The Uphill Task of Trading DeCorrelations
This is the year of the trader.
It is time to make a call. The hunky dory days of the past 2 years with QE1 and QE2, not the Queen of England Jubilee in mind, are almost over.
I am still struggling with recurring visions of dramatic changes in the correlations I have grown used to in the past 2 years. Risk on – buy EUR, GOLD, S&P and USTs.
It is turning as we speak now. The LTRO II effect ? Then why not the first one ? COMPLACENCY ? MISPLACED COMFORT ZONE ? MANIPULATED PROPAGANDA ? CROWDED TRADE ? OR ALL OF THE ABOVE ?
Trading EUR/USD while watching Gold now. How weird does that feel ? And reading bad news as good news. Weak ISM Numbers = QE3 = Buy GOLD, STOCKS, EURUSD and everything.
Such behaviour would have been called travesty in the old days or even perverse. Yet you just have to participate or face extinction and be the lemming that is left behind.
3 years of QE and now LTRO and BOE. Are the good times back ? Or are we headed to a new world order in correlations ? Playing around with the correlation tables, I notice that JPY had a big fall in correlations with the SPX and 10Y UST in the recent year.
Lets not get complacent and live life as we have known it in the past year.
Just look at the chart above to see how the distortions were created. There is a story forming here.
De-Correlating markets.
Carpe Diem and more to come.
the question is do you think QE is treated as a STOCK or FLOW concept. I subscribe to the STOCK concept- meaning in the world of excess liquidity there will be ENOUGH money chasing govt bonds carry, enough money chasing credit carry, enough money chasing equities carry whilst we are in the cyclical short upbursts (or wriggle up to borrow a phrase from the famous bridgewaters). Unresolved structural problems from the past years mean periodically these get flashed out by market-makers and/or politicians to “tank:” risk assets.
QE and Operation Twist has long term effect unlike LTRO which is only 3 years.
Its like a vein splitting into capillaries and thus, that is why we had all the super correlations in all the asset classes in the past 2 years when people started getting the gist of it.
I believe the equity rally happened when lower yields justified stock prices. Thus we had an amazing convergence in yields and SPX.
It was an easy 2 years because it didn’t matter what asset you bought, its whether you made more or less.
This year… I am not so sure.
if you look at the breath of the SPX rally it is uneven- meaning the bluest chips and/or stocks exposed to EM outperformed- i will say its reflection of where the QE goes to. Hence profit margins in SPX is still hovering at close to record margins. Granted this year ASSUMING the stock of global QE stagnate, SPX can still rally via an expansion of P/E multiple (I not a firm believer of that though) or through the bluest chips buying earnings (M&A of smaller profitable companies and cutting costs, as it is tough to improve profit margins in the 3rd year of recovery).
Again without a big sell off of UST (which FED will not allow in this year), DCF will not harm the E of the P/E…..
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