We have been strong proponents of various relative-value (RV) trades as this highly volatile and increasingly binary world infers more Knightian uncertainty than any normal strategist, talking-head, fringe blog can cope with. What is frustrating nevertheless is the degree of confidence that many economists and strategists forecast directional bets only to fail miserably (and rapidly). Refreshingly, Citi's European credit research team take a similar perspective to ours on the current policy uncertainty and expect nothing less than spreads to keep oscillating wildly (between depression and muddle-through). Their crucial insight is to tie the evolving crisis to the Kubler-Ross stages-of-grief and recognize that expecting a decoupling (or lower correlations between and within asset classes) is only for those in denial - trade the phases instead in 2012 - following the path of this year.
As we re-enter the 'Bargaining' phase (or perhaps prolong the 'Anger' phase), correlations will remain high (as will stress). The argument that corporate balance sheets are strong remains moot all the time the sovereign remains in peril and so focusing on the asymmetries and dislocations is key.
There are simply too many linkages between sovereign stress and corporate balance sheets to rely on analysis that extends any trends - for example, economic growth, availability of credit, capital flight, transfer risk, devaluation, and most clearly government interference.
Remaining neutral cash, using index overlays to position for short-term views and recognizing that macro matters most (so beta and domicile trumps sector allocations (ex fins)) leaves them focused on the relative-value trades or dislocations as they prefer, like us, to exploit the asymmetries - such as between equity and credit that we have been so positive and vehement on.
Other examples of dislocations include: non-financials and equity volatility, credit curves, investment grade relative to high yield spreads, and financials vs sovereigns.
The previous top-down presentation that this group gave on the decades of deleveraging set the stage for the chronic problems ahead. Only when there is a credible lender-of-last-resort with public funds enough for Italy and Spain will it be safe to get long and earn carry once again...
In the meantime, Despite Strong Corporate Balance Sheets...
Don't Expect Decoupling...Trade The Phases of The Crisis Again In 2012!