2100 Xenon’s Jay Feuerstein writes on Hedgeworld.com today that history suggests futures markets will not only return to trendiness, but yield the best opportunities of the past 30 years. Here are some excerpts from his piece:
Trading futures in 2011 has been tough because the budget, the budget deficit, the real estate crisis, the joblessness, the Federal Reserve, The European Central Bank and the IMF have all spawned surprise headlines that left well-thought-out trading strategies in shambles. Short-term traders find themselves whipsawed by the news while long-term traders own positions that appear to be going nowhere. Moreover, except for a brief respite at the end of 2010, the markets have been in this Bermuda Triangle trading environment for more than two years.
Once the global economy finds a clear pathâ€”up or downâ€”markets will price themselves accordingly, and disciplined traders will find a literal goldmine of opportunities. Just look at what happened in the 1970s. The recession of 1973-74 was the worst, at that time, since the Great Depression. War raged in the Middle East. The stock market lost 40 per cent of its value, housing prices plunged, workers lost jobs and for the first time the U.S. began to run a budget deficit. Fed Chairman Arthur Burns burst open the monetary spigots and was roundly criticized because commodities such as gold and silver began huge bull runs that saw their prices rise tenfold in less than five years. Emerging countries such as Japan were the miracle economies that kept the world afloat while the United States struggled with inflated union contracts and historic borrowing costs. Sound familiar?
At the same time, the resulting market opportunities in metals, grains, interest rates and soft commodities created the opportunities for the earliest trend followers such as Larry Hite and his Mint Asset Management. He and Ed Sekoyta are credited with being the first of their kind but they soon had company. Paul Tudor Jones, Richard Dennis, John Henry and Monroe Trout all amassed great trading records in the ensuing decade.
Today, the markets are in much the same place as they were when Gerry Ford left office in 1976. Commodity prices are booming. The stock market, though just two per cent from three-year highs, is flat over that period as well. The Fed is especially generous, and the Obama administration is desperately trying to stay afloat as the 2012 election nears. No tough medicine is yet in sight.
Meanwhile, the Fed says it is ready to continue to ease policy, though rates are already at zero. The only thing it could do is buy government debt, but that would not be the best idea given the possible downgrade that is coming. Still, the only bullets it has are in dollars, and it could flood the short-term money markets with cash in order to keep the economy afloat while Washington sorts out its problems. One of the differences between today and the late 1970s, early 1980s, is that the world is a much smaller place. Repercussions from Washington reach every corner of the world, with at least three of those corners in a pretty tough spot. The Eurozone is struggling with Greece, Portugal, Spain and Italy, whose defaults could throw French and German banks for a multi-billion dollar loss. Chinaâ€™s miracle is slowing, as inflation and real estate prices make workers there feel less successful than the economy they have struggled to build. And the Middle East, despite its oil profits, continues to be a violent place as nascent governments struggle with the new independence they have found in the wake of the deaths of Saddam Hussein and Osama bin Laden.
Ultimately, all of this will sort itself out.
Going forward, when looking at the political prospects for the country, possible results run along party lines. If the Democrats win, the markets will know what they stand for: inflation and a lack of fiscal discipline. The Obama/Bernanke team will revive the economy but at a severe inflationary cost. Nonetheless, markets will have direction. Bonds will fall, stocks and commodities will rally. Traders will have plenty of trades to choose from. If the Republicans gain office, trades will still abound but they will be the trades of a double dip, deflation and illiquidity. Most likely, the Republicans will cut the deficit, thereby removing fiscal stimulus. Bonds will skyrocket, the yield curve will flatten, stocks and commodities will swoon and swap spreads will dramatically widen. Even if the two parties work togetherâ€”Heaven forbidâ€”regardless of the presidential outcome, good trades would emerge because stocks would rally, bonds would fall, commodities would flatten out, however, but the dollar would rally. Markets would move enough for sustainable trends in any of the three cases. All traders need is some direction, and it is coming.
Read the Hedgeworld op-ed here.