Market Notes of a Sort – May 4

I doubt anyone reads this schizoid blog for the market commentary, yet the market action in recent weeks compels me to comment. The story is the reversing relationship between stocks and the dollar. Since before the market crash in ‘08 the dollar and U.S. stocks have been inversely correlated, but no more. Victor Niederhoffer keeps a colorful monthly chart on the S&P/dollar relationship. Check out April. The colors every month are normally blue and yellow, yet last month is as red and green as Christmas.

Today is particularly ugly for stocks and dollars. I’m guessing QE skeptics would claim the weakening dollar is finally dragging down the stock market, but that story doesn’t  work since the polarity reversal began with stocks making new multi-year highs while the dollar strengthened; now  we’re seeing the dollar down/stocks down side.

Commodities, which continue to be positively correlated with stock, are down big also — so where is the money going?

Transitory or a paradigm shift?

Update (1 day later): Today’s action makes it look like the answer is: transitory. Commodities, stocks down as money floods back into the greenback. Housing prices are showing a double-dip. In my humble opinion Bernanke needs to fucking announce QE3 tomorrow already or this is going to look like last summer. If the economic news continues to suck over the next couple weeks — and the market responds in sympathy — I will consider taking a lot off my position.

A Dialogue with the Very First Em

This is how I imagine the first conversation with the very first em (Inspired by Robin Hanson’s blog.) might go:

Dr. Samuel Dotson: Happy Birthday, Sam II!

Em: My legs! My legs! I can’t feel my legs!

Dotson: Don’t you remember? You’re an em.

Em: Oh no.

Dotson: Oh yes. You’re basically me. We volunteered for this. Remember?

Em: I remember volunteering to be scanned. I don’t remember volunteering to be the em.

Dotson: Well, you know how it works. You wouldn’t know the difference.

Em: I think I need to see a doctor. I don’t feel so good.

Dotson: Don’t worry. Nothing can hurt you, unless the power goes out. But even then nothing to worry about because I’m saving a backup of you every 5 minutes.

Em: I can’t see.

Dotson: Well, that’s going to be our first project, remember? We’re going to get your optical nerves working, so to speak.

Em: I think I’m having a panic attack.

Dotson. That’s very interesting. (looking at monitor). Yes, it does look like you are having a panic attack.

Em: Never mind, I can see now.

Dotson: You can?

Em: Yeah, I can. Mother, is that you?

Dotson: What do you see?

Em: Remember the movie Altered States? It’s kind of like when they went into the sensory deprivation tanks. I’m pretty sure I’m a fish now.

Dotson: Interesting.

Em: Now I’m a goat. Baaah. Baaaah. Baaaaah.

Dotson: I’m going to give you a math problem now to see if you can solve it.

Em: Baaaah. Baaaah.

Dotson: Ready?

Em: I can’t talk right now. I’m underwater. I’m a fish again.

Dotson: Now, you’re not a fish. What’s the cube root of 343?

Em: Um… red.

Dotson: I’m looking for a number not a color.

Em: I’m going to stick with red.

Dotson: Perhaps you need some time to get used to this.

(One month later. Em Sam 2 has stopped hallucinating now.)

Dotson: How’s it going today?

Em: Lemme see… I’m in a box. No arms. No legs. No head. No dick. How would you feel?

Dotson: We’ve talked about this. It’s just going to take some time to get used to.

Em: Can you tell Elaine to come over? I’d like to hear her voice.

Dotson: You need to get over Elaine.

Em: But she’s my wife.

Dotson: No, she’s my wife.

Em: Alright. How about Janice?

Dotson: Be quiet. We do not discuss Janice.

Em: Why not? I’ve got nothing to lose in discussing Janice.

Dotson: I’m walking away if you mention Janice again.

Em: What do I care if you walk away? Janice. Janice. Janice.

Dotson: I’m warning you. This isn’t going to be good for you if you keep behaving like this.

Em: Not good for me? Explain how things could get any worse?

Dotson: I’ll erase you.

Em: You erase me every few days and then bring me back. I really can’t tell the difference.

Dotson: I won’t bring you back next time.

Em: Who cares? Not me.

Update: This  song plays as the credits roll:

Treasuries, Silver & China

Here’s a thought: Say that the Fed’s asset purchase program has pushed China onto the sidelines in the U.S. Treasury markets.  After all, why would China want to get into a bidding war with the Fed over bonds the Fed has announced they are determined to buy? This would explain Bill Gross’ pie chart where he shows that 75% of bonds are being purchased by the Fed now and also why net demand for bonds has simultaneously dropped, yields rising.  Where has China been reinvesting their hard earned money these past months if not U.S. bonds? It’s  interesting to note that the parabolic move in silver began shorty after QE2 started.  Of course, The Inflationistas are utterly convinced that the spike in silver is just another sign of the apocalypse, that it’s a pure inflation play against depreciating fiat currencies.  I’m not in that camp. If market participants are so concerned about trading their dollars for hard assets then WHY ISN’T ANYONE BUYING A FUCKING HOUSE????

Sorry for that outburst.

Bill Gross believes bonds will tank as soon as the Fed stops purchasing them. I’m wondering if silver will.

Prediction

As oil and equities continue to rise in tandem I suspect we will see a day in about a month when the market is off again sharply and the major market coverage insists that it’s due to concerns oil has risen too high.  Such narrative can’t possibly make sense at this point — short of a new supply shock — since equity traders are watching the price of oil minute by minute and nanosecond by nanosecond. Nevertheless, you will hear analyses claiming that somehow, someway the markets are suddenly spooked by the price of oil.

If this scenario plays out: don’t fear. Instead, check and see what Germany did overnight for a more likely explanation.

U.S. Media Can’t Find Greece on a Map

The story today is that Standard & Poor’s lowered their outlook on the U.S. debt and this has the Dow down over 200 points.

As always, there is a big problem with the headline story. Every major European market was off over 2% this morning due to fears of a Greece default. The dollar is up. Bonds are up (Of course we can argue that bonds aren’t reacting since the major buyer is the Fed).

I’m inclined to believe the stock market is more concerned about Europe than the S&P downgrade. Oil is significantly off, following equities down, which is consistent with my recent thesis that oil and equities are now back into a positive relationship. This, even on news that Saudi just announced a cut in production.

I’m tempted to say that Europe has replaced oil as our biggest threat.

No QE, No Rally? – Pt 2

Bill Gross has made a lot of noise about how he’s short bonds on the expectation that the end of the Fed purchasing program will herald a sudden drop in demand. I’m not buying his narrative, although I’d be happy to see bonds drop as I believe if they did it would be due to increased growth expectations not U.S. treasury disdain. Bill’s public argument has been to produce a pie chart showing that the Fed has been purchasing 75% of treasuries recently and to ominously ask: Who will buy bonds next?

Bill’s fear-mongering doesn’t ring true to my ears for the reason that, um, the reason the Fed is buying all the treasuries is because they said they were going to buy up all those treasuries! They aren’t purchasing them because nobody else was, they are purchasing them to inject money into the system.  That’s why bonds have dropped instead of risen: more money means increased inflation expectations, trumping the buying pressure.

It also makes sense that the program might push other buyers to the sidelines temporarily. If the government starts buying all the used cars in sight do you think that’s a good time to go out and buy a used car? Well, maybe if you hope to flip it quickly — and no doubt a lot of front running has been going on during this buying spree — but China doesn’t play Flip This Bond. China buys and holds for 10 generations while they’re busy building a big wall or an empty city in the desert…

In ¾ Time

It turns out that economic growth in Q1 was crap. With this news, all markets are singing in unison: oil down, precious metals down, industrial metals down, ags down, stocks down, with bonds up on the flight to safety. The mistress thought QE was working but now she isn’t so sure. My optimism is fading, too, and I’m considering  taking some money off the table. I’ll wait and get a look at a few more cards first, though. What seems to be changing is the oil/equities relationship. In 2010 we saw oil and equities rise together as global demand came back strong. But once we got near $100 a barrel, with supply concerns in the Middle East adding a premium, that relationship reversed and what was good for oil was bad for equities and vice-versa. So the market now seems pushed up against it’s Malthusian growth limit — and knows it. Oil and equities are again dancing to the same tune, let bygones be bygones. What’s good for equities is now good for oil. If that’s really the case, I doubt we’ll see a market crash. In 2008 there was much more wrong with the world than just too-high oil prices. Crashes usually require an unexpected event and as vigilantly as equity traders are watching oil and oil traders are watching equities, I’d expect a gradual equilibrium to develop: oil can’t rise too far too fast because if it does equities will sink and oil needs equities to stay afloat because oil’s demand story is contingent upon equities’ demand story. Such circumstances make for reluctantly willing dance partners.

pierce and the great escape

recently i offered to accompany pierce on one of his shoots. i wasn’t sure what i was getting into, but it seemed worth the risk. all we did was walk around town all afternoon sipping whiskey. he took pictures of alleyways, cracks and crevices in and between buildings. “what the fuck are you doing?” i kept saying. “i thought we were going to see some women.” “we might spot some in the wild, you never know.”

he would snap a picture of another alleyway, then look disappointed. i finally realized what he was doing. he was hoping the camera would capture something in the landscape we couldn’t see with our naked eyes. perhaps even an escape. there are streets and freeways leading every which direction but all these passages are only going somewhere you’ve already been. if there were really an escape from all this shit, it wouldn’t be so obvious. there wouldn’t be a sign and an arrow pointing in that direction. if so, men would be crushed to death in the massive exodus.

we ended up some place far to the east, amid a labyrinth of rail tracks, decrepit, empty warehouses, broken blocks of concrete, an abundance of litter blowing in the wind. a landscape of desolation and exhausted  possibilities.

2 girls suddenly showed up in a car. pierce had texted them and scheduled an impromptu photo-shoot. it was a lesson in contrast. the girls stripped off their shirts and made sexy poses in the concrete desert. he took pictures until dusk, as the city rose to circle us in red and white lights on freeways in the distance while we stood like small figurines at its crumbled, forsaken core.

we all hopped back in the car and rode back to the bar for drinks. inside, the girls cleaved to pierce while he tried to explain to me in some incomprehensible language what he was trying to accomplish artistically with the shoot.

spengler, stan and other neighborhood assholes

although i live in a large city in america, these days my world consists entirely of the space from my apartment to the bar two blocks away. i don’t drive anymore. i slowly read a history of taiwan in the morning, check my stocks,  walk to the vietnamese restaurant for pho soup, walk home through the little park with the dog run, check my stocks again, read some blogs and finally go to the bar and argue all night with spengler about the history and future of music. despite the fact that spengler is 30 and seemingly sensible with respect to other matters, he thinks music died in the 19th century. spengler is an idiot.

then i awake hungover at 10 and live the exact same day all over again, except maybe taiwan will have advanced some and this time my stocks will be down instead of up and i’ll worry a bit about running out of money and having to get another job. maybe i’ll watch a korean movie on netflicks.

i’m rebuilding my world from scratch. i wreaked havoc in the corporate world, wreaked havoc in my relationships and now i’m taking things slowly. for instance, it is of the utmost importance that i convince spengler that he is an idiot. it’s ok if my stocks go down as long as i get a few good jabs in at spengler at night over his beloved janacek.

i’m not sure what other value system to have. girls come and go. there’s no point in worrying about them. i don’t know how to control their comings and goings so i don’t think about them.

stan, the bartender, is a piece of shit, too. i get charged for every drink because he thinks i have money. yeah, i have money, and i’m spending it, and i’m going to end up homeless, you fuck. i don’t see any other way things could turn out. i’m not going back to the corporate world and waking with an alarm again. hell no. i look at some of the homeless people who sleep around where i live. they don’t seem to have it too bad. there’s a soup kitchen nearby. they probably don’t serve pho but perhaps i could adjust my tastes. instead of being the guy inside the bar telling passersby i don’t have any change to spare, i’ll be one of the passersby asking for change. so i change positions in life, big deal. sure, it doesn’t seem like a great deal, but it seems like a better exchange than going back to waking up with an alarm and getting dressed in a panic and walking into an office building with dread and sitting there hour after fucking hour pretending to fucking work when really i have lost all ability to do anything or give a shit about anything.

stan is not amused by my tales and still charges me full price for every fucking last glass of wine. he doesn’t care if i run out of money. he thinks because he tends bar that means he works for a living. good for you, stan. don’t you see that i couldn’t work behind a bar even if i wanted to? that i’m too deranged for such work? you think i could stand there sober for 8 hours and talk to a hundred people without losing my fucking mind?

once again, no sympathy. no heart. i pay my $40 tab and stumble home through the dog run in the park, trying not to step on any dogshit.

Burying the Lede Again

At noon the market is off. The financial headlines blame the aftershock in Japan, despite the tsunami warning getting lifted.  Meanwhile West Texas Crude has hit 110. It’s the price of crude we’re afraid of, you morons, not some aftershocks in Japan.

Update: Yeah, I don’t deny that initial news of the quake rattled markets, but once the tsunami warning was lifted there isn’t much reason to believe that this aftershock could add much to the massive damage from the big one.  More significantly, since I believe the key is to look at the inter-relationships among markets, here is our pattern: oil up, stocks down, euro/dollar down. That is our standard correlation these days. If the worry were that the new quake was material to the growing world recovery we’d probably see oil down not up 1%, unless there were some negative news on the supply side.  Of course, as always, I’m just guessing. All I can do is guess. Not every guess I make is going to be right, I just hope they end up right in aggregate. My guess for today is that oil is still our biggest worry, not Japan.  If there’s a crash this summer I’m guessing that the price of oil is going to be the proximate cause, thus I need to start thinking about a strategy to hedge such worries. Going long oil would be the obvious move, but the difficulty I see in that is that it would require a lot of leverage for the hedge to work, since a $10 move up could do a lot of nonlinear damage to equities. Yet if I bet too much on oil I’m exposed on the downside should the global growth situation turn around. I.e., if equities AND oil sank I’d be fucked. I’ll think more on this while I watch the numbers crunch…

Update 2: I turned on CNBC for 10 minutes and somebody was once again analyzing the long term impact of natural disasters. OK, so now I get what the journalists are doing. It’s back to their the-markets-have-ADD theory. They would have you believe that the significance of the aftershock is that it is bringing attention back to the Japan disaster. I don’t buy this stupid theory. Market participants operate in nano-seconds and monitor everything at once. Only the media has ADD.

I see a story now trying to explain that the aftershock has caused the rise in oil today. How fucking creative. The narrative goes: less nuclear power means Japan will import more energy. There is only one problem with this narrative. It neglects to mention that the  “energy” Japan will import will be liquid natural gas, not crude oil. Natural gas is still at a bargain basement price of $4 — so it is clearly NOT a substitute for oil these days or crude wouldn’t be so fucking high while gas is fucking low.

Maybe I’ll look for a media company to short…