Realist Risk Managers

“You have to be realistic even if you’re an idealist.”

-Izzeldin Abuelaish

 

Ideally, the US stock market would never go down (its biggest down day of 2012 = -0.57%). Realistically, that’s not going to happen.

 

Ideally, you can wrap a Global Macro Risk Management Process up in a baby blue Tiffany box and slap a white ‘here’s what will happen in 2012’ bow on it for your clients. Realistically, you need to do the opposite of that and Embrace Uncertainty, every day.

 

The aforementioned quote comes from a book I am in the middle of reading right now called “I Shall Not Hate” – a Gaza Doctor’s story about managing life’s risks – those that are far greater than that of a Greek politician’s career this morning.

 

Back to the Global Macro Grind

 

After spending the last few days risk managing with some of our most thoughtful clients in Boston, I came to the simple conclusion that Greece has become a tree within a forest of globally interconnected risks.

 

The deep simplicity of that conclusion shouldn’t be a surprise. What’s happening to the rest of the world’s Growth and Inflation Expectations certainly didn’t cease to exist because the manic media doesn’t have an analytical process to absorb it.

 

The Top 3 Risk Management Topics our clients wanted to focus on in the last few days had nothing to do with Greece:

  1. Japan’s Sovereign Debt Maturity spike in March
  2. China’s Inflation Rising Post #BernankTax
  3. Down Dollar = Rising Inflation = Slowing Growth

Unlike some pundit spewing their qualitative views, a Realist Risk Manager (a Buy-Sider) is held accountable to real-time risk ticking on their screen every hour of every day. Being early in this business can also mean being wrong. Being late can also mean you blow up.

 

Maybe that’s why Japan was such a hot topic on the road. People are no longer allowed to blow up. Blowing up client moneys in 2008 was, allegedly, what “everyone” (other than those of us who didn’t) missed. Getting tagged for another -10-50% loss of capital in 2011, for some, made 2008 + 2011 a trend. And a 3rdtime probably means prepping your resume for an interview at Chipotle.

 

Why Japan? Why now?

 

We’ve been making this call since 2010, “The Sovereign Debt Dichotomy”, which attempts to simplify trading the short side of stock markets (long CDS) by waiting and watching for the Keynesian policy makers of that country to bump up against the biggest sovereign debt maturity within their economic region. Timing is critical.

 

That’s why we got bearish on Spain, then Italy, then France – in that order – in the order that their respective monthly sovereign debt maturities ballooned. After their stock markets imploded, we covered and got out of the way.

 

In today’s Chart of The Day, you’ll see that Japan’s March Debt Maturity Spike is:

  1. The largest, nominally, that Japan will ever have to bring to market
  2. Larger than any other European debt maturity by a considerable margin

Every client pushed our lynx-eyed Asia analyst, Darius Dale, and I on the next obvious question – why aren’t Japanese spreads and CDS blowing out yet?

 

A: throughout the entire European Sovereign Debt crisis, they didn’t either. They started to when it became clear to the market that their largest maturities couldn’t be absorbed at lower/stable yields.

 

Ideally, everyone would be able to price everything’s risk, efficiently, in real-time. Realistically, markets don’t trade that way. They trade on the expectations and emotions associated with last price.

 

Sometimes markets don’t go down, literally, until the day of the “new news”. Look at China in the last 48 hours:

  1. Inflation Rising = Consumer Price Inflation (CPI) up to 4.5% y/y (versus 4.1% last month)
  2. Growth Slowing = Chinese Exports down -0.5% y/y (down y/y for the first time in 2 years)

On that “news” this morning, US centric stock market investors who are still staring at the tree (Greece), now have to react to “China Slowing” as a Top 3 Most Read Bloomberg story. Unlike the US stock market, which has not yet had a -1% down day in 2012, Hong Kong was down -1.1% on that (Indonesia -1.7%, South Korea -1.3%, etc.).

 

Ideally, I’d like to sleep once in a while. Realistically, that’s not going to happen either. Global Macro market risk never sleeps.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, France CAC, and the SP500 are now $1, $114.12-119.02, $1.31-1.33, 2, 3, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Realist Risk Managers - Chart of the Day

 

Realist Risk Managers - Virtual Portfolio


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