I think this "big picture" deflation-inflation debate (carried out on this thread as well) misses the point. Although I don't especially disagree with Trotsky's view, I just don't think it has much value for traders or speculators. The point for me is how do I trade now, next week, next month? And the key debate should be mostly about maladjustments, not deflation or inflation.
Here's where I'm focusing: The pricing of various asset classes is quickly becoming a function of how aggressive large speculative pools and hedge funds are at piling in to them. For instance take a close look at how Goldman Sachs made their money this quarter, answer: trading desks (translate, aggressive carry trades).
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I am absolutely astonished at how quickly and extensively this is happening, and nobody seems to be talking about it much. And the reason it's occurring is that 1% short rates in the US, encourages all kinds of leveraged global carry trades. It's a shark feed with lots of people in the water, and there is no lifeguard. They will use this to push up various assets, whether justified (some are justified, but again no rhyme nor reason, look how late energy was to the party, and that one was a no brainer). It's just go long some asset, they don't care if it's 10 year bonds, gold, crude oil, corn and soybeans, base metals, foreign currencies, NASDAQ or stock futures, junk stocks and bonds on margin, just some way to leverage a trade using very cheap borrowed money. Then the smaller momentum traders pile in too.
Some of this is hard to track. Credit instruments are almost impossible to quantify, because it's so large and infected with derivatives trading (read 12/16 CI issue), and further obscured by massive central bank involvement.
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But let me give you some examples in three markets I've been trading and investing in: corn, gold and energy:
Look first at the grain and corn COT's for 10-21. Small and large specs were short 91,519 corn contracts with options (and commercials were long). Today (12-16 report) the spec crowd is LONG 93,311 contracts with options. The only thing that's really changed that I can see is the emergence of a "China story" (now a common, very overworked speculative theme). Take that across the grain subtotal group (corn, soybeans, wheat) and the specs are long a whopping 334,410 contracts, and commercials are short that. There are no more meaningful crop reports right now. Now I have to tell you that I've been aware of the China inventory drawdown for a year, it's what put me in the trade cheap. So this isn't "new news" at all to me, so tell us something we don't already know?
In energy the large and small specs have ramped up from 2974 contracts and options long to a whopping 174,874 long, JUST SINCE 11-04. Interestingly, in the nat gas component of this pile on the specs are only long 8914, still a relatively modest (and suggestive?) number. Only in a badly maladjusted economy run by central bankers completely asleep at the switch would we see pile ons like this.
Gold has seen a big spec pile on (long a record 185,306 contracts w/options) for some time, which illustrates that this can continue for a period. But, in terms of what it means for a trader, I'd say "the end is near" and "the risk is very high". Too much hot money can get caught offside in ALL these markets. The primary debate in my mind is the nature and dimension of the topping action. And can they continue to borrow enough at breakneck speeds to leverage numerous simultaneous bubbles? Instinct tells me it won't take much to disrupt all this. Will it be a slow rollover, or a "fast break" decline in any given market?
In Sept. when I first cautioned on gold stocks I felt it might be a parabolic followed by a fast break. It now kind of appears to be more of final parabolic, and slow roll top?
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Slow roll is what the stock market looks like too, but it's impossible to know. There are so many people long all these markets, that a fast break in some ways makes the most sense. Catch a lot of people long too many hot trades.
In energy I've been patiently positioned for over a year. During this Thursday meltup, I finally sold about 12% in some names that just went long term cap gain. I'm betting that there is still more upside momentum, or at least a slow topping action that will give me some warning here. But, again, the fast break scenario might catch me in the net along with everybody else who insists playing Easy Al's non-chaperoned fully attended, raging hormone, teenage drinking party and orgy. |
