Monday, August 18, 2014

Here we go again

So here we go again.

Stocks have (probably correctly) looked through ongoing tensions in Ukraine and are within a pitching wedge of the all time highs (well, the SPX at least.)  At the same time, fixed income markets are rowing merrily down the stream, with many bellwether Eurodollar contracts also close to the top end of the yearly range.

(BBG chart courtesy of the world's most deluded fantasy soccer player.)


The prices, incidentally, imply rates well below those suggested by the infamous dot scatter plots in the Fed's latest SEP- and indeed most of those before that one.

This week, of course, see the release of both the July Fed minutes and the annual Jackson Hole symposium at the end of the week.  The theme for the latter, "Re-Evaluating Labor Market Dynamics" is particularly apt given the speed at which various thresholds have been blown through in the US and UK.

One doesn't exactly need Holmes' power of deduction to presume that at least a portion of the conference will be an apologia for Yellen's relentless cherry-picking of negative facts to support the initial conclusion (or is that mantra?) of "more accommodation is needed."  Your author has demonstrated on a couple of occasions that current labour settings are less atypical than Yellen might have you believe.

Of course, Macro Man's opinion and two bucks will get you a cup of coffee and not much else, so one has to remember to focus on what one thinks the Fed will do, rather than what they should do.    Even there, however, it is important to recall that next month's Fed looks likely to introduce some clarification on what the monetary policy of the future will look like, and perhaps also offer a few tweaks to the communication strategy.

These will be seen as another successfully surmounted step on the road to tightening.  Moreover, with markets currently pricing quite a bit less tightening than the median FOMC participant, the risk looks skewed to the downside from Macro Man's perch.   If for some reason this week's cherry-picking at Jackson Hole isn't as effective as expected....well, that could be the catalyst for a nice little downtrade.

Wednesday, August 13, 2014

You wonder why macro isn't making any money?

Short sterling pricing before UK Mansion House evening, June 12th:


The money quote from Mark Carney's speech:

"This has implications for the timing, pace and degree of Bank Rate increases....It could happen sooner than markets expect."



The trend in economic subsequent data has been broadly neutral:



And yet the BOE releases in inflation report today that, accompanied by Carney's testimony, has been seen as overwhelmingly dovish.   As a result, current pricing of short sterling is as follows:





If you're paying attention, you may notice that this now prices lower rates and less near-term tightening than was the case when Carney issued his warning two months ago:




Remember, kids:  Carney folk are frauds and their games are rigged against you!

Tuesday, August 12, 2014

Guardians of the Financial Galaxy

Macro Man had the, ahem, "pleasure" of taking his youngest, Macro Boy the Younger, to the cinema over the weekend to view the latest comic-book blockbuster, Guardians of the Galaxy.   As he was watching and averting questions about Jackson Pollock, it occurred to him that many of the characters bore more than a passing resemblance to some of the "heroes" of financial policy-making that he's observed over the years.  Call them Guardians of the Financial Galaxy, if you will:

Peter Quill:  He's a bit shifty, a bit of a know-it all, and he's been living in a region of the galaxy that's not where he was born.  Even when he's trying to do the right thing, he can move the goalposts and hoodwink people to get what he wants.   He has a number of unconventional gadgets that help aid him along the way.   He's the star of the show, as he'd no doubt tell you if you asked him.   Who could it be but Mark Carney?   (Apologies to James 'Hollywood' Bullard, but the casting director thought he was a bit out of his depth.)





Gamora:   A woman in a made-dominated world, she kicks ass while cleaning up a lot of other people's messes.  With the guts to be bold when it's required, she's not afraid to leave her natural surroundings to fight for what she believes in.   In  a bit of a surprise, Gamora is represented by Gill Marcus  of the SARB.






Rocket:   A smug know-it-all who isn't quite as clever as he thinks he is, certain aspects of Rocket's physiognomy recall a well-known Wall Street Journal writer who's the frequent recipient of dodgy leaks from the Fed.  However, it would be grossly inappropriate to elevate Mr. Hilsenrath to such a prominent position, so we must focus on Rocket's winning personality.   His hectoring, badgering tone and seeming inability to recognize his own tactical failings will be instantly recognizable to anyone who ever sat though one of Jean-Claude Trichet's  press conferences.




Drax the Destroyer:  In his comfort zone he appears all-powerful  and can intimidate lesser beings to bend to his will.   However, when confronted with larger forces his strength is impotent, and it turns out he isn't actually all that clever; some of his policy choices are actively harmful to the greater good.  His nickname says it all, really, and the fact that the character shares a name with a prominent interest rate futures brokerage is icing on the cake.   Who could it be but Alan Greenspan?




Groot:  This half-creature, half tree is notable for his strength and his inability to say anything but one phrase.   From her wooden performances in press conferences and Congressional testimony to her endless repetition of the "more accommodation needed" mularkey, Janet Yellen is Groot.


Friday, August 08, 2014

A few things we've learned this week

1) The ECB does not wish to become a sausage factory

2) Russian banks can still access ECB liquidity, but only if they bring a note from their mother, two box-tops from Cheerios, and promise really hard not to use the money to circumvent sanctions

3) Actually, given the Russian counter-sanctions and their devastating impact upon the Norwegian lutefisk industry, scratch the Cheerios requirement

4) ECB rates may stay low til the end of the decade...rumours abound that another Dutch candidate
 will succeed Draghi

5) As one commenter noted, the days of + Sharpe lazy longs in credit are over....roll on the days of 5+ Sharpe lazy longs in Bunds!

6) The 4-week average in initial jobless claims has hit eight-and-a-half year lows.   Based on Macro Man's assessment of the current environment, roughly half of the claimants are macro punters

7) In a change from the last 2,000 years, the Middle East is a disaster

8) Although the top may well be in for credit, we're not quite at the point where it goes down in a straight line

Wednesday, August 06, 2014

Oh Dear

Oh dear.

While Macro Man has been cycling halfway across Massachusetts, his mates have been sending him some rather ugly charts.

The DAX has looked terrible ever since Germany won the World Cup.   Apparently peripheral weakness is a more formidable opponent than the Brazil team:



Meanwhile, the more speculative grades of credit seem to have decided to price at least a smidgen of the liquidity and leverage risk premia that Macro Man wrote about a week or two ago:


Whether this is the beginning of the Big Kahuna correction still remains to be seen, of course.   Suffice to say, however, that the days of 5+ Sharpe lazy longs in speculative credit look to be over for the time being.

Friday, August 01, 2014

Le jeu est fait

As the digital clock ticked over to 8.30, Bond watched his screen carefully.  Le Chiffre showed his hand, and while it was a good one, somehow it wasn't quite as good as Bond had feared.   Looking at his own position, he exhaled and felt the tension drain from his body.  Bond's hand was superior.  He had won.

Bond accepted the congratulations of his fellow agents with dispassionate grace.  Somehow, he almost felt disappointed.   Defeating Le Chiffre had almost been too easy.  So much for Research Section's warning to expect an adversary as dangerous as SMERSH or Blofeld's SPECTRE.

After taking a last swig of coffee, Bond rose from his chair and strode purposefully out the door in the corner of the trading floor.  He punched the 'G' button in the wood-paneled lift, then closed his eyes and leaned back against the wall of the small enclosure.  Perhaps Moneypenny would take him up on his offer tonight?  Or maybe he should ring up that fit instructor from the cycling studio...

As the lift doors open, Bond reached into his pocket and extracted the gunmetal cigarette case.  Opening it, he took one of the gold-banded cigarettes made specially for him by Merloni Bros. and lit it with his antique Ronson lighter as he exited the building.   Taking a deep drag, Bond watched the pedestrians stream by.  How little they knew of the dangers from which Bond had protected them!

Suddenly, Bond's mobile phone began to ring.   He fished into his pocket to retrieve it, then answered.  "Yes?"

"It's 009.  You'd best get back up here, 007.   Something's not quite right."

Cursing silently under his breath, Bond took a final puff of his cigarette, ground the remainder under his heel, and re-entered the building.  A 30-second lift journey can seem like an eternity when your position is coming a-cropper and you don't know why or how badly.  Bond gave a sour look to the man who darted into the elevator just as the doors were closing, then pushed the button for the floor two levels below Bond's.  Another ten seconds added to the journey!

When the lift doors finally opened onto his floor, Bond fairly sprinted back to his desk.  009 was waiting for him with a worried look on his face.   "It's your friend Felix Leiter, 007.   Le Chiffre seems to have caught him out and it looks like he's in rather a bad spot.  He managed to get a message out to warn you."

"Thanks," said Bond coolly.  "Eh bien, Le Chiffre.  Le jeu est fait."

Stay tuned to your screen to see if Bond can survive his encounter with the treacherous Le Chiffre.

Macro Man is a charity bike ride this weekend and will be away for a few days thereafter.   Bonne chance a tout. 

Casino Royale

The scent and stink and sweat of a trading floor are nauseating at eight in the morning.  Bacon sandwiches and lashings of hot black coffee on top of the previous evening's excess are sufficient to blow an ill wind through even the most iron of constitutions, and in the close quarters of a trading desk there is a palpable atmosphere of discomfort.   Then the soul-erosion produced by trading- a compost of greed and fear and nervous tension- becomes almost unbearable as the senses awake and attempt to revolt from it.

James Bond sat at his desk and looked at the bank of multi-coloured numbers flashing merrily on his trading screens.  He told himself to stay focused, to not get distracted by his neighbour exhaling heavily and fanning himself with a folded tabloid newspaper.  Instinct told him that danger lurked below the quiet surface of the market like a barracuda in search of prey.

Bond glanced at his watch.   The burnished steel hands on the black lacquered face of his Rolex Submariner read 8.09 on the first Friday of the month.  Ninety minutes earlier he had been behind the wheel of his Bentley Continental GT Speed, harnessing each of its 645 horses as he made a racing change onto Park Avenue and sped towards midtown at ninety.

The memory of the Bentley's throbbing engine brought the hint of a smile to .his face.  As a young man Bond had been introduced to the marque by his first Chief, M3, that grizzled relic of an earlier era.  Under the old man's direction Bond had been to Hell and back, but regarded him with the special affection that the most successful young traders feel for a tough but fair mentor who pushes them to their limits.

As the world became more complicated, however, M3's ability to influence policy decisions waned, and he had finally been put out to pasture for good in 2006. Bond still missed the days when the red phone would ring with an order from M3 that would put him in positions of almost unbelievable danger.  For much of the past several years, however, he had had to navigate an environment of seemingly perpetual crisis, including a series of harrowing adventures aboard the QE2 and her sister ships.

He returned his gaze to the screen.  The prices seemed hesitant, unsure, almost as if they were awaiting the orders of a higher authority.  Bond sighed and sat back in his chair.  He caught a movement out of the corner of his eye and swiveled his head.   Miss Moneypenny, the delectable team secretary, was walking down the aisle with a sheaf of papers in her hand.  She gave him a winsome smile as she dropped them on his desk.  "From Research Section, James."

"Moneypenny, is tonight the night?   Champagne and caviar after the close?"   He gave her a huge wink.

"Oh James, don't tempt me," she said breathlessly, and with a swirl of her just-long-enough skirts marched back to her desk in the corner of the trading floor.

Bond grinned and glanced at the papers.  Most of them were routine dockets which he ticked off quickly and put in a pile destined for the shredder.  One, however, labeled "Most Immediate: Le Chiffre" caught his eye.  He picked it up and read.

To:  All personnel

From: Research Section

Station W has learned that an agent known  as Le Chiffre is likely to be operating in financial markets at approximately 8.30 am on the morning of Friday, 1 August.  Mr. Le Chiffre (alias The Number, The Cypher, Nicolas-Francois Parolle) is believed to be a member of an organization known as SMERKT, the name of which derives from the Russian smert' k torgam, 'death to trading.'  It is our view, along with the American BLS and FOMC, that this organization is dedicated to the destruction of the trading profits of Western financial institutions.   Our Board believe that it could prove as inimical to our interests as SMERSH and SPECTRE were several years ago.

Le Chiffre is thought to be an erratic adversary who may not be what he seems at first glance.  All agents are ordered to keep an immediate watch out for Le Chiffre, to notify headquarters if he is located, and to take appropriate action to neutralize the impact of his scheme on our interests.

Bond put the report down and leaned forward into his desk, wincing his eyes and concentrating.  Le Chiffre....Le Chiffre.   Bond couldn't quite dispel the notion that he knew that name.   But from where?

He picked up the paper and studied the list of aliases carefully.   "The Number"....he was sure that he had encountered something like that before, and that it hadn't been a pleasant experience.  Absent-mindedly, Bond slipped his hand into his pocket and fingered the miniature laminated Warwick PPE degree that he liked to keep hidden.  The PPE had gotten him out of tight spots before....would he need it again today?

His eyes flicked to his watch again.   8.25, the dial told him silently.  Almost time for Le Chiffre to make his appearance.  Bond cursed silently and told himself to think harder, to penetrate this shadowy figure that represented "death to trading."

On his Bloomberg terminal from IT Branch, Bond punched in the letters "ECO US" and hit enter.  Scrolling backwards, he noticed an entry entitled "ADP" for Wednesday, with a tiny "215" next to it.  Something about this line didn't look right.  What government agency releases something called an ADP?

Bond found himself reaching for the red phone button that connected directly to Headquarters.   Slipping on his wireless headset, he hunched over his desk and covered the mouthpiece with his hand to avoid being overheard.

"Bill?  It's me,  Bond.   I think I have a lead on Le Chiffre.  I found a suspicious entry when reviewing the US economic calendar.  Something called ADP.  It doesn't fit with the rest of the data releases, and I'm sure it will give us a line into what Le Chiffre is going to do.   How good of a line I don't know, but it's all I have to go on now, other than the general profile of how Le Chiffre has behaved in the past."

"Okay, keep following that trail and see if it leads to Le Chiffre," said the dry voice at the other end of the line.  "If you find him, at this point you won't have much time to counteract him.   Use your instincts and do the best you can.  And 007," the voice said, almost as an afterthought.  "Be careful."

Bond had earned the coveted 00 prefix, which gave him license to trade any asset that caught his fancy.   Most of the agents on the desk were specialists; there were only three of them that had won the right to join the 00 section.

Bond scrolled forward on his ECO US screen until the day's date- August 1- appeared.   His eyes scanned the entries, then stopped at one line.   He felt his blood turn cold.  "Non-farm payrolls."   NFP.   Nicolas-Francois Parolle.  The Number.  Le Chiffre.

In his mind's eye he could see himself seated at a table with Le Chiffre and other indistinct figures, his hands on the green baize of the table's surface.    He could hear the riffle of the cards, his voice saying "Banco", receiving a good hand.  Bond then imagined a slow smile on the face of Le Chiffre, the dispassionate voice of the croupier saying "Neuf a la banque.   Monsieur Le Chiffre gagne."

Bond shook his head to clear the vision and tried to forget the imaginary defeat.   The digital clock on his screen said 8.29:55.   He took a deep breath and got ready to enter the Casino Royale.

Who will win?   Bond or Le Chiffre? Watch your screens at 8.30 am EDT to find out. 




Wednesday, July 30, 2014

Encore Une Fois

Yesterday's discussion of financial market versus real economy leverage prompted Macro Man to spend some time hanging out with FRED to do some digging.  What follows are the fruits of his labours.   Although he retains his caution not to expect daily updates henceforth, let's have a look at leverage encore une fois.

As a couple of commenters noted, overall leverage in the economy as measured by total liabilities as a multiple of GDP has steadily declined since the crisis, albeit while remaining at historically high levels:


The decline has been largely driven by two sectors.  The first of these is from households/nonprofits, which is unsurprising given the environment of tight credit conditions, uncertain employment prospects, and weak income growth that has prevailed since the crisis.



The second is equally unsurprising, given the nearly daily levy of fines and the 13,000-plus behemoth that is Dodd-Frank and its sundry legacy laws and regulations.   The authorities have stated that they don't want any financial sector institution to be too big too fail, an on an aggregate basis their plan is working.   Now about that credit creation to spur economic growth.....


Ah, but that doesn't tell the whole story now, does it?  As a number of commentators, including the Fed, has noted, nonfinancial corporate debt issuance has been "brisk."   How brisk?  Well, it's soared to all time highs as a percentage of GDP.  Last year alone, the stock of debt liabilities increased by $744 billion at the same time the sector was pushing through some $450 billion of stock buybacks.   Hmmm.....issuing debt to buy back stock.   If that isn't increasing leverage, Macro Man isn't sure what is.    On a macro basis, this is one of the reasons to be concerned about credit, even if there has yet to be a notable deterioration in credit quality.   Remember, folks, come the revolution someone is going to want to sell this stuff.....who's going to step up and buy?



The final sector worth highlighting is of course the Federal government, which has seen its liabilities grow by some 40% of GDP over the last six years.  Of course, the Fed and other central banks have taken down a decent slug of this issuance, and it is worth wondering what might happen if the improvement in the government's fiscal stance were to reverse.   Then again, such a reversal would probably come in the context of a weak economy, which itself would likely catalyze QE Googolplex or whatever the next round will be called.



While this little study isn't exactly rocket science, it is occasionally worthwhile to review slow-moving figures like this to ensure that they say what you think they should.   Specifically,  the expected deleveraging of households and banks is occurring apace (hence the Richard Koo 'balance sheet recession' concept), though corporate debt issuers continue to party like its 1999, if not 2006.  Again, this may not be particularly useful in timing an eventual crack-back in credit, but it does suggest that when such an episode occurs positioning will be just as important there as it is in many other markets these days.