Self-imposed exile

Apologies for the long delay from MCFX. We passed our own 20% down take-a-break marker. The catalyst being obvious from the first line of our last post. Long equities. Okay, so the bear-market rally we were harping on about. Yep. That one that didn't happen. Well exactly. Pretty harsh.

We disappeared to France to take some time abroad to ponder things. We came back more bearish EUR longer-term though wary that Ireland may be bailed out by Europe at any moment which may cause some painful volatility.

We've been jobbing bits and pieces in smalls - none of it successfully. Only trade we still believe in is long GBPCHF which we've jobbed quite successfully and still hold.

Other macro thoughts include that we are giving up on equities. We still believe at some point they could have a massive rally but longer-term we are coming around to the theory that the cult of equity is over. I think the pain this time will be too long. There will remain tradeable opportunities over the coming years but I'm no longer convinced that equities will necessarily be higher in 5 years time than they are now. At least not in real terms. In nominal terms they probably will but surely there is a better way of playing that reflationary trade?

However, relative value we can't help but feel that long German equities against short Spanish equities will be a great trade (thank you MPPI for this idea). Amazingly, they've performed roughly similiarly over the last few years. We can't help but feel that Spanish equities are horribly screwed to put it nicely. They are stuck in a deflationary environment with increasing unemployment. I don't like having outright equity exposure so hedging with German equities makes sense. They are quite highly correlated being in the same investment bracket for most funds but the divergence should grow.

Another idea which MCFX's brother has been talking about is long oil vs short gold. I like long oil over a longer-term period. It will rocket again at some point: the thing about oil is the supply side is much stickier than the demand side. Falling demand has been the story of this collapse in oil prices but supply is also falling, albeit slowly, but eventually just as viciously, and when demand starts picking up that supply won't be able to come online again so quickly. It's also a way of playing the reflation trade. So longer-term we really like long oil.

Gold we also think will do well in the impending world inflationary environment. The problem is that anecdotally every Tom, Dick, Harry and Mary are in this trade. There is not enough gold around to make the gold ingots demanded by the private sector. This worries me. I think gold can take a horrendous whack short-term.

So in conclusion, while we like the thinking behind this trade as a relative way to play the commodity reflation story, we just think that the timing of both parts of the trade is very very difficult.

That's all for now. MCFX is returning to France next week - this time to formally improve his French. I may update from abroad but only if I'm inspired - and these markets are seldomly inspiring me nowadays!

Good luck!