Dodging Bullets
What a week. If you are still standing, I suppose that counts for something in itself. I retain my relatively constructive stance towards this not being a repeat of 2008, but we should not be blind. The market is trading shit and anyone being long risk the last six months must feel a bit like Neo from the Matrix. So you managed to dodge the oil bullet, you managed to dodge the HY bullet, you managed to dodge the copper bullet and you managed to dodge the CHF bullet ... but will you dodge the next?
Meanwhile, the bull market in benchmark fixed income is now getting silly, and I wonder what comes next. In EM, the higher USD is a drag but people are forgetting that the huge move lower in US rates is normally associated with all kinds of milk and honey in these markets, and yield here will be looking mightily attractive with benchmark rates racing below zero everywhere else.
We now have rates up to 5 year below zero in the Eurozone and below zero up to 10 years in Switzerland. Both of these economies run substantial external surpluses. Macro 1-0-1 suggest that this will be a source of carry trades, all dependent on the volatility regime, but fundamentals are fundamentals after all. And I am not even talking about Japan where it is arguably the same story. The conclusion is perhaps to forget a little bit about Yellen in the next few months, there is another game in town and it could take over the show for a while. Many a carry monkey just got nuked, but I cannot help but feel that this is part of the final capitulation setting up the mother of all carry trades, to end them all! This doesn't make me particularly "bullish" actually; in fact it is scary as hell because unless you are the chosen one or an agent, and I am neither, you cannot dodge all the bullets, all the time!.
Portfolio Notes:
The SNB slaughter prompted us to do a little clean-up. In the long-term part of the portfolio* we sold some equities and upped the gold holding significantly. Stupid, silly, insane you say ... well, we know an inflationary regime when we see one and this could go quite crazy, quite quickly. Meanwhile, we have opened up a position in BP, another bet on higher inflation, which has been working out a charm so far, but only enough to just about cover losses elsewhere. You see, and keeping with the theme above, even we didn't manage to dodge the fallout from SNB's nuke. KGF, currently our biggest position, has 10% of its revenues in Poland where they have a lot of CHF denominated mortgages ... gówno!
*Keeping turnover to a minimum!