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A Macro Mystery - asset allocation123008

“The most beautiful experience we can have is the mysterious. It is the fundamental emotion that stands at the cradle of true art and true science...”
-Albert Einstein

Managing my way around this increasingly interconnected global landscape of macro factors, that’s exactly how I have been feeling over the course of the last few weeks - standing “at the cradle of true art and true science…”

Most will agree that consistently earning an absolute return across global macro investment cycles is far from a science. Some are beginning to agree that math and neuroscience are finding a special place in terms of making accurate market predictions. No one will agree that there is a standard (and legal) investment process that is solely based on “art”. That’s what makes this game great. There is a bid and an ask price for every point of view.

In the US market, here are three critical levels of support that the mathematician in me continues to be beholden to: SP500 864, Nasdaq 1501, and Russell 456. Notwithstanding yesterday’s bone dry volume, the “beauty” of the trading “experience” was that, intraday, all 3 of those levels were broken, tested, and tried. As mysterious as it was, all of those indices rallied into the close …  once again confirming the current bullish “Trade” opinion for which I am currently accountable.

On the global macro front, here are three more critical levels that the “artist” in me finds of mathematical relevance: US Dollar Index $82.80, Gold $804/oz, and LIBOR 2.89%. Provided that both the US Dollar and 3-month LIBOR can hold below those levels, I see a very relevant “Re-Flation” Trade continuing to manifest in both Global Equities and Commodities. Gold, of course, needs to hold $804 to confirm this artistically arithmetic conclusion.

All investors have to have a process. For some, that might be asking their friends what they like – for others it could very well be locking themselves in a room with ear muffs. This is what makes markets – where men and women of conviction take a stand and slap it on the tape. Darwin’s rules will win out in the end – the most repeatable process will self select the largest following. My goal, every day, is to prove that my team’s process is worthy of your respect and consideration.

The Russians have considered many economic processes. Over time, most of them have failed. If a process isn’t repeatable across economic cycles, it will fall by the sword of the global capital flows. Today is the anniversary of the USSR’s formation in 1922. Marxist Socialism was tested and tried back then. For a period of time, it actually worked. In the end, it was not repeatable.

My team was both shocked and dismayed that Stalin was voted to the “Top Three Russians Ever” yesterday. No, this wasn’t a 1930’s poll – this was yesterday! The rise of Putin’s nationalist regime has apparently warmed the hearts and minds of Siberians who now have heat, and we get that… heat is good… but for the entire country to find any level of positivity associated with Stalin is both “mysterious” and shocking altogether.

Why is this relevant this morning? Well… “its global this time”… remember? And while we have to admit that Commodities crashing has made the acronym “BRIC” more of a metaphor for what a wall of them feels like when landing on levered long “prop” desk heads… we cannot forget that Brazil, Russia, India, China, and Khazakstan (BRICK) are no less different than SAID (Saudi Arabia, Iran, Drillers) petrodollar kings of the would be “world is awash with liquidity” narrative fallacy past. All of these countries need “Re-flation” to get paid. They are incentivized to do the unthinkable to ensure that both their stock and commodities markets go higher.

If you want to see where the bodies lie in a war, follow the money. Who gets paid for what and why? Both the Israeli and Saudi stock markets have only moved up into the right of their respective charts since the Gaza bombings began. Today is Day 4 of the incursion, and the Middle Eastern stock markets are cheering it on. This isnt art – these are the facts. Debunking how all of these macro factors are interconnected remains both a “beautiful experience” and a mystery to me all at once. But understanding that the Saudis need a $60-70 strike price in oil is far from trivial.

For now, the technicians, scientists, and BRICK layers alike will have a hard time disagreeing with my aformentioned 6 macro levels. I am far from a poet, but within my macro investment process they certainly do rhyme. “Re-flation” is coming…

My upside target for the SP500 remains 915.

Best of luck out there today,
KM

A Macro Mystery - etfs123008