GO GREECE LIGHTNING

The anatomy of a bail out:

1). Story leaked to press

2). Government officials refute claim

3). Bail out takes place in some form or another

If the entity has been deemed too big to fail this is how it has worked in every case except Lehman Bros. and chances are this is how it will work with Greece as well.

I am certain* that the leaders in the Euro zone think this will stop the problems with the remainder of the PIIGS.  I think that it may, for a time.  The fact of the matter is that they will eventually have to bail them out as well.  Whether they do this with any publicity is still to be determined, but rest assured that Portugal, Italy, Ireland, Spain and any other problem country will get bailed out.

In reality why shouldn’t they?  When you can print money at will there is no reason not to bail them out.  If you’re a government official you think this way, but if you are a normal person with half a brain you understand the potential pit falls of this scenario.  If I could print legal tender at will I would be richer than Bill Gates, but if I could print legal tender then chances are the same technology and right to do so would be available to you, which means that our money would not be worth much.  It would become a race to see who could print money the fastest.

All that said the real goal of the Central Banks around the world is to get us out of this crisis and to do so they believe that if we become awash with USD, Euros or whatever that we will begin spending again and inflation will follow.  I am certain that eventually it will, but I think that consumers and consumerism for that matter has been changed by this, “crisis.”

Source: Bureau of Economic Analysis

Google Trends Search for Coupons

People have begun to understand the negative affects of personal debt.  They have been forced to understand that their home is not an ATM.  Also, the fact that a job is never truly secure and a back up is not easily found all the time has really hit home with a lot of workers.  It has switched on the light, which shows them that they cannot borrow at the rate they once did because it is simply not fiscally responsible.  Home prices and job security are never fixed and things change quickly.  Consumers are becoming more frugal.  They are paying down debt, using coupons, saving more of their income and learning how to live within their means.

So while governments continue to throw good money after bad, people are beginning to realize what it means to be responsible with their money.  Perhaps this change in consumer behavior will somehow affect change in capitals around the world.  One can hope anyway.

*As certain as one can be when attempting to predict the future.

THE EMPLOYMENT REPORT

My first reaction to the employment report was to laugh at the 9.7% because to me this was most likely people dropping off of the data because they had become “discouraged.” Which means they still want a job but for the time being have stopped looking so they are somehow, according to the government, no longer “unemployed.” Go figure.

I then decided to pull up my new favorite employment indicator and much to my surprise the Employment Population Ratio actually ticked up in January. Not much, but it did tick up. On a month over month basis this appears to have little meaning as the data has had a tendency to tick up and down around a certain point on a month over month basis, but who know maybe it could be the start of something. I highly doubt it means anything, but you never know.

MORE ON INFLATION/DEFLATION

Here is some more interesting data regarding our current economic position as well as the prospect for inflation.  In an inflationary environment people generally tend to invest their money in hard assets such as businesses, real estate, commodities, etc in an attempt to keep up with the effects inflation has on fiat currency.

I still stand firm in my belief that consistent increases in government spending will lead us into an inflationary environment where people will want to hold assets other than cash, but I think that time may not be for a while given the fact that people are still concerned with overall economic health.

Gross domestic private investment measures investments in fixed assets within the U.S.  This particular gauge while up 8.22% from Q2 to Q3 2009 is still down –28.40% from it’s high in Q1 2006.  I find this data a bit troubling from an inflationary standpoint for the reasons given in the first paragraph.  People and business are not investing.  To the contrary, this data shows that they are in fact hanging on to their dollars as opposed to spending them.

Further evidence shows that private residential investment has apparently purchased a one-way ticket and it is questionable if it will ever return.  Of course it will… one day, but for now we have not even seen an uptick in this data.  Another thing to keep in mind is the fact that a lot of the loans that got us to that high point were liar loans and this is a segment of the market that will probably not return to significance within the foreseeable future.

On a positive note those that still have jobs and income have not seen much of a dip in their disposable incomes.  According to the Bureau of Economic Analysis real disposable personal income is only down about 2% from it’s high.  This is good for those with jobs, but as you know from this previous post the number of people who have jobs is becoming less and less.

In the end all the data I keep running into supports a deflationary environment in the near term.  If government continues on its spending binge, which history shows it will regardless of who is in power and monetary policy continues to be loose then inflation will at some point kick in.

As with all things in trading it becomes a matter of timing and how long you can stomach your position.

EPR & INFLATION

According to the talking heads towards the end of 2009 the employment picture was getting better.  Job losses and unemployment were starting to become less and less.    I ran across this chart in some of my reading this morning.

The Employment-Population Ratio (EPR) measures what proportion of the working age population is employed.  The data used to derive this ratio is the total non-institutional working age population and civilian employment.

To me this graph is quite telling.  The jobs picture is in fact not beginning to turn around.  It is only getting worse.  As of year end 2009 the EPR was at 58.2.  That is a figure we haven’t seen since August 1983.  In reality our employment picture has been moving backwards more or less since 2001.

I have spoken in the recent past of the potential inflation around the corner, but before we can have that the velocity of money must increase.  It would be difficult for the velocity of money to increase with a bleak employment picture.  Furthermore, banks are being rather tight fisted with loans these days, the Fed is planning to pull lending facilities and consumers are paying down debt in historic amounts.  None of this bodes well for the inflation prospect in the near term.

STOP YOUR PROP, EVIL DOER!

I wonder what the administration is defining “prop trading” as specifically?  Does that mean market making in already liquid stocks or does it refer to marketing and selling CDO, CMO and other derivatives or does it address various arbitrage situations.  I am unclear on what prop trading is to the President.

Now I do have to be honest and say that I agree with one aspect these new regulations and that is banks not running hedge funds and private equity funds.  Let’s be honest, most of the hedge funds held inside banks are sub par anyhow.  The best managers don’t open funds within banks because they know that their potential pay is much greater outside that arena.  While I do not like a heavy government hand I don’t think this idea is all that bad and I really don’t think it will really make any difference going forward.

Again I do not know what exactly is considered prop trading, but if prop trading includes things like market making I believe that we are putting undue regulations on these banks.  Market making is a necessary function in any market.  However, there are already a number of different non-bank market making firms that will gladly pick up the slack.  At the same time couldn’t the Goldman Sachs of the world simply say ok we are not taking customer deposits any longer and drop the bank holding company?  I don’t really know, the implications are not clear to me at this point.

On another note prop trading was not the root of the “financial crisis.”  I am unclear as to why it has become a target.  The root of the problem was no doc loans for people with little to no income being packaged and sold with unjustly high credit ratings.  Is this the prop trading the administration is trying to target?

Either they do not understand that “proprietary” trading can encompass a very wide variety of strategies or they would really like banks to stop trading for their own benefit.  If a bank makes money and decides to use some of that money to trade for its own benefit why should Washington have any say over that?  Now if a bank makes money and then uses that money to push garbage products onto clients who believe everything a salesperson tells them then perhaps this issue would need to be addressed by Washington.  Oh wait that will go on until the end of time.

Whatever the case I believe “prop trading” needs to be clearly defined in this case.  I am sure in time it will be, but today’s remarks leave far too much room for interpretation.

NEW YEAR

Happy New Year!

I am going to try and be around a little more often than the last part of 2009.  Right now I will commit to once a week.

I have finally narrowed down what I am going to do with myself.  In Q4 I looked at a number of potential ideas for alternate business than I had been in along with some ideas for the same line of work and decided to stick with what I know.

I’ve still been trading although in smaller size than before.  One program I run ended up doing better than I had anticipated for the year and the other not so much.  So I continue trying to figure out how to raise assets into my little shop.

I am finishing putting together another fund with a friend of mine that we have been getting good responses on so far from prospective clients.  I wont go into details on what it is all about, but I am very excited about the potential.  My ultimate goal is to roll what I am doing here into this other company if the performance continues.

I am thinking that 2010 may be more of a traders market for the equities this year because the Fed is removing some of its “facilities.”  Maybe going forward we can focus on what is really going on as opposed to the amount of liquidity that the Fed has pumped in.  At the same time there still remains a large amount of liquidity in the market place.  My view is more my wish than anything else.

Other things I am watching carefully this year are long-term rates and metals.

Some more thoughts

Some ingredients for inflation are:

1). Increase in money supply
2). Decrease in confidence of currency
3). Increase in the velocity of money
4). Debt to GDP ratio >100% (not entirley accurate)

At this point we are missing two of the four listed. I will expand on my thoughts when I get more time. If you haven’t voted yet in the poll from the previous post please do. I don’t know who answers what so be honest.

INFLATION, DEFLATION, STAGFLATION, HYPERINFLATION WHAT?

A macro thought from a micro guy.

One thing I have been working heavily on is learning about the Japanese style deflation they experienced after their real estate and stock boom.  As most people know Japan went through a similar period of inflated prices starting in the 1980’s and a corresponding re-pricing starting in 1990.  In an attempt to revive the economy Japan pumped money into banks that should have failed and passed a string of deficit funded stimulus packages.  Japan then dropped their key interest rate to 0 in an attempt to inflate their way out.  Unfortunately enough confidence had been lost in the Japanese economy that no one wanted to borrow from them especially at 0% interest rates.  Inflation did not occur; in fact deflation was the outcome.

Now we find ourselves in a similar problem.  How have we responded?  We have pumped money into banks that should have failed, we have passed increasingly larger stimulus packages and we have followed a ZIRP (zero interest rate policy).  One could conclude that we are headed for the lost decade(s). 

The similarities are eerie to say the least, but Japan had some differences as an economy at that time.

1). Next exporter

2). Not a reserve currency

3). No war funding

4). Less un-funded liabilities

As of December 2008 Japan’s Debt to GDP ratio was 172.10%, and they still have problems with deflation.  I believe there is only one possible outcome to the position we find ourselves in but before I go into more detail I would like to get some votes from readers on where they think the U.S. is headed.

BACK AROUND

I’ve had a lot going on lately.  I am considering moving away from the speculative trading side of things and into a different area.  I penned keyed a post announcing my exit of speculative trading altogether last week, but quickly pulled it because in reality I was not sure if that was the case or not.  It was more emotional than anything and I felt it said too much too soon.  In fact it did.  Events have been changing on a day-to-day and hour-by-hour basis around here.  I’ve been continuing to work on my managed accounts, which did not do so hot last month, but still remain positive on the year and have locked in a good month already if they can keep the gains.  I have also been working with a couple of other people on an interesting hard asset management idea, as well as one other possible business that could have potential.  I guess all things have potential, don’t they

I am not exiting speculative trading entirely but I do find myself moving in a direction that is less speculative then previous.

There you have it that is why I have not been around much because I’ve been trying to figure everything out. 

RAISING UPDATE

wdallasm via flikr

I finally had a sort of eventful phone conversation with a third party marketer yesterday. Right off the bat he let me know that my AUM was too insignificant for his firm, but he was rather nice about it.  He said he would hook me up with a seeder fund.  I didn’t really think I needed a seeder fund, but I’m willing to explore all possible avenues.  He used to live in the town we recently moved to, and as it turns out he and I grew up in the same town.  He is 33 years my senior but I think having that connection helped me out a bit.

I don’t know where it will go from here, but it was a good conversation and I can’t ask for any more than that.  From the way he was talking he does much more on the hedge fund and also mutual fund side than the CTA.

I fired up the old brain yesterday and started to work on a new idea for the first time since June or so.  The basic premise is to normalize price in a number of different ways and buy on weakness and sell on strength.  I have been looking at it on a larger number of commodities rather than my normal equity index futures.  I’ve still been working with in sample data so I can’t speak to how I think it may pan out yet, but my gut tells me in the long run it won’t.  Until I can prove that I’ll keep working on it.

Other than that I find myself short the equity market.  I don’t really want to be and my last short didn’t work out so great, but here I am.

Looking forward to my son’s 4^th birthday party today.  He’s going to have his first sleep over.  He was so excited that he got up around 5:45 this morning.  However, this isn’t too abnormal as we can expect to see him in our room anywhere from 5:30 to 6:30 every morning.  Early to bed early to rise…