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“When anger rises, think of the consequences.”

-Confucius

 

One of the best parts about being a risk manager in global macro is that there is no real information “edge” that my competitors can glean from getting winks and nods from the old boy network. The edge in global macro resides in having a repeatable research process that can quantify the crowd’s behavior.

The vaunted “1 on 1” is one of the most overpriced research products in our business. It being priced at a premium is the output of a self destructing sell-side business model whose “ideas” continue to be discounted as lagging indicators. As a result, there is an analytical void at both the sell-side supermarkets and the media that perpetuates their consensus leanings that you can capitalize on.

Without giving away the secret sauce manufactured here at our risk management boutique, I can tell you that we have learned a lot from neuroscientists like Dr. Richard Peterson in recent years and have found some very effective ways to quantify sentiment. This becomes quite handy, particularly when you can identify what we call the Angry Shorts in a crowded global macro position.

As a practical matter, we look for the appearances of key words and phrases in mainstream media and then overlay it with a multi-factor risk management model to come up with trading ranges in markets. Yesterday, the words “euro” and “parity” had what I considered a statistically significant reading.

That’s why I wrote in yesterday’s strategy note that “our call this morning will not be to pile on to the “parity call” that has quickly become the most deserved and consensus trade in global macro. Both our immediate and intermediate term duration targets for the Euro are converging in the $1.21-1.22 range. Whenever these durations converge, my own mathematical prejudice is to cover my short position.”

 

In other words, the timing of my calls is directly correlated to the math. I don’t wake-up every morning and lick my finger hoping the wind gives me the signal. I wake up to a new daily set of data - most of it is quantitative; some of it is qualitative; but all of it needs to be quantified and risk managed.

As a practical matter, the next step is putting the outputs of our models on the tape. Unlike the conflicted and compromised sell-side, we do that real-time, every day. In the Virtual Portfolio (we don’t believe in running a prop desk in front of, beside, or behind our clients), you can see all of our positions on a marked-to-market basis. We are either right or wrong and you should be the first to remind us of as much. We are accountable.

Yesterday, as it tested and tried our immediate term oversold level of $1.22, we capitalized on some Angry Shorts in the Euro and made the following two moves: 

  1. 1210PM (EST) – we bought oil as it was immediate term oversold
  2. 1219PM (EST) – we shorted the US Dollar as it was immediate term overbought 

Now the decision to buy oil was immediate term in nature (3 weeks or less), whereas the decision to short the US Dollar was intermediate term in nature (3 months or more). Oil is now broken, across all 3 of our core investment durations (TRADE, TREND, and TAIL), but has immediate term upside to $76.17/barrel. We were already long some oil going into the day, so we didn’t get angry about it; we waited for our price, and bought more with the expectation to keep a trade a TRADE.

On the US Dollar Index position, I laid out our intermediate term thesis on the Duration Mismatch between the Euro and the US Dollar in my strategy note from last Thursday titled Fiat Fools. Without re-hashing that in full, the bottom line is this: US sovereign debt problems are only different than Western European ones in one key factor – timing. The darkest days for professional US politicians who perpetuate a fiat currency policy are coming.

Yes, the Euro-trashing by Trichet has been voted on in a very public (marked-to-market) way. One TRILLION is a lot of French Fiat that has created what Mr. Macro Market sees well ahead of a lying Spanish politician. That’s why the Euro has lost -18% of its value since November. While it may be “new” to the money honey at CNBC, it’s not new to the real-time risk managers of global macro. Neither will it be “new” news to anyone who has studied basic calculus when the USA gets its turn.

If you are looking for the simpleton version of the math on the topic of US debt, deficits, and unfunded liabilities, read “Comeback America” by David Walker. I am in the middle of reading it right now. Since Walker was the comptroller general and head of the GAO (General Accountability Office) of the United States of America, his view of the actual numbers versus the Made-Off ones is quite revealing.

I’ll spend more time on what Walker calls the “Financial Hole” ($56 TRILLION US Dollars) in the coming weeks and months, but for now let me leave you with something that can help you help your friends get really angry about – a TRILLION dollars…

Whether its Euros or US Dollars, as Walker wrote, “think about that word, trillion”… “if you can”…

“The $1.42 trillion deficit translates to about $2.6 million of debt accumulated each minute, $160 million an hour, and $3.8 billion a day.”

Them be some liabilities that Americans are going to be getting really angry about within 6 to 9 months. Make sure you are short the US Dollar before that anger management becomes consensus.

My immediate term support and resistance lines for the SP500 are now 1109 and 1144, respectively. I remain short SPY and we will be hosting our Monthly Macro Call this afternoon (email if you’d like to participate).

Best of luck out there today,

KM

Angry Shorts - DOLLAR