We have heard about the so called economic recovery for months now and while it is true that markets are higher we have our doubts that any of this optimism is seeping into the real economy.  Because of this we tend to believe that we are headed for a double dip recession, assuming that we ever got out of the first one.

Lately we have started to see renewed signs of a downturn in some of the economic indicators that we follow.  All things employment have been bad with the unemployment rate, exhaustion rate, and unemployment 27 weeks or longer rates up.  Anyone that is seeing an upturn in employment must be on an acid trip as there are no signs of anything but more unemployment.  Just Wednesday we had housing starts come in lower than expected.  One indicator that we follow is the Citi Economic Surprise Index.  They have them

One of our major themes here at The Macro Trader over the past two years has been to short Europe.  We mean that in a general sense as we have been short Spain and Italy off and on for over a year and are bearish on most things EU relative to most of the world.  One area that we have been looking at a lot lately is that of the Euro.

After being overvalued by 40% back in March of 2008 the Euro fell about 20% as investors went into risk aversion mode and bought the US Dollar.  Since March of this year the Euro has once again climbed into wildly overvalued territory again and is currently about 35% overvalued. As you can see in the chart below when the Euro gets very far above or below the 20% bands it has a

One of the largest problems that seems to be getting little attention is that of the pension fund crisis.  While it has yet to hit in earnest it is definitely upon us.  The basic problem is that due to poor returns, both nominal and adjusted for inflation, pension funds are extremely underfunded.  While everyone in the investment world seems to know about the problem it does not seem as though anyone is talking about it.  So here are some charts that show the problem with the standard pension fund.

In the chart below we are looking at someone who started at the beginning of 1995 investing $1,000 a month, in a 70/30 stock bond mix, rebalanced monthly.  We are using real returns on the SP500 and on the Dow Jones Corporate Bond Index as our investment proxies.  Also in the chart is the same $1,000 a month invested solely in T-Bills. 

There is some interesting news out of China that they may in fact re-export some of their copper stockpiles.  Here is the link to the Bloomberg story “China May Re-Export Copper on Stockpiles.”   While not a rally killer by itself this is pretty damning evidence that a major part of the rally in commodities came from Chinese stimulus buying.  This was more bargain buying than an actual demand driven rally.  This could lead to a good sized move down as demand has not picked up inline with supply and now China is not only done buying but may even start to sell.

As you an see in the chart below copper has been in a steady uptrend since the end of 2008 and the move preceded the rally in other risk assets that started in March 2009.  The trend has been very consistent and is up about 130% in that

Since the start of our newsletter we have been using a relative strength table that looked at Fidelity Select Sector Funds to show what industry groups are leading and which groups are lagging.  The relative strength calculation is similar to the style used by Bill Oneil and IBD but is slightly shorter term in nature. We used the Fido Funds due the their price history and breadth of different groups.  Now that there are not only enough different industry group ETF’s, but also the needed price history we have revamped the model to use ETF’s instead.

We publish one list for United States industry groups and one that is focused on global ETF’s with several country and a few sector specific ETF’s.  These tables are valuable in a few ways.  One is that we have developed a trading model based upon them that uses the rankings along

A lot is made of relative returns and how one strategy or fund does against the SP500.  While not the best benchmark for something like Global Macro it is nonetheless the benchmark that everyone is most familiar with and that is used the most on CNBC and in magazines.  So how does global macro stack up to the SP500?

The chart below shows how $1000 invested in the SP500 and the Barclays Global Macro Index would have done for YTD for 2009.  As you can see the SP500 while getting off to a rocky start is now leading the macro index by 9.68% so far.  While the performance of the SP500 has been impressive the other side of the story is that to get the 18.04% return in the SP500 you first had to go through a -19.56% drawdown in January and February to get it.  Contrast that to

Gimme fuel, gimme fire, gimme that which I desire,

Can’t fight the need for speed,

I’m loose, I’m clean, I’m burning lean and mean, and mean.

Ignite the open trail,

Excite, exhale, comin on, hot from hell, yeah hot from hell.

-Metallica “Fuel for Fire”

Where has all of the money gone? We know that the world should be running out of green ink any day now due to the Treasury printing money 24/7, but with all of this money coming into the economy we would have expected runaway inflation.  Up to now we have seen, for the first time in decades, steady deflation.  In fact as you can see in the chart below, since 3/1/09 YoY CPI has been negative. (click on chart to enlarge)

CPI 12-Month % Change

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

If over the past six months or so it has seemed as if you were partying like it was 1999 it might be time to reevaluate your stance.  One thing that we have been taking a closer look at lately is the pricing of risk.  Obviously when investors think that risks are low they will demonstrate risk seeking behavior.  We have seen this as the SP500 has climbed 56.6% from the March lows to the highs on 8/28/09.  With a rise like that you would think that 2008 never happened, of course if you believe that then you also believe  in a land of make believe with money trees, the fountain of youth, and SI models for all of us.

Of course some investors counter saying that while things could be better we are seeing the beginning of a recovery.  They then say that while the market will likely climb slower,

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