Tuesday, February 26, 2013

It's The Economy Stupid: David Zervos

You can read all of this if you are really into economics. I did, but I am paid to do that.

However Zervos did pen this gem: "...if you are going to run with bulls, you will occasionally have to take a horn in rear!"

And this one: "And if you don't seize these opportunities you will be left behind hugging your trash can in the kitchen like Charlie Sheen"

And here are some definitions to help you:
LTRO: The European Central Bank's long-term refinancing operation
Spoos: S&P 500 futures
USDJPY: U.S. dollar and Japanese yen currency pair. AKA "the gopher".

John Broussard
Assistant State Treasurer
Chief Investment Officer
State of Louisiana
Department of the Treasury
Ph: 225-342-0013

-----Original Message-----
From: DAVID ZERVOS (JEFFERIES & CO., INC) [mailto:dzervos2@bloomberg.net]
Sent: Tuesday, February 26, 2013 10:18 AM
To: John Broussard
Subject: The important stuff and the fluff

The markets continue to be driven in the short term by a lot of noise. People are focusing on the UK downgrade, Italian elections, Cypriot bailouts, LTRO paydowns, the US sequester and Charlie Sheen's twitter pictures during the Oscars. All of these "focal points" have about the same long term relevance for financial asset prices - nil!

In the end, there are only three primary drivers of asset prices globally - Ben, Mario and their new buddy Haruhiko - the rest is fluff! This does not mean that USDJPY cannot airpocket 2 figures on a lazy New York afternoon; or that spoos can't drop 25 points on European political uncertainty and heated fiscal policy banter from DC. Grinding rallies and sharp sell-offs are the basic ingredients of a bull market. And if you are going to run with bulls, you will occasionally have to take a horn in rear! That's why we always carry a little first aid kit with us full of blue eurodollars. They always ease pain from the inevitable piercings.

But as we move forward on this path to a reflationary recovery, it is critical to maintain a view of the forest for the trees. Central banks are diluting the value of fiat currency. And more physical cash will chase the same set of real assets. This in turn will drive asset prices higher and generate our much discussed reflation trade! Whether the Italians elect a comedian/criminal as their PM, the Cypriots haircut some Russian oligarchs or there is 8 billion less per month spent on a handfull of bloated US government programs does not matter. All of these "focal points" are about as important as what was going through Charlie Sheen's head while he was hugging trash can in his kitchen.

Ben is on a mission, Mario will do whatever it takes and Haruhiko is the guy who called for a 3 percent inflation back in 2002. So what should we look forward to? Well, Ben is on center stage today in front of Congress to give us his usual dovish quack. Unemployment is too high, inflation risks are contained, the Fed has the tools, and the Fed will use the tools to deliver a reflationary outcome. And importantly, the costs of a larger balance sheet do NOT exceed the benefits. He has delivered this unwavering message for over 4 years now, why would he change? And Mario already did his heavy lifting after the last ECB meeting with a warning on Euro currency strength and downside risks. The Euro has in turn obeyed with a little help from Silvio and Beppe. Finally, we have Hirohaku. All indications are that this staunch critic of past restrictive BoJ policies is about to join the printing party. I really enjoyed Jon Hilsenrath's piece on this subject on Monday's journal - http://online.wsj.com/article/SB10001424127887323699704578323950460067178.html?KEYWORDS=Hilsenrath - especially because it referenced our last piece on growth wars.

The G3 central banks are all engaged in the same policy. They are using their domestic portfolio balance channels (aka printing presses) to reflate risk assets. They are of course risking significant future inflationary pressures, but that's an issue for another day. These two facts are all you need to know. To get caught up in Italian politics, Cypriot haircuts, UK downgrades or US fiscal policy is missing the big picture.

I know that many folks have to focus on minute by minute pnl swings. It's just the way our business has evolved. In a way its a shame that so many investors spend their entire day deciding whether to cut, add or sit on some levered position! Cut, add, sit...cut, add, sit....ugh! A money manager for a very large pocket of unlevered assets once said to me - "the day I worry about the pnl on one of my trades over the next 3 months is the day I leave this business". Unfortunately, the market is not dominated by folks with that luxury. Thus, most traders will have to go read some god awful mumble on Italian coalition formation, the house of deputies, the upper house.....yadda, yadda, yadda. Whenever I try to read that stuff it reminds of 1994-1996 with Berlusconi, Prodi, D'Alema and Dini. We bounced around from right, to left, to independent with a crisis at every turn. Italian markets swooned while the bull market in US risk assets ripped!! Some things never change.

In the end, I'm going to keep my eye on the long run prize and stay focused on the important drivers. The large money manager has the right approach. The day to day is noise. The big picture is amazingly clear. Of course it will not be a one way ticket to reflationary paradise without a few bumps on the road. But don't be confused by the occasional setback. These are normal. These are opportunities. And if you don't seize these opportunities you will be left behind hugging your trash can in the kitchen like Charlie Sheen. Good luck trading.

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