groceries! If that is NOT telling I do not know what is!

DBA (ETF still excellent play)

EQUITY

Been massively short banks, mainly LEH, DBK and BARC - closed all of them, waiting for GS results today, focus now on European banks for me - the inverted yield curve is slow and awfull grind for EURO banks - funding is an issue again - watch how SWAP rates expanding..

Short small STOXX 50 - took of large DAX put play (with profit for once!) - looks to like bifurcation from here:

1. Rebound, based on short-term oversoldness - reaction 2-3% up before final 5th leg down...

2. Directly lower - it seems, even on days Crude tanks, the market is extremely heavy ........

I am 50/50 on those two - and awaiting clarification - 1367/72 close will indicate scenario 1 in play....

Net long individual stocks: pharma, Water, resources, and steel - hedge with short S&P.....

If first scenario plays.. merely taking hedge of......

OVERALL:

This is not time for momentum in stock market -deflation history returns are: -3.0% y-o-y, so make damn sure you like your stocks before commiting.

Final notes: Like EURGBP higher to new high - like JPY exposure. Playing FI from mean reversion side . Open on equity awaiting "catalyst" for 5th and final clean-out of downside - possible below March low...on LEH or similar story...

"Announced hikes" being taken back from central banks - politicians in P.I.GS countries standing on the ready to fight Trichet!

I am writing extensive report on my US visist - let me prewarn you its not NICE reading :-)

Good luck,

Steen

when in doubt......go on holiday?

My colleague David Karsbøl have developped a model based on the supposed short-term model of The US Treasury mentioned in Paul O'Neills book, where he states based on only weekly data alone The Treasury's growth model exceeded Wall Streets economist forecast accuracy (Mind you that's an easy goal to set yourself!), but the point being this:

David models continues its free fall indicating we are now moving into solid negative growth and consumer demand.

The later is best seen through the spectrum of credit cards - The US consumer has always been willing to flaunt the plastic even when they have negative equity, but in the land of designer credit cards things are turning to the worse:

Moody's Investor service reports that the charge off rate, which measures defaults as percentage of loans outstanding - rose 6.05% in in March, from 4.64% a year earlier.

The charge off rate peaked above 7% in the 1991 and 2001 recession.

The underlying trend indication is for worst to come as:

1. The repayment amount are decreasing. The US consumer is simply paying less into the bills, obviously indicating either consumption preference or lack of hard dollars...

2. The amount of people skipping 3rd and 4th payment also on the rise.....again not exactly the best sign..

The thing to understand, and this is important.... The financial "melt-down" in banking has been avoided (for now) by Bernanke and his Merry Men's circling of the wagons, but the next phase is one of considerable weakning global demand, the tail risk being we will revert back into credit crisis, as personable income collapse, margin erodes, corporate defaults starts to rise, and banks continues to hoard capital.

Trichet, a man who at long last is gaining some respect from me, hit it spot on yesterday: "The worst could be to come, and an ongoing, very significant market correction is in process"...

My respect for Trichet is rising(note: rising - not gained!) as maintaining unchanged ECB rates does the job for now - it gives him some credibility vis-a-vis inflation, and he realise, correctly, cutting rates not doing anything to real economy as the banks are in trouble.

He also, between the lines with his insight into the European banking system, indicates the European banks needs to earn up to the credit issue and the incoming freight train called potential stagflation.

The European banks are heavily subsidised through the liquidity provision in place, with Spanish banks issuing mortgage backed paper at 101 with ECB and seeing the actual price in the market trading @ 90 bid at best - talk about indirect support.

In terms of the temperature of the market, the bullish consensus hitting new highs, and CNBC commentators, their guests, can not stop talking the market higher - I have been neutral but I am slightly concerned about the market from here;

1405-10 in the S&P was supposed to get us flying, now in the 4th week we trade 1395-1435 and

VIX volatility is coming off - we are due for volatility spike and a range break-out.

I feel downside is the more likely as Q1 earnings was massive disappoint overall.

Stripped for oil companies, the 441 companies who reported so far saw profit tank 30.2% this quarter and 26% in the last.

Energy companies now make up 50% of all profit in the S&P!

Not exactly reason for joy - the fact is the market became oversold in January and March, and now its overbought, the next bigger directional play will be based on how the real economy tracks from here - my take as described above being a path of grinding slower growth, something a very smart friend of mine calls: growth recession indicating negative quarter by quarter growth but probably not outright recession numbers.

It should also be noted Q1 from growth perspective saw one-off factors which will be hard to copy in Q2 - Germany and Europe saw unusually high investments rates- probably covering the fact that most European companies faced bottle-necks in production, input materials and labor.

While in the US the massive inventory build was hardly a choice situation for US companies...but as always I am merely putting odds on this not making predictions.

Strategy

Moving away from Beta long, to net short exposure on market as of today; short banks-, big europeans industrials, and net indices - all on valuation and lack of technical upside break.

Still like credit overall in high grade names.....

EMG- extremely overpriced - looking to sell.......

FX - still firmly believing in new cyclical final low for US dollar- pricing in 100 bps hikes in the US a joke right in front of prolonged slow-down..........Long CAD, AUD, EUR vs. US dollar.

FI - mean reversion play long Bunds @ 113.38 ish... mainly options...

Commodities- stopped in agri- and still long long-term puts in crude....but looking for normalisation of commotidies to gradually reflect growth slow-down.

Best of luck,

Steen

If confusion is the first step to knowledge, I must be a genius. Larry Leissner

If Mr. Leissner is right I sure am a genius!

The confusion on my part does not actually go on the long-term picture but more on the short- and medium term pattern.

The fact is that the market consensus has moved to expect Fed to be hiking by 10 bps in one years time from now, while still betting 25 bps in next weeks meeting just to safe guard the economy.

No, my confusion, goes to the pure fact of me being a Libertarian through-and-through although after listening to Soros, Kaufman and others I am beginning to see "clouds on the laissez faire horizon".

Looking back at the last 20 years and really since 1987 Soros is absolutely right this has been the biggest credit binge ever - the whole system was built on the fact that credit was readily available and if there was a crisis Greenspan and his merry men came to the rescue; 1987, 1991, 1997, 2000-2001 .....and now in 2008.

The banks created business models which took advantage of the free-flowing credit and doing the so called financial engineering (talk about contradiction in terms!) they told the investors and public at large that they had invented a money machine. Obviously now we all know, that yet again, this was not the case. The mark-t0-market effect was not duely calculated and compounded. (Read UBS story in FT this week)

Let me give you an example;

I bought a house in 2001 for let's say 5 mio. DKK, took out mortgage based on the valuation on 90% - then I kept the house for 3 years, now the "market" told me it was worth 15 mio. DKK - right.....but surely the mortgage value would be something like initial cost (5 mio) plus inflation x 2, plus replacement value plus average disposable income/ Houseprice maximum ? But no the mortgage value is and was based on the "market value" of it - fair ?

No, a tangible asset can not continue to go up merely because the market "clears" the price higher, there must be fundamental fair value around which the loan valuation is based otherwise we end with a market which is self feeding both on the upside and on the downside.

I would even argue that logically my "quick-and-dirty price" is more logical than a house rising from 5 mio to 15 mio. in 3 years? Nothing fundamentally argues for this being correct ? Am I wrong? This example is one of 1000s but a true one!

If you follow me so far - then, however, if the "market" is not the correct pricing mechanism then what is ? A bunch of useless central bankers? or some other STATE CAPITALISTIC enterprise?

Neither, the "market" needs to smarten up and make sure it does not compound positive and negative movements outside the scope of fundamental value.

Warren Buffet, Jim Roger, George Soros will all tell you the best deals they ever did was based on good fundamental value, not market timing, if that is the case then surely we got some way to for this NEW CAPITALISM to go back to normal again?

I probably argued myself into a hole, my point here is;

Every time the "market" has had trouble the central banks or governments have bailed out the system, this time it may be different. Fed has little ammunition in the bag except for doing Carry-On movies with business as usual, but the banks is in a position where IF they get their balance sheet in order they will move towards my valuation model based on FUNDAMENTALS, which mean they will lend out less and more expensive.

That's the real paradigm shift here - the credit bubble is in process of being de-leveraged - the new world is one where there has been power shift to the savers; i.e the Middle East and Asia, who will have less of a strategic angle on the US and Europe as future export growth for them is being hammered by two unavoidable factors;

1. Lower global growth - if credit is less then growth is less.
2. Rising de facto cost of producing as there "workers" demand bigger and bigger share of production cost.

If you don't believe me then check the two worst performing market this year? China and Vietnam both down more than 40% - sign of the times?

I am very open to discussion here, but the above issue is one which bother me big time, as I believe the old regime and "rules" of trading is being thrown away... and it is time to look at the world from 10.000 feet and with more than day to day glasses.

The good thing here begin, if the market moves towards normalisation on credit creation and lending standards we are in for less volatility and better growth long term as the world again allocates capital to the HIGHER MARGINAL UTILITY - and not as now to dead financial instruments in some alphabet soup no ones understand. Hopefully this will also mean that the talented young people of today will stop applying for jobs in funds like mine and move on to change the world to a better place dealing with real issues like;

Demograhics, the quickly rising population
Food, lowest production to demand in history
Energy, alternatives more needed than ever

Strategy;

FX: Still some EURUSD long, but starting to built reversal trade - if the market is right about FED being done on downside there is risk of dramatic out of the blue correction in EURUSD. My friend Drew Baptiste, Morgan Stanley, warns me it could biggest in the last 1-3 years, but new low in US dollar is ideally needed.

Still long MXN - best performing stock market, long term growth - like it....

JPY - long - still think its matter of time before new lows is coming - the anti-risk trade I know and its costly, but......

FI: Given up on upside for now - think mean reversion still the game. My model turned bullish FI last two days on mean reversion - let's see how it plays out.

EQ: Short versus the 1400-05 major trend line - may work may not - but in it.....

COM; Long grains - what a ride - that vol for you.

MTD: down like 70 bps.

More later in the week more direct market relevant.

Go Liverpool 2night.....!

Steen

We seriously need a crisis now!

Back - still slightly jet-lagged but I got so much on my mind, and I will try to distil it as best possible:

1. Unemployment is rising and fast

2. US consumers has been max'ed out
3. Asia dream is over for this time....high inflation and negative real rates killing world saving reservoir.
4. US Dollar is on the brink of real crisis
5. 95% of all managers do not understand the risk involved here. A system without a healthy working interbank market is no market.

I know, I know, most people see me as this total pessimistic guy on the economy - and the world, and to some extent that has been right since last spring where I started rambling about the incoming risk of slow down, crisis, and how private equity was dead.

I am not praising myself here, I for one, admits to not having ANY predictive powers, but at all times I do try to put odds on upcoming market moves.

Where in the past being too pessimistic has been wrong 99% of the time, I now think we have seen true paradigm shift, where being too optimistic will reward no one.

Why?Think about it for two minutes:

In a "normal" business cycle the rich nations will invest in the poor in order to get excess return on their capital. The flow will go from rich to poor nations.

Now? We have the "poor" nations, i.e EMG countries pouring money into the US at returns which is sub-par.

This will not work I am sorry. Capital should go where the marginal return is positive and rising not the opposite!

The fact is 10% of the world, I.e, the US, uses 80% of the world savings!In fact the whole recycling story is tied up on two things:

1. Strategic Deals. Energy deals for Middle East and for Asia import of cheap labour
2. Political agendas where Asia got the US "by its balls" by owning trillions of IOU notes.

Nowhere! Nowhere is allocation of capital based on best return profile!!!!!!!!

If you had the choice in investing a sum of money where would you invest?

1. Europe - poor demographics, with tail wind maximum growth of 2.5%....
2. US - poor demographics, saving deficit, real rates of minus 200 bps and weakening US dollar policy, maximum growth of 3.5/4.0%
3. Asia - excellent demographics, high saving rates, EXTREME need for infrastructure investments, minimum growth rates of 4.0/5.0% ?

I think it is very simple, and most intelligent investors seems to agree as the P/E for EMG for a while exceeded the P/E for G-15!

My point here is..... as the viscous cycle continues to compound the more the REAL RATES of growth, inflation , employment, currency rates gets out of whack with fundamentals.

Take Asia - now they got no monetary policy options (its own by Bernanke through the US dollar peg), high inflation (most above 5%) and negative real rates.

The biggest savers in the world is losing money saving !

Short-term that's not an issue, but when the net wealth decreases so does the incentive lend the money overseas.

The US consuming 80% of world savings offers you: more negative real rates than at home PLUS a guarantee for loss of currency value - is that a proposition you will take? No!

The result if this continues is one of stronger and stronger Asian currencies, with consumption falling as REAL WEALTH decreases and consumption comes down.

The saving grace being the STATE CAPITALISM in Asia which will keep pumping money into infrastructures making sure it crowds out private capital.

So this process which has been going on for way too long due to incompetent central bankers like Greenspan and Bernanke is reaching cross road where the worlds needs to face two major ghost:

Inflation and recession.

For balance to be established several things needs to happen:

1. The confidence in the US dollar needs to be restored preferably by increased saving rates and yields and a firm commitment to improve and maintain US competitiveness. This will work as confidence in the US will lower long-term yields, reduce inflation expectations and make investors commit to the "cheap" US dollar by allocating capital into the US.

2 Money needs to flow to highest marginal utility, which means where investment returns are highest. This means re-establishing the banking system to be able create CREDIT which in turn will be used for investments. The world is full of money, but there is ZERO credit. The market needs to flush out bad investment so the sounds investment can attract the proper rate....

3. The central banker should step away from speaking, engaging in the market place, and let market forces play it role. They should monitor inflation and commit to reduce inflation expectations to long-term averages.

Long time ago in the 1980s when I went to University I learned in Polical Science that the economies that survives long-term are the ones with the least amount of public engagement.

The US being the prime example, the very set-up of the US constitution making sure that Congresss and the President can't agree on anything meaning everything is left for the micro level of the economy to work things out. This worked so well during the Clinton years, which was ALL talk and no action (which reminds me of a lot of people I have met both internally and externally recently :-))

The bottom line here:

Never in my long life as a trader has perception and reality been further apart.

No one seems to understand that a capitalistic system with the above rules and no working banking system is the biggest systemic risk ever, and the policy response is one of more STATE CAPITALISME than before.

It is beginning to look a lot like the 1970s:

Big government, central ignoring inflation risk and rising energy and commodity prices.

This time we have a helicopter pilot who thinks its right to collect rent on Federal money - where is Volker when we need him ?

Finally, here is link to lengthy interview I did yesterday on the markets if you are not already bored - the link to the interview is on the right hand side.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUn1XoFl9aB4&refer=home

We had excellent March - took profit - restarting engines now...

FX: Long MXN vs USD, long EURUSD from today.... (@ 1.5545 and @ 1.5665), short EURNOK @ 8.0170

FI: Long 122 US T-bonds calls

COM: Long AUG puts.. Long DBA

Looking to built negative Asian growth portfolio....more on strategy tomorrow.


Med Venlig Hilsen Yours Sincerely Steen Jakobsen, Chief Investment Officer, Saxo Fund Management Saxo Bank A/S -London
40 Bank Street, 26th Floor Canary WharfLondon E14 5DA
Phone: +44 (0)207 151 2010 Fax: +44 (0)207 151 2001
Please visit our website at: http://www.saxobank.com


Disclaimer
Trades in accordance with recommendations, especially in leveraged investments such as foreign exchange trading and investments in derivatives, can be very speculative and may result in losses as well as profits. Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information contained in this email.

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Inflation jumping castle - and what to do

Message in a bottle, message in a bottle - The Police

I most humbly apologies for not updating as stated, but let me explain my overall issues right now:
1. On one hand I think the biggest mispricing right now is the decoupling story. How Europe is not going to be hurt by the US cold. That's simply naive both academically but also based on history. The market has increased the probabilities of ECB cuts despite the Trichet talk. Right now market is pricing 65 bps (based on swap spreads). The European rate adjustment downwards has been a quick and steep as the US.

If this is your main driver for theme, then the logic would be to be long short end Europe, short European growth companies and certainly short banking/real estate........ This is my prime focus right now. Point being: The world is dissecting bad US news as their life depended on it, meanwhile the European data continues to deteriorate.

2. Long or short fixed income overall? The base argument, and my belief, that the credit crisis is bigger than market perceive it to be (more on this later) should make we want to be long and stay long fixed income across the curve.

The fact the banking industry can not leverage their balance sheet will make the central banks go even deeper than needed (and setting off inflation alarms!)........

On the other hand can I ignore monetary data, inflation core and gross, high gold prices, high commodity prices overall? Hardly, the day-to-day inflation is through the roof and works as direct tax on the consumers. The US been early in giving tax hands-out, but the fact is the 500 $ disappear into higher energy, food and loan payments.

We may be, as stated by George Soros, at the end of massive credit cycle, and getting ready for a wash-out. A wash-out which will be hugely positive. Imagine if the banks started allocating capital at highest marginal utility and not to highest greed factor!!!!!!!!

I have 100s of other issues on top of the two above, but seeking the answer to the equation makes me sway from bull to bear, and back. A situation I am increasingly getting feeling I share with even the super minds of this industry.

Why is it so important?

When fund managers like myself try to map out the world we like logic, mostly linear outcomes, what the world is giving us right now is a complex matrix of potential answers. The root of the problem not really the complexity of the problem, but more the dynamics of it.

Normally, as in since 1982, the central banks have applied more drugs for the sick patient - but has the patient become immune to this medicine by now?

Does the lack of banking edibility create bigger issues? The answer here is yes, the central banks (despite their short comings) have learned from the 1920s-1930s where policies were the reason for the crash. However, to me this begins to look a lot like the 1970s, where the central banks, main Fed, was to expansive fuelling inflation..........

1970s was about big business, big government, and if today's Sovereign Wealth Fund are not big government, I don't know what is. The Bush administration have made gigantic hole in the coffers to spend on wars....also big government. Inflation is REAL TERMS is rising, faster and faster... food prices is at all time high, and only going higher due to demographics, growth and eating habits....

So to cut a long story short, I am slowly, and as always step by step getting to the end conclusion that this time its different, it really is. It is at the end of a Super Credit Cycle, and should the Mononlines become downgraded before the rescue package is in place, then the banks will roll over and put aside an additional 50-100 bln. USD of risk.


Strategy:

Moving from day by day, to week by week now, main themes:


FX: Strong believer in cyclical US strength coming shortly - the US export alone will add 1.5% to growth in the US this year, and with Europe catching some of the US cold, the relative performance of the two currencies EUR and USD should line up better.

The bottom line on EURUSD is as follows: A EURO above 1.5000 for 1 or 2 years is equal to closing EUROPE.

FI: Going into Fed meeting with Puts on T-bonds. Market will probably see this as reflation...

EQUITY: Long some out of money CALLS for the sake risk diversification.

Commodities: Flat.

Running very flat book overall... as I make my next move.

So if you got strong ideas, please... send me a message in a bottle..


Good luck tonight.

Steen

Bear Market is here.... but too early for 1929 like crash?

I am not hiding! I took off all the bullish trades late yesterday which turned out to be extremely lucky.

Only done two trades today:

JPY: Bought some good size 106.50 JPY call for Friday as my good friend Drew Baptiste of Morgan Stanley been telling me if 107.22 goes it#s 3rd of 3rd wave target ting 97 +-

Drew has been extremely right on JPY plus it mixes well with my prevalent view that Q1 is all about risk adjustment and going "home" on investments.

The second trade is long EURGBP 0.7546 / my "favourite" salesperson telling its "key reversal" and other terms I clearly do not have the capacity to understand, as I cant for the life of me think of ONE reason why GBP should do better the Europe. Brown is doing everything wrong, Darling (what a name) is already joke 3 month into the job, and todays GA in Northern Rocks shows the incompetence of the government and its adviser's.

It is very clear to me some significant repricing is taken place, and in the process the "counters" are losing out. Counters are the very people who buy on dips and who thinks this time is like the last few times.....Nothing could be more wrong...

The policy action from the central banks is "print some more money!!!!!!!!!", in the US the FOMC, they are cutting rates and normally the bank will "blow" up their balance sheet to match the expected cut, only problem being that this time the balance sheets of the banks are so stretched they cant even do origination on deals, and one loan after the other gets negated, so the market stuck with banks going around to anyone, like me, with a positive current account, begging me to take some of "their special deals for you, my friend!" off them in order to clean up the balance sheets.

There are several so called investment banks running desperate to find someone with money to spend.

Another thing; SWF, SWF - I noted yesterday and I will note again today; Dubai Ports can not buy a port in the US, but they can 'as much as you like' in the banks? Logic? None! Banks are even more "strategic in nature" than ports..........

The US dollar crisis is very, very close now...... 1.5000 goes and we will see central bank intervention in my mind. The weaker US dollar makes the Fed decision even more difficult, but the Fed does not care about the US dollar, Bernanke has no clue, neither does the rest of adminstration. They should be hiking rates to defend the US dollar, make US more attractive and re-establish their inflation expectations.....but......thats almost as likely as me being drafted to play for Denmark along side Tomasson.

Strategy

FOMC is desperate. Desperate people does desperate things. We are HIGH alert rest of the week......Only Fx positions as of now.. and mainly in options..

FI: Getting hammered on long bond, but hedged through the JPY. Still expect very dynamic move to higher rates inside this week....... Looking to do spread long Europe short-end vs short long end US....

Commodities: Still "pis.... off" at myself for negating trade ahead of USDA report Friday, but...fact remains commodities NEED to reflect "recession mode"......

FX: Short GBP, Long JPY.....

Equity: Neutral, still better buyer than seller....

Good luck,

Steen

Central bankers are lost... totally lost....AGAIN..

My "models" are very close to confirming a BEAR MARKET. No less, no more. The key final ingredients will be Bernanke's speech tonight - if the market, as it has done in the past, sell of during and after his finish, we will have first real bear market since 2000.

The only thing that will be able to help this market out is rumors. Rumors of Sovereign Wealth Funds (One wonders why considering their track record so far!!!), and inter-meeting rumors of cuts.

Having said all thay I am still in NEUTRAL mode - there is to much consensus in the market, which concerns me always. No less after having read the F.T piece about Ray Dalio of Bridgewater: http://tinyurl.com/3dgapx - he made it his business to NEVER correlate with other managers, something I have always done, but to much less success than Bridgewater!

Strategy trading:

Fixed Income

Unchanged. Still waiting for cycle change in yields - we are close to breaking triple bottom, but for now holding out for "surprise" upside either through more liquidity (read: reflation) or better than expected US data.

Foreign Exchange

Long AUD.CAD - starting to accelerate - looks fine.

Long EUR P, 1.44 (spot @ 1.4710) 1 month

Long JPY C, 104 (spot @ 108.25) 2 weeks

Long EURSEK, and Long NOKSEK.

NOKSEK flirting with 1.20000 today, break should lead to 1.2500. In times of recession these two economies are VERY different.

Sweden is VERY open economy, with most of the Swedish companies being US dependent. This could be seen through Q3-4 in 2007 when the Swedish stock market significantly underperformed other European Indices. This is continuing, and as a rule to exception Riksbank is more negative than the local banks, leaving door open for much, much higher EURSEK.

Norway on the other hand, will see demand for oil and fish, BUT.. if oil starts to react to RECESSION fear, it should also find support around 7.90000.....

Commodities

My biggest change - I have been drumming for GRAINS and Crude for almost two years now, but now I am getting square.

It has to be said I am a very defensive fund manager, but the upcoming USDA Crop report tomorrow got me worried. Following the "real experts" it seems we, the financial people are, too bullish in the wrong time of year. An excellent link http://www.agriculture.com/ag/

I sold my long time holding of DBA yesterday @ 34.45 -

I also as stated yesterday sold Crude(Feb) @ 96.95 - We have been trading in- and out so we are now comfortable short from 103 USD net, which have taken us above the critical 102 $ line.

Remember the play here is merely for Crude to "catch up" with the recession story - another way to play this could be to short SHIPPING........

Equity

Tried the long side into close yesterday, did not feel right and our model continues to ask us to wait for confirmation, which I will respect.

Early last week I put downside break @ 60/40, it is now 75/25, we really need "something tangible" from Bernanke tonight, next week in Congress or at the next meeting. Note that market got 50 bps @ 75% probability, almost destined to disappoint.

OVERALL

Still in day-by-day play, but getting feeling new trend emerging... Crude right now trading 93.70, having broken critical 95.55 - and gold offered to... 850/55 test will be critical, I am net buyer net seller, but not before those levels.

Theme: Recession light - and the repricing needed plus re-coupling, the US is not, not alone in lower growth rates..

I am attending conference tomorrow with Lawrence Summers, sponsored by Skagen Fonds, I am looking forward to asking him about "strong US dollar policy" if I get the chance....

Stay lucky,

Steen