Thursday, November 20, 2014

Number crunching

26.1% :  The amount that retail gasoline margins expanded in the United States last month, even as prices dropped $0.34/gallon.    (Hat tip: Anony from the comments section.)

202,000:  Number of Google results for "FX price fixing"

542,000:  Number of Google results for "Gas Station price fixing"

$500,000,000:  Average annual cost to the world if one assumes a daily FX fixing volume of $10 billion and that each rate was wrong by an average of 2 bps (bear in mind that those orders against the main direction of the fix receive a windfall, not a cost!)

$1.34 billion:  Average annual cost to just US consumers if we assume price gouging of $0.01 per gallon

$4.3 billion:  Amount of FX-related fines levied thus far

$41 billion:  Amount of total FX fines expected by Citi bank-stock analysts

$594 billion:  Total subsidies, in 2010 dollars, to fossil fuel companies from the US government, 1950-2010.


--------------------------------------------------------------------------------------------------------------------------------

BONUS SECTION



0:  Policy rate moves delivered by Mark Carney

6%: Current UK unemployment rate

7%:  The threshold unemployment rate for considering rate hikes, unveiled by Carney sixteen months ago 

£870,000 : Carney's salary and pension contribution

:  Ratio of Carney's compensation to policy moves

250,000: Approximate world population of chimpanzees, each of whom could have delivered the same monetary policy result as Carney

 


Wednesday, November 19, 2014

A head-scratcher

Bloomberg is running a story entitled "Yellen Inherits Greenspan's Conundrum as Long rates Sink", noting the apparently inexorable yield decline at the back end of the curve and bemoaning the possibility of curve inversion when (if?) short rates rise, thereby threatening credit expansion.

Macro Man is left scratching his head.

Oh, if only Yellen (or Bloomberg) could identify some institution that holds, say, $2.4 trillion of Treasury bonds.  Perhaps they could be persuaded to sell a few if yield curve inversion were truly problematic.  

If only..... 


Tuesday, November 18, 2014

Abe goes all-in

The market is evidently coming to grips with the latest Japanese GDP "shocker", as is the political establishment.  Japan has such a long and (in)glorious history of freakish data out-turns that it is difficult to be truly flabbergasted by yesterday's number, particularly as it was largely driven by inventories.   Nevertheless, the data was clearly very disappointing, and if you're keeping score at home, the economy has now shrunk by 1.8% in real terms since Shinzo Abe took office.  As an aside, in real terms the economy is now smaller than it was when Abe was unceremoniously booted from office the first time, in September 2007.



On the face of it, therefore, one can question how effective Abenomics has really been.   To be sure, the imposition of the consumption tax hike is a massive qualifier which dented the momentum that Japan's economy built up last year.   That having been said, following the previous VAT hike in 1997 the economy rebounded strongly in Q3, more than recouping the pullback in Q2.  While it's true that the global economy is on a weaker footing than 17 years ago, it's not like it was all pony rides and lemonade back then, either: Asian crisis, anyone?

That's not to say that Abenomics has been totally ineffective, of course.   USD/JPY's 50% higher than it was before Abe took office, and the Nikkei has more than doubled.  That's good news for most exporters, equity holders, and pajama-clad retail FX punters; in a familiar theme to those in the West, it's less clear that the beneficent impact of these asset price moves has filtered down to Main Street.

Abe's response?  Well, it's one that many members of the FOMC and non-Germanic ECB board members could appreciate: clearly we haven't done enough!

The BOJ knocked the market's socks off with its QQE decision at the end of last month.   Recent declines in prices, particularly for energy, evidently gave them ample cover - recall that there is a negative impulse from yen weakness as it pushes up energy costs, which Japan's legions of pensioners are rather sensitive to.   A nearly 25% decline in the yen price of Brent since earlier this year may have afforded Kuroda an opportunity to up the ante.

However, it's worth noting that even at the current price of Y9500 or so, oil is still very expensive by historical standards.   Pushing the yen weaker is not an obvious panacea in that regard.



The asset allocation shift of the GPIF will create plenty of demand for domestic equities and a supply of yen as the institution buys foreign assets.  As this happens, the music may well play on.   After the fact, however, the GPIF will be taking very much more investment risk than they are accustomed to.   Perhaps this will not be an issue; US pensions and endowments have certainly ridden a roller coaster over the past decade or so in terms of their investment returns, albeit generally on nothing like the scale that the GPIF operates in.  That having been said, it is probably worth asking the question about what would happen should 2008-type price action (or even 2002-type price action) occur; the GPIF would almost certainly be sitting on monumental losses.   Perhaps this attempt to kick-start the economy is worth this risk; then again, maybe it isn't.

Finally, Abe is now calling a snap election just two years after he was swept into office, presumably to freshen his mandate to throw even more lighter fluid on the searing rallies in USD/JPY and the Nikkei.  His decision to postpone the next VAT hike for a few years, while probably wise, will nevertheless not please either the mandarins in the MOF or Kuroda (the recent aggressive easing was presumably a quid pro quo for staying the course on VAT hikes.)

Should Abe's LDP win another sizable majority, one would have to presume that the asset allocation shift will continue apace, maintaining a tailwind for recent trends.  That having been said, on a structural basis Macro Man is a little wary.   Price action in the Nikkei, for example, is strikingly similar to that during the time of the last "revolution" in Japan, i.e. the Koizumi administration.


Needless to say, that didn't end well.   Macro Man can envisage USD/JPY trading back up to the low 120's but is sceptical that it can extend much further.  Political tolerance elsewhere in the world for much more yen depreciation has to be called into question, particularly in the context of a global growth deficit.   Moreover, thanks to years of Japanese deflation the PPP marches steadily lower, and 125 today is a much weaker yen than it was 10 or 15 years ago.

Still, in the near term it's hard to fight the trend, particularly when the policy levers on both sides of the trade appear supportive.   Nevertheless, it's worth remembering that one-way bets in the yen usually end not with a whimper but a bang.

Not that Abe will mind, of course.   If he gets chucked out of the PM's office again, there will no doubt be a warm welcome for him at the Eccles building.   After all, if Koizumi can impersonate Elvis, why can't Abe mimic Janet Yellen?




Friday, November 14, 2014

A simple question

If this


led to this,


how could regulators allow this if they were actually serious about stopping fraudulent behaviour?

Wednesday, November 12, 2014

Not much to say

Macro Man's a bit on auto-pilot at the moment.  USD/JPY continues to be a star performer in FX land, with new rumours of potential snap elections in  Japan the latest catalyst.  Meanwhile, the SPX continues its gradual march higher, thus far holding each of the 4 gaps since the panic low.  Tactical purchases on the dip have been sold, and while Macro Man still owns a bit of equity for the Santa rally he's not interested in buying any more:



Europe, meanwhile, remains an "avoid like the plague."  Perhaps the physicists at CERN can figure out how the Eurostoxx banks index manages to suck and blow at the same time....


As far as fixed income goes, EDZ5 is currently bang on the sweet spot of the 99.25/12/00 put fly that Macro Man mentioned a couple of weeks ago.  Nothing to do there except wait.



  In the words of the immortal Fat Boys:   Brrrrrr....stick 'em!




Friday, November 07, 2014

It's good news that good news is bad news

"Together with the series of targeted longer-term refinancing operations to be conducted until June 2016, these asset purchases will have a sizeable impact on our balance sheet, which is expected to move towards the dimensions it had at the beginning of 2012."

At the end of March 2012, the ECB's balance sheet was EUR 2.98 trillion.   It currently sits at EUR 2.03 trillion.   The difference between those two figures is 950 billion euros.  The first TLTRO managed to attract a demand for just 82 billion of loans, for reasons mentioned in this space yesterday.  Even if we assume that the take-up for TLTRO #2 doubles, that would still be a shortfall of nearly EUR 800 billion.  There aren't enough ABS and covered bonds to buy to fill that shortfall.   What's next- corporate debt (thereby exposing the ECB to more overt credit risk)?   Sovereigns (thereby offending German sensibilities vis-a-vis monetary financing)?  Neither of these will solve the primary issue of getting credit to SMEs.

Although the market has anchored upon this statement thanks to Draghi's emphasis, the statement isn't actually anything new.  The "dimensions....2012" phraseology appeared verbatim in the September statement, for example.  Moreover, it is classic central bank speak, allowing plenty of wiggle room.   How close to that previous level of 2.98 trillion constitutes the same dimension?  2.9 trillion?   2.5 trillion?  One has to posit that if Draghi had his druthers, the dimension best describing the size of the ECB balance sheet would be the Fifth one.

In the meantime, Macro Man isn't sure that we learned as much as the market seems to think we did.  Yes, the mention of relative balance sheet sizes would appear to sanction a lower currency, but if you didn't know that that's what the ECB wants then you haven't been paying attention.

Still, that's not to say that Draghi won't get his wish.   US jobless claims printed the lowest 4 week average since the height of the dot-com bubble yesterday; at the rate this is going, Janet Yellen might have to use your author as her next example of a poor soul who's not working.  US fixed income has slid lower ever-so-gradually, taking EDZ5 a full 25 ticks off of its October 15 highs and right into the sweet spot of the 99.25/12/00 put fly mentioned last week.  Can we press "stick"?

Sadly not, with payrolls set to be released today.   Macro Man's model is quite bullish, forecasting a robust 272k out-turn.  Should that result eventuate, one would have to think that both the dollar and yields will be marked higher.  As for stocks....the day ends in "y" but doesn't begin with "s", so the default setting is that they rally.  Then again, that pesky 4th gap is still unclosed, and great employment data makes it that little bit harder for Yellen to keep moaning.  Eventually, markets will capitulate and start pricing tightening again.

She should relax.  After all, it's good news that good news is bad news.

Thursday, November 06, 2014

An alternative to caring about Draghi

Hard as it is to believe, it's already time for another ECB meeting.   A lot of water has clearly passed over the bridge since the last one, and while the DAX is largely unchanged since that October 2 "rien fait" result, the IBEX is some 5% lower and BTPs are off by a point.   More pleasantly, EUR/USD is actually a couple of big figures lower, largely as a function of USD strength engendered by the BOJ.  (That, signor, is how you weaken your currency!)

Given the ongoing doldrums of the Eurozone, the seemingly daily collapse in oil, and the rather tepid take-up of the first TLRTO, there's a school of thought that Draghi and co. will loosen some of the requirements to participate.  That, combined with the successful announcement of the bank stress test results, would putatively increase the incentive for banks to apply for loads more liquidity.

Or will it?

Unlike during the time of the original 3 year LTROs, there aren't exactly a lot of high-carry trades on offer, particularly at the short end of the periphery.  While the spread between the refi and the deposit rate represents the actual cost of holding excess cash, and remains as low as it has ever been, one would have to presume that the act of "cutting a check" to the ECB for the privilege of parking cash there is one that many banks will wish to avoid.

More generally, of course, one can clearly question whether there's anything else the ECB can reasonably (and practically) do.   Yes, theoretically they could engage in a swashbuckling BOJ-style orgy of monetary munificence....but there is no other central bank in the world where the chasm between theory and practice is so wide.

Moreover, while there is clearly a demand-related deflationary impulse in Europe, the genesis is a fiscal one, and there is little empirical evidence that any amount of monetary pump-priming can replace the salutary effects of time in resolving the problem.

At the same time, the trend of disinflation/deflation is a global one, caused in many cases by global factors.  A by-no-means-exhaustive list includes the following:

* Globalization has shifted the supply curve for many, many goods (and some services) much more abruptly than the demand curve; the equilibrium level of many prices has therefore shifted lower.  Observe the PCE deflator for durable goods; although it also declined (by more, in percentage terms) during the Great Depression, the current 20-year secular decline reflects a structural supply shift rather than a shock-induced demand shift.



* Technology such as the Internet has had a profound impact upon the world economy in terms of efficiency of communications.  Productivity in many aspects of economic life has shot higher as well (insert Facebook joke here.)

* The payoff of fixed investments is still being reaped or, in the case of the commodity sector, just starting to be reaped.  Although the TMT infrastructure bubble didn't necessarily work out so well for many of the firms that did the work, it is a sunk cost the benefits of which are still being enjoyed today.  Commodities, meanwhile, move in super-cycles given the extraordinary intensity of the capital expenditure required to bring new supply on-line.  A glance of the last decade of the Australian dollar illustrates where we've been in that cycle; a brief trawl through some of the comments made by some of the usual-suspect resource firms should leave you under no illusions about where we're headed.  At the same time, the world's largest fossil-fuel consumer has become less dependent upon global production.

None of these factors are particularly unique, but then again neither are periods of secular price declines or stagnation.  Consider that the first transatlantic telegraph cable was laid in 1858.  Eleven years later, the first transcontinental railroad across the United States was completed.  These innovations, combined with the end of the Civil War, enabled the US to fulfill the 19th century role occupied by China today.  US exports as a percentage of the global total exploded from 7.9% in 1870 to 13.2% in just 10 years.  And what did inflation do during this period and its aftermath?

It was negative for much of the time.


Source: www.irrationalexuberance.com

So what does this mean for inflation targeting?  A student of history might suggest that for central banks to target a completely arbitrary (positive) inflation figure against the tide of disinflationary/deflationary factors cited above (as well as others) is akin to King Cnut ordering back the waves or Xerxes the Great shackling the sea for breaking his pontoon bridge across the Hellespont.

In other words, futile.

In fact, worse than futile if their efforts to combat forces that are clearly beyond them (does anyone think any easing Draghi might do will positively impact the price of oil?) lead to substantial price distortions in items and assets that are more easily influenced by central bank policies.

Indeed, one could argue that this is the narrative of the last 20 years of central banking in the United States.

Of course, the realpolitik is that in a world still awash in debt, deflation is a distinctly unsavoury outcome.  Small wonder, therefore, that in a world where schoolchildren get "participation awards" rather than winners' medals, monetary authorities are trying their damnedest to keep the balls in the air as long as possible to shield as many people as possible from unpleasantness.  For better or for worse, the exaggerated economic cycles of 140 years ago are simply unpalatable- even though those countries that "took their medicine"  during the crisis seem to be faring rather better than many of their peers these days.

None of this means that you should buy or sell euros or Spooz today or tomorrow.  Sometimes, however, it's worth taking a step back and considering where we are in the very big (dare we say macro?) picture.  It's certainly more interesting than wondering if and how the ECB might adjust their latest string-pushing exercise....