Long Day’s Journey Into Night: A Bear’s Search For Proper Shorts

Long Day’s Journey Into Night: A Bear’s Search For Proper Shorts

As a pessimistic China observer (naive western perma bear), I’ve wanted to short emerging markets for sometime. For my sake I’ve been very patient on this trade and haven’t fancied a go on the dark side, unless you count my 2nd failed attempt to short the Superhuman Canadian Banks. Luckily there was an ongoing implosion in US retail industry that has kept me busy. But even that trade appears less appetizing these days. So here I am, a bear without anything to short, which is partly why I’ve turned my attention to the rip roaring Emerging Markets, but I swear I have other good reasons.

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Whatever happened to Brendan Fraser? I guess the same question could be asked about the dollar bulls.

 

Anyway you slice it, USD positioning is not only incredibly bearish, but just 9 months ago incredibly bullish. The shift in investor positioning  is enough to give a person mental whiplash. Why the sudden shift you ask?

Such a shift in sentiment is not without a narrative to support it.

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I’m not mocking the proponents of this theory, although it certainly seems like I am, I swear (see previous Mummy reference) that I’m not. I just happen to sincerely doubt the speculators who switched from net long to net short are capable of such deep thought and will only come to their sense after they realize they’ve overreached.

As the infinitely evil DarthMacro likes to argue the USD will lose reserve currency status eventually but until then there are likely to be a few tradable scenarios in which we don’t have to sell the dollar into oblivion. Now MIGHT just be one of them…

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Because last time I checked, the USD is still THE world’s reserve currency.  As much as certain countries want to shift to a new regime, the high levels of debt and fragilities built into the current system make that virtually impossible. A clear example is the EU and the Euro. Although recently, some rather smart people have started to suggest that in fact the EU can handle a stronger Euro.

The note was from September 5th, but little did I know, 2 days before I made this tweet that in fact the French had begun to protest the much needed labor reform, although not in “great” numbers. There’s a star wars reference in here somewhere…

And yet, despite the mild protests, if your are an exporting economy and your currency strengthens 15% against a major trading partner, it’s going to hit you no matter what. Just look at the German DAX (blue) versus the Euro (black).

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By the way, before I go any further, is there a more bullish sign out there than a heavy exporting economy’s stock market moving up in lockstep with a stronger currency?  I’m sure some really smart macro guys picked up on this, unfortunately I was not one of them. But I digress because right now the DAX is having trouble rallying into this “excessive” Euro strength.

It’s bad enough for Germany, but what about countries like Greece, Spain, and Italy who were already suffering under a currency too strong for their own good. Fellow European exporter, Sweden has seen its economy take a turn for the worse.

Why is this significant?

After doing a little digging (aka a simple google search), I found Sweden’s top ten export markets to be as follows: Germany (10.3%), Norway (10.1%), US (7%), Denmark (6.9%), Finland (6.7%), UK (5.9%), Netherlands (5.3%), Belgium (4.5%),France (4.3%), China (3.8%) and Poland (3.2%).

Sweden mostly exports to Northern European countries. Meanwhile a large part of the resurgent EU story is actually a southern rebound story. Countries like Italy and Spain even Greece have started to show signs of life. Of course the Euro was already too strong for these countries. One can only imagine what the 15% rise YTD has done to their future growth prospects.

It is important to remember that the level of a currency is not as important as the magnitude and direction of change. The last time the dollar was at this level in 2014, emerging markets were undergoing a massive correction, commodity markets were in complete disarray and china was seemingly on the verge of a complete implosion. Once again I reiterate this does mean I think the EU is about to implode under a stronger Euro, just that the monetary union’s economies are about to take a breather…

Speaking of China, the rising power seems to be making trade deals every day to wean itself off its dependence of the US and the USD.

Have any of the dollar bears asked why China needs to do these trade deals in the first place? Oh yeah, because the US is a key trade partner and the USD is an ESSENTIAL cog in global trade as it stands right now. Removing the USD from the global economy would be tantamount to bleeding the global economy dry. Global trade would grind to halt, and everyone would be worse off. No one wants that. But I digress…

Because China’s economy has been running hot on the back of a poop ton (technical term) of stimulus and the weaker dollar.

What is often missed in this post Jan 2016 correction world is that China has gone from an exporter of deflation to an exporter of INFLATION, and given the fall in the USDCNY this should show up in the US in a big way towards the end of the year catching a lot of people off guard.

Can rates in Europe and Japan going to follow the US higher? With the NIRP and QE programs still in place I’m not so sure. Draghi certainly has the potential to tighten, so I won’t count the euro out. But the yield curve controlled Yen in this scenario?

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At the very least, it seems like we are setting up for a bit of 2016 Q4 redux, where rates in the US rise higher than they do in the EU and Japan and the dollar strengthens. Given investor positioning, rising rates and a stronger dollar could set up for quite the pain trade. Not only are investors very bearish the USD, they are also very long UST duration.

Retail investors going hard in the paint for that $TLT.

Should probably ask some of my millennial friends what they think of dividend stocks.

And just so we are clear on the size of the potential tinder available to such a pain trade…

 

If you’re an EM investor it might even get worse, because China’s economy due to base effects and waning stimulus is set to slow into the end of the year.

Did Klendathu find his desired short trades? Perhaps. It seems that higher US rates are in the cards, and given USD positioning, we could see a rebound in the USD, but I wonder if we have in fact seen the highs for the USD this cycle.


 

DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

 

Buy Low: Cripples, Bastards and Broken Things

Buy Low: Cripples, Bastards and Broken Things

I’ve struggled to write this article for over a month now. Thinking about the most clever way to talk up the bull case for oil. With the potential breakdown in the USD I thought about just saying dollar bear market = commodity bull market. But let’s face it, that’s far too obvious and I’ve already done that

” I believe on a cyclical basis that commodities have bottomed or are in the process of bottoming. Maybe oil retests the 2016 lows, but overtime it should head higher, US shale be damned.”

Then I thought about incorporating the oil bull case with the fiat bear case. Because when every central banker is behaving like the Mad King Aerys Targaryen, shorting fiat in terms of real assets is a no brainer (maybe some other time though).

Instead, I thought it important to focus on something Opa used to tell me:

 “Buy low.”

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RIG, a company we own through the ETF OIH, is down over 95% from its ATHs and was recently trading at the lowest point in its 23 years. To put that in perspective, RIG fell 50% FOUR times. The multi year trend of rising RSI momentum and repeated failure to mark a new low is reminiscent of the pattern in the Euro we saw at the in December of last year. To be clear this trade is not without risks.

But as contrarians we welcome such news. If we look at the broader OIH ETF which includes as basket of these names. We’ll see a similar pattern bottoming pattern to RIG’s.

OIH123.pngThink about what this chart is telling you. Think about the statement the market is making in regards to the oil industry. Offshore oil drilling is dead.

If US shale is really a technological revolution, why have the producers underperformed the commodity since the bottom in 2016?

And yet we are led to believe that oil prices will be contained in a 40-60 range. As Jawad Mian recently noted, complacency towards this mythical range is reminiscent of the view from 2011-2014 that oil would remain above $100 in perpetuity. And with the largest cut in capex since 1998, this seems unlikely to say the least.

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Meanwhile, it’s been up to US shale to make up the difference in capex. I’ve recently read a couple of skeptical reports on the technological revolution that is the US shale industry. One of which comes from my friend @IndiePandant who makes a strong case that the shale revolution is not all it’s cracked up to be.

Then there’s a man who is as smart as he is skeptical, Russell Clark, who brings up a number of key questions in a recent piece such as the rapid decline rates of US shale, the heavy concentration in the Permian and Eagle Ford plays, and the incredibly poor returns on capital. And then of course there’s the plateauing US rig counts.

If the rig count is plateauing, why are predictions for US oil production growth continuing to rise?

 

And if the bearish oil case was only a bullish US shale case, that might be enough, but it gets better much better…

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In case you haven’t learned to zig when The Economist zags yet…

The “Electric Vehicle crushing oil demand” story is completely overblown. Mass adoption, or even marginally higher rates of adoption continue to be pushed further and further out into the future. Meanwhile oil demand is booming baby.

It is likely that the weaker dollar combined with China’s fiscal stimulus have reawakened global oil demand. Although Emerging markets are not booming like they used to, they are still growing, and require more and more energy to fuel their growing economies. So not only is it likely that have we overestimated future oil supply, it’s likely we have underestimated future oil demand as well.

At a time when the all knowing oil gods cannot survive,
perhaps it is time for contrarian millennials who know nothing to thrive.


 

DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

USD Bull Market: Hanging By A Thread

USD Bull Market: Hanging By A Thread

The US dollar is the most important variable in macroeconomics and it has reached a critical juncture. After hitting multi-decade highs, the BIS labeled “global risk indicator” has fallen over 10% and is now on the verge of breaking key technical levels. In short, the USD bull market is hanging by a thread.

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Speculative dollar positioning was deeply caught off sides at the peak and has since flipped bearish. From the FT:

“Investment funds last year wrongly ramped up their bets on the greenback climbing, but according to CFTC data they are now net “short” for the first time since mid-2014 — after which the US currency went on a wild rally.”

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Conventional wisdom here suggests, you go long the dollar with a well defined stop…

And yet, structurally, the dollar looks as weak as it did back in the early 2000’s.

The parallels don’t stop there.

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Even though the dollar has not yet officially broken down against other major CURRENCIES, there are major breakouts in financial assets that are very sensitive to the dollar. Perhaps most importantly are the Emerging Markets which using the total return of the ETF $EEM as a proxy are breaking out of a decade long consolidation.

Even the much hated Caterpillar, a global economic bellwether, which had suffered declining sales for over 3 years before recently returning to positive sales growth has hit all time highs.

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The new all time highs in both CAT and EEM are reflections on the falling dollar and global growth which hit a post crisis high. More than 2/3rds of OECD countries are actually experiencing “accelerating growth”.

But global growth cannot continue without a response from the commodity complex (another dollar sensitive asset class) which appears to be finally emerging from a +5 year bear market. Gold, the ultimate short dollar trade and usually the first mover of any commodity bull market, bottomed in 2015 and has recently broken above its multi-year downward trend line.

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Copper and other base metals have been on a rampant run as of late as well.

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Here’s a chart of Alcoa, also breaking out of its post-GFC box.

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If that wasn’t enough, here comes the Fed to bottom tick commodity based inflation.

Fed trolling aside, while the dollar has not yet broken down completely, the price action across EM equities and commodities suggest that it is highly likely that the dollar has further to fall… BUT!

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But that does not mean the dollar is about to break down. I don’t think the Fed is aware of the full effects of its Quantitative Tightening (QT) program. As the Fed readies its QT, the US treasuring is planning to further drain dollar liquidity by issuing $500B of new notes by the end of the year.

So when you combine the falling dollar liquidity at a time when speculators are on the other side of the boat with a key technical stop, you get a no brainer trade. Especially if you are someone like me who is positioned for some of these longer term bearish dollar trades, it makes too much sense not to hedge some of that risk over the shorter term. As such, the Klendathu Capitalist has started buying dollar calls. We’ll see how that works out for him. Cheers!


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

Opa

Opa

It’s been over a month since I published something on this blog, making it the longest period of quiet I have endured since I fully dove into the world of finance back in December of 2015. At the time, I was on track to play professional Smite, a Multi-Online Battle Arena game or MOBA. At the time I had received a few offers from professional teams to join them in the upcoming season. Fate had other plans.

I woke up on the morning of December 12th to discover my dog of 3 years Dragon had died that night. I found him at the foot of my bed lying motionless on the floor. His sudden death, forced me to take stock of my life. I was depressed, overweight, and stressed beyond reason. I may have climbed to the pinnacle of my “sport” but without my best friend it was a hollow achievement. Later that week, I decided to rededicate myself to the craft of finance, focusing specifically on global macro economics, figuring that if I could climb to the top of one game I could do it again.

I bring this up, because once again I find myself wracked with the sudden departure of another dearly beloved family member, this time, my Opa, Leonard E. Baum. Many in the financial community will know him as a legend, the man who helped build the foundation of mathematics which supports our modern society, but to me and my family he was always just Opa.

He never bragged to us about his accomplishments. In fact, he rarely talked about them. He kept that part of his life a secret, only leaking small details here and there when we probed him enough, like the time he admitted to cracking a certain Russian leader’s personal code.

And despite his penchant for silence, I was able to learn of some of his most inspiring trades.

He bought Amazon so long ago, that his brokerage firm did not have electronic records of the date. During the depths of the GFC when everyone thought the world was going to end, he was buying Citi Bank, temporarily holding the market at $1. Although it briefly broke $1, he never sold and like Amazon still held those shares till his death. Despite these incredible trades, when I asked him just a week before his death, what his best trade was, he without hesitation responded “Julia”, my late grandmother.

It’s no wonder why I’ve always held him in such high regard. But to me, despite those incredible accomplishments he’ll always be the one who taught me how to multiply large numbers when I was three. In fact he gave me so much mathematical instruction that by the time I entered the first grade I was already doing fifth grade math. My elementary school teachers hated accommodating their lesson plans around me.

What is not widely known though were his story telling capabilities. Most children got simple bed time stories, but Opa would give us his rendition of the Iliad and the Odyssey so often that “sulking in his tent like Achilles” became a common phrase around our household.

Little did I know how inspirational these stories would be to me later in life. I wrote my first ever screenplay loosely based on Opa’s serial tellings of the knight Kay who would travel around the world killing witches and freeing princesses and the like. Like his stories, mine too starred a knight, although not in shining armor, his name was still Kay. And even though Opa was legally blind, and even though it was a beyond awful piece of writing he still found a way to read it. He was even kind enough to tell me how much he liked it, noticing the mathematical patterns embedded within.

Fortunately for readers of this blog, I won’t make you read it. Instead, let me leave you with a piece of Opa’s own writing. A critique of what he saw to be his strengths and weaknesses as a trader. I hope you will find it has insightful as I have.

Leonard E. Baum’s Paper On His Trading Capabilities

OPEC: Stronger Than It Looks

OPEC: Stronger Than It Looks

The author ducks.

Peering up from the keyboard with a flame retardant helmet and goggles to protect his most delicate of features he writes…

OPEC is stronger than it looks, much stronger. I’m reminded of the lava planet battle between Anakin Shalewalker and OPEC Wan Kenobi in Star Wars Episode 3.

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You see, OPEC Wan Kenobi has the high ground and is better positioned to withstand an attack. He repeatedly warns young master Shalewalker any attack is folly.

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But Shalewalker is young, arrogant, and brash. He ignores master OPEC’s warnings and attacks anyway, ramping up production like no one ever thought was possible. But it’s still not enough to overcome OPEC Wan Kenobi’s superior positioning and the young jedi ends up a cripple for the rest of his life.

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Incredible puns and film references aside, I think US shale (and the cheap dumb money that flowed into it) will end up doing a great service to OPEC. Thanks to US shale the price of oil has been suppressed for over 2 years now. With the oil price persistently low, companies are loathe to invest in future production.

Even though we’ve seen a dramatic reduction in capex, the major oil companies saw their debt almost double from 2012 levels. From Reuters:

“Five of the largest publicly traded oil companies – BP, Chevron, Exxon Mobil, Royal Dutch Shell, and Total – are trying to work down debts that totaled $297 billion at the end of December. That nearly doubled the companies’ 2012 debt levels.

But even with oil prices about 70 percent higher than a year ago, most companies have yet to reach the point where their cash flow covers annual shareholder payouts and expansion projects vital to the industry’s long-term survival.”

The major oil companies decided instead of producing more oil in the future, they’d rather give money they don’t own to their shareholders…

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And what did OPEC do during this time? They added 2m bbl per day of production.

Instead of taking on debt, OPEC members dipped into their pile of savings while at the same time investing in future production.

While reducing crude demand locally through renewable energy investments and tax incentives.

That’s all well and good, but US shale is still ready as the swing producer to put a $60 cap on the oil pice right? The magnitude of the drop in capex suggest that’s highly unlikely.

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With the recent ramp up in shale production focused in the most lucrative areas. The easy oil although not gone is quickly being drained. Repeated frac-hits (where a rig drills into another operating well) might be reducing the efficiency of shale wells.

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The high decline rates of shale wells is another major headwind to sustained production growth. Lastly, US shale’s ability to ramp up further production will be limited by rising service costs.

In the end, we may discover that the technological revolution of shale has as much to do with technology as it does with free money.

Unlike its competitors, OPEC has not produced oil at a loss. It has not spent money it doesn’t have. It has increased investment and now stands to profit from the myopic behavior of yield starved investors. With the world potentially on the eve of a new commodity bull market, the author quite likes the position of OPEC as a future supplier of oil demand that is highly unlikely to fall off to this supposed EV revolution (a discussion for another time).


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, what follows is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

A New Bull Case: OBOR Wan Kenobi

A New Bull Case: OBOR Wan Kenobi

“Help me OBOR Wan Kenobi, you’re my only hope.” ~ Insolvent Governments

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Before I get to the topic of conversation, China’s One Belt One Road project (OBOR), I first want to point out something that has gone relatively unnoticed in the macro community: equity markets around the globe are breaking out of long term ranges.

Japanese small caps have charged to post crisis highs.

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Leading me to believe the Nikkei is not too far behind as it heads to a new millennium high.Screen Shot 2017-06-26 at 7.54.40 AM

After the 2015 bubble bursting, Chinese A shares are breaking out to new highs. Screen Shot 2017-06-26 at 9.11.15 AM

Taiwanese equities are surging above a two decade long down trend line!

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Indonesia breaking out to a multi-year high.

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Trump’s wall talk can’t stop Mexico.

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This bullish price action is not limited just to Asian or Emerging markets. Equities in Germany and France are breaking out of multi year even decade long down trends.

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In the weaker southern states, Greece and Spain have begun to show signs of life as well.

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This all begs the question? WTF is going on here? With debt levels around the world at all time highs what economic development could possibly justify such bullish behavior?

You asked for miracles Klendathu, I give you O. B. O. R.

China’s One Belt One Road program is not just the largest infrastructure project in world history, it is a statement. It is a unified statement from the world’s largest and most insolvent governments that they will not suffer a debt deflation. In one voice they are shouting out:

“…we will not go quietly into the night. We will not vanish without a fight. We are going to live on. We are going to survive. Today we celebrate our Independence Day (from debt deflation).”

For as much as the global elite have decried the end of globalization, the governments themselves have never been busier forming closer economic ties.

Trump is secretly shedding his anti-globalist stance in exchange of US infrastructure investments from China…

And Chinese cooperation on North Korea.

Europe has also boarded the OBOR train. Deutsche Bank has agreed to invest $3B in OBOR projects over the next 5 years. We all know how much the EU loves its Paris accord, and recently Prime Minister Li Keqian reaffirmed China’s commitment to the Paris Accord. Spain’s King recently met with Xi Jinping in Kazakhstan of all places. Here’s a lovely photo of the two:

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But perhaps the most telling geopolitical development that hints at some grand bargain is Japan’s recent shift.

Mind you, Abe’s grandfather is considered a war criminal in China. Abe is a hard core nationalist, and yet here he is, making nice with China on future trade deals. With government debt to GDP at 280%, a central bank that owns 40% of that debt, and a declining population Japan is the epitome of an insolvent country that is running out of time. Some time in the next five years the BoJ will be completely out of financial assets to buy.

Without getting too much into the motivations and plausibility of such an ambitious project, it’s important to realize what the world’s largest and most indebted governments are telling us: “We are going to print the money, we will bailout the banks, we will build the infrastructure, we will do everything in our power to prevent a debt deflation.”

For the remainder of this blog post, I am going to consider the broader implications of a global put option backed by the world’s largest fiscal authorities, mainly this idea that reflation trade is not a trade at all, but a multi-year trend that no one, not even the commodity suppliers is properly positioned for.

While the miners may have not gotten the reflation memo…

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It looks like some of the commodity currencies have.

AUDJPY.

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CADJPY.

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As for commodities themselves, my favorite play going forward might just be copper. On top of the bullish macro demand trends and likely future supply deficit, copper is a way to play the electrification of transportation, which includes not just ground based transportation, but now recently we’ve seen ferries and air planes get the electric engine treatment.

Equities of the two largest copper producers Chile and Peru appear to be in the process of bottoming.

CHILE.

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PERU.

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I find it unlikely that we’d see a continued rally in emerging market equities without considerable follow through from the commodity producers. Below is a (log scale) chart of $EEM / $COPX.

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Note RSI momentum divergence at a key point of double resistance.

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This theme applies across the commodity complex. I believe on a cyclical basis that commodities have bottomed or are in the process of bottoming. Maybe oil retests the 2016 lows, but overtime it should head higher, US shale be damned. Perhaps this is a reason why the future king of Saudi Arabia MBS declared a “turning point” in US Saudi relations. With Trump and the US on the OBOR train, reflation in the price of oil is only a matter of time.

Of course, higher commodity prices lead to higher inflation as well. Over the next few years we should expect upward pressure on developed market bond yields in particular. One interesting theme might see European and Japanese banks benefit greatly from a steeper yield curve and negative real rates.

And yet as nice as this all sounds, the path towards reflation will be anything but smooth. When such powerful forces (the largest debt bubble in history versus the largest fiscal stimulus in history) battle it out for the soul of Gotham it seems insane to expect our low volatility environment to persist.

In the short term, I am actually looking for the deflationary forces to gain the upper hand. The fiscal forces have not fully aligned and at the same time investor expectations have run ahead of themselves. More specifically, investors have piled into Emerging Markets while ignoring some rather sizable macro risks.

Compounding the deflationary risks, the Fed has been on a rate hike warpath of late ignoring any and all consequences of its hawkish policy. Back in April I argued that rampant vol selling has lulled the Fed into a false sense of security:

“This is rampant selling of vol will lead to a whirlwind of unintended consequences, because it creates a false sense of security at the Federal Reserve. Historically the only thing that has stopped the Fed from hiking is a falling stock market. The Fed never responds to economic data, or dollar liquidity issues or anything of that sort. It only responds to falling stock prices. And if stock prices are being artificially propped up due to this “rampant selling of vol” then the Fed will keep on hiking or said differently vol sellers have numbed the Fed to its own hawkish policy!”

As US equities have pushed to new all time highs, the Fed has been led to believe that the US economy and financial conditions are better than they actually are. When we look at bank lending data, we see a deterioration in demand as rates rise and the uncertainty surrounding the current administration warrant caution out of highly levered US corporates.

Further complicating the situation, is China who through the currency peg is forced to import the Fed’s myopic monetary policy. Despite the superficial stability we’ve seen all is not well in the world’s 2nd largest economy. The yield curve has been inverted. In any other major economy a yield curve inversion would signal caution, but in China it is assumed the authorities have complete control. When in fact liquidity in the interbank market has dried up and some of the largest issuers of Wealth Management Products who have been buying up illiquid assets around the globe have had their funding cut.

In the end, I think it’s quite easy to make a case that the Fed has already tightened too much. Risk assets, especially those most vulnerable to tighter dollar liquidity appear to be overextended, which leads me to believe that the next move in global economy is likely to be a deflationary one that will lead to a stauncher commitment from the fiscal authorities to their reflationary policies. I’ll be looking for commodities to be the first to recover in any sell off.


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, what follows is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

Greece: The Gateway To Mispricetopia

Greece: The Gateway To Mispricetopia

“Location, location, location.” ~ William Safire

As the sea based terminus of China’s One Belt One Road (OBOR) program, Greece’s role as a gateway to Europe is greatly undervalued. There are good reasons for that undervaluation, or at least there were, whether it was the depressed European economy, the debt crisis, crippling austerity, global trade slowdown, or the business unfriendly Greek government. While the Greek government may not change anytime soon, everything else either has or is on its way to turning from a negative into a positive.

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Most importantly, a gateway is only as good as the two locations it connects. With the global economy undergoing a major slow down these past 3 years, and Europe stuck in a series of rolling crises for the better part of a decade, the value of Greece as a gateway was quite small. But that appears to be changing. Global growth is on the rebound (at least temporarily) and more importantly the EU appears to be growing for the first time since 2011.

You can make case for that growth has peaked and sentiment towards Europe is extreme, but if you had any doubt that there might be a recovery going on in Europe, look at the defeat of the populist and Euro-skeptic parties.

These political parties which feed off anger, disappointment, and despair have been pushed into the background. If there ever was a sign of improvement in the region, it would be exactly this.

And with the Euroskeptics out of the way, the EU can push towards closer unity.

The French led by Macron are pushing for Greece to be brought back into the fold. Macron has and continues to be a staunch supporter of Greece. From The Telegraph (my emphasis in bold):

“The confrontation at the height of the 2015 Greek debt crisis is revealed in “Adults in the Room”, the new memoir of Yanis Varoufakis, the controversial former Greek finance minister who tried – but failed – to win debt relief for Greece…

On June 28 2015, with Greece’s bank on the cusp of closure, Mr Varoufakis writes that he received a text from Mr Macron offering to broker a last-minute deal to win debt-relief for Greece in return for structural reforms.

“I do not want my generation to be the one responsible for Greece exiting Europe,” Mr Macron wrote, offering to broker a meeting between the Greek prime minister Alexis Tsipras and President Francois Hollande.

The attempt, however, was blocked by Germany whose ultra-hawkish finance minister Wolfgang Schaueble was suggesting that Greece take a ‘holiday’ from membership of the euro.””

Although Schaueble shot down the deal in 2015, a lot has changed since then.

On top of Schaeuble’s shift towards a more unified EU, Greece posted a 2016 budget surplus of 0.7% versus the 0.8% of Germany. This is in stark contrast to the 15% budget deficit Greece ran in 2009. And more importantly if Germany continues to push a hardline, it and the EU could cede even more of their influence over Greece to China.

From the article:

“Cooperation in infrastructure, energy and telecommunications should be “deep and solid”, Xi added, without giving details.

Tsipras is in Beijing to attend a summit to promote Xi’s vision of expanding links between Asia, Africa and Europe underpinned by billions of dollars in infrastructure investment called the Belt and Road initiative.

Greek infrastructure development group Copelouzos has signed a deal with China’s Shenhua Group to cooperate in green energy projects and the upgrade of power plants in Greece and other countries, the Greek company said on Friday.”

China also is a major stake holder in Greek ports. From Al Jazeera:

“Chinese shipping company COSCO is the majority stakeholder in Piraeus port, Greece’s largest, and Chinese officials harbour hopes it will become a major international trading hub.”

From Jing Daily:

“Chinese nationals have taken almost half of the investment licenses the country has granted to foreign investors over the past four years through its “Golden Visa Program.”

But it’s not just investment, China is going to start sending vast amounts of tourists to Greece after it launches the first direct flight between the two countries in September of this year. Over the next two years that Chinese tourists to Greece is expected to climb from 150,000 per annum to over 1,000,000 according to Chinese estimates.

Given that Greece’s tourism industry contributes 20% to GDP, this infusion of cash rich Chinese tourists should be a shot of adrenaline into Greece’s capital starved economy, which will go a long way to easing negotiations between Greece and its creditors. But it’s worth noting that China isn’t the only non-EU country investing in Greece. Russia has taken the 2nd most real estate investment licenses in the last year. From Jing Daily:

“By the end of January 2017, the Greek government issued a total of 1,573 real estate investment licenses to foreigners, out of which Chinese buyers took 664 seats, followed by 348 from Russia, 77 from Egypt, 73 from Lebanon and 67 from Ukraine, according to the data published by the Ministry of Economy. (The data is based on the number of real estate permits they have released.)”

Once again, this poses a huge problem for the EU who is beholden to Russia’s natural gas and oil exports. From MacroPolis (my emphasis in bold):

“To this end, the EC considers a route via the Mediterranean – the Southern Gas Corridor – a crucial investment, stating that “the Mediterranean area can act as a key source and route for supplying gas to the EU.”

This is where Greece comes in. The first major achievement was the signing of the Trans Adriatic Pipeline (TAP). This project sees some 550 km of the pipeline passing through Greece which will link to with the Trans-Anatolian Natural Gas Pipeline and the existing South Caucasus Pipeline (SCP) connecting Turkey to the Azerbaijani gas fields in the Caspian Sea via Georgia.

Together, the three pipelines will form the Southern Gas Corridor, seen as essential for Europe and to diversify away from its current dependency on Russia for gas.

In essence, Greece finds itself at the center of a tug of war between the east and the west. But this is not a zero sum game for Greece. Both sides need Greece to do well for their respective side to thrive. China needs Greece for the success of its OBOR program. The EU needs Greece to form a stronger Union, for it’s role as a buffer from migrants, and as a alternative energy route to end Russia’s gas monopoly among many other things.

It’s a win win situation for Greece, a country who has suffered for five years under harsh austerity without access to the capital markets. The economy is a coiled spring waiting to explode. With China and the EU vying for the country’s undervalued assets its a matter of time before the energy in that spring is released.

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Disclosure: The author is long GREK.


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, what follows is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!