There is a World inside the World
Stanley Druckenmiller once said
As a macro investor, my job for 30 years was to anticipate changes in the economic trends that were not expected by others - and therefore not yet reflected in securities prices.
From a very young age, sitting in Mombasa, on the edge of the Indian Ocean world and without realising what I was doing, i used to pore through the back pages of the Economist and try and forecast the movement of the data points that the magazine published weekly. Of course, in those days, before the arrival of the Internet my information spectrum was like one of those Photographs The Chandra X-Ray Observatory publishes, a tiny snapshot of an infinite universe.
Some years later, when i arrived on the Credit Suisse First Boston trading Floor, I understood intuitively that I had finally arrived at my destination. Here I found an incredible latency of market prices and minds, a combination that I mistakenly believed then could be replicated but later understood was something impossible to believe and never found again. I worked for other City of London Institutions, I returned to Africa where internet latency now operates at c21st speeds but my obsession has always been the same as it ever was; a nine year old looking through the back pages of the Economist and catching a glimpse of the Macro Universe. The most important lessons I have learnt are
This Enterprise is a continuous University. You need to understand yourself.
You have to course correct yourself, your personality otherwise its a Life of Tilt.
Like Edwin Lefevre said that If you intend to swing a line then you have to risk manage, You have to stay in the game.
There are so many lessons and I cannot list them all here.
Don DeLillo in his book Libra
There is a world inside the world .There's always more to it. This is what history consists of. It is the sum total of the things they aren't telling us.
And within the Macro World There are multiple micro worlds. There are inorganic moves. There are intra day cycles. And also today we have computerised Algorithms running amok amplifying moves creating amplification beyond our previous wildest experience.
It was a tumultuous year in 2022. The War in Ukraine which is still simmering in this cold Winter.
Pope Francis: "I don't see the end of the conflict in the short term, because this is a world war. Already several hands are involved"
The Think Tank Propagandists will tell us that Putin is going to be defeated on the battlefield, that he is on his last legs and about to be ''regime-changed'' by Kremlin Insiders. These Propagandists are limit long their narrative, they cannot change their narrative under any circumstances. Its existential for Putin, a defeat on the battlefield of Ukraine will undercut his entire raison d'etre. Therefore, my central hypothesis is aligned with Pontifex. The War will continue and my macro outlook is informed by that hypothesis.
The US China relationship remains highly adversarial. Decoupling is de rigeur.
Both The US and Russia are fundamentally autarkic economies and Europe is not. Germany's Euro 2 trillion of industrial output levitated on cheap Russian Gas and windmills will not cut it and Russia retains the nuclear option of just shutting down some production which would tip the supply/demand equation into disequilibrium and more than compensate them via price for the demand reduction.
As Russia pivots away from supplying the West and supplies to the East, China and India have been big beneficiaries as they suck in commodity imports at below market levels. This has proven to be a significant Tailwind.
The Periphery will remain a pressure cooker. Africa, for example, needs a Brady Plan. its not going to get it.
The Markets
The Long End of the Curve.
Stagflation is a Feature now and not a bug. To address stagflation, interest rates will need to rise much higher. Terminal rates of 2.5% in the Euro area are fantasy land economics. Christine Lagarde admitted as much in her last Press Conference of the year. In order to bring Inflation under control in such an environment Euro rates will have to rise considerably above 5% given that Inflation is still running above 10%. US interest rates also are headed to a terminal rate above 5.5%. Therefore, my First Trade for 2023 is a structural short of the German Buxl.
German Thirty Year Bond Yield. [My minimum Target here is 3.00%+ Yields]
The Foreign Exchange Markets
The Foreign Exchange markets were a wild rollercoaster ride in 2022. The Dollar rose until a few weeks ago.
$DXY via ksel Kibar, CMT @TechCharts
The Japanese Yen got to just shy of 152.00 before the Bank of Japan stepped in.
The Pound Sterling traded just above 1.035 before embarking on a run above 1.20 on a return to more conservative economics.
I think the $DXY heads back to 110.00+ and one can lean into this with a 102.50 Stop. My Proviso is that i can foresee $JPY printing 110.00 if the Authorities make a serious move to re-calibrate YCC. The Euro looks overcooked but interest rate differentials might lend support.
EM Currencies remain a structural short.
The overarching premise in the FX markets is to stay agile because there are so many moving parts.
Commodity Markets
I expect Gold and Silver to trend higher on increased Global Portfolio allocation and the risk that Russia demands Gold as a settlement currency for its Oil.
I particularly like the Soft Commodity and Food Index complex for 2023.
CHART OF THE DAY: The FAO food price index fell slightly last month, bringing the year-on-year % change to just +0.3%. Wholesale agri commodity prices remain high, but the inflation wave has ended. @JavierBlas Dec 2
Therefore, I am structurally long the Index, and enhancing that Long with a Long position in Coffee, Wheat and Cotton.
KC_F @BWM_AB
Wheat Chart via @jeffpeterson01
Equity Markets
We have not seen the lows and I expect further P/E compression.
Crypto Markets
We have long passed peak delirium. I am a Seller of the entire complex and expect $BTC to trade as low as $4,000 in 2023
Please all be aware that Bitcoin $BTC is developing the infamous "three blind mice" chart construction. @PeterLBrandt