When Everything is Strong

For every buyer, there is a seller.

For every debit, there is a credit.

Net exports globally equal zero.

Identities.  They help bring rationality when some people think that the economy only goes one way, as if China could sell off its US Dollar holdings without harming itself.  No one in the global economy has unbridled power.

Thus, I would like to bring to your attention this post from The Capital Speculator.  Everything is strong except high quality bonds.  Hmm… when was the last time I saw this?  Oh yeah, a piece by Richard Bernstein back in 2006, when everything was running hot.

This is not zen, but when everything is strong, something is weak.  Well, okay, high quality bonds are weak… that is normally true when liquidity is rampant.  Money markets are weak too… worse than 2006. Urk.

Think of it this way… long term fixed income claims are not prospering, and savers are getting peanuts, and very, very few peanuts.

Can this continue?  Yes, for two years at most in my opinion.  When the asset markets bifurcate into risky and non-risky, we are close to a top or bottom in the risky assets.  This is not a bottom.

Look, I have made calls at awkward times… equities in 2004, residential housing in 2005, subprime mortgages in 2006, and high yield 2008-2009.  I am not a permabull or permabear.  I aim for what will make money over the intermediate-term.

When everything is strong, be careful.  Trees don’t grow to the sky.  This is the time to pull in the horns.  Counting in the Fed’s future retreat from excess liquidity, it is all the more the time to be careful.

6 Comments

  • cold.as.ice says:

    So will we see you lighten up on (let’s say US stock) and expand into cash or something like Emerging Markets?

    For things that I want to hold for a while, I have been selling OTM near calls and rolling them month to month. I may take a hit but the income reduces my exposure.

  • matt says:

    Mr. Merkel:

    I noticed that the AAA corporate spreads have increased dramatically over the past 5 months.

    There was certainly a spike higher this week. Does the short trading week have any effect on trading?

    • Matt, AAA corporates, or something else AAA? Where did you see the widening in spreads?

      In my experience, the length of the week is not a big impact on trading. Short weeks tend to be low volume, disproportionately.

  • cold.as.ice says:

    Since Q1, Jim Jubak has been speaking of mid year as a rotation from developed world to emerging markets http://jubakam.com/2011/02/enjoy-the-outperformance-of-u-s-stocks-but-please-do-think-about-how-long-it-can-last/ Similar observations to this article.

  • jdmckay says:

    (beg quote)
    Identities. They help bring rationality when some people think that the economy only goes one way,(end quote)

    Well, that makes sense.

    Translating that into good sense choices depends on correctly identifying the dynamics w/in those economies.

    Be careful you see what’s there, and not what you want to see.

    (beg quote)
    as if China could sell off its US Dollar holdings without harming itself.
    (end quote)

    That’s one way to look at it.

    From where I sit, I see that sentiment expressed often by financial people. To me, sounds like a game of chicken.

    (beg quote)
    Well, No one in the global economy has unbridled power.
    (end quote)

    See above.

    This world is a dynamic place. Things come, things go. Tomorrow is a new day.

    Be careful that yesterday’s assessment does not become today’s reality.

    Pretty evident that, what I’ve had to say to you about China… really, not that long, less then a year… the momentums of our respective nations are going as I said. Belatedly, we’re now seeing in our (western/US) press things like China’s producing cutting edge products borne of their own research. Whole lot of that from their Universities.

    It’s not stolen or borrowed, they have, are, and have momentum in the near future in this direction. And whole large swath of *that* is very intelligent response to accurately taking inventory of needs in their environment, the things I’ve been hammering: water, energy, broad based and research oriented (eg: following the science, and being smart w/that knowledge) education… they are doing all that.

    And they are doing it, w/out regard, to US stagnation in most of those same domains. If anything, we’re going backwards… denying realities.

    As I’ve said before, we have created for ourselves massive hazards by identifying our economy’s value by currency shenanigans, w/little regard to the underlying activity of our people… the real value produced by our work product.

    When our (US) stuff is about the same, or probably a little less value oriented then a decade ago, and these other “emerging” economies have eclipsed and transformed what, how & why they produce what they produce…

    Context matters. The more people, the more reliant one is on the other, the more magnified these differences become as a simple contrast of value produced.

    US hazards are growing fast, as stagnation in our collective response to not just current needs, but future ones, remains static. At some point, w/200m + people on our shores are being increasingly misinformed, have less access to cutting edge knowledge (Universities), have less activity here in which to bring that knowledge forth in meaningful ways, and who’s physical health is deteriorating noticeably…

    It’s a fools game to form one’s assessments of things around currency shenanigans, largely removed from the dynamics of the people’s activities w/in the affected domains of that currency.

  • Know what else is cheap? Big Tech. If you disagree, let me present a good way to play it with a lot of safety: calendars and diagonals. LEAPS in big tech are cheap in a lot of spots, making calendars and diagonals excellent ways to play fluctuations with limited exposure and agility. easy to turn a bull position into a neutral or bear one, low demands on your liquidity, smaller limited losses…. big fan right now…

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