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Take my currency-Please

11 Sep

While the volatility in Equity and Credit markets over the past year has been quite benign, the volatility in currency markets has really heated up this year, most likely as a response to a perceived shift in Fed policy. What has really driven capital flows however has not been the relative rate adjustments by Central Banks, but the perceived economic strength of the U.S. vis-a vis almost all other G7 and non G7 countries. We have all heard the cute little analogies used to describe the relative strength of the dollar: ” The cleanest of the dirty shirts”, ” The smartest kid in summer school”, etc..  What is interesting to us is that such minuscule yield spreads are the impetus for such drastic movements in the relative value of currencies. Not only that, we are completely astonished that no one is really advocating the positioning into something which can hold its value relative to all currencies; namely hard assets.  We know that our astonishment is too dogmatic however, as we are all aware that  in reality Financial Markets are constructed to deliver product, most of which is designed to give people what they think they want and not what they really need. We still adhere to the precept of mean reversion (both in returns and relative currency values); a philosophy which is completely contra to todays current ideology. Kings don’t live forever, fade King Dollar and Buy Stuff

Not everything that counts can be counted, and not everything that can be counted counts

8 Sep

If you follow Howard Marks of Oaktree Capital,  you know he is clearly one of the most astute investors around and his newsletters are among the best as well. In his latest missive, he references the above Albert Einstein quote when discussing the measurement of risk and reward. This quote got us thinking as to the state of the investment landscape today. The explosion of Algorithmic trading based on up- to- the second “information” as well as a fixation on monthly data which is itself suspect in its measurement and meaning leaves capital markets appearing to focus on only that which can be counted.  The focus on what cannot be counted has never been more absent, as the prevailing thinking is that the risks associated with the unknown can be alleviated with the existing, or further iterations of, Central Bank policy. Nassim Taleb would refer to these uncountables as black swans, and it would seem as we move further and further away from the events of 2008/2009, the capital markets amnesia regarding the potential for such black swan moments becomes greater and greater. Those asset classes whose returns have been driven by leverage and momentum are most at risk when the amnesia wears off.

Time to Dance

26 Jul

The recent decision by Credit Suisse to exit their commodities business, marks the latest in a long line of Commercial and Investment Banks that have made the conscious decision to exit their respective commodity businesses. This decision reminds us of previous exoduses in the past, such as in the late 90’s when Merrill Lynch left the business, only to re-enter in the early part of the 2000’s. As Chuck Prince astutely remarked in response to the frothiness of the credit markets in 2007,” as long as the music is playing you’ve got to get up and dance”. Well, faced with additional capital requirements and a myriad of Dodd-Frank related regulations, the decision by banks to not dance is probably the proper response. However, if one believes (as we do) that there is no better contra-indicator of value (outside of Central Bankers) than the behavior of Bankers, than this decision clearly indicates that the commodity area is ripe for outsized returns.


30 Jun

Recent comments by the Bank for International Settlements (BIS) that “Global Markets are under the spell of Central Banks and their unprecedented monetary policy settings” echoed what we and others have been saying for the past 3 years. Not only have they been under a spell, they have been put into a rate induced coma. However, as we have stated repeatedly, the aftershocks and consequences that will result once the spell is broken will be dramatic. It would appear however that neither the BOJ or the Federal Reserve are paying any attention to such talk, as both seem intent on achieving goals that are either ever-shifting or incongruous. Concurrent with these comments, was an article in the WSJ regarding the extensive security detail afforded The Fed Chairwoman. Not to be flippant, but we cannot understand why such security is directed at someone whose main activity these days is maintaing the status quo (doing nothing). Don’t be hypnotized, Buy Stuff.

Staring in the Rear View Mirror

24 Jun

The one singular characteristic of todays capital market environment that has been the most perplexing and frustrating has been the complete lack of concern for what “might” happen. As we have discussed, low rates and the absolute manic focus on additional yield at whatever cost, has produced an almost universal catatonic state. Nothing is more indicative of this than the markets complete lack of attention to the potential for reflation/inflation. We forgive the equity markets for their lack of focus as they have the attention span of a six year old, but it is curious that the Treasury Market continues to remain oblivious to what are emerging signs that pricing pressures are already upon us. Slack in the labor market, spare capacity, and seasonal one-off factors are only some of the reasons given as to why we should ignore what are clearly clouds on the inflationary horizon. Perception is reality however, and the reality of low long term rates will remain until the broadly held mis-perception on inflation/reflation changes. The argument is also made that inflation/pricing pressure will never come to bear primarily because we would have already seen it if it were going to take hold. Our feeling is that all of the liquidity sloshing around has flowed into the easiest parts of the capital markets (debt and equity markets), next up are the hard asset/commodities markets which will in turn lead to overall broad price increases, which will then  ultimately flow through to wages. We have never seen the kind of uncharted, unfettered Central Bank action that we have most recently experienced, so rest assured that when this inflationary cycle unfolds it will most likely not look like anything we have seen before. Buy Stuff

Suppression to Confiscation

17 Jun

Not content with its massive effort on the financial suppression front, the Federal Reserve has supposedly been discussing an imposition of fees on certain bond funds in an effort to avoid potential market dislocation. This causes us an unlimited amount of consternation for a number of reasons 1) They, and they alone, created the atmosphere whereby investors of all risk tolerances are forced to step out on the risk curve in an effort to earn anything 2) Charging exit fees in an effort to stem basic market forces is one more effort to cement their position as the ultimate arbiter of unforeseen events. We always have to pause in instances like this for fear of sounding like a conspiracy theorist, but one has to believe that this has the potential to open the fee floodgates with respect to any market that suddenly could become illiquid (note: this is every market).While some hard assets are criticized by many as non-yielding and thus unworthy of holding in ones portfolio, at least there is no fee imposed by the powers that be on this allocation decision. Sell Paper, Buy Stuff

Groundhog Day

23 May

I can’t help but feel like Bill Murray in the movie Groundhog Day, whereby it appears that every day in the Capital Markets is a repeat of the day prior. Forget the new normal, or the great moderation, we are now in the midst of the Groundhog Day Market. In this nirvana, Stocks rally, bonds rally or at least stay range bound, commodities sell off and volatility across the board stays stubbornly low. Investors in this new era, would appear, like Bill Murray, to be in some kind of twilight zone where it’s not “no news is good news”, its there is no new news. Every day the background noise is the same: “Stocks are the place to be given where rates are”,” The Fed will not raise rates until…”,” Inflation is dead”,” De-flation is the greatest risk”. This world would indeed be nirvana if not for the faulty premise that underlies all of this complacency; namely that Central Bankers have it (whatever it may ultimately be) under control. What concerns us is not the occurrence of some black swan event, but rather the high level of disjointedness which will occur given the significant mis-allocation of capital across all global Capital Markets.Major dislocations in markets usually do not stem from one single “event”, but rather from the collective group -think that believes that all events are simply one-off in nature and thus can be controlled. Market dislocations occur when the macro suddenly overwhelms the micro, thus rendering simple solutions (Central Bank action) relatively ineffective. Don’t mistake sameness for safety, Buy Stuff.