No more Nokkie (again....)

Wed, 4 Aug 2010 18:38:19 +0100

Following the appreciation of the Euro versus the USD, the pair is close to fair value. That means the opportunity in USD/NOK has diminished.

I expressed a positive view on the NOK rather than via Euro because of the better savings and growth prospects in the Norwegian economy. It USD/NOK seemed a safer trade than EUR/USD.

With the EUR/USD have moved back to fair value, USD/NOK has also reached my zone of indifference.

For some reason, the US equity market seems willing to ignore weaker US (and global) growth prospects (possibly because QE2 is perceived as equity market friendly, despite a signal that the US is entering a moribund growth decade).

A weakening in the equity market might result in a stronger USD - odd how this might be economically, but it seems to be the case when risk appetite weakness, possible because the USD is a funding currency for risk trades (according to some?).

I retain the GBP/NOK position.

Removed USD/NOK is two moves (on 2nd and 3rd August) at 6.00. Initial position established 20th May 2010 at 6.45.

How does your spending go?

Sat, 10 Jul 2010 22:27:28 +0100

A steal from the Daily Show.
This is a chart from “The Job Impact of the American Recovery and Reinvestment Plan” co-written by Christina Romer, the current head of the Council of Economic Advisors. I added the last print of the current level of US unemployment.

June 2010 Performance Report

Fri, 9 Jul 2010 21:38:28 +0100

June proved to be another month of performance and it was dramatic - taking the performance index back to levels seen in May 2009. A whole year of effort destroyed!

Equities weakened due to concerns that problems besetting the fiscal policies of Euroland would weaken global growth generally. That resulted in positive performance from the equity short. However, the currency positions performed poorly - being long Euros and short GBP was an expensive trade. Being short gilts was similarly costly.

There are two policies being pursued in the western world: negative fiscal thrust in Europe and fiscal profligacy in the US. At some point the USD will suffer, but for now it benefits from flight to quality properties - although in the last few weeks that correlation has started to weaken.

The portfolio lost 51% of the previous accumulated total

UK Inflation dismissed and central banker productivity measures

Sun, 4 Jul 2010 13:10:47 +0100

UK inflation is surprising on the upside (last print 3.4%) And central bankers have started to jaw-bone their excuses.
This week we have had two members of the MPC making speeches about why inflation has been so high in the UK, despite the large negative output gap:

Paul Tucker’s Speech
Adam Posen’s Speech

Both speakers argue the increase in inflation does not matter - the Bank will overcome it; either inflation is transitory and therefore no need to raise rates (Tucker) or if the economic recovery is sustained there will be higher rates (Posen).

The problem comes though if weaker sterling has made the UK more prone to inflation. Whilst sterling has appreciated around 10% on a trade weighted index from its nadir, any stabilization in concerns about European government indebtedness will result in sterling weakening again.

Tucker’s argument that inflation is symmetric in a recovery places hope on the argument that if inflation rose during the aftermath of the credit crisis, it will not necessarily rise further as the economy recovers.

Whilst the economic arguments outlined in the two speeches are interesting, it seems we are merely seeing some old fashioned central bankers games.

The reality in the UK is that there is about to be a huge fiscal tightening that will reduce the contribution to growth from the government.

The MPC want to demonstrate they are thinking about inflation to the markets (and public) whilst inflation remains high and above the bank’s target. By talking about it, they avoid having to tighten rates - they know the government is about to do the job for them. They just need a bot of time for fiscal policy to work through.

They also want inflation - as argued for sometime, it is nominal growth that matters to de-leveraging and tolerating higher inflation is the way to restore consumer and government balance sheets by transferring wealth from savers to borrowers.

So by talking about inflation concerns and then dismissing them, inertia will prevail. Measured by movements in interest rates as the numerator, central bankers will continue to be the least productive workers in the west. Measured by speeches, however, their productivity is likely to be the same as ever.