Secular Outlook by Mohamed El-Erian of PIMCO.

“Last weekend’s drama in Europe is yet another illustration of this phenomenon. Policymakers are now forcefully using the balance sheets of the EU (ultimately Germany) and ECB to compensate for the debt excesses in the periphery (particularly Greece) and the related overexposure of European banks.”

Meanwhile, back at The Factory, the internet continues to be the largest communication platform I’ve ever been involved with. If I didn’t own the darned thing, I wouldn’t be where I am–in hiding.

On another note, some noteworthy happenings impressed me recently while speaking to my assistant, Tonya:

–Last week Goldman Sachs downgraded EPS estimates for the banks by 15%.

–The federal reserve hiked interest rates by 25 bps from .50% to .75% on February 19th in a surprise move. Since then, stocks have marched higher while volatility has slunk lower. There are various rumors making the rounds that the fed will repeat it’s actions from February–hike rates by 25bps in another “surprise move.” Moves are moves, but I definitely appreciate surprise moves and use them often.

S&P Futures / VIX

–Ratings agency Standard & Poor’s changed their ratings on Greece last week from negative to stable. Does anyone care about rating’s agencies anymore? Haven’t they been proven meaningless?

–I will be working the Ironman II premier in various locations, including Los Angeles. My client–Ms. Pinky Megiston–is involved with the show so though I’ll be there, absolutely no one will have any idea who I am. After all, not even I know who I am anymore. Whenever I have lost my mind in the past it has always led to bigger and brighter things. This time shall be no different.

Complex as it isn’t, my bankroll is positioned all over the world and the only one who really understands it is me. In reference to the public markets of late, we are approaching an important juncture. A turn is at hand. Given my data points, I need determine the best allocation of my capital to the assets that will gain in value most rapidly–I need appreciation and velocity.

Libertarian

In order to execute my trading model, I must stay true to it. In doing so, It is essential that I have no obligation to other people’s money (OPM). Since I am not paid by anyone to manage their money, my emotions are not tied to the performance of any monies but my own.

With sole trading discretion, I can take whatever risks I choose. As my model is not hindered by diversification, I can allocate all my capital to one thing, and I can go all in whenever I want. Nobody else has a say. With no limited partners, I am able to exercise my beliefs in Objectivism. I am held down by no management. My decision are derived like those of a machine: a robot with a heart.

Tony and I

Don’t ask the question—I already know what it is. It is sitting on the tip of your tongue, and you want it to hang in the sky so you can watch my reaction. But I’m not even going to let you ask. I am going to explain before you can claim your smug satisfaction.

“What about back in September when you wrote about running money for Tony Stark? What’s that all about? In some circles it is rumored that you are a money manager to superheroes and now up above you are claiming that you are not running OPM.”

Indeed, I do communicate with Tony as to how to allocate some of his assets. However, I am not paid a dime to manage anyone’s money—just my own—and I must keep it that way. Because I must stay true to my model.

What Does the Model Say Now?

Keep in mind that the trading model is not one of profit regularity and predictability. My model is one of relatively inconsistent bouts of extreme capital expansion. The dime bets that go to $50—tail events. Yeah, I’m that guy.

It is still my opinion that the largest opportunity in the years ahead will be trading gold. Gold is going to make an extremely rare and large move higher, and when it happens, it is going to happen very quickly. I have seen this movie before. Monetary policy has grown out of control on a global scale and gold is the ultimate risk aversion trade.

In my post the other day, I spoke of some tells that lead me to believe that there is a large move brewing in the markets. The situation remains the same. In fact, Dubai risk has widened even more.

The Currency Market

From my view of the money flows in the currency markets, I am seeing the carry trade moving away from the US Dollar and into the Japanese Yen. The Yen is the new carry trade.

Yes, the dollar has strengthened of late (chart below), but the recent strength in the mighty US Dollar is more related to carry traders re-arranging. Sovereign swaps on the US have widened enough to signal that the dollar will grow weaker as opposed to stronger in the not so distant future.

All Roads Lead to Rome—Again and Again

So here is the triangulation: there is a large move brewing in the market and the move is connected to a sovereign related event. Therefore, we should look to buy the asset that will appreciate most during a time of governmental stress.

During the crash of 2008, the best asset to own was the US Dollar. The dollar was the risk aversion trade. However, during the crash of 2010, the US dollar will not be the risk aversion trade. Let me explain. The stress on the horizon is sovereign related, but the demand we have seen in the US dollar lately is temporary. The asset, therefore, to own is going to be the ultimate safety trade, the one to which we always return: gold. (Silver will tag along.)

There is a large dislocation set up, and it is the opinion of Vincent M. Vega, editor-in-chief of Volatility News dot com, that the asset class to appreciate the most and with the most velocity is gold. Like the the Jackie O. trade of the 1970’s, it is time again. The gold trade is on. Be a part of it. History is in the making. Will I see you there?

And the beat goes on.

The Dollar Strength Will Fade

BofA / Merrill Lynch is out with a note on interest rates. They see the Bank of Canada as the next central bank to move on interest rates.

– Bank of Canada’s Carney speech hinted that the central bank is considering a rate hike earlier than the prior forecasted mid-2010.

–There is a trade surplus expected for December and a 15 month high for January housing starts. Both of these data points support a forecast for the first Bank of Canada rate hike in June 2010.

Meanwhile, back at the office, Gold hit an all time high today and the S&P 500 closed +14.26 points or 1.37% at 1054.72.

The gold market is going to offer an obscene amount of trading opportunities, both long and short, in the years to come. The breakout today is big news.

Gold - Weekly Chart

Now, the big bad question is what to do from here. It has been my viewpoint that gold is vulnerable to a violent sell off–if there is a sudden risk aversion rotation into the US Dollar. Last night, there were rumors that oil traders would abandon the US dollar and attempt to denominate oil against a basket of currencies. These rumors make the rounds now and again, and they are always funny. Oil is not going to trade against anything else anytime soon. After all, if you were an oil trader, what would you like the contracts settled in? I prefer my oil settlements in dollars (just fine thanks). That said, not everyone thinks like I do. The rumors of oil re-denomination, a 25 bps rate hike in Australia and weakness in the greenback all pointed to the the new high in gold today.

I remain sidelined in the yellow metal for the moment, and it feels lonely. The move in gold is starting to be about momentum and trading the technicals–an endeavor which I have a decent track record.

The next chart speaks to the conspiracy theory of the day. Rumors of a derivative loss at Goldman Sachs (GS) between 9:30 and 10:00 AM PST. These rumors come up from time to time. I discussed my thoughts on Goldie in a prior post. I’ll leave them at that. Before you dismiss the Goldman oil rumors straight away, check out the price action. They traded in lockstep throughout the equity session. Conspiratorial as these rumors may be, the charts sure move together.

Goldman Sachs Vs. Oil

After the bell today, a slew of oil numbers were released. They all seemed inline except the distillate numbers, which were -2.9 million versus a flat estimate. Oil traded a tad firmer on the news.

Tomorrow before the bell we’ll see numbers out of Monsanto (MON) and Costco (COST). After the bell Alcoa (AA).

I am off to dinner with a vice cop turned lawyer turned trader. Reinvention is the mother of innovation. And the beat goes on.