[DcifrThs]

this process has been going verrrrrry slowly for a few reasons, the main one is the pain in the ass getting even monthly data.

despite the problems, i've accumulated some very good data from 1960 and now have built a respectable (nonupdated unfortunately) database fromw hich to make pretty pictures to go along w/ my anaylsis.

be that as it may, i wanted to throw out the main positions i'm looking at now and hoepfully get some feedback.

1) long EM credit default swaps. these have fallen (i.e. spreads jumped) recently as more negative news from the US comes in. i think this is overdone since many of the major EM countries in the index depend far more on china/euro area than the US

2) long ~10yr BEI. this one is one of my highest conviction and most thought out trades. it is long 10yr TIPS short 10yr nominal bonds (duration adjusted obviously). the rational is as follows: right now, we are in a precarious economic position. growth is at risk and capacity pressures/still relatively tight (but easing slightly) labor market, high commodity prices, and a weak (and likely weakening) dollar are all contributing to an inflationary environment. the break even inflation rate though hasn't adjusted significantly. it should and it isn't. it apparantly seems to adjust more in retrospect and thus appears to be not a great predictor of future (or expected) inflation. i.e. during the last 3 years, the BEI rate adjusted more in retrospect and didn't even predict the moderate inflation we saw until it already happened.

a rate cut now will only stoke inflationary fires and thus push the 10yr nominal yield even higher and increase demand for inflation protected securities.

further, the fed has shown a high bias for low rates and is likely to cut even when not 100% necessary to hold up growth since inflation expectations appear to be anchored (i.e. the 50bp cut in sept. and the previously low rate era etc.). this is a risk as the faith in the fed's ability/will to control inflation will be tested when the economy slows AND inflation pressures persist.

add to that the liquidity premium (not liquid TIPS vs. very liquid 10yr) which perenially depresses TIPS yields and this position looks highly attractive. this is a longer term position though since, as noted, the BEI rate won't likely adjust immediately.

3) long 2yr, short 10yr. right now, as stated above, a rate cut is likely to push up yields for the 10yr (more inflationary expectations) while obviously pushing down yields for the 2yr. this isn't priced in sufficiently at this point.

4) short USD vs. JPY, Yuan, and asian emerging markets. this is a fairly straightforward trade. despite global imbalances starting to correct themselves, the falling off of demand for US treasuries by these countries combined with their ever growing CA surpluses and US interest rate direction spell tough times for the dollar vs. these countries (while the dollar might even be overpriced vs. the EURO at this piont)

5) on a similar note, the pound now looks expensive vs. the Yen and Yuan.

6) this one i'd wait until the short rates adjust after the coming likely fed cut (as noted the fed apparantly likes lower rates). i'd bet that after the coming rate cut, UK rates and US rates will converge. the UK economy is showing weakening signs and the housign bubble there will likely eventually put some downward pressure on growth as well (though not as much as in the US). so i'd go long UK short rates and short US short rates (1-2yrs) and use that diff bet to capture the narrowing of the interest rate diff. this could also be a signal for going long the USD/GBP as that might be a bit expensive after the coming fed cut.

7) finally, i think that the gumming up of the credit markets is likely to come to a halt in 3-6 months. but i think it will improve in the coming weeks/month so i'd start putting on a euribor spread narrowing bet. i'd go long 3mo euribor futures 1mo out and short 1mo euribor futures 1 mo out.

i'd love to hear some feedback or questions on these 7 bets that i'm writing up right now so let's hear it.

thanks,
Barron