Recent Successes and Failures
It has been a strong period for equities and a strange period for me. I will deal with the latter point first.
- I said that I expected a risk-asset rally in late January. But I never got an entry point into equities.
- I bought copper as a catch-up trade and then exited for no loss after the market fell back.
- I shorted the rally in USD/JPY and exited for a loss when my stop was hit.
I avoided equities for a good reason — that my process did not allow it. But I had dwelt before on the fact that my process would not allow me to repeat my long-equity trade of September 2010 (on the basis of the Fed’s actions). I have now modified my process to account for this. There is no reason to feel bad about missing the equity rally — if you are not following your process, you are likely to lose money. There will be other trades and other markets. My objective is to build a process that will keep me in the game for many, many years.
I wavered in my long-risk-assets view on 6th March after going to an investor event and talking to bearish people. In particular, I focused on the danger of the high oil price to US growth (subsequently I read James Hamilton’s argument that the effect should not be too large http://bit.ly/AzKxH0). When the markets fell sharply — that very day — I was already re-evaluating my views and was spooked. I wrote a note on 6th March about how I could be wrong, if I was wrong. I think it is fair to say, given the subsequent market action, that I was not wrong. The improving US economy and looser monetary conditions worldwide have caused an equity rally. Now, there is no reason to feel bad about re-evaluating one’s views. I am wrong about things all the time, and it is only constant questioning that means I am ever right about anything. What there is reason to feel bad about is panicking like a little girl after talking to a few bears and then seeing a drop in the market that I should, if anything, have used as a buying opportunity. As it was, I felt uneasy about my long copper position and moved the stop to my entry point. This was a mistake. The market got nowhere near my original stop and subsequently rallied, but my position was taken out for no loss. Narrowing stops to the entry point has no intellectual justification and is not part of my trading process.
There is also reason to feel bad about my piece on ECB action on 9th March. I had previously argued that the completion of the second LTRO was not a monetary tightening (unlike the end of QE2 in the US, which I argued before the event was a tightening). However, because markets were down, I saw a tightening aspect to Mario Draghi’s comments at his latest press conference. I think that my original view was right, and that the ECB has not tightened significantly — certainly not enough to derail a risk-asset rally. My opinion was led by the market action. This is hardly unusual behaviour among market players, but that does not make it any less stupid.
In contrast, my loss on USD/JPY was quite acceptable. I thought that US 2-year rates would not rise signficiantly, and that the relationship between the 2-year interest-rate spread and the currency would hold. I was wrong on both counts, too early in trying to pick a top in a market that was running strongly, and too quick to trade a relationship that was on the outside edge of its scatter plot but not at an extreme. But that is all fine. I was wrong, I followed my process, and I lost money. That is bound to happen sometimes.
Lest anyone extrapolate from my tone to my performance: that is not possible. I am still comfortably up YTD.
So, 2-year interest rates are rising in the US. So are 10-year rates, and German interest rates, and indeed rates in general. US equities are rallying strongly, European equities somewhat less so. The equity markets of the PIIGS and indeed of much of the Eurozone remain a long way down from their most recent peaks. Japan has had a sharp rally, Shanghai and Hong Kong a limper one that has left them well down from 2011 peaks, while South Korea, Brazil and India’s markets are moving towards their own 2011 highs, although not there yet. As equities have moved upwards in general, despite the divergence in their levels, the USD has rallied, but so have EUR and GBP; JPY has weakened sharply, and AUD has fallen. Copper has managed a limp rally but seems to have broken its strong correlation with SPX. To put it simply, everything is all over the place.
To put it less simply, the strong risk-on, risk-off correlations that have driven markets since the financial crisis seem to have shifted down another gear, or even gone into reverse. True, Chinese equities have been doing their own thing for a while, bond yields have been kept low by the Fed’s 2014 language while equities rallied in the autumn and winter, US equities were stronger than anything else for much of last year, and European stocks have suffered with the euro crisis; but for the USD to rise as equities rose, for copper to lag (presumably on weakness in China), for AUD to fall as equities rise (also on China, and domestic problems), for JPY to drop on BoJ action rather than global conditions — these things are new. It may be that we have passed a break point in global risk-on, risk-off, and that individual markets will dance more to their own tunes. Or it may be that new correlations are being established for a world in which the US has strong growth, developed-world central banks have all moved further in the direction of activism (dragged kicking and screaming, in the case of the ECB and BoJ), and Asia experiences a slowdown.
Rosenburg Still Sceptical About Rally…
… according to the FT. I will just say this. The SPX is driven by earnings and credit spreads. Credit spreads are narrowing on looser monetary conditions. Trailing earnings continue to rise (the slowdown in earnings growth happened last autumn, not today — recent growth has been strong) and US economic growth is improving earnings expectations. So equities are rising. There is no puzzle and no reason to think that the rally is somehow not real.
Australian Housing Starts
I had a quick look at this series. It was down 6.9% QOQ Q4, the third negative quarter. More importantly, if one looks at a chart of the absolute level, it is clear that the series is sliding and is already in pretty depressed territory (it has been at the current level or lower 25% of the time since the series began in 1984). Is this the Dutch disease effect, or a genuine slowdown in China? Either way, Australia is starting to look genuinely shaky.
- US current account -124bn d.e. Q4. The current-account deficit remains notably narrower than the pre-crisis period, and fairly stable. In the mid-2000’s, the deficit was on a widening trend and became very large.
- Import prices 0.4% d.e. Feb. Remain subdued.
- Australi motor vehicle sales 0% d.e. Feb.
- Initial Claims
- Empire State
- Philly Fed