Scuttlebut

Running your own money from home is great. Set up in the garden, a glass of rosé on a sunny day, reading and writing about markets, - it’s a good way to be spending time.

And even better, I don’t have to listen to the ravings of lunatic risk managers – who are worried about whether commodities will get delivered, and who want you to cut your equity exposure at the point of maximum volatility. The point, in other words, when you should be raising your stake. Risk managers are happy, almost try to persuade you to add risk at points like this, when the risk reward has deteriorated. But I didn’t intend to pen a rant about VAR and its disciples – I wanted to talk about running money at home.

The problem of course, is that there aren’t so many people around. So it’s hard to sniff out when there’s real fear in the air – something that was clear in mid-January – when I moved back to the long side. Hard to know when folks are getting complacent. Something I suspect is happening right now.

And it’s harder to keep in touch with contacts. That was something I did all the time when I was a commodities strategist. And on occasion it paid off big time. I heard about the collapse in aluminium orders from the horse’s mouth in October 2000 - around three weeks before the data came out. That set up some very profitable trades.

Now what I heard over the weekend reminded me of that time. I was chatting to a guy who runs a major global ad business. And what is interesting is not that things are slowing – but just how diverse everything is. Russia and India are going gangbusters – with Western companies, even banks, buying ads aggressively. The US of course, is weak. No surprises there. But Western Europe is doing a swallow dive.

Now that is intriguing. It’s certainly not consensus. And it’s the kind of scuttlebutt that shows up later in the data. It also supports some of the leading indicators – such as business confidence – that have been coming out much weaker than the activity data itself.

Now I like the negative call on Europe. It was Europe, much more than the US, that benefitted from easy money and the credit boom. It was Europe that saw the most aggressive house price inflation. And it was the European banks that went furthest down the rabbit hole of structured credit derivatives, convergence trades and other esoterica. They will be the ones most hamstrung in the great unravelling of the shadow banking system that is still to come.

Now, of course, the German Mittelstand and the French engineers are, and will, continue to be beacons of strength. But it is precisely because they are strong that rates have stayed too high for too long for the rest of the economy. And it is now, according to the scuttlebutt I’ve heard, that the chickens are coming home to roost.

Now I’ve thought a bit about how to trade this. And it looks to me like Dec 08 Euribor is ripe for a bid – after a vicious 120 point sell off from early February. I’m long Dec08 Euribor with one risk unit, looking to build up to a maximum of four units long if the trade is successful – in line with my standard practise for my leveraged fund.