Thank you all, for responding to my post calling for views on where market's likely to be heading.
Regret that I am only given 2 books to award participants. I would have really liked to give them to all who have taken part.
I'm giving the 1st book to Eddie as a form of encouragement. Hope he continues to blog, and that in due course, will be able to see that the market is better treated as a teacher and a friend.
The 2nd book I'm giving to The Lonely Trader. He has done the impossible thing of confusing me even further on the first read of his "mini-book" (quoting Eddie). If I can't understand something, it has gotta be good. :-)
Below is his musing (in blue), which I have read over and over, and enjoyed it more each time I went over it. It contains a multitude of issues he could only briefly touch on (I believe he would have written 500 pages if only he had the time), and serves as a starting point for anyone who's interested in exploring further those topics being discussed.
I like what he stated in his opening - that "What we think depends on our time horizons and our objectives". I personally couldn't have agreed more. Time/investment horizon and objectives are factors that have always underpinned the framing of my arguments on such topics as whether daytrading, swing trading, or longer term investing is THE way to work our money. To me, each is a good timeframe, depending on one's needs and the resources at his/her disposal (time, energy, CAPITAL) - with the latter constraining the person to a specific investment horizon.
So, here goes The Lonely Trader's write-up that won him the book "Hedge Fund Trading Secrets Revealed" by Robert Dorfman:
I have to make my characteristic caveats here. What we think depends on our time horizons and our objectives. There is also the meta-question of where we choose to get our information. I don’t try to get too cute about it, preferring to get a broad view from mainstream media, bank research, and market commentary from a diverse range of folks in the know (excluding all speculators!). I think a lot of people go wrong in not caring enough about where they get their information.
My views are an amalgamation of what I have read – opinions, research and analysis, etc. – from other sources. Very little of the substance of my opinions is from original analysis. (And by analysis, I don’t mean the simple stuff the so-called blogosphere “experts” do every day. We can do most of that for ourselves. I’m talking about deep analysis here – the kind very smart people get paid a lot of money for.) So, very few of my opinions are original. Forgive me for any plagiarism, please. This will read like a confused rehash of what everyone else is saying, but I want the free book so here goes.
I have changed my mind since October/November when I said I was a long term buyer above 7500. The title of that post was “Rothschild would be a buyer here.” I was a bit too enthusiastic…. I don’t believe there will be the kind of turnaround everyone is hoping for in the latter half of 2009. There may be a brief respite, but that’s about it. In terms of the Dow, the odds are very good that the November 2008 low will crack – and very convincingly. Oil and gold will remain under pressure. Gold will not get much further above its highs of 2008 in the medium term, even with risk aversion increasing. I think the most popular position is and will be leaving everything in USD through much of 2009. On the macroeconomic front, I think deflation is not over. All the dollar-printing going on will not be inflationary – yet. Nobody will be spending any of that money. Inventories will collect dust, or be sold off at fire-sale prices. It won’t be enough to cover the bills. Factories and offices will close. Labor will stand pat on its unrealistic demands. Prices will fall across the board. Housing prices still have a lot more room to fall, and this won’t stop until well after 2009. I think that when this whole thing hits bottom, the peak to trough decline will exceed 10%. Real unemployment, not the crap that BLS puts out, will exceed 15% before the end of 2010. This will be what most thinking people – and most working people for that matter – call a depression.
Globally, I think 2009 will be growth-negative. Even if the IMF is right about 0.5%, in real terms I think this is a big net-negative. I think we have only seen roughly a third of the write downs from banks. In the US specifically, it is possible we could see a nationalized banking system. More banks will fail. Big banks. (Some are already insolvent.) States like California already are insolvent, and could be bankrupt before 2010. The US government will face a credit downgrade soon. Treasury flows will dry up as foreign buyers of US debt are forced to support their own collapsing economies. There will be defaults in Euroland – Spain, Italy and Greece are the top three contenders in the MSM, but who knows how many more will succumb to debt spirals. One or more could declare bankruptcy and abandon the monetary regime this year. This doesn’t mean I think the monetary union will dissolve, but as the larger economies of France, Germany and the Scandinavias build proverbial firewalls around their financial systems, weaker countries will be left to burn. Admittedly I’ve gone back and forth on the fate of the euro. I still think dissolution for the common currency is possible, but I wouldn’t bet money on it. (And I’m not, as you know.) The UK is already in serious trouble. At the beginning of 2008, insuring $10K in debt for five years cost $8. It now costs about $135. By comparison, the same debt in the US, which started out at roughly the same price in 2008, costs about $75 today. By the end of the year, EURUSD could be at parity, or close to it. GBPUSD could be at parity as well. (If you live in London now, try to get the hell out of there by 2010. Get your money out of there now.) In Asia, the picture is no better. Exports have all but ground to a halt. China needs to maintain a growth rate of 8%, according to its leaders, just to keep everyone happy. China has a very long and unhappy history with grumpy rural poor. I think its economy will be lucky to hit 5% and this will likely push rural poor from grumpy to froggy. China may have to “get military on their @$$es.” Demographics in China are fascinating – and under the circumstances, frightening in their contradictions and disparities. Unprecedented debt-financed overcapacity isn’t helping. I’m sure most of us already have an idea of what is at stake for those unfortunate people. There will be sovereign defaults in “Other Asia”. (My term.) Corporate default risk has been flagged for more than a year by rating agencies, particularly in shipping, property and technology. In an area not particularly known for transparency and robust institutions, the first big default will come as a surprise to the market. The result will probably be a cascade of panic. The general problem in Asia will only grow worse and it will be understated until a major dislocation occurs. Responses will be ineffectual. Protectionism in China and Japan, a typical reaction when they perceive any threat to their market shares and revenue streams, will only sink them further into the hole. India isn’t immune either. For many of the same reasons. And the fact that Asia’s financial systems are relatively insulated from the credit crisis is of marginal benefit when global contagion is peaking – not financial contagion, but the most basic kind of economic contagion among interdependent economies.
I could go on and on, but I’m starting to get depressed. Trading wise, stay very short term unless you can scale your bets to keep risk low. Long term, keep bet sizes miniscule. When things start to get crazy again, even those miniscule bets will start to look too big if the instrument rolls over on the trade. As far as specific ideas, my favorites are puts on Alt-A, Prime and commercial real estate. (Shorting any underlying instruments will probably seem too risky.) If you are long gold, hedge your position. There is something very fishy about gold right now. Unless $900 holds, I expect a deeper correction soon before heading higher. Same with Silver. Copper will depend on China – and demand looks like it will pick up a bit. But I don’t think the move will be sustained. While I think it is reasonable to be long oil, don’t hold your breath for a return to $100 and beyond anytime soon. Commodities will be unpredictable. Demand shouldn’t pick up too much for most, but even if it does don’t expect prices to spike. (Recall China’s recent announcement of a doubling of soybean imports – the underlying price actually fell afterward.) I hear of commodities going both ways, with talk about breakouts and inflation and all that. I think we’re a long way from the kind of inflation many pundits are expecting.
Currencies will continue to present opportunities for speculators with money to burn. Stay away from illiquid currencies unless you have a specific methodology that is suited to trading them. Stay away from pure yield plays until some semblance of "order" returns to the markets. As far as the majors go, there are some opportunites shaping up. Be careful on the crosses. Be careful with the CAD. Shorting GBP rallies might be an idea I can get behind. Shorting the yen as well, especially in relation to the USD. AUD should be supported well by gold for the time being. Look for relative strength to improve over the short term. I’m still betting on the EURUSD and the NZDJPY, but you know my bet sizes and time horizons are unique – and uniquely suited to large adverse movements. So those trades don’t really reflect my fundamental views.
These themes should remain with us well into 2010, barring some kind of unforeseen dislocation, like a major war. (Another topic for another time.) I’ve only touched on Japan because I’m still building my case, but it will figure prominently in our woes to come. (Or, if we’re lucky, merely “whoas”.) I’m sure I’ve missed some important points and I’ve probably contradicted myself somewhere, but there it is.
Regret that I am only given 2 books to award participants. I would have really liked to give them to all who have taken part.
I'm giving the 1st book to Eddie as a form of encouragement. Hope he continues to blog, and that in due course, will be able to see that the market is better treated as a teacher and a friend.
The 2nd book I'm giving to The Lonely Trader. He has done the impossible thing of confusing me even further on the first read of his "mini-book" (quoting Eddie). If I can't understand something, it has gotta be good. :-)
Below is his musing (in blue), which I have read over and over, and enjoyed it more each time I went over it. It contains a multitude of issues he could only briefly touch on (I believe he would have written 500 pages if only he had the time), and serves as a starting point for anyone who's interested in exploring further those topics being discussed.
I like what he stated in his opening - that "What we think depends on our time horizons and our objectives". I personally couldn't have agreed more. Time/investment horizon and objectives are factors that have always underpinned the framing of my arguments on such topics as whether daytrading, swing trading, or longer term investing is THE way to work our money. To me, each is a good timeframe, depending on one's needs and the resources at his/her disposal (time, energy, CAPITAL) - with the latter constraining the person to a specific investment horizon.
So, here goes The Lonely Trader's write-up that won him the book "Hedge Fund Trading Secrets Revealed" by Robert Dorfman:
I have to make my characteristic caveats here. What we think depends on our time horizons and our objectives. There is also the meta-question of where we choose to get our information. I don’t try to get too cute about it, preferring to get a broad view from mainstream media, bank research, and market commentary from a diverse range of folks in the know (excluding all speculators!). I think a lot of people go wrong in not caring enough about where they get their information.
My views are an amalgamation of what I have read – opinions, research and analysis, etc. – from other sources. Very little of the substance of my opinions is from original analysis. (And by analysis, I don’t mean the simple stuff the so-called blogosphere “experts” do every day. We can do most of that for ourselves. I’m talking about deep analysis here – the kind very smart people get paid a lot of money for.) So, very few of my opinions are original. Forgive me for any plagiarism, please. This will read like a confused rehash of what everyone else is saying, but I want the free book so here goes.
I have changed my mind since October/November when I said I was a long term buyer above 7500. The title of that post was “Rothschild would be a buyer here.” I was a bit too enthusiastic…. I don’t believe there will be the kind of turnaround everyone is hoping for in the latter half of 2009. There may be a brief respite, but that’s about it. In terms of the Dow, the odds are very good that the November 2008 low will crack – and very convincingly. Oil and gold will remain under pressure. Gold will not get much further above its highs of 2008 in the medium term, even with risk aversion increasing. I think the most popular position is and will be leaving everything in USD through much of 2009. On the macroeconomic front, I think deflation is not over. All the dollar-printing going on will not be inflationary – yet. Nobody will be spending any of that money. Inventories will collect dust, or be sold off at fire-sale prices. It won’t be enough to cover the bills. Factories and offices will close. Labor will stand pat on its unrealistic demands. Prices will fall across the board. Housing prices still have a lot more room to fall, and this won’t stop until well after 2009. I think that when this whole thing hits bottom, the peak to trough decline will exceed 10%. Real unemployment, not the crap that BLS puts out, will exceed 15% before the end of 2010. This will be what most thinking people – and most working people for that matter – call a depression.
Globally, I think 2009 will be growth-negative. Even if the IMF is right about 0.5%, in real terms I think this is a big net-negative. I think we have only seen roughly a third of the write downs from banks. In the US specifically, it is possible we could see a nationalized banking system. More banks will fail. Big banks. (Some are already insolvent.) States like California already are insolvent, and could be bankrupt before 2010. The US government will face a credit downgrade soon. Treasury flows will dry up as foreign buyers of US debt are forced to support their own collapsing economies. There will be defaults in Euroland – Spain, Italy and Greece are the top three contenders in the MSM, but who knows how many more will succumb to debt spirals. One or more could declare bankruptcy and abandon the monetary regime this year. This doesn’t mean I think the monetary union will dissolve, but as the larger economies of France, Germany and the Scandinavias build proverbial firewalls around their financial systems, weaker countries will be left to burn. Admittedly I’ve gone back and forth on the fate of the euro. I still think dissolution for the common currency is possible, but I wouldn’t bet money on it. (And I’m not, as you know.) The UK is already in serious trouble. At the beginning of 2008, insuring $10K in debt for five years cost $8. It now costs about $135. By comparison, the same debt in the US, which started out at roughly the same price in 2008, costs about $75 today. By the end of the year, EURUSD could be at parity, or close to it. GBPUSD could be at parity as well. (If you live in London now, try to get the hell out of there by 2010. Get your money out of there now.) In Asia, the picture is no better. Exports have all but ground to a halt. China needs to maintain a growth rate of 8%, according to its leaders, just to keep everyone happy. China has a very long and unhappy history with grumpy rural poor. I think its economy will be lucky to hit 5% and this will likely push rural poor from grumpy to froggy. China may have to “get military on their @$$es.” Demographics in China are fascinating – and under the circumstances, frightening in their contradictions and disparities. Unprecedented debt-financed overcapacity isn’t helping. I’m sure most of us already have an idea of what is at stake for those unfortunate people. There will be sovereign defaults in “Other Asia”. (My term.) Corporate default risk has been flagged for more than a year by rating agencies, particularly in shipping, property and technology. In an area not particularly known for transparency and robust institutions, the first big default will come as a surprise to the market. The result will probably be a cascade of panic. The general problem in Asia will only grow worse and it will be understated until a major dislocation occurs. Responses will be ineffectual. Protectionism in China and Japan, a typical reaction when they perceive any threat to their market shares and revenue streams, will only sink them further into the hole. India isn’t immune either. For many of the same reasons. And the fact that Asia’s financial systems are relatively insulated from the credit crisis is of marginal benefit when global contagion is peaking – not financial contagion, but the most basic kind of economic contagion among interdependent economies.
I could go on and on, but I’m starting to get depressed. Trading wise, stay very short term unless you can scale your bets to keep risk low. Long term, keep bet sizes miniscule. When things start to get crazy again, even those miniscule bets will start to look too big if the instrument rolls over on the trade. As far as specific ideas, my favorites are puts on Alt-A, Prime and commercial real estate. (Shorting any underlying instruments will probably seem too risky.) If you are long gold, hedge your position. There is something very fishy about gold right now. Unless $900 holds, I expect a deeper correction soon before heading higher. Same with Silver. Copper will depend on China – and demand looks like it will pick up a bit. But I don’t think the move will be sustained. While I think it is reasonable to be long oil, don’t hold your breath for a return to $100 and beyond anytime soon. Commodities will be unpredictable. Demand shouldn’t pick up too much for most, but even if it does don’t expect prices to spike. (Recall China’s recent announcement of a doubling of soybean imports – the underlying price actually fell afterward.) I hear of commodities going both ways, with talk about breakouts and inflation and all that. I think we’re a long way from the kind of inflation many pundits are expecting.
Currencies will continue to present opportunities for speculators with money to burn. Stay away from illiquid currencies unless you have a specific methodology that is suited to trading them. Stay away from pure yield plays until some semblance of "order" returns to the markets. As far as the majors go, there are some opportunites shaping up. Be careful on the crosses. Be careful with the CAD. Shorting GBP rallies might be an idea I can get behind. Shorting the yen as well, especially in relation to the USD. AUD should be supported well by gold for the time being. Look for relative strength to improve over the short term. I’m still betting on the EURUSD and the NZDJPY, but you know my bet sizes and time horizons are unique – and uniquely suited to large adverse movements. So those trades don’t really reflect my fundamental views.
These themes should remain with us well into 2010, barring some kind of unforeseen dislocation, like a major war. (Another topic for another time.) I’ve only touched on Japan because I’m still building my case, but it will figure prominently in our woes to come. (Or, if we’re lucky, merely “whoas”.) I’m sure I’ve missed some important points and I’ve probably contradicted myself somewhere, but there it is.
7 comments:
Interesting. Jules' blog now has economic analysis... :)
"There will be sovereign defaults in “Other Asia”."
May I know which of these Asia sovereigns the author is speaking of ?
Some of the usual suspects are moving towards the yawning edge once again (as expected the world over, with lowering government income/increased expenditure/pump-priming/liablilities servicing), but overall and structural balances are stronger compared with previous periods as well as other regions currently [but think the author is discounting this here].
Of course, some Asian sovereigns have unfavourable structural risks (notably Pakistan); would be interesting to see who is on the author's Asia default list.
:)
Don Chu
:-) I'm actually thinking of adding Hunk analysis, Don LOL!
I'll give "the author" a chance to respond to the points you've made before I say anything :-)
Nope. Not telling. (I don't know, anyway.) Structural factors in Asia may be stronger than previous crisis periods because at this juncture, the fat lady still isn't singing. (And the supposition that they are stronger is open to debate.)
There is still a lot of slack in the global economy along with lingering toxic contagion. Of course, this could all turn on a dime. We could wake up one day and all of a sudden everyone and their mother-in-law would be piling into euros, AUD and NZD. Consumer prices and wages would be rising. We would all wave goodbye to the spectre of deflation in our rearview mirrors, only to see inflation (hyperinflation?) looming when we turned around to face the road. All that money that was pumped into the system is finally getting its comeuppance. Either way, we are about to get a historical bitch-slapping. You gotta be ready to duck and parry.
I like to mix my metaphors. Sue me.
We prefer "biting" here, Lonely. ;-)
Don:
I'm still with Lonely on this. No one's looking forward to D-day, but I really think that what we're seeing now is merely the tip of the iceberg. We can't have all the facts - what we can do is to be prepared for the worst.
Lonely doesn't take a stance that he can't back up with empirical findings. You pick the wrong guy to challenge. ;-)
:)
Was just asking a question...think there's no need for slapping, suing, or biting.
And that was hardly a challenge; was genuinely interested in finding out if there was any pertinent information that led to that particular emphatic remark on defaults.
And the timeframe matters - a default in 2009 is less likely, defaults in 2010 and beyond much more so. And defaults come in many guises - negotiated workouts, terms and conditions accompany many quasi-defaults; that's what the supranationals are there for.
Definitely we have to prepare for the worst - and that's what the markets are for, discounting information and amalgamating views.
Sadly, for this social behavioural game of the markets, empirical findings are "hard-to-value". But in this case of empirical valuations of national balance sheets of current Asia EM vs 10 years ago, current Asia EM vs LatAm EM or Europe EM, the numbers (for what its worth) are unambiguous.
As for personally preparing for the worst, my "epiphany" after reading Peter Warburton's Debt and Delusion (1999) eventually led to an asset-lite, liquidity-preferred mantra (years too early), purchasing Perth Mint certificates and almost following Barton Biggs' tip of putting aside a sizeable amount of the only useable/portable currency in times of war, anarchy and forced flight - light, precious jewelry.
But it appears I am the optimist in this conversation.
:)
Don Chu
All, didn't take it as a challenge either. I'm not one to avoid a good argument. It is very instructive. Don, do you have a blog?
Hi Jules and lonelytrader,
Jules:
I got your email and just read the post you mentioned about the Tosser. Erm, am actually abit afraid of commenting there, so am replying to you here instead. :)
lonelytrader:
Great, no worries. :)
Like I've also told Jules before, I registered for a blog some time back just to allow for commenting at some wordpress blogs. It has remained in pristine emptiness until recently when I started using it as a post-it referencing board for a few persons. Am expecting it to remain as an online waste-basket for the forseeable future. But here it is:
http://dustysojourner.wordpress.com/
Jules:
Whatever happens, may peace reign in your heart and spirit.
Don Chu
[Btw, not that it matters, but if you read my words regarding the above post contents, I actually have a rather pessimistic view of economic conditions (but certainly not allowing it to translate into pessimism in daily living). And for quite some time now, my lifestyle and indeed my overall portfolio (above and beyond the trading accounts) has been slanted towards high-liquidity hard assets for quite a while (as mentioned, I was in too early there) - almost in anticipation of severe economic+social conditions (read closure of common markets, breakdown in international transport infrastructure).
All I'm missing essentially, is a ticket on a slow boat to Perth when they do ground the planes. And I'll just need to pray that my Au and Ag deposits are still safe and have not been appropriated by the aussie state or federal governments, when I finally do arrive there.
If all else fails, and the barbarians (whoever they are) are already at the gates, that's alright too.
I'll just pick a nice spot on the eastern beach, enjoy a bit of cool north-easterlies and get a nice view of it all coming down. :)
]
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