Macro Trading 101- We are doing a re-launch of our free e-mail course on Macro 101.  Starting Thursday anyone who is signed up will be receiving at least one e-mail every three days with a 1-5 page covering some aspect of global macro trading, what it is, the benefits of it, etc.  While these e-mails will likely not make you the next Bruce Kovner or George Soros, we do hope that you find them informational and useful in how you view the markets.  If you would like to receive these e-mails simply put your e-mail in the box in the top right of this page.  Right now we have 20 planned lessons but will add more as time goes on.

Videos-We are starting to make some videos.  Over the weekend we will be uploading some short 5-15 minute videos that explain some of the charts and indicators that are proprietary to our newsletter and members area.  We will be going over the basic structure of the letter, risk indexes, industry group rankings, etc.  Starting next week we will also be doing a question and answer video once a week where we will go over questions from our newsletter subscribers and answering them.

Daily Updates-A few months ago we started to post a daily indicator update to our members area.  At first it changed a lot from day to day but we have it close to where we want it.  There will be a video describing what each indicator means and some of the ways that to use them.  Some are very simple like overbought/oversold levels of SP sectors while others very effective short term timing models for different asset classes.

Newsletter-Our primary product is our weekly newsletter The Macro Trader.  Published since November of 2007 each week we send out a letter with our analysis of what is happening in stocks, bonds, commodities, and currencies.  In addition to our research we go over specific trading ideas that we follow in our model portfolio.  If you are interested in global macro we would of course encourage you to take a one month 4-issue trial of our service.  The cost for the trial is a whopping $1.  If you find that you enjoy our research and insights do nothing and you will be charged monthly, quarterly, or annually depending upon what you choose.   If on the other hand you find that we are not a good mix then jut log in via Paypal and unsubscribe.  To take a trial click on here.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

One of the many reasons why markets have been falling is due to the fact that the money supply has not kept up with the economy.  After stoking the fire in a big way during the crisis with bailout money, stimulus, and QE the economy finally started to take off.  At first the different forms of stimuli were doing enough but over the past few months it appears as though they have stopped keeping up with demand.  Now instead of enough, and arguable too much money in the streets the situation has reversed and now there is not nearly enough money out there to make up for the surge in economic output let alone to find its way into the markets.

In the chart below we have an indicator that measures the real money supply growth against economic output to determine if there is adequate money to sustain current economic growth and for the markets (This indicator came from a NDR chart we saw somewhere several years ago).  What we have done is take the year to year change in industrial production and subtract it from the year to year change of the real money supply using M3* data.  As you can see in the chart, money supply relative to industrial production has taken a huge dive indicating that we either need more QE, more government spending, or we will likely see a dip in output.

Real Money Supply (M3) minus Industrial Production (Year-to-Year Changes)

Happy Trading,

Dave@TheMacroTrader.com

P.S.-Since M3 has been discontinued by the Fed we are now using the M3 data from NowandFutures which has reproduced it with a correlation of .99999 to the old M3 data.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

We could go off on him for days, but instead we will just say this, the current PhD in charge of the fort once said that we could use helicopters to dump money into the economy.

Who needs a PhD in Econ if this is an acceptable solution?  If you are broke and are able to print money even a 5th grader could tell you to just hit print.  I for one and glad that we have such enlightened people up at the Fed.  Between all the PhD’s that our tax dollars employ we should be in economic nirvana in no time at all.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

30-Year Fixed Rate

What about real yields?  After all a few months back we showed how real rates were at multi year highs.  Well that time has passed as rates are once again close to 30 year lows.

Real 30-Year Fixed Rate

With interest rates this low you would think that we would at least be seeing decent sales growth if not record breaking.  And yet as the numbers showed today the sales are not coming.  Look at the chart below.  The red line is the all time low which happens to be from the most recent release.  Fewer homes were sold in April then in any other time in at least the last 50 years.

New Home Sales

Right now it seems as though our long held deflationary beliefs are correct and that the economy still has too large of a gap to be expecting any real inflation.  We will of course see how this all turns out but anytime you have near record low interest rates and new record lows in housing sales it definitely does not bode well for the economy.  Double dip here we come.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

Why did it fade from glory?  As best I can tell it faded because it kept telling the same story month after month.  That story is the fact that the exhaustion rate has remained at its all time high levels for the past 10 months staying above 50 the whole time.  (Click on chart to enlarge)

Exhaustion Rate

After looking at the exhaustion rate I went over to the BLS stats that show how many people are unemployed and for how long.  First off  of course is the unemployment rate.  As you can see it is at 9.7% slightly down from the cycle high of 10.2%.  (Click on chart to enlarge)

Unemployment Rate

Next up is the number of people who have been unemployed for 15 weeks or more.  As you can likely guess from the exhaustion rate the number is quite high.  We took this number a step further and calculated the number of people unemployed for 15 weeks or more as a percentage of the labor force. As you can see in the chart below 5.78% of the labor force has been unemployed for 15 weeks or more.  (Click on chart to enlarge)

Unemployed 15+ Weeks Or More As A Percentage Of The Labor Force

Finally lets look at the number of people unemployed for 27 weeks or more as a percentage of the labor force.  As you can imagine by the previous charts, most notably the exhaustion rate, this number is quite high and is at all time highs almost double the previous peak. (Click on chart to enlarge)

Unemployed 27 Weeks Or More As A Percentage Of The Labor Force

So why aren’t these numbers with the exception of the unemployment rate getting much press lately?  Well there are likely a variety of reasons but the most likely reason I could come up with is that they have not changed.  The employment situation has been bad and getting worse for over a year now. So while they can try and spin the weekly initial claims number any way they want the underlying problems are not improving.  If this recovery is real, meaning we don’t fall into a double dip recession, then we are going to need to see more than just a token improvement in the employment numbers.

Happy Trading,

Dave@TheMacroTrader.com

P.S. The idea for weeks unemployed as a percentage of the labor force was from a chart we saw at EconomPic.  If you like mainstream and obscure economic numbers as well as different ways to look at them then you should mark Jakes site as a daily read.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

Right now we are seeing what could be the beginnings of a new liquidity crisis or maybe just the second leg of the last crisis.  If spreads were rising just due to a weakening economy then we would not be overly concerned as these events take some time to really move lower.  Right now however we have a huge mess that goes by the name of the EU.  We are not necessarily saying that 2008 part 2 is upon us but we are saying that this is a real cause for concern, basically the rise in spreads is anything but bullish and as it reinforces our view that this is not just a normal correction but instead could be the start of something a lot worse.

Money Market Spreads

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

Currently the situation in Europe is pretty bad.  The EU is essentially in complete disarray as new problems seem to surface every couple of weeks.  Everyone but the EU knew that the PIIGS had problems but now Hungary, Belgium, and even France are coming up in the news as problem areas.   We are seeing currency issues, debt issues, liquidity issues, structural issues, etc.  The EU right now is like the Lindsay Lohan of regimes with all of its issues.  All of this adds up to what is the largest fear, a sovereign default.  If this were to happen, or when it happens we will see some major turmoil across all markets.

So what are investors doing right now?  The have been fleeing the Euro and Euro denominated assets.  No one wants EU based stocks, bonds, or the Euro.  As they leave the Euro they have been going into the US Dollar, US Treasuries, and into gold.  Yes, they are leaving the Euro to buy gold.  While investors across the world have been buying gold the trend has been especially obvious in the EU and its neighbors.  We can see this in the following charts.

Here is GLD the gold ETF.  As you can see it has been steadily moving higher but only recently started hitting new highs as it sold off back in December and took a long time to consolidate.

GLD-Gold

For real evidence that gold is going up on worries of a sovereign default we need to look at gold priced in Euros.  As you can see in the chart below gold in Euros consolidated but has barely even pulled back during the past year and has really accelerated to the upside over the last few months.

Gold in Euros

Being very tied to the mainland Europe, and having a weak economy as well many UK investors have also been buying gold to get out of Pounds.  While not quite the move of the Gold/EUR this has been a strong and steady move.

Gold in Pounds

Finally lets look at gold in Swiss Francs.  As you an see the trend has been pretty much the same with a steady move higher and very tight consolidation.  One thing worth noting with the Swiss Franc is that in a normal crisis investors would be taking their money out of their regular bank and putting it in Swiss banks.  This time around Switzerland gave up their role as the ultimate bank by giving away their client list to the I.R.S.  We think that Swiss Banks will be looking back and shaking their heads at that move.  This is not the only reason (the Swiss want a weak currency for example) for the relatively poor performance of the Swissy but it does not help, especially in the long term.

Gold in Swiss Francs

Comparing gold in US Dollars to gold in European currencies it is obvious that people want out of the Euro and see gold as a reasonable substitute.  Hopefully this helps answer why gold can be a good investment even if we are in a deflationary environment.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long GLD

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

First lets look at the two year yield.  After all if hyper inflation is right around the corner it would make sense that we might see some of that in the short end of the curve.  As you can see in the chart below the 2-Year is not signaling higher inflation anytime soon.

2-Year Treasury Yield

Maybe looking at the long end of the yield curve would give a signal.  After all if gold is climbing inflation must be almost here, right?  Looking at the chart it would appear as though the market is not expecting much.

30-Year Treasury Yield

Lets give this all one more chance.  What are TIPS showing us?  Surely if hyper inflation is upon us inflation protected bonds would give us a sign.  Looking at the 10-Year breakeven rate it appears as though inflation expectations are in fact dropping instead of rising.

10-Year Breakeven Rate

Apparently many investors are reading things a bit wrong.  Gold is not going higher due to fears of imminent inflation.  Right now gold is almost purely a currency trade right now.  With the problems in Europe investors are scared of government and instead have been going to the shiny stuff as a perceived safe asset.

Inflation will come at some point down the road but it is not right around the corner.  Whether you are looking at bond yields, commodity prices, the CPI, housing, or Fed statements we are seeing the same signals, and they are almost all pointing towards deflation/disinflation and not inflation.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

3-Month LIBOR

The first thing that would lead us to assume that this is due to panic and not recovery is the way in which LIBOR is rising.  What we mean is that if you compare it to T-Bills it usually trades very much in line except in times of fear.  Looking at the chart below you can see that the last three times that it has diverged was also when we had banking system fears.  The top in the summer of 2007 which kind of started off the whole mess, fall of 2008 when the world seemed to be falling apart in front of us, and then in late winter 2009 when we already had the ZIRP in place but it looked like things might be getting even worse.  Of course once things got back on track and the end of the world as we know it was at least postponed the relationship got back in line with LIBOR at a slight premium to T-Bills like regular times.  Another thing that we find odd is that if LIBOR is rising on a recovery then why aren’t T-Bill or  2-Year Treasury yields climbing?  Would bond investors not drive yields higher if they thought this recovery had legs?

3-Month LIBOR and T-Bills

Looking at other money market spreads shows much of the same thing.  Namely that spreads are going up, this by the way is usually not a good thing.  Looking at the TED spread, LIBOR-OIS spread, and 90-day commercial paper-T-Bill spread you can see that they have all been climbing since the Greece and EU problems really started to gain some attention.

Money Market Spreads

Now lets look at some spreads in other nations.  It should come as no surprise that they are also on the rise.  In the first chart we have the EURIBOR-OIS spread, after spiking higher it has continued to inch its way basis point by basis point wider and wider.

EURIBOR-OIS

Next up is the TIBOR-OIS spread.  As you can see it is also rising although a lot slower then in the US or in the EU.  As we will see in a few charts however that is how it always is.

TIBOR-OIS

Finally we have the UK LIBOR-OIS spread. Again it should not be much a surprise that it too has been climbing quite a bit.  The UK is weak and its nearest mega-economy the EU is weaker.  Banks are and should be scared.

UK LIBOR-OIS

Looking at the three spreads over the last few years you can see in the chart below that the global banking crisis affects them all.  Another thing worth noting is that Japans spread (the yellow line) may be rising slower but the swings have been far more muted the whole time.  Of course Japan has been dealing with a broken banking system for almost two decades now.

EURIBOR-OIS  TIBOR-OIS  UK LIBOR-OIS

We will end this post with one last indicator that we follow closely and that is the VIX.  This volatility index is simply an average of stock, bond, currency, and commodity volatility indexes.  If most asset classes are seeing an increase in volatility it rises and if most are declining it goes down.  As you can see in the chart below it has been going up the last few months as many market participants are once again focusing on risks.

Average VIX

In closing we have many concerns in our current situation.  Some pundits claim that markets are headed higher and that we are under estimating the recovery.  They say that everyone is too worried and that the fundamentals are strong.  We apparently are looking through an entirely different lens.  With the EU continuing to deteriorate we cant help but wonder how investors can look at the rise in LIBOR as anything but bad.  While Greece is indeed a small nation the Euro is what is at stake.  Yes, the same Euro which is probably the biggest economic experiment of the last 30+ years.  In addition to the EU we have “regular” geo-political concerns as well like Iran, the Korea’s, and our future energy supply.  So while we could of course go higher we definitely should be concerned.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

FXE-EUR/FXB-GBP

Yellow Area=First target

Next Line Down=Measured Move

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are short the EUR/GBP

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks