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It’s getting tiring isn’t it? Doomsday prediction after prediction.

Let’s start with the International Fund forum where 1,300 managers got together to predict the end of financial markets.

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Then this morning, we were greeted with news George Soros had given up working on his beach body to return from retirement to manage his macro fund. And guess what? He is uber bearish. From the WSJ:

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After a long hiatus, George Soros has returned to trading, lured by opportunities to profit from what he sees as coming economic troubles.

Worried about the outlook for the global economy and concerned that large market shifts may be at hand, the billionaire hedge-fund founder and philanthropist recently directed a series of big, bearish investments, according to people close to the matter.

To top it all off, we get a new astrological forecast from the former Bond Kind himself:

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This last one I actually agree with. Gross is correct when he predicts the mind numbing bubble in sovereign bonds will end badly.

But how does it follow that the best way to express this view is to short stocks? I just don’t get it. We all agree sovereign bonds are a disaster waiting to happen, yet everyone is hiding in fixed income, supposedly avoiding risky assets by being long the very instrument they believe is causing the bubble. Huh?

Let’s go through the arguments presented at the International Fund Forum to see if we can maybe understand their logic. From Marketwatch:

BERLIN (MarketWatch)—Negative interest rates, ultracheap loans and aggressive quantitative easing—central banks are doing everything they can to prevent another financial crisis, but their unconventional measures are instead creating a massive risk to the global economy, top money managers say.

Gathering for the international FundForum in Berlin this week, more than 1,300 fund managers spent three days discussing the current investment outlook and the central banks’ monetary “experiment” emerged as a major concern for the industry.

“I think it’s fair to say it is an experiment because it hasn’t been done at this magnitude of negative interest rates. So many sovereigns have negative interest rates,” said Alexander Ineichen, founder of Ineichen Research and Management.

“In 2008 we had a Lehman moment and central banks stepped in, which was nice. But a lot of the structural issues have not been resolved. A lot of the leverage just went from the private sector to the public sector. My guess is that the next big risk, the next ‘Lehman moment’ is the sovereign. It’s because the problems are now there. The risks are structural,” he said.

“Think of central banks like a doctor. They’re walking by, they see their patient—the global economy—in trouble. They will not walk away from the patient. They are wired to respond even if they don’t have the right medication,” he said. “What happens when you respond for a very long time with the wrong medication? You start worrying about side effects, you start worrying about unintended consequences. That is where we are today.”

I can’t say I disagree with many of their complaints. And this final paragraph accurately describes the problems faced by Central Banks.

But let me ask you a question? What do you think are the chances these Central Banks suddenly realize the epic shit house they have built and decide to conduct prudent monetary policy? The answer is zero.

The ECB is busy buying boatloads of corporate bonds. What happens if they stop and raise rates to more normal levels? These bonds default. How is that going to play out with European governments? Or what about Japan? The BoJ owns half of the Japanese ETF market. How likely is it that they simply pick up their marbles and head home? Yeah right… Maybe they will even sell these newly bought assets in an attempt to clean up their balance sheet.

Any of these bearish hedge funds who believe the Central Banks will do anything except MOAR of the same are delusional. Bill Fleckenstein is correct when he forecasts “Central Banks will keep printing until the bond market takes away the keys.”

Meanwhile, don’t look now, but their printing is affecting markets.

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Remember how all the hedgies were all beared up in January? How China was going to implode and take all commodities to zero?

Whether it is nat gas, crude oil, corn, wheat, cotton, they are all rising. Yet instead of focusing on that, hedgies are busy hiding in long dated fixed income at ridiculously low rates.

Although I think the global economy is thoroughly screwed, I just don’t accept it will end in a deflationary bust. I think history has shown this is a terrible bet.

Don’t mistake my scoffing at negative stock market bets as a belief everything is fine. Quite the contrary. Everything is so FUBAR’d the only way out is to inflate at all costs. Yet too little appreciate the most likely end to this mess is a fiery explosion to the upside.

The bears are right, they are just shorting the wrong assets…


It wasn’t so crazy after all

Some of my buddies laughed when I wrote the piece The most beautiful arbitrage of all time in early February. I have to admit, I wrote it with tongue firmly in cheek, but it ends up I wasn’t that far off base after all…

FRANKFURT (Reuters) - Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the European Central Bank, according to sources familiar with the matter.

Such a move by a bank part-owned by the German government would represent one of the most substantial protests yet against the ECB’s ultra-low rates, which have been criticised by politicians including Finance Minister Wolfgang Schaeuble.

Although no decision has yet been taken, the lender has held discussions on the matter with German authorities, said two officials, who asked not to be named because of the sensitivity of the matter.

A spokesman for Commerzbank said it was not storing cash “at the moment” and declined to comment on whether it might do so in the future.

No word yet if the vault will look anything like this:

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Thanks for reading,
Kevin Muir
the MacroTourist