In our last post we discussed how we at The Macro Trader think that risk is vastly under-priced.  We looked at several different volatility indexes as well as Bill Luby and VixandMore.com’s JunkDEX.  The JunkDEX shows how well stocks like AIG, FNM, C, CIT, and BAC are doing.  As you can see in our previous post “Volatility Indexes, Risk Appetite, Mispriced Risk, And Where We Think We Are Headed” the JunkDEX  has had a monster rally.  Usually this would signal at least a short term top as speculative fever burns out.   Obviously the rally was not done and we are up since then.

To more quantitatively show the huge run up in risky assets we went looking for some factor based indexes that would show the performance of “good” and “bad” companies.  In our search we came across some custom stock baskets from Goldman Sachs that use Edward

After being the largest hedge fund strategy in 1990 representing 71% of the overall hedge fund assets global macro has shrunk and now only represents about 15% of total assets.  While most people assume that this dropoff in assets was due to poor performance the numbers actually show a totally different story.  In fact according to the Credit Suisse/Tremont Hedge Fund Indexes, global macro has been the number one investment strategy with a total return of 502% from 1994 through June 2009.  Compare that with a total return of 335% from long short equity or 321% from event driven funds.

Of course most investors also have a misguided perception that every trade is like the trade that “broke the Bank of England.”  That trade in 1992 made Soros and his Quantum Fund over $1 Billion in a few days and garnered a lot of publicity.  The funny thing is

One of our favorite, as well as one of the best indicators that investors can follow is that of interest rates.  Since we are global macro traders we follow interest rates across the globe for every country that we can find reliable data.  We track short and long rates for 58 different countries for use in many of our models as well as for other indicators like global and regional yield curves.

As you can see in the chart below (click to enlarge) short term rates for the G-10 are low.  In fact right now there are five countries that are following a zirp (zero interest rate policy) and consequently their 90 day rates are down under .5%.

G-10 Short Term Interest Rates

After dropping significantly throughout

In our last post we discussed our views on deflation and how it will  be around  longer then most investors think.  Most people are stuck on the idea that hyper inflation is just around the corner and that you must be buying gold, most other commodities, and Asian stocks and at the same time short the US Dollar, Japanese Yen, US Treasuries, and US stocks.  Eventually this may be the right stance, but for now we think, along with the market, that it is the wrong view for the short and medium term.

The main issue stems from the idea that because the government has printed a gazillion dollars that we MUST have hyper inflation tomorrow.  The reality is that until that money is actually in circulation it will not cause inflation.  If you look at the financial situation of most banks it is obvious that

The fate of the global equity market rally now comes down to China. Will it continue to stockpile hard assets? Will the data points continue to soothe and impress? Much is at stake either way…  

If you grew up in the United States, you know that English literature is one of those subjects they foist upon you in 10th grade or so. I recall very little from English Lit 101. Most of the stories and poems we read (or pretended to read) have become a hazy blur.

But after all these years, one poem still stands out. Due to its oddness and simplicity, I have never forgotten it. The poem is “Red Wheelbarrow” by William Carlos Williams, and it goes like this:

so much depends

upon

a red wheel

barrow

glazed with rain

water

beside the white

chickens.

Make 130 Times Your Money With New $1 Government-regulated “Silver Shots!”

Imagine transferring $10,000 from your

by Anthony David

For the global macro trader there are essentially two different kinds of trades: relative value and directional. Relative value is essentially when you are looking at two different instruments that have reliable historical relationships and trading off that relationship. Directional trading, as the name implies, is when you place a bet saying that you think oil, gold, etc is going up or down.

There are multiple categories of directional traders. Some are technically oriented and deemed technicians and look at charts and other price action based studies. Other macro traders use fundamental analysis thinking that they can determine if an asset is under or over valued. Gut feel is a style as well. Most of the time gut traders lose their money but there are a few that can trade successfully solely of off their feelings. The next large category of traders are the CTA long term …

America may be banged up, but Europe is teetering on the edge of flat-out fiscal disaster… which helps explain the bizarre action in gold and the dollar as of late.

Imagine a postcard-perfect mountain village. A-frame chateaus, old world door crests, cheery gas lamps – the kind of place you might see tucked away in the Pyrenees or the Swiss Alps. As a crowning touch, large flakes of snow are gently falling.

Now take a step back. Instead of an actual village, you are looking at the contents of a snow globe.

The snow globe is sitting on the edge of a large oak table.

Now you see the back of a large, well-manicured hand – perhaps a banker’s hand – accidentally sweep the snow globe over the edge of the table. The snow globe hurtles toward the cold marble floor, where it will shatter into a thousand pieces.

What you have just envisioned

by Jesse Baruch

What is global macro? Before we look at how we trade its important to answer the question What is Global Macro? The best answer weve heard is that its simply looking for the best risk- to-reward opportunities in the world. That means that if the Singapore equities look cheap and we can see why they would go up significantly and they present us with a low risk entry, we buy them. If US Treasuries look grossly overvalued and present us with a low risk shorting opportunity, we short them. If US Investment Grade Bonds have the highest yield spread in 30 years and strong balance sheets, we look for a low risk entry and buy them. If the Euro/US Dollar looks relatively cheap and the interest rate differential is favorable, we look for a low risk entry to buy it. …

That was an ugly jobs report. I anticipated bad news, but I thought the employment hit would really start in earnest in next month’s report, as there is some lag in employment numbers but seeing this level of degradation in the employment picture shows us that “the bad” is coming sooner. Not only was this month’s number bad but downward revisions in previous month’s numbers as well.

This scenario was outlined in Et tu, September

That is a chart of the US dollar versus the Romanian leu.

Romania is a deficit country that relies on foreign investment, really it is at the mercy of foreign investment. In fact foreign investment is vital throughout the region. The only country nearby that might be in generally rougher shape is Latvia, but the lat, as it is known, has only weakened by about 1% compared to almost 10% for ron.

This article from MarketWatch gives a good recap of what is going on including some detail about a recent report from S&P that says Romania, Latvia, Iceland, Bulgaria, and Turkey are most vulnerable to adverse market conditions. The overnight rate in Romania is 7% and has been heading lower since February.