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Global Macro Notes: Slowing To A Crawl

Aug. 20, 2012 8:51 AM ETCOPX, XLU
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Global Macro Notes Mon Aug 13th


  • Japanese GDP Slows to a Crawl. Japanese economic growth slowed to an annual rate of 1.4 percent in the second quarter, the government said Monday, as cooling global demand weighed on the nation's exports, while domestic demand, which had helped Japan outperform other Group of 7 industrialized countries this year, appeared to lose steam.

Japan stagnation shows further evidence of global growth slowdown. Twenty years on, still near stall speed. U.S. at increasing risk of becoming like Japan b/c policymakers fear the impossible outcome (Greece), thus improving odds for the more likely one (Japan).

This sounds more bearish than bullish, re, contrarian positioning. Hope in stimulus is a time decay hope. The returns on such are rapidly diminishing. Hope for China stimulus over the weekend was not met.

  • Preparing for a collapse of the euro. Banks, companies and investors are preparing themselves for a collapse of the euro. Cross-border bank lending is falling, asset managers are shunning Europe and money is flowing into German real estate and bonds. The euro remains stable against the dollar because America has debt problems too. But unlike the euro, the dollar's structure isn't in doubt.

Further evidence that Europe's problems are far from solved. There is no structural agreement that the periphery countries deserve to be saved, let alone how.

Deadly serious issues in China. Stimulus won't cut it this time, and may be off the table due to inflationary concerns. If China implodes, the Aussie implodes with it. More reinforcing evidence of global slowdown and meaningful cycle fears.

Romney pick of Ryan as VP candidate intensifies "America as Japan" risk. Fiscal conservatives wrongly believe America could become 'Greece.' This belief system could lead to a combination of economy-weakening austerity measures and non-job-producing, budget-draining tax cuts that increase the likelihood of becoming like Japan.

Democrats no answer either, though, as Dems more likely than Repubs to let America fall off the 'fiscal cliff.' No reason to expect logic or sound policy from either party.



  • The Disappearing Market. "There are times when the market gives the impression it is fading into nothingness. Volume becomes very low, trading ranges become very small, volatility becomes very low. Also, there is very little change in market levels and day-to-day fluctuations are minimal. Looking back at history, when that happens it is almost always a sign of a market high point."


Copper weakness = further confirmation of Asia / global slowdown thesis, serious threats of commodity led implosion. If we get a $USD ramp, all of this accelerates. To the degree that late stage China growth entered a ponzi stage (complete w/ Golden Elephant subprime), the ramifications are serious.

Strong odds for more 'grind-up,' but non-trivial odds for swift sell-off. A very dangerous time to be complacent. Light volume and narrow ranges leave this 'grind-up' rally vulnerable to a sufficiently negative catalyst, or just a big enough sell order to crack things wide open.

  • Nasty bearish engulfing in KOL (coal miners).
  • Copper miners (COPX) rounding out?

Various and sundry base metal miners and other base metal plays have been beaten like a red-headed stepchild, but playing them for a rebound is a little too cute for our taste in respect to serious ongoing China concerns.

  • Utilities (XLU) flagging out?

If the grind-up rally is going to stick, then bonds are going to head lower, which means rates are going to rise and safe haven capital flow is going to leave utilities and go back to more logical areas of the market.

Food for thought: Would a utilities short actually be something of a hedge / neutralizer for other shorts, as utes are likely to do worse (break down faster) if the risk on rally continues?

  • GBPNZD: Beautiful clean downtrend pattern.

Don't know what the relationships here are (UK vs New Zealand), but odds are the UK is worse off than NZ and that pattern sure is pretty…


General stance is to respect the price action without deferring to it. Price action here is increasingly bullish, but it also increasingly smells like bullshit. A low volume, low volatility environment, with junior traders manning the NYC desks and bears mostly neutered / scared off by threat of the big central banker mallet… with technicals to justify emotions, this is the type of environment where bulls could get ahead of themselves (or perhaps already have) enough to feed a severe downward dislocation.

Of course, the upward grind could also continue, against a backdrop of waving off macro data concerns, until the frying pan to the face comes at a later date. Right now, though, the general mood seems 'hopeful and unrealistic' in the manner that bulls love to embrace, where, when risk assets rally for bullshit reasons, the longs don't ever question it, they just smile and try to justify their hopefulness with fundamental backing after the fact.

Also classic from a poker / pot-odds type perspective in that the high probability play (going with grind-up) gives greater likelihood of a small, risk-inadequate payout; whereas the lower probability play (positioning for a less likely but meaningfully possible sell-off) has potentially excellent reward to risk. Being a contrarian and understanding expectation means understanding when the outlier bet is the better bet (as when your 30% draw has a 6 to 1 payoff and so on).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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