There are so many things to consider when trading in the current climate. First and foremost, CAUTION is the key word, not FEAR. As Billy Joel would say, “We didn’t start the fire,” but as traders and investors we have to dance on the embers. The trading environment is dangerous because the algo-driven trading shops are being bombarded with an endless flow of headlines and outlets fighting to be the first to report any news story. Let the speed merchants draw markets to levels where risk can be measured rather than trading just to trade.
There are relevant themes that will be playing out for profit. Commodities have been a constant for NOTES FROM UNDERGROUND, especially the precious metals. Food and energy will continue to be a major theme as the Chinese and other nations cannot be caught with food shortages. Credit Suisse analyst Zoltan Pozsar has written two thought-provoking pieces laying out scenarios about the end of the PETRO-DOLLAR system as the U.S. and Europe place a strangle hold on the Russian foreign reserves, forcing them and others to search for an alternative to a dollar-controlled system. Pozsar’s pieces are provocative and his reputation as one of the best financial analysts of the monetary markets makes him very credible. It may take awhile for the ideas expounded in Pozsar’s thesis to play out but his analysis is worth a read.
***On Thursday we heard from the ECB. The statement was more hawkish than anticipated, putting upward pressure on the euro area sovereign debt markets. The central bank intends to end its PEPP purchases — as was announced at the previous gather — but it seems the ECB will taper its purchases each month beginning in the second quarter, ending June at 20 billion euros. This caused spreads relative to German debt to widen.
What was for certain was that ECB President Christine Lagarde couldn’t HIDE the contentiousness of this meeting as the anti-inflation Hanseatic group appeared to be pushing for a quicker pace of NORMALIZATION. Lagarde was adamant that the ECB was not tightening but normalizing. And probably for the first time ever, Lagarde actually acknowledged that the discussions surrounding the pledge to end QE were intense.
We have no idea where this goes as Brussels is meeting in order to put forward a massive EURO fiscal stimulus plan to support energy and military spending that is necessary to create a stronger and independent EUROPEAN UNION. More broadly, this means that it’s likely the FED will proceed with its 25 basis point RATE HIKE this week. Be patient in dealing with a world trying to comprehend where politics and finance reside at this juncture.
In the meantime, enjoy the podcast with myself and Jacob Shapiro, a non-traditional thinker in the world of GLOBAL MACRO