Thoughts About The Markets

The above graph shows the RTS since September 1st, 2004. As you can see, we touched on the lows of late 2004 (trying to cast my mind back, but I think it was weak commodities and post-YUKOS unhappiness that drove the market down), and now have rebounded strongly, seen some retrenchment, and are now just off the highs of 2009. The fact that we've come back from the retrenchment is encouraging - my interpretation is that the hot money took its profits in June, but there was longer term money available to come in and buy from them.

And there is good reason to buy - the RTS is trading at a historic high discount to the MSCI EM index, in terms of P/E. This is not a perfect measure, but there is not a lot else to guide yourself by. At least we can say that Russia is relatively cheap. Of course, this discount could be closed by the MSCI EM P/E ratio falling faster than Russia's - at this point a short MSCI/long RTS trade looks like a good bet, even if China has already come off sharply. I like the idea of this sort of pair trade at this point in the recovery. Yes, we have come off the bottom, but at some point the market has to take a breather, and a pair trade will help insure you against the risk that we are in fact in 1930, and the bear market and the recession has only just started. Yes, pumping liquidity and government spending into the system has brought us back from the abyss, but no one has convinced me that a combination of higher US unemployment and the need for the US consumer to save more will not drive us into a deflationary spiral.