Macro Man

Headbanger's Ball

2009-11-23T09:12:00.002Z

As we embark upon Thanksgiving week, thus ushering in the low-liquidity holiday silly-season, you can almost hear Slade (or is that Quiet Riot?) in your ear as you watch the screens. If you're a noise trader, there are rich pickings to be had; if you're a signal trader, thre's not much you can do but pick your spots and bear it.

Still, there have been a couple of interesting features as we kick off the week. Gold has made (another) new high, seemingly dragging the DXY down in its wake.

Speculation that the ECB is moving towards an exit strategy received a boost on Friday when they announced changes to the ratings requirements for ABS collateral from March onwards. While there's no suggestion that rates (either the refi or EONIA) will necessarily rise in conjunction with this change, given the relatively rich market pricing, it's probably not a surprise that the euribor strip has been sold on the back of the announcement. However, the strip is now pricing the rise in euribor to be relatively front-loaded, which opens up some interesting curve trades.
Meanwhile, the Brownian motion of the SPX continues apace, with short term chartists no doubt keying on the little head and shoulders pattern on the short-term chart. At this point, Macro Man has no strong conviction on how the price action will resolve itself; given holiday illiquidity, all it will take is a big order to confirm or negate the pattern. Yawn.
Thrown in some noise about soverign risk, and you've got the perfect recipe for a headbanger's ball this week. Whether that describes the noise of the market or the relationship of Macro Man's noggin to his desk remains to be seen...

Window Dressing?

2009-11-20T09:50:00.004Z

Macro Man is back in the saddle, or at least his office chair, this morning after his first decent night's sleep in what seems like forever. It's expiry day today in equity land, and indices are producing the seemingly-obligatory squeeze up, despite the rather poor performance of other measures of risk appetite and/or reflation.

One issue that has captured macro punters' fancy this morning is yesterday's price action in Treasury bills. The Feb-10 bill traded to a low yield of 0.005% yesterday, and some bills of shorter maturity reputedly traded at negative yields (though Macro Man in fairness has yet to find them.)
This raises the question of who would purchase bills at zero or even negative yields the week before Thanksgiving? There has been some mumbling that the flow into bills represents some sort of "window dressing", though why one would start doing so on the 19th of November defies explanation. Why, too, would any bank buy bills when they could simply deposit cash as reserves at the Fed and earn a "tasty" 0.25%? (This is a legitimate query; Macro Man is not intimately acquainted with the regulatory/capital impact of bills versus reserve deposits for bank holding companies.)

Anyone who can shed light on this action is encouraged to do so in the comments section; from a distance, however, it wouldn't appear to be a particularly healthy phenomenon for bills to trade through zero yield!!

And that in turn would jive with the last 36 hours' price action, which has suddenly taken on a very "risk off" feel. Equities and FX carry traded poorly from the get-go yesterday, and while the former has managed at least a tepid bounce, the latter still looks pretty poor.

In any event, Macro Man's Bloomberg inbox has been stuffed to the gills in recent days with analyses purporting to entice him into doing x,y, or z trade on December seasonality. "The euro almost always goes up from [insert cherry-picked date here] through the end of December!" "The January effect has moved to December!" Blah, blah, blah.

The EUR/USD phenomenon is well-known to everyone who trades currencies for a living; on the basis of price action over the last couple weeks, it seems as if every single one of them are long as a result.

There's also been a lot of mumbling about the potential for an equity rally in December, based on the solid performance of equities thus far this year. Here, at least, we have a sufficiently large data set to do a study that at least borders on statistical significance.

Taking monthly SPX returns since 1930, Macro Man compared the returns of the first 11 months of the year with those of the ensuing December. Sure enough, there is a positive relationship between the two, as illustrated in the chart below.
Macro Man ran the regressions both with and without a constant; both regressions generated statistically significant (t-stat >3, p-value < 0.002) results. Based on the 20% y-t-d returns on the SPX thus far, both regressions suggest Dec,ber returns of roughly 2%, give or take. That's broadly in line with the historical average; in the 11 prior cases in the sample of 20% + 11 month returns, the average Decmber return was 1.84% (with eight winners.)

So is Macro Man trading in his ragged furry suit for a nice new pair of horns over the next six weeks? Not quite yet. While the possibility of an equity melt-up/window-dressing orgy is clear and present, your scribe cannot quite shake his feeling that the rally is tired and fundamentals remain poor. The bizarre price action in T bills, be it window dressing or a "shoulder tap" allocation, has left him scratching his head....

A Game

2009-11-19T10:13:00.003Z

Macro Man's feeling a bit under the weather this morning, so today's post will be mercifully short.

What do these four countries have in common:

Brazil, Indonesia, South Korea, Taiwan

a) They all have trade surpluses, according to the last monthly data

b) They all saw the value of their FX reserve holdings rise by at least 1.5% in the last monthly reserve data

c) In the last month, they have all announced either the contemplation or imposition of capital controls or punitive taxes/restrictions on foreign access to domestic asset markets.

d) All of the above.

The answer, of course, is (d). Macro Man has been murmuring darkly about protectionism for most of the three-plus years of this blog's existence, and the drumbeat is growing louder.

Here are the stories on Brazil (which also closed an ADR loophole yesterday), Indonesia, South Korea, and Taiwan.

Now clearly, this is a) taking the piss, and b) not good news in the long run for global trade and risky assets. As yet more countries adopt a "we want you to buy our trinkets, and we want to buy your financial assets, but we don't want you to buy our financial assets" policy, the risk of a pushback must be rising.

Sadly, the Obama administration has resembled its predecessor in lacking the backbone to tell Voldy, et al to "shove it", and now the Europeans have even joined the Yanks in making an annual pilgrimmage to kow-tow to the Dragon Throne.

Maybe this will end well.....but Macro Man struggles to see how.

The Fed And Bubbles

2009-11-18T08:55:00.004Z

On the same day that Ben Bernanke made his speech mentioning the dollar, his intellectual blood-brother Don Kohn made one that touched heavily on the issue of asset bubbles. At the risk of over-simplifying the speech, Kohn essentially said that monetary policy is an inappropriate tool for addressing ongoing asset bubbles, and that regulation is the preferable policy option. Oh, and we're not currently observing another asset bubble forming before our very eyes.

His defense against using monetary policy to address bubbles was essentially "gee, it sure didn't work in the dot-com bubble of '99 or the housing bubble of '04-'05". The obvious rejoinder to this argument, of course, is that despite hiking rates the Fed never managed to arrive at a tight
monetary setting; Macro Man's nominal GDP indicator suggests that policy remained moderately easy during the late-90's tech bubble and ludicrously easy during the housing boom.

So from that perspective, Kohn's argument is specious at best; the Greenspan Fed never properly applied monetary policy to address asset bubbles!

At least Kohn conceded that the Fed's regulatory policy (i.e., "who? me?") had been, ahem, sub-optimal. And it doesn't seem to be a stretch that regulation should play a stronger role in addressing asset bubbles moving forwards; hell, even requiring mortgage applicants to send in $5.99 and two box-tops from Lucky Charms would significantly raise the reporting hurdle from its 2005 liar-loan nadir.

Still, if Kohn's claim that "our abilities to discern the "correct" values of assets is quite limited", how can the Fed fail to recognize that Nasdaq 1999-2000 was a bubble....
...as was the 2003-05 housing market.....
...and oil last year.....
...but that a less than 10% decline in the value of the S&P 500 in the first few weeks of last year was sufficiently worrisome that it merited a 75 bps inter-meeting cut a mere 8 days before a regularly scheduled FOMC policy decision (which produced a further half-point cut.)?
Put another way, why does the Fed feel powerless to identify bubbles in real time, but is evidently highly confident in its ability to determine when asset prices have fallen below equilibrium?

If the Federales are truly concerned about ensuring financial stability, addressing asset price moves in a symmetric fashion would be a great place to start. Because on the evidence of the last dozen years or so, the Greenspan/Bernanke/Kohn is a helluva lot more trouble than it's worth.

Bernanke And The Buck

2009-11-17T08:32:00.003Z

Following on from yesterday's post, Macro Man received confirmation this morning that Britain is, in fact, going to the dogs. He rolled up to the station this morning to find that his usual 6.33 service has been cancelled until further notice because of striking train drivers. (Apparently the reports of high unemployment are a fiction.) Fortunately, he was still able to make it to work on time.....because the previous train ran 20 minutes late and he was able to catch it!

Anyhow, there were a couple of interesting developments in the US yesterday. Headline retail sales surprised on the topside (though given revisions, the report was actually pretty much in line), led by, of all things, auto sales. Macro Man had expected auto sales after cash-for-clunkers to remain pretty weak for some time. And while the auto sales index did remain well below its C-4-C high, there was nevertheless a pretty solid bounce from the September low.
If this is emblematic of how the consumer will behave, there are a few itneresting implications. First, Macro Man's core view that the savings rate will push towards 10% will prove to be incorrect. US household saving should rise, and 'twill be a pity if it fails to do so. In any event, if Christmas sales prove to be unexpectedly robust, the chances of a late-year melt-up in risk assets will increase sharply.

A final implication would almost certainly prove to be an unexpectedly sharp widening in the US trade deficit, of which we received a hint on Friday. Given that the accumulated current account deficit of the US is the foundation of the DGDF thesis, an early re-widening could prove to be rather bearish for the dollar...particularly if the Fed refuses to compensate foreign investors for financing it. (Foreign owners of printing presses would, not doubt, continue to do so courtesy of their unwillgness to implement their own monetary policies.)

We saw a similar instance in 2003 and 2004, a period in which the USD weakened sharply against those currencies with market-determined exchange rates. Given the imprecations which are already flying towards Washington from Beijing, Frankfurt, and elsewhere, one can imagine how unhappy foreigners would be with a further sharp weakening of the dollar. (Judge for yourself how they might feel about a re-widening of the US trade deficit courtesy of sustained consumer demand.)

In any event, this backdrop provides an interesting prism through which to read Big Ben's speech to the New York Economic Club last night. After spending most of the speech bemoaning the prospects for commercial real etstae, bank lending, and unemployment (while also sounding rather confident that inflation won't be a problem for some time), BB addressed the issue of the dollar in an unusually stark manner:

The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

That the Chairman of the Fed would mention the dollar so explicitly was news, as indeed was the cherry-picked headline "Fed Policy Will Help Ensure Dollar Is Strong" that flashed across the Bloomberg newswire. Now, anyone reading the previous 28 paragraphs could only reach one conclusion- addressing both sides of their dual mandate, the Fed ain't hiking rates any time soon. Now perhaps this means that the dollar should indeed be "strong"...but Macro Man suspects that most observers might reach the opposite conclusion.

This, in turn, raises the question of the provenance of the paragraph on the dollar. To Macro Man's eye, it looks like it was placed there for the benefit to the Chinese and Europeans (and maybe just a smidge for the gold-buying Joe Sixpack.) 28 paragraphs on why there's no reason to hike, one paragraph on how the dollar has retraced its crisis rally but why the dual mandate means the dollar should be strong. This looks like classic CYA stuff....

So, with the prospect of a late-year risk melt-up, a widening trade deficit, and a complacent central bank, the dollar must be toast, right? Perhaps...but perhaps not. For one, Macro Man isn't really prepared to concede the "rebuilding savings" argument just yet, nor that all financial sector skeletons have been premanently confined to the closets in which they reside.

Moreover, the euro in particular trades very poorly, like it's almost as crowded as the morning train that Macro Man will henceforth be required to catch. The price action of the last six weeks or so can be viewed as either a "teacup" formation, which is bullish....or a double top, which is not. At the risk of descending in chart-reading tautologies, the outcome will likely depend on whether 1.5064 or 1.4628 breaks first.

Just about everything that Macro Man sees says that EUR/USD should be going up, and yet it's not. And that, if you're long, might be even more annoying than the minefield of the morning commute.

Cats And Dogs

2009-11-16T08:43:00.003Z

It's been raining cats and dogs for most of the last week (though sadly not during this turgid display, which might have excused the unappetizing fare on offer), so Macro Man has domestic pets on the mind.

After a brief respite last week, it feels like every man, woman, cat and and dog in the world has put in a bid for gold, taking the shiny metal/only "real" currency/barbarous relic (delete as appropriate) to fresh all time highs. Or at least, fresh nominal highs. While gold is starting to get a bit of that "Nasdaq 1999" feel about it, Macro Man is well aware of the quasi-religious fervour of some of its adherents. And if we want to devise a measuring target, looking at the "real" price of gold (or at least, the price of gold deflated by headline CPI) isn't a bad place to start. As the chart below suggests, the nominal price would nearly have to double to approach the early 80's "real" highs, though the metal's subsequent collapse suggests, post hoc, that such levels were, shall we say, bubblicious.

Meanwhile, in currency land, China and America are starting to fight like cats and dogs: a bit of barking and hissing with no real violence. The APEC meeting produced no substantive results, other than a cunningly-timed story in the FT in which China bemoans America's monetary policy settings. Leaving aside the fact that no one forces China to get to the dollar or to set deposit rates at farcically low levels; perhaps we should just revisit the chart of aggreagate money supply growth over the past year-and-a-bit?
Moving along from cats and dogs to flamingos, Japan has hosted the latest painful goolie-squeeze of popular trades. Shorting "Japan, Inc." has been a popular theme over the last couple of months on the deteriorating fiscal situation and underlying demographic challenges. At one point last week, Japan's soverignn CDS premium was wider than that of Spain. (As a reminder, only one of those countries has $1 trillion of FX reserves.)

Anyhow, the worm turned towards the end of last week, and even a well-above consensus print on Q3 GDP (1.2% q/q, non-annualized versus an expected 0.7%) derailed the squeeze in JGBs.
Four or five weeks to build a position and profit, a few days to lose it all. Such are the joys of portfolio management in a position-driven market. It almost makes arguing (or raining) like cats and dogs seem enjoyable by comparison...

Step Off

2009-11-13T10:02:00.005Z

Sometimes, you just need to step off the desk and get away for a bit to clear your head. For Macro Man, this is one of those times. He runs a book that can, at times, be quite sensitive to changes in the correlation and/or volatility structure across different assets. When it works (which, knock on wood, is more often than not), it's a beautiful thing. When it doesn't, it's hair-pullingly frustrating.

Take yesterday. Sometime just before 3pm London time, a Reuters headline flashed that "German government fund may be forced to inject more capital into WestLB." Given that the banking system is the sort of seedy cousin of the Eurozone that no one likes to talk about much, it wasn't much of a surprise to see the euro (which your author is long on expected CB reserve flows) take a hit and never recover.
A-ha! Good thing your scribe is clever, and has embedded some Eurpopean banking index puts in his portfolio to guard against just such an event! Except that the European banking index fell a little, then recovered to make new highs on the day, and only afterwords drifted off to close "only" a bit up on the day (at roughly the same time as the euro was making its then-lows of the week.)
Adding to the "fun" was the fact that this very story had apparently been the lead article on the front page of the Handelsblatt, which is available for purchase well before 3 pm London time!

So much for efficient market theory, and so much for efficient portfolio construction. At this point it literally feels like Macro Man has a little trading vampire on his shoulder, picking off his trades one-by-one and sucking the life out of them.

So in an effort to clear his head and get a fresh perspective, Macro Man's taking care of some other business today of a more mundane nature. The market is stelling him to step off.....and he's obliging.

Blast From The Past

2009-11-12T08:56:00.003Z

Macro Man is back on the desk this morning, safely re-attired in standard-issue hedge fund costume: sport coat, jeans, and collared shirt. He's never been a fan of wearing a suit and tie, but in the current populist backlash against bankers and hedge funds the idea of slipping a knotted length around his neck is distinctly uncomfortable!

Today Macro Man would like to address a couple of old stand-bys and one new development from yesterday. Leading off are his old mates from China, where the market is all aswirl with talk that the authorities will soon countenance an adjustment in the exchange rate. In its recent quarterly report, the PBOC announced that it intends to "improve the exchange rate mechanism is a proactive, controlled, and gradual manner..."

ZZZZZZZZ. Perhaps this is different from the vrap that they've been spewing for the last year, but if so, the changes are marginal. Uncoincidentally, APEC finance ministers had a go overnight, and the Chinese are also confronted with the prospect of finger-wagging Americans and Europeans washing up in Beijing over the next few weeks. The PBOC comments look like a bit of pre-emptive ass-covering, nothing more.

While one year CNY expectations are well off their pre-crisis lows, they are neverthless within a hair's breadth of the their post-crisis lows. Macro Man struggles to see the fascination with playing this. With China, the best course of action is to "watch what I do, not what I say." And right now, they're doing nothin'.
Another blast from the past that has recently caught Macro Man's eye is the underperformance of small cap US equities. Last summer, Macro Man put on a large/cap small cap spread, which squeeeeeeeeeeezed painfully 'til he couldn't take it anymore, then promptly exploded higher after Lehman. Typical!

Anyhow, he's observed that the Russell 2000 has been a notable underperformer recently; in contrast to the SPX, for example, it is some 5% off its recent highs. Perhaps it is simply case of not being "too big to fail", or perhaps there's a more sinister aspect to the underpformance- e.g., strains from lack of access to credit. Regardless, while Macro Man's large cap/small cap proxy indicator (OEX/R2K) has popped recently, it's well off the highs of last year, let alone those from earlier in the decade. Perhaps readers who have focused on this more acutely could share thoughts on positioning in the large cap/small cap spread?
Elsewhere, there was a rather interesting and, frankly, puzzling development in the UK yesterday. In a marked change to the last year, the Bank forecast CPI inflation to be above target in 2 years with unchanged interest rates, and to be above target in three years with current QE and market interest rates. That's quite a change from prior reports, where the Bank had forecast an inflation undershoot over the relevant two year horizon.

From Macro Man's perch, that looked like a relatively hawkish change, on the margin. So naturally, the short sterling strip ripped higher; Dec 2011, for example, is up 20 bps since just before the release. Is Macro Man missing something here, or is the market smoking crack?
In any event, it's worth keeping an eye on the labour market. Macro Man's one-factor BOE model, based on data from the first nine years or so of the MPC's existence, continues to support the case for QE by prescribing sub-zero interest rates. Note, however, that it is turned up slightly....a development that Macro Man plans to watch with interest.
Who knows, maybe in a year or two Macro Man can revisit the relationship in another "blast from the past" moment....

This Little Piggy Went to Market...

2009-11-11T08:48:00.000Z

Macro Man is out marketing this morning in that delightful process known as the investor round table. As such, today's entry is limited to....err...the above sentence. Feel free to discuss potential new highs in the SPX, EUR/USD, gold, or anything else in the comments section.

Normal service resumes tomorrow.

Tired

2009-11-10T08:38:00.003Z

"I'm so tired, I haven't slept a wink.
I'm so tired, my mind is on the blink.
I wonder should I get up and fix myself a drink."

I'm So Tired, The Beatles

Macro Man can sympathize with John Lennon's 1968 lament. Not only is he weary of these treacherous markets in the "existentialist ennui" sense, but he struggled to get any sleep at all last night. Wondering the same thing as Mr. Lennon, he eventually decided in the affirmative and hauled himself out of bed for a bit of coffee and Special K.

There wasn't any particular concern keeping him awake last night; it's more of a general disgust at getting sucked into silly trades. One of his general trading maxims is to "know your market"- i.e., whether it's a market that forgives mis-timed trades or punishes them brutally. He's pretty sure that he's not alone if feeling that the current market is among the latter.

It's hard to believe that Spoos are now barely a percent off of last month's highs. Man, that didn't take long, did it? If yesterday's price action is anything to go by, a break of the ~1100 cash top could generate the dreaded melt-up scenario.

There are some who posit that the fate of the market is tied up with the health care bill. Macro Man's strong sense is that there is a real disparity in views over how important the bill is, depending on where one lives. Non-US residents seem to viw the bill from a purely academic perspective, in terms of its impact on govenrment and private sector finances, s well as on a company-specific level. It feels as if the issue is a much more emotive one for US residents, with the bill representing "the end of the American way of life" or "a badly overdue helping hand to the uninsured underclass", depnding on your viewpoint.

Your author will stay out of that fray, but finds the chart below to be of intense interest. Courtesy of Pareto Securities, it suggests that the famously profligate US consumer isn't quite as profligate as we thought....he's just trying to pay his health care bills. (edit: note that the labels on the chart are reversed.)
Elsewhere, Fitch has made some menacing rumbles about the UK's AAA rating, which has put sterling under a pit of pressure this morning. Gordon Brown's Peso has had quite a strong run over the last few weeks, as short the pound was, in retospect, one of the bigger flamingos out there.
These would, on the face of it, appear to be good levels to get back in. But this is a market that rallied sterling last week after the BOE was alone in doing more QE; just another slip of paper for the "things I don't understand" drawer. One thing that Macro Man does understand is that he's tired of getting whipped around; it's time to raise the bar for trade entry.

Off To The Races

2009-11-09T08:39:00.004Z

On your marks...get set....go!

Markets are off to the races so far this morning, as all manner of risky assets on Macro Man's screens have roared higher. It almost feels as if markets, having successfully survived the murderer's row of event risks last week, exhaled over the weekend and decided that plan A (liquidity-driven uber-rally) wasn't so bad after all.

For if markets "wanted" to head lower, they surely could have. Friday's payroll report was an ugly one beneath the veneer of a largely in-line "number of jobs" figure. The household data, for example, was pretty appalling, continuing the divergence observed in this space on Friday. Sometimes, it's useful to look at data in its simplest form; readers are invited to reach their own conclusions as to what the chart below implies moving forwards.
Similarly, the latest Krishna Guha article with the impressive St. Louis Fed president, James Bullard, suggests at least some voters do not wish to repeat the mistakes of the not-too-distant past.

On some days, that perhaps might have been enough to send markets reeling. Not today, however, which is instructive. Perhaps markets are relieved that the G20 accomplished nothing of consequence? That Gordon Brown's proposal to tax ~~the very air you breathe~~ financial transactions received short shrift from Lil' Timmy?

Or have they been swayed by the IMF report that the US dollar is potentially being used as a funding currency? (A little-known codicil to the weekend report also noted that the sun would rise in the east, observed that ice cream is cold, and forecast that the Pittsburgh Pirates would not win next year's World Series.)

In any event, it is worth observing that among the star performers in recent days have been Asian currencies; the ADXY is nearly back to its October highs. Macro Man notes this because Asia was really the first "risk asset market" to roll over, a week before the fateful Guha article appeared in the FT on Octboer 23.
You don't have to be a chartist to think that after a healthy correction, if we make a new high then it really could be off to the races....

Random Shots

2009-11-06T08:55:00.004Z

You've heard of The Longest Yard. You've heard of The Longest Day. Well, this has been the longest week, given the barrage of significant releases, announcements, et al. We conclude today with US non-farm payrolls, after which Macro Man plans to relax over the weekend.

Anyhow, he doesn't have the energy to conjure a neat tie-in this morning...all he can manage is a collection of random thoughts:

* Very little (short of a positive print) would surprise Macro Man from today's payroll number. Last month's household data and the recent jobs hard to get measure from the consumer confidence survey would suggest risks are to the downside. Claims and the ISM employment figure would suggest risks to the upside. Throw in a dash of statistical hocus-pocus, and just about anything is possible. Jan Hatzius at Goldman has been, ahem, unusually accurate recently; for what it's worth, he's forecasting -200k and 9.9% on the u-rate...
* Is the equity pain trade for a melt-up? The most recent II survey showed a collapse in net bullishness back towards historical lows (excluding March.) Combined with the 30 level on VIX holding, Macro Man's left to wonder if the liquidity orgy is back on the cards. USD/KRW seems to think so....
* If you needed any convincing that this market is screwy, the dollar index ETFs should convince you. Wednesday saw an enormous amount of November call buying on the UUP (dollar bullish) ETF. As in, 320,000 lots enormous. Then yesterday, someone tried to engineer an enormous squeeze in the ETF, to the point where it ran out to shares to create! UUP soared 2% on a day when the dollar....didn't. You can see the effects of the squeeze on the chart below (depiciting UUP, the bearish UDN, and the underlying DXY.) So yesterday, you could bet on the $ going up, make an equal bet on the $ going down, and make money. Yeah, this market is rational....
* So yesterday, the BOE did more QE (£25 bio), JCT was more hawkish than expected (suggesting improved growth prospects and hinting at a not-too-distant embarking on an exit strategy)....and EUR/GBP goes nowhere on the day, net/net. Yeah, this market is rational....

* It has become a cliche (repeated in Macro Man's own FAQs) to recommend books like Reminiscences of a Stock Operator or Market Wizards to people looking to indoctrinate themselves into trading. But Macro Man is rapidly coming to the conclusion that re-reading those books is a mistake for someone with a mature investment strategy. It seems like every time that Macro Man does so, a cold streak immediately follows. Perhaps, subconsciously, it encourages the reader to deviate from their preferred methodology based on some "pearl of wisdom" contained in the books? Macro Man is curious if other experienced punters have found the same. (And yes, a couple of weekends ago, your author picked up Market Wizards to read while eating a sandwich for lunch...)

* Reader of the comments section have recently been treated to a, ahem, "vigorous" debate between "Gary" and "leftback" on a range of issues, including the differences between pension and hedge fund management. Macro Man is always bemused by the mutual contempt with which large real money guys and hedge fund guys often regard each other.

To the PF guy, the hedge fund guy manages a bit of loose change with the attention span of a gnat...and gets richly rewarded for it. Oh, and he doesn't have to worry about stuff like liability matching, long run return assumptions, or Jimmy Hoffa. To the HF guy, the pension fund guy has the ease of not marking to market or getting tinned/losing assets after a small cold streak. Responsibility for losses can be dispersed amongst the many heads around the committee table. Benchmarks are for sissies: it's all about absolute return, baby! (Well, except for 2008, natch...)

Unsurprisingly, there is some truth in these caricatures...but caricatures they nevertheless remain. Ironically, among the greatest PF/endowment managers are those that trade more like HFs. Jack Meyer, et al at Harvard managed a clip of capital that I assume most PF guys would concede was reasonable, but traded many of those assets much more tactically than most PF...with spectacular results.

Of course, they also got paid like HF managers...and some alumni decided that paying 8 figure salaries to a small group of people (who generated a decent chunk of the univeristy's operating budget, btw) was unacceptable.

And so Meyer, Samuels et. Al left, to be replaced by a group of successively cheaper, more real money-ish managers. And surprise....performance has gotten a lot worse! There is a lot more overlap in the Venn diagram of good PF and HF managers than most would believe....

QE or not QE? That is the question

2009-11-05T09:00:00.003Z

Dear Fed,

Macro Man speaks to a lot of well-informed, knowledgable punters. Many of you (collectively on the FOMC) know some of these very people. They are smart, and they spend a lot of time analyzing you and trying to understand your way of thinking.

And last night, after you changed this:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period

to this:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period

the interpretation of this group of well-informed observers ranged from "as dovish as it could be" to "man, that's pretty hawkish."

Please. I know Greenspan once said that if his meaning was clear, you hadn't understood him properly. But where did that get us? Seriously, one shouldn't need to employ a literary theorist to figure out what you're saying. Ditch the stupid word games and speak clearly. Compared to A students like the RBNZ:

In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010

and the Bank of Canada:

Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target

you collectively get a big fat F for your essay.

Sincerely, Macro Man

Given the opacity of the Fed's communication strategy (in terms of using blunt phrases to convey very nuanced shifts), is it any wonder that the market's reaction was as schizophrenic as it was?

And given that schizophrenia, is it any wonder that a "signal" trader like Macro Man is struggling amongst all the noise? Taking an introspective step backwards last night, Macro Man concluded that one of his primary problems is that he is reacting to short term price swings, rather than anticipating. The problem with reacting is two-fold: conviction is necessarily lower than it would be with a well-thought out macro view, and the lack of serial correlation leads to a lot of top-and-tailing. Macro Man has had enough.

Anyhow, the primary feature of the Fed's semiotic parlour game was the introduction to conditionality to the "extended period" clause. The first two conditions- the output gap and actual inflation- would not appear to merit tightening for the foreseeable future. The third- inflation expectations- could prove to be a bit more problematic, though 10 year breakevens are still below their pre-crisis levels. Still, the recent normalization is striking!

QE or not QE? That is the question. Whether 'tis nobler in the mind to suffer the slings and arrows of outrageous banking, or to take arms against a sea of troubles, and buy Gilts to end them?
-Hamlet's Soliloquy, by the ~~Bard of Avon~~ Swerve of Lomard Street

The highlight of the day today will be the Bank of England's policy announcement at noon local time. An extension of QE has been widely bandied about in the press, particularly in the wake of the recent GDP shocker. Ex-MPC'er David Blanchflower certainly favours more; at this juncture there appears to be little firm consensus, however, with some shops calling for nowt and others calling for £50 bio more gilt buying, plus a cut in the reserve deposit rate. If the latter were enacted, one would presume that sterling would get trashed.

Whether the Bank should do more QE is, of course, another question: the GDP figures scream "yes!", but more forward looking indicators suggest a more positive trajectory for the economy.

Either way, there should be some fireworks. And let's not forget Jean-Claude, ostensibly relegated to the role of bit-part actor in this week's drama, but always capable of stealing the show at his press conference. Needless to say, Macro Man isn't getting his hopes up for a spot of plain speaking there.....

Turnarounds

2009-11-04T08:34:00.006Z

It's been a shambolic start to what should ultimately prove to be a pretty important day. Macro Man normally catches a 6.33 am train from his local station into London Bridge; imagine his horror, therefore, when he opened his eyes this morning to discover the numbers "6:27" on his clock face.

After muttering the obligatory four-letter epithets under his breath, he sprang out of bed and raced through the shower at breakneck speed. If he hurried, he reckoned, he could just about make the 6.46 train which, while slower and considerably more crowded, nevertheless manages him to deposit him at London Bridge 20 minutes later than his normal service.

As he raced to get dressed, however, he heard an ominous rumbling from outside his window. This in turn prompted Mrs. Macro to spring out of bed, offering her own invective; the bins hadn't been put out and the dustmen were already outside. We dressed and jointly raced downstairs, with Macro Man not bothering to tie his shoes before springing out the door....only to find the garbage truck blocking his driveway.

"Which bins?" (recycling or rubbish?) shrieked Mrs Macro.

"Guys can you move I'm late to catch a train and I need to get out of here now!" bellowed Macro Man, in his best stream-of-consciousness technique.

Oh-so-slowly, the rubbish collectors backed the truck up, and Macro Man hopped into his trusty Golf and sped off towards the station, rolling down the window to offer a barely-awake wave to a disheveled Mrs. Macro, who'd managed to get the bins out in time. (Unbeknownst to Macro Man, Macro Boy the younger was, at roughly this time, slamming the door behind his mother, thereby locking her out for ten minutes.)

The station's only a couple of miles away, so after parking up and sprinting (with untied shoes!) to the platform, Macro Man improbably managed to get there at 6.39...enough time to queue for a coffee! In the annals of close morning shaves (in the figurative rather literal sense, naturally), this was close to a record turnaround from the bed to the station.

The rest of the journey, meanwhile, offered its own challenges; the later train is smaller and calls at more stations, so perhaps inevitably, Macro Man got stuck sitting next to some large-boned chap who felt it necessary to hold two large briefcases on his lap rather than stowing them in the luggage racks. His arrival at London Bridge reminded him of why he gets the early train; every ten minutes after 7 am appears to double the volume of passengers milling about the station.

By the time he fought his way to the platform of his connecting train, he was confronted by a mass of humanity commonly found only at major sporting events, the Muslim hajj, or Chinese job fairs. Imagine his shock and bemusement, meanwhile, when the first train to arrive on the platform was.....his usual 6.33 service!!! He isn't sure what happened to it (it wasn't on the board at his station at 6.40, so presumably arrrived and left at the normal time), but it looks like he was gonna be behind the 8-ball no matter what happened this morning. Sort of like the last couple weeks of trading, actually....

In any event, that rather verbose and tortured introduction was merely a way to inject the notion of "quick turnarounds" into today's post. For if Macro Man executed one this morning in gettting out of the house, so too, has gold in recent days, defying gravity (and the general strength of the dollar) to post fresh all time highs. It's up more than $60 in the last six trading sessions, spurred partially by yesterday's news of India taking down a 200-ton print from the IMF, but more clearly by real buying flow.

As is always the case with the yellow metal, there are a dozen stories and theories offered for its performance, and per the usual it is difficult to distinguish fact from fantasy. However, an Occam's Razor analysis might well suggest that someone is taking an (informed?) punt on either financial stability, the maintenance of globally easy liquidity conditions, or both. If the latter, in particular, one would have to posit that the dollar would come under renewed pressure after the Fed (unless punters wish to wait for payrolls).

The last 13 hours or so have also seen a fairly sharp turnaround in risk sentiment. Spoos are up a percent and half or so from the levels prevailing when Macro Man left the office yesterday. Earlier this week Macro Man observed that VIX around 30 was likely to be a critical juncture; for the time being, at least, it has helped staunch the equity market's losses. Similarly, Macro Man's proprietary risk index has recently gone back below zero after six months of risk-seeking readings. The next few trading sessions will likely determine whether this index bounces into year end or sustains a "proper" bout of sustaind risk aversion.
On Friday, September 11, the SPX closed at 1042.73. The following Monday, Macro Man created a reader poll on where the SPX would close at year end. The response was overwhelmingly bearish.

He'd like to repeat the exercise today. This space sometimes gets labeled as a "bearish blog", an appellation which Macro Man dislikes. His paramount interest is in getting things right (the signal, that is, rather than the noise), even if he doesn't always do so. In any event, he has detected a distinctly pro-risk attitude towards some of the punters with whom he speaks on occasion. So he'd like to take the market's temperature on a slightly more statisitically significant scale.

Where will the S&P 500 close the year?(survey software)

It's 10 am London time, and Macro Man's still feeling a touch groggy from his quick turnaround this morning. He can only hope, by the time he goes to bed, that his trading fortunes manage to execute a similarly impressive 180.

Hunting Season

2009-11-03T09:22:00.003Z

Yesterday was instructive, n'est-ce pas? The ISM was substantially stronger than exepected (OK, new orders dipped slightly, but employment rose sharply to exceed 50), equities popped sharply higher.....and then spent most the rest of the session melting away. Sometimes it's possible to over-intellectualize things: at the moment, stocks trade like they got 'em but they don't want 'em.

When Macro Man hears phrases like that, there's only one thing that pops into his head: hunting season. Flamingo hunting season. To be sure, flamingo-hunting has been in play for stuff like EUR/USD, ADXY, and broad indices for a couple of weeks. But now it looks like the hunters, having bagged their quota of big-game flamingos, have started poaching out-of-hours.

Macro Man wrote about Sunday night's ZAR/JPY carnage yesterday; last night saw the poachers go 2/2, as EUR/HUF was the victim of what is known in the trade as a "drive-by" stop loss run, which is an occupational hazard when you leave stops in illiquid pairs with NY spot desks.

More generally, taking a step back and observing the performance of the "naive" G10 carry basket (long the 3 high yielders, short the 3 low yielders), we can see that (unbelievably!), it has recouped nearly all of its "end of the world as we know it" losses. If you were fortunate enough to put this thing on close to the lows, you no doubt are feeling fine. But the very vehemence of the rebound would suggest that G10 carry is heavily posittioned. Add in the fact that AUD and NOK are especially beloved of reflationistas, and the potential downside for those currencies on a continued flamingo run would seem considerable.
And what of intra-equity market price action? Here, too, we observe an interesting dynamic. The chart below represents the relative performance of a basket of turds (some of whom don't currently exist [though their stocks are still listed], and the rest of whom wouldn't exist without government largesse) against the SPX. As you can see, there have been quite a few peaks and valleys over the year, with the relative outperformance in March and July/August looking like short-covering rallies in the turds.
Anecdotally, however, people have gone long these turds on the flimsiest of rationales, and now it appears to be going wrong. Indeed, the roll-over closely resembles that of June/early-July, a period which happened to coincide with quite a sharp downdraft in stocks.

It's hunting season, all right. How long the season lasts may depend on Chief Gamekeeper Bernanke tomorrow night- that is, assuming that the poachers follow the guidance laid down by the Fed. With so many flamingos turning into turkeys, however, there's probably no guarantees even after tomorrow night.

A Manute Bol Week

2009-11-02T07:54:00.003Z

It's a big, big, big week. Starting off with today's ISM (well, technically, starting off with yesterday's China PMI), we've got the Fed on Wednesday (the end of the extended period?), the BOE (more QE?) and ECB on Thursday, and of course payrolls on Friday. Throw in the odd corporate bankruptcy, an old-skool bank writedown, and the odd kleptocraric land-grab, and the only thing bigger than this week is 80's NBA player Manute Bol (pictured, left, with teammate Tyrone "Muggsy" Bogues.)

Manute, the "Dunkin' Dinka" from Sudan was, as you may well discern from his physique, something of a novelty player. His offensive skills were, well, offensive and he was a poor rebounder due to his lack of mass. He did excel in one area, however: blocking opponents' shots with his impossibly long arms. He even led the the league twice in that category.

Actually, the end of last week was a bit reminiscent of Manute as well. After the key breakdown in major indices on Wednesday, stocks appeared to execute a Manute-style rejection of the downmove on Thursday....followed by a severe rejection of the rejection on Friday. Got it? Good.

In addition to the veritable Everest of event risk this week, we are also at a fairly critical technical juncture as well. The break of the relevant trendlines and moving averages has been well-flagged, both here and elsewhere. But the recent uptick in the VIX has also taken it to interesting levels. Way back in the day, when Lehman Brothers still roamed the earth, the 30 level on the VIX usually signalled the wash-out point for bear moves in the stock market. As you can see, both before and after Lehman, equities generally turned when the VIX got to 30+, thus sending the VIX itself back down.
So in a sense, this week will provide an interesitng laboratory for us to determine if the market truly is more "normal", or whether the darkest fears of the most ursine bears will be realized. If Macro Man were a sell-side analyst this morning, he'd probably write something like "risky assets are either a great buy or a great sale at these levels...by Friday we'll know which one." In practice, it is unsurprising that implied vol across assets is getting pumped up.

Indeed, the week has already witnessed its first "volatility event." Unluggy Mrs. Watanabe, perennially poor punter of foreign exchange, experienced a Manute-sized drawdown in her account today. ZAR/JPY, a cross that offers granite-like liquidity at the best of times, was evidently the subject of a horrendously-executed margin call stop-loss run, which sent the cross down 10% from Friday's highs.
Naturally, it has since recouped virtually all the losses, giving a Manute-sized headache to Mrs. Watanabe and anyone else unfortunate enough to leave a round-the-clock stop loss order in the ZAR.

Anyhow, it's game on, and this week will set the stage for the end of the year. Macro Man is preparing to take his shots; he can only hope that he doesn't encounter Manute barring his way to the basket.

Treat....or Trick?

2009-10-30T09:47:00.004Z

This equity price action is becoming almost Biblical: "and on the fifth day, the market rose again...." Macro Man was somewhat bemused by the enthusiastic reception to yesterday's GDP number, by the economics profession at least as much as the marketplace.

After a four-day slide, that an above-consensus real GDP print encouraged a bounce was hardly shocking, particularly in light of the history of the last seven months. Yet the reaction from sell-side economists: "A very strong report! We're upgrading our forecasts!" bordered on the nonsensiscal.

For one thing, the margin of the consensus "beat" was razor-thin: 0.3% anuualized is less than 0.1% q/q. That this is the advance number that will be revised twice in the next month or two provides even less reason to go overboard with the enthusiasm.

More viscerally, however, to Macro Man's mind the report was actually worse than expected. Years of poring through Japanese national accounts data have taught him that in deflationary/bubble-bursting/highly distressed economies, nominal GDP is what matters. And on that score, the resultant figure- + 4.3% q/q, SAAR - undershot the 4.6% consensus by the same margin that the real figure beat it by.

Moreover, as the chart above illustrates, the quarterly nimonal growth was well below "trend", even as the real figure exceeded trend. Colour Macro Man unimpressed. Of course, there were some positive aspects to the report: residential construction rose for the first time since 4Q05. Of course, whether that can continue with plenty of untapped housing supply from foreclosure sales remains to be seen. Similarly, the surge in auto sales and the decline in the savings rate last quarter suggests that it will be difficult to maintain a 2.36% contribution to growth from household spending.
Meanwhile, the latest interesting twist out of Korea occured last night. Industrial production surged 5.4% in September, taking the y/y growth rate to 11% and the underlying production index to an all time high. This, combined with the smart bounce in the US, surely gave a tasty boost to the Kospi, right?

Nuh-unh. After a half-hearted gap higher on the open, the index sagged badly into the close, falling to its lowest level since August 20th. The divergence vetween the Kospi and IP is curious, not least because the Kospi peaked more than a month ago, leading other markets by several weeks.
At the risk of beating a dead horse, Macro Man finds it very interesting and very troublesome that a cyclical market like Korea with apparently rock-solid macro fundamentals is trading so poorly. By way of comparison, the SPX was at 1007 the last time that the Kospi closed as low as it did today.

It's the season for tricks and treats (hint: here comes the obligatory Halloween tie-in); somewhat worryingly, it's becoming a tad tricky to tell the difference between them. The evidence is increasingly mounting that the naked liquidity trade is coming to an end, and that markets will soon have to float or sink on their own merits. Judge for yourselves what that implies for the goodies that have stuffed many high-beta portfolios over the past couple of quarters.

Crucial

2009-10-29T08:56:00.005Z

"Life all comes down to a few moments. This is one of them."
-Bud Fox, Wall Street

Looking back on his sixteen year career in finance, it's been Macro Man's experience that each year is often defined by a handful of critical days or events. While Bud Fox had the benefit of knowing how important his visit to Gordon Gekko's office would be, it's often not quite as obvious in real time how important an event will be.

When Ralph Cioffi's Bear Stearns hedge funds blwe up in July 2007, for example, it was viewed as in interesting development that might result in an orthodox phase of risk aversion; little did we know that it would usher in a global financial meltdown the likes of which none of us had ever seen. Similarly, when Macro Man took to the slopes on Friday, February 13 this year, he had no clue that it would become the defining day of the year for him (which happened when he blew out his knee in waist-deep powder.)

Today, on the other hand, has all the hallmarks of a potentially defining day for the rest of the year. Yesterday saw the SPX close below its uptrend line from the March lows; while prior trendlines have been violated more often than traffic laws by your average London cyclist, this time may be different. Even as the index was making new highs, the RSI was making lower highs- a classic momentum divergence that signals trend exhaustion and possible reversal.
Moreover, the market has gone down four days in a row. According to Macro Man's mate "Nick the Greek" at Citi NY, this has happened three previous times since the March 9 low: the average return on day 5 has been 1.66%. Adding spice to the chili is the release of Q3 advance GDP; with a forecast range of 2% to 4.8% around a median of 3.2%, the potential for someone to be surprised is rather large. Anyhow, the point is that if (and aat this juncture, it remains a very big if) equities put in another poor day's performance today, it may be a signal that something has changed.

Obviously, next week will also prove critical, with ISM, payrolls, and the Fed. There appears to be something of a divergence in pricing across markets. On the face of it, the dollar and equities look to be pricing in the removal of the "extended period" language, which acccording to the recent Guha article would imply that the Fed could (rather than will) raise rates within six months. But then looking at the strip, where December 2010 eurodollars are more or less at their highs of the entire cucle, it seems likely that such an outcome is not fully priced into fixed income.
As usual, reality is more complicated than it seems at first appearances. The dollar has evidently been buoyed not only by all the mumbling about the Fed, but also by the more prosaic (and powerful) fact that US corporates have been aggressively buying dollars. That positive earnings outcomes have been skewed towards those firms with large international sales is probably not a coincidence; still, the apparent vehemence off the flow is notable.

One other little development has caught Macro Man's eye. It may be nothing but an attractive p.a. investing opportunity, but it may be more, and to Macro Man's mind raises question about LIBORs. NS&I, which administers the UK version of savings bonds, recently icnreased their one year fixed rate interest on offer to 3.95%. To put this rate into contrast, one year Gilts offer a yield of 0.46%, one year swap yields are 0.93%, and the entire LIBOR complex is well, well below that level.
Now, if you are a depositor with excess cash who is willing to forego liquidity for a year, why would you ever leave the money on deposit with the bank, where savings rates are miniscule? Surely these rates are going to vulture deposits away from the banking sector? And if the banking sector loses desposits, shouldn't LIBOR move higher?

There is a hell of a lot of complacency in global front-end trades which, to Macro Man's eye, look close to fully-priced. The risk is surely skewed towards LIBOR-OIS widening, rather than narrowing? And if that happens, it could well be a crucial development for financial markets.

Wobbles

2009-10-28T09:37:00.006Z

It's all looking more than a little wobbly this morning. After yesterday's solid 10 year auction helped stem the bloodflow from the execrable consumer confidence figure, equities managed to put in a fairly "blah" close, which suddenly seems like the new "high volume percent and a half melt-up."

The canary in the coal mine for the current market came from, of all places Australia. Quarterly CPI was released a bit highre than expected; given the recent AUD love-fest and the swirling focus on RBA tightening, this surely led to a nice rally in the Oz, right? Not so fast, my friend. Of all the flamingos out there, AUD is surely among the biggest, given that there is apparently nothing wrong with it. Or maybe there is. The Aussie banking sector, which has largely flown under the radar during the entire crisis, apparently has a few skeletons (or at least turds) in its closet, as NAB's earnings report was an absolute shocker. The AUD has been spanked as a result, which surely must tell us something.

Meanwhile, European banks have continued their descent down the liuft shift this morning, with Irish banks grabbing this morning's "limelight." It's been a while since financial stability has been any sort of focus, but it is pretty striking that every mornin this week, Macro Man has beens serendaed with comments like "ING down 20%" or "Bank of Ireland down 15%." The European banking index doesn't look any better than the BKX; given the relative lack of pain taken by European banks, one could easily argue that the downside for the SX7E is greater.
And w(h)ither the euro? It's hard for Macro Man to figure out whether this just a flamingo-y position squeeze, the by now-usual month-end jitters, a reaction to a possible change of Fed language, or a Leftback-style "Big One."

What's interesting to note is that amongst the cosmic background radiation of the DGDF trade has been signs of a vulnerability to a dollar rally. If we overlay EUR/USD with the skew in 1 month 25d risk reversals, we see that for the first half of the year the correlation is quite high. Over the last few months, though, even as the dollar was going down the drain, the riskies came off ; they've actually been bid for euro puts for most of this month. Again, whether that's a canary in the coal mine or prudent hedging remains to be seen, but it is certainly curious.

Overall, Macro Man's expectation of higher volatility trading conditions is looking prescient (or at least more accurate than this week's directional calls). The last several months have seen month-end wobbles, which have swiftly righted themselves once the calendar page flips. With the Fed, NFP, and G20 looming, the jury is still out on the current wobbles. Will markets prove to be Weebles, or Michael Spinks?

Not The Best Start

2009-10-27T09:15:00.003Z

Macro Man's not had the best start to his day. Macro Boy the Elder, giddy that half term school holidays have arrived already, woke up at half past four this morning and decided that he wanted to watch television. He was swiftly dispatched back to bed, but the harmony of the night's sleep was shattered.

Then, when it came to catch the train this morning, the great British railway system performed its predictable collapse in standards whenever the clocks change by offering a half-length train. There's almost nothing worse than being crammed into a cattle-shed train at 6.30 am with some guy's butt three inches from your face. One of the few things that qualifies is being crammed into a cattle-shed train at 6.30 am with some guy's butt three inches from your face and spilling scalding hot coffee all over yourself.

Another, if you were limit short dollars, was yesterday's price action in foreign exchange. While USD/Asia has had a bid tone for a week and a half, as recently as yesterday morning EUR/USD was at its highs. Cue a correction, a break of a highly-visible uptrend line, and a lot of head-scratching.
The dollar's gotten further support from a Steve Beckner article suggesting that the Fed will say that they give a crap about the value of the buck. At the same time, things are starting to look a little wobbly. It's interesting to note that the star performers of the summer, turds such as FNM and FRE, are down nearly 50% from their recent highs. Meanwhile, European banks have been clubbed - ING is down 25% in the last 2 days- even as the macro data offers little comfort that it's all sunshine and sweetness in the pipeline. Today's M3 growth data in the Eurozone showed continued straight-line deceleration...not exactly good news.
It's not just European banks that are wobbly- the BKX also looks dreadful. Perhaps it's just a wobble...but maybe not. While it's certainly not out of character for markets to test the resolve of weak hands, there has clearly been a bit of a shift in the tone of the reflation trade over the past week or two: it's gone from fairly relaxing to rather bumpy.
In markets, as in sports, it's not about how you start but how you finish. Macro Man's month appears to be ending as his day today started, so he's gotta put his nose to the grindstone to manage risk and turn this sucker around.

2009-10-26T09:38:00.003Z

This weekend in the Macro Man household was all about "savings". West Ham unexpectedly saved a draw against Arsenal after being down 0-2 at the half, which left them....err....still second bottom in the league. Then the once-mighty Steelers defense saved the team not once, but twice against The Clash by returning fourth-quarter turnovers for touchdowns (sandwiching a kickoff return TD by the Vikes.)

Then, of course, there was the daylight savings-related turning back of the clocks here in Europe, which gave us an extra hour yesterday but doesn't actually save daylight at all- quite the contrary, as we now enter the long, dark winter where it's pitch black at 5 pm. Ugh.

Anyhow, all of this focus on savings led Macro Man to consider the question of savings from an economic perspective. Ever since the financial crisis went nuclear last year, Macro Man has held the view that the US personal savings rate would approach if not breach 10%. It is for this reason that he was largely disdainful of the green shoots phenomenon for much of the summer.

Of course, in real time, that view proved to be wrong. While Macro Man's relatively pessimistic views on the labour market have proven to be accurate, Cash for Clunkers, among other things, encouraged the consumer to go back to the well, sending the savings rate from 6% to 3%.

Macro Man has a couple of thoughts on the phenomenon. First, it is pretty undesirable from a long-run perspective; US households need to spend less, from both an internal (re-balancing the composition of GDP growth) and external (re-balancing global current accounts) perspective. A swift return to the consumer's recent spendthrift ways is not encouraging.

However, if one posits that cash-for-clunkers merely brought forward future spending (which seems a reasonable proposition, given ongoing frailties in the labour market), then the bullish expectation of a V-shaped recovery, with the right side of the V just as steep and just as long as the left side, may well be misplaced. Those sorts of recoveries are engineered once pent-up demand is unleashed. From Macro Man's perch, a halving of the savings rate this early in the cycle suggests that this is unlikely to happen this time around.

Another country plagued by a savings problem is, funny enough, Japan. Over the past two decades, the household savings rate has plunged from the high teens to the low single digits. Ironically, this is exactly the policy prescription that a parade of US Treasury officials have recommended to Japan since the mid-90's (and are currently recommending to the rest of Asia.) Unfortunately, the decline in savings has come not via higher spending, but via reduced incomes.

And it's not only households that have seen their incomes reduced; the central government has been forced to drastically reduce its estimated tax take. This has led to something of a brewing crisis; the new DPJ government seems to be flirting with markedly increasing net JGB issuance, even as the Postal Savings dials down its purchases to fund withdrawals and benefit payments.

As a result, JGBs have been on something of a slippery slope recently, trending down nicely over the course of the month. At the same time, the yen has recently quit being an "anti-dollar", and seems to have latterly joined the dollar and sterling in the global currency doghouse.
Whether the downtrend in JGBs and the yen persists remains to be seen, of course. Japan certainly compares favourably to the US and UK in terms of its stock of savings. However, the government is, if anything, more profligate and in more trouble than the Anglo-Saxons; given that the yen has traded as something of an uber-currency over the last few months, one might reasonably posit that moving from a penthouse currency to an outhouse one might provoke quite a sharp move. Naturally, Mrs. Watanabe is now quite long of yen in her currency speculations; just doing her bit, no doubt, to reduce the level of savings in Japan.....

The Treadmill

2009-10-23T09:49:00.006+01:00

When market punters chat to each other, which they often do, the conversation almost inevitably opens with some variant of "So how you getting on?"

The typical response bears a striking resemblance to that of high-level amateur athletes. When you ask somebody, for example, how well they ski, it seems that the best skiers almost always reply with "oh, I'm OK." In Macro Man's experience, people who reply "yeah, I'm pretty good" generally are not. (By way of disclaimer, Macro Man was a "yeah I'm OK" guy before he came a-cropper.)

In any event, Macro Man's standard answer to market punters these days likens his mentality to that of a runner on a treadmill: he feels like he has to run as fast as he can just to stay still. Ever since the SPX market bottom on March 9, the year has been something of a grind. Given his largely incorrect big-picture view, Macro Man adopted a sort of macro RV strategy after he returned from his knee surgery.

It has done OK, but as we approach year end and assets appear to be trading largely off of the available liquidity, his strategy has ground to a halt. So at the beginning of this month, he decided to pump up the vol a little bit and become a bit more directional. The problem with that, despite the SPX and EUR/USD trading at their highs of the year, is that it's been pretty damned noisy. The last 72 hours in US equities are a prime example of how easy it is to get sucked into doing something stupid:

The noise surrounding Fed policy and possible exit strategies doesn't make it any easier. For if and when the Fed does withdraw accommodation, it seems likely that today's stellar performers will be tomorrow's home-run shorts. As such, today's trial balloon in the FT on the Fed's semiotics has sparked substantial interest (though curiously, only fixed income markets seem to have reacted.)

While this will certainly be a key theme for 2010, it looks to be a premature consideratoin this side of new year. Macro Man likes to look at a simple Taylor rule proxy, which is the y/y change in nominal GDP. As the chart below illustrates, it has pegged levels and changes in the Fed funds rate pretty well over the past forty years. What's cool is that the chart highlights two periods of overly-lax Fed policy error: the 1970's, which produced high levels of inflation (and was followed by the Volcker Fed bringing down the hammer in the early 80's) and Easy Al's free-money giveaway in the early part of the Noughties.

While y/y nominal GDP is likely to turn up when it is released next week, it seems unlikely to print levels that would be consisent with a need for higher rates until the middle of next year. Still, this game is not so much about predicting what will happen in 6-9 months as predicting what the market believes will happen. Obviously, there are exceptions to that rule, and the longer your time horizon, the more you can focus on your forecast. But in a world of ten-minute macro, market belief matters.
Ultimately, of course, you can't buck the data, as recent purchasers of sterling found to their detriment this morning. Q3 GDP shocked the consensus by printing -0.4% q/q, prolonging the recession, re-opening the case for QE and giving the queen's head a proper slap on the cheek.
Alas, Macro Man's bearish GBP options look set to expire worthless next week. Such is the joy of directional trading, where you have to get your direction and your timing right. Is it any wonder that Macro Man feels like these guys?

Oooooffff

2009-10-22T09:48:00.003+01:00

If you've ever been punched in the solar plexus or had the wind knocked out of you, then you probably know how risk assets feel right now. When Macro Man threw the steaks on the barbie last night, the SPX was pushing 1100 and oil was nearly $82/bbl. When he checked his screen 40 minutes later, he could almost literally hear the "ooooooooooooof!" being cried by Spoos.

Ex post, a number of reasons were given for the sell-off: Bove downgrading WFC, Obama announcing pay caps on TARP banks, a disappointing Wal-Mart call, etc. The real answer, however, is a bit more prosaic: a couple of huge ($5 billion) sell tickets went through in the last 40 minutes or so of trading, which naturally pushed the price lower. You can see the impact on the intraday volume chart below.Meanwhile, other sacred (risky) cows are being ushered to Dr. Market's abattoir. Over the past few weeks Macro Man has pointed out the apparent distribution trend in Korean equities. Despite this, the won had remained relatively resilient, in conjunction with the splendid performance of broader stock markets. Starting last Friday, however, there has been something of a fire-in-the-theater rush for the exits in KRW, INR, and other Asian currencies. Even USD/RMB forwards have seen some short-overing.

As long as the Fed remains accommodative (and yesterday's Beige Book suggests that it will), this sell-off in stuff like EMFX is probably little more than a bit o' flamingo hunting. (There has been some rumbling that recent FX price action is related to the Galleon closure, but the relatively small AUM of their non-equity books suggets that this is wide of the mark.)

One market clearly seeing pink flamingos being shot down is short sterling. Yesterday's BOE minutes suggested little appetite to expand QE, and even suggested that soem members are getting a trifle concerned about the Bank's relatively sanguine longer term inflation forecast.

Cue the predictable ralling in sterling (the currency) and kiboshing of sterling (the interest rate contract.) While Macro Man does have sympathy with the notion that Merve will wake up one day and Swerve hawkishly (and thus understands the recent carnage in the reds), the recent kiboshing of front Dec looks decidedly flamingo-y, and may have overshot.

As the chart below demonstrates, front Dec is now pricing 3m LIBOR nealr y10 bps higher than the current reading. The would put the spread over the BOE's interest on reserves at 16-17 bps. Compare that with, say, the US, where 3m LIBOR is currently just 3 bps over the 25 that the Fed pays on its reserves.
Ultimatelty, Macro Man suspects that liquidity will remain ample this side of new year, and that front Dec sterling looks like it's starting to offer some value.

Perhaps there is actually a little too much liquidity, at least in the US. news that John Meriwether is going for strike three literally beggars belief. Sadly, it's been Macro Man's experience that European investors don't have nearly as much money to piss away........

Roots

2009-10-21T08:57:00.004+01:00

Macro Man has previously observed that blog traffic can sometimes say a lot about the significance of market events or interest in a particular theme. If this is the case, then it appears that concern about the weakness of the dollar is very real, as yesterday's post generated a near-record level of traffic. This was largely due to the fact that a few high profile sites very kindly linked to Tuesday's post, but still....someone has to be interested enough in the subject to click through. For the first time in a couple of years, Macro Man finds the subject of external imbalances to be of paramount interest, and since Brad Setser moved on to bigger things, there is perhaps a dearth of commentary on the subject.
Regardless, the drumbeat of dollar weakness rolls on, as the buck is back close to its lows of the year against the euro. Exotic barriers around 1.50 have, by all acccounts, helped put a lid on spot for now, but one would have to believe that it's only a matter of time before the level breaks. Hell, even sterling has continued last week's bid tone; if the BOE minutes don't hint at an appetite for more QE in December, one might reasonably conclude that the Queen's head could enjoy another dies mirabilis.

Although equities had a bit of a setback yesterday, the pro-risk drumbeat marches on (despite the swirling winds of financial and economic protectionism.) While the Bank of Canada intimated yesterday that loonie strength would stay their hand on rates for another couple of quarters, another strong currency phobic CB, the RBNZ, changed its tune by suggesting that the strength of the kiwi would not preclude rate hikes.

And in the London morning, China leaked its September industrial production figure, due to be released tomorrow, at a better than expected 14.1%. You could almost literally hear the risk longs shouting "hip hip hooray!"
Regular readers will know that Macro Man has been (incorrectly) fairly sceptical of the green shoots phenomenon and has fought the equity rally (if not position-wise, at least intellectually) for much of the way up. One factor that he almost certainly underestimated, or missed altogether, is that of margins. As a top-down macro guy, he doesn't really gt his hands dirty with company- or sector-specific margin analysis; he has neither the data nor the expertise to do so.

But as a top-down macro guy with a penchant for crafting little indicators, he does have a proxy that he was watched for the last few years to give him a rough idea of what margins are like. Simply put, he looks at the y/y change in US CPI ( a proxy for corporate selling prices) against the y/y change in finished goods PPI ( a proxy for corporate costs.)

To be sure, the proxy isn't perfect, nor is it intended to be. But it ain't half bad as a rough-and-ready indicator, as you'll observe that prior "negative margin" readings have typically coincided with recessions/bear markets/ticking timebombs.
As you can observe, after plunging to record negative territory in H2 of last year (a period that coincided with near-record negative equity performance!), the margin proxy screamed higher earlier this year. Macro Man ignored this signal to his detriment. Today, the margin proxy is stabilizing at relatively high levels which, much as Macro Man may hate to admit it, could suggest upside profit surprises (such as those observed thus far for Q3) if maintained.

Rest assured that he will pay this little indicator a bit more attention in the future; it won't just be with currencies that Macro Man gets back to his roots.

The Myth of The Strong Dollar Policy

2009-10-20T08:54:00.005+01:00

Here are five great myths and/or lies of the modern financial system:

1) "The check is in the mail"

2) "I'll call you right back"

3) "We are long-term investors"

4) There is a secret cabal of gnome-like creatures that manipulate the gold price (up or down, depending on your druthers)

5) "The United States believes in a strong dollar"

When the strong dollar policy was formulated by Bob Rubin in 1995, it was sincere and served a purpose. After all, the Treasury market had experienced a horrible sell-off the previous year and the buck made all-time lows against the JPY and DEM in 1Q95, prompting the last bit of multilateral currency intervention in which the US was an enthusiastic participant.

And one could argue that the policy served a useful purpose throughout the 90's; by maintaining tight monetary conditions, it replaced some element of Fed rate tightening, while at the same time affording the US a useful (positive) terms of trade shock. It was only a decade ago that oil flirted with $10/bbl!

However, in the Noughties, a decade dominated by global imbalances, the bond conundrum, and a host of other resource misallocations, it's been quite clear for some time that the strong dollar policy is a farce worthy of Rabelais. It's a well-known fact that the strong dollar policy is a hollow one, and Macro Man can only conclude that in diplomatic circles, it must represent the epitome of poor taste for JCT, among others, to reiterate their support for what has become a "strong dollar" policy (emphasis on the quotes.)

'Tis a pity, really; the strong dollar policy once served a useful purpose, and it's not difficult to envisage it doing so again. By failing to withdraw its support of an overtly strong dollar when one was no longer desirable (quite the contrary), the US Treasury has done America and the rest of the world a disservice.

Of course, it's a tad rich for JCT to dance around someone else's linguistic parlour tricks; after all, he is the undisputed master of speaking in a literary code of his own devising (remember 'strong vigilance'?!?!). And even in the currency realm, the Europeans have their own form of linguistic semaphore; when Europe warns of "excessive volatility" in currncy rates, they are really moaning about the level of the euro.

For if it really were volatility that Europe cared about, then they should be chuffed to bits. As the chart below demonstrates, one month realized vol in EUR/USD has collapsed in recent months and is now, at 6.9%, at the low end of the post-Bretton Woods range.
Belatedly, of course, the Europeans seem to have noticed that the Chinese aren't exactly playing "good neighbours" when it comes to global currency policy. And so after years of American financial diplomats trudging to Beijing to wag their fingers at the unrecalcitrant Chinese, Messrs. Trichet and Juncker will be making a similar pilgrimmage over the next couple of months.

For some reason, Macro Man can't shake the Kim Jong-Il/ Hans Blix scene from Team America from his mind, though he suspects that feeding the European worthies to a shark tank would probably not escape notice.

The best that the Europeans can probably hope for, however, is if the Chinese response is something like this:

Meanwhile, Brazil has re-instituted a punitive tax on foreign capital, a week after Turkey was rumoured to be contemplating a similar arrangement. Taxes on capital, moaning on currencies, nothing on interest rates. You can almost literally see the wagons circling as each country looks out for #1.

It's entirely possible for this liquidity/positioning/DGDF rally in risky assets to continue through year end; in many ways, it's in everyone's best interest for this to happen. But Macro Man can't shake the feeling that we're all repeating the mistakes of the last cycle (in fast forward, no less!) and that when the reckoning comes, it won't be much fun.