Wednesday, July 29, 2015

Any change at all?

So Fed day is here, but Macro Man isn't entirely convinced that we're going to get a tip of the hand either way from Yellen and co.   At this juncture September is clearly live but far from a done deal, consistent with the message that the Fed gave last month and in the intervening period.

It's not exactly like the evolution of key inputs has been overwhelmingly skewed in one direction or the other, either.   Since the day before the last Fed meeting, this has what's happened to a number of inputs (or something like them) that they are likely considering:

In what should surprise almost nobody, the general theme is that that labour markets continue to strengthen, growth is decent but not spectacular, and inflationary pressures look pretty nonexistent.   Call it six weeks as a microcosm of the last six years.

If rates were already, say, 2%, one could on perhaps argue that on balance that the inputs may skew ever so slightly towards standing pat.   However, it does seem as if a number of the Federales have come to grips with the idea that escaping ZIRP is a worthy goal in and of itself, so Macro Man is happy to call it a push.

We probably won't get the the clarion heads up that we got in the last cycle- to refresh the memory of the old salts (and educate the 20 somethings who've never seen a rate hike), the money line of the May 2004 statement was:

The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. Similarly, the risks to the goal of price stability have moved into balance. At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

Of course, the Fed already exhumed "measured" when it came to characterizing the pace of the taper, so it's dubious they'd pull the same trick again on rates.   No, the more your author thinks about it, the more it feels like that any change will be fairly nuanced, an acknowledgement of the passage of time as much as any thing else.

As for markets, it's probably an "as you were"- one eye out for China and commodities, and the other on a hammock on a beach somewhere nice.

Monday, July 27, 2015

Spot the difference!

Here are mostly underwater Chinese equity longs crowding through a tiny exit:


And here are mostly underwater Chinese crowding through a tiny exit.   Can you spot the difference?


In next week's edition, gold traders re-enact the final scene from The Italian Job.

A brief history lesson

Macro Man has been thinking a bit more about commodities recently, and before addressing the upcoming Fed meeting in another post later this week, he thought it would be useful to follow the line of thought.

Commodities generally, and gold in particular, have been in the headlines recently given their sharp price decline.  Some, indeed many, commenters have expressed the idea that gold is oversold, below its equilibrium level, due for a bounce, etc.    While short-term momentum indicators have certainly reached oversold levels (and are exhibiting a bit of positive divergence), Macro Man thought it would be useful to put the recent price decline in a longer-term perspective.

Obviously, the supply/demand/storage dynamics for commodities can differ dramatically, and just because one has gone down a lot does not necessarily imply that others should follow suit.  Nevertheless, if we look at a broad range of commodities we can still perhaps get a sense of whether or not there are outliers- particularly in the case of gold, where the vast majority of the stuff that is dug up is not "consumed."

With the aid of his friend "Raving Irons", your author perused a number of medium-term commodity charts to get a sense of where the current decline is in historical perspective.

Here's the chart of copper, for example; as you can see, the current decline has taken it to where it bottomed in 2006/07.  (Incidentally, a break of this level would look pretty ugly from a technical perspective, with plenty of fresh air between here and a 50% decline.)



 Other industrial metals look no better.  Here's aluminum, which is back to where it was in 2004/05.


Nickel doesn't look any better, with a its price decline representing a similar journey back in time.
OK, we can chalk all of these up to "China" and the "economic cycle", and say that they represent a specific dynamic given that China's been the hegemonic source of demand for a dozen years.   How about energy?

Brent, which strips out the pipeline/refining issues that can distort WTI pricing, is also back to 2006/07 levels.


Natural gas, the production of which has benefited from all of the alternative energy exploitation in the US, is back to where it was in 2002.


Even wheat, which doesn't require a supercycle of investment to shift production patterns, is where it was in 2006/07.



As for gold's monetary chum, silver, its recent shellacking has put it back to 2007/08 levels.


And gold? Alone of all the commodities surveyed, it is above its high price before Lehman Brothers went under.



Perhaps the question, therefore, is not why has gold done so badly, but rather why has it done so well?

Monday, July 20, 2015

Gold, Jerry, gold!

Is it just Macro Man, or do some of the smug musings of "just buy the dip, equities are going up forever" adherents sound a bit like gold bugs in 2011?

 
Not that Macro Man expects a similarly precipitous decline in stocks any time soon; nevertheless, the gold chart does illustrate how quickly and how wrong things can go with relatively little obvious warning.  Such, alas, is the peril of faith-based investing, where mantras are repeated in a style more reminiscent of a Buddhist monk.

Regardless, someone had some gold to shift this morning (or some stops to run, in which case expect a visit from a clown car full of regulators), sending the tarnished yellow metal to its lowest price (against the $, at least) in more than five years.  Technically, it looks pretty awful; fortunately, our central bankers won't be able to use it as an example of deflation, as they were notably silent on the "inflationary signals" from gold in the early part of the decade.  To mention it now while remaining silent then would be intellectually dishonest, and they would never do that, right?  Right?


Thursday, July 16, 2015

The only loony chart was the...err....loonie

Hurray, the Greek vote passed, the bailout is on!  OK, now how long til the next debt restructuring/writedown/foregiveness/default?  Even the IMF acknowledges that Greece remains completely, utterly stuffed- bailout or no bailout.  Perhaps that's why the euro, at the time of writing, hasn't budged on the news.


Let's see what Signor Draghi has to say about Greece and the ELA this morning.

A number of commenters and twitterers on yesterday's post observed that the very act of observing the three month pattern of crazy days was likely to negate it.   Such seems to have been the case;  while one need not be Mystic Meg to have deduced that such a random pattern would not continue, Macro Man has frankly been a little surprised that the market did not move more violently in the run-up to and aftermath of the Greek vote.

Of course if one wishes to cherry-pick, he could argue that yesterday's action in Canada qualified as a little crazy.  The Bank of Canada delivered a somewhat surprising rate cut, and in his comments Poloz hinted that QE could potentially be in the offing.  Sigh.  There remains essentially zero empirical evidence that QE boosts economic output or inflation; the latter in particular is subject to global secular forces of oversupply in manufacturing and labour markets.   The best its adherents can do is offer lame counterfactuals about how bad things would have been without QE; these counterfactuals, of course, are outputs from the same macroeconomic models that have signally failed to deliver anything remotely resembling accurate forecasts in the post-crisis period.   Garbage in, garbage out, as the saying goes.

In any event, the CAD got trolleyed yesterday, and is looking very interesting indeed from a technical perspective.  USD/CAD has broken out on the daily chart and looks set to test the March 2009 high of 1.3250:

Beyond that level, there's a lot of fresh air.

The chart of GBP/CAD is even sexier, with a very strong breakout after quite an extended period of consolidation and then sharp swings.  Loathe as Macro Man is to hitch is wagon to Sideshow Bob  Mark Carney and his magic flip-flops, this one does look like ti could go quite a bit higher.


As for Janet Yellen, your author saw relatively little change in message from what she gave us last week.  For more than a year now, his base case has been a hike in September of this year, and at this point it still looks like even odds that he'll be correct (though Fed funds futures are pricing more like a 1/3 probability.)
 
What's interesting is that she sounds, if not desirous, at the very least resigned to the notion that ZIRP world really ought to end sooner rather than later.  The irony, of course, is that the global economy might have been better suited to such a move a while ago; as someone once said, he who hesitates is lost.

Nevertheless, it's an interesting question as to what will happen to the US short end in the event of a September hike.   Although Yellen has already more or less promised that this tightening cycle will be sponsored by Foghat ("slow ride....take it easy"), the market continues to price relatively little even with that proviso.  Of course, some of that may be a function of the uncertainty surrounding how rate hikes will look.  Will the Fed target a single level for FF, or a range?   If the latter, how wide will it be (i.e., how wide will the corridor be between IOER and the RRP rate?)

Do two hikes put FF at 0.75%, and assuming a basis of 15 bps, LIBOR at 0.90%?   Or do two hikes put FF in a target range of 0.50% -0.75%, with the practicalities of the market flooring it at 0.50%, and thus putting LIBOR only a bit above 0.60%?

Inquiring minds want to know.   In any event, it looks like risk is being deployed to price only one hike; a lot of "pin the tail on the donkey" tight call flies have traded looking to target 99.50...more or less where we are now.  That's consistent with pricing one hike this year, with FF at 0.35% or so and 15 bps of basis.  Could that happen?  Of course...but a lot of these structures have been financed by selling puts, which could end up biting someone in the arse should Janet get the bit between her teeth.

Either way, markets are going to be very interesting indeed in a couple of months' time- and won't even need a calendar pattern to "prove" it!

Wednesday, July 15, 2015

Ruh ruh, Raggy

With the contentious Greek parliamentary vote to pass the necessary bills to progress with the Anschluss bailout program today, there's bound to be a bit of volatility today.   All the more so if one is a believer in calendar effects or financial numerology.   Consider the following:

October 15, 2014:  Bonds go crazy:


Three months later, on January 15, 2015, the SNB pulls the bid in EUR/CHF:


On April 15, exactly three months later, Bunds hit their all-time low yield and don't look back:


(Hat tip to Fred G for pointing this out.)

Three months later is...err....today, with the spectre of the Greek vote looming large.   As  Scooby Doo might say:   Ruh roh, Raggy!  Buckle up out there, as it might be a wild one.

Bonne chance.



Monday, July 13, 2015

Double down

Trent:   Double down

Mike:  What? 

Trent: You got an 11.  You always double down on an 11

Mike:  I know, but it's $200.   It's blood money

Trent:  Mike, you gotta double down

Mike: I can't double down

Trent: Mike, if you don't look like you know what you're doing...

(Mike loses the hand)

Trent: I'm telling you baby, you always double down on an 11

Mike: Well, obviously not always

Trent: Always, baby

Mike: I'm just saying not in this particular case

- Swingers

 
So, Alex Tspiras has executed the most stunning collapse in resolve since Brazil capitulated against (who else?) the Germans in the semifinals of last year's World Cup.  Tspiras, playing the part of Brazil's ineffective front man Fred, has agreed to rush through a series of exactly the type of austerity measures, micro-managing reforms, and sovereignty-losing asset sales that Syriza was voted in to oppose.  #Thisisacoup, indeed.

From Europe's perspective, this looks like yet another attempt at a Martingale strategy for Greece, throwing more money at a huge hole, doubling down yet again in the hopes of getting back to flat.  Whether they honestly believe that Greece can work its way out of its mountainous debt (which suggests the Eurogroup is either incredibly naive or incredibly stupid), or figure that it will be a problem left to their elected successors  is an open question.

As, indeed, is the issue of whether this program will pass in the Greek parliament.  The "OXI" vote seems like a long time ago, and one can understand that many of the most enthusiastic Greek opponents of the Eurogroup will feel betrayed by the Tspiras government.  The text of the statement is scolding in nature, and it strains credulity that it drills down to things like reforming the bakery sector.  Who knew that baklava was to blame for Greece's dire economic circumstances?

Notably absent from the statement, of course, was any mention of debt relief/writedowns/restructuring.  Again, how Europe can think that this bailout will draw a line under the crisis is, frankly, baffling, particularly given the experience of the last several years.  The Einstein quote on insanity comes to mind.

Still, should the program squeak through Parliament and the ECB plays ball with the ELA, the storm will have passed....if only temporarily.   It's seems quite certain, however, that Greece will be in trouble again well before the expiry of the program....and that's a bet you should always double down on.

Sunday, July 12, 2015

The Greek negotiations in two pictures

Euclid arrives, confident that they can make a deal....



...alas, no deal, no summit, no soup for you!   "Poor bugger," Christine Lagarde thinks to herself.



Apparently, selling euros and equities on Friday afternoon to buy them back early Monday is the new market inefficiency...