Macro Man

Spring has sprung
The data's riz
I wonder where the bearies is?

They say the bears are on the offer.
But that's absurd
The offer is on the bears.

Team Macro Man apologise for the lack of service recently. Last week saw their technical pullback first get Apple'd and then FED'd. And though there were glimmers of the technical turn, it looks as though it has morphed into a "technical pause". Despite the fizzling out of yesterday's Euro summit there has been little sell-off which leaves TMM thinking that there is a chance of the European "Policy by Sloth" may work.

TMM wrote back in December about what they believed the necessary conditions were to bring about an end to the crisis. The classic Anglo-Saxon view (TMM cannot resist the French line) is that the only way out of the crisis is fiscal union. But TMM believe it is far more nuanced than that - strictly, that measures that confirm the path to some sort of fiscal union in the medium term are in place. Specifically, as we wrote back in December, TMM reckon we need to see the following:

(i) A large enough amount of cash to cover Spain & Italy's financing needs for the next two years,
(ii) Incentives to longer term investors to buy Eurozone government bonds,
(iii) Structural reform measures aimed at rebalancing within the Eurozone and, lastly,
(iv) Clarity on the growth outlook.

In TMM's view, clarity on the first three of these conditions is enough of a firewall for the rest of the world to chug along, and the last of these would be enough to unwind at least some of the under-performance of European assets and loosen financial conditions significantly.

TMM also highlighted the Silver Bullet Fallacy: there rarely exist simple solutions to solve complex problems. The alphabet soup thrown by US policymakers at the the 2008/9 GFC is point in case. What is more important for markets, is to be able to see the exit. And, as many have noted over the past couple of years, the exit can only come with growth, and that is why the last of the above conditions is arguably the most important.

The Street was generally surprised at how strong the take-up at the December 3yr LTRO was, and this morning's FT report that several banks are likely to double or triple their request for 3yr money at February's LTRO seems to slot nicely in the framework of providing adequate liquidity both for the banking system and Spain & Italy in particular - conditions (i) above. Putting this in the context of the EFSF and ESM and the seeming probability that the March summit will confirm ESM and EFSF to run alongside and the numbers have begun to add up. It is only the end of January, yet Spain has already funded about a fifth of its 2012 funding needs. The expanded collateral pool similarly means that French banks will be able to fund a large amount of their balance sheets with the ECB, incidentally, reducing the power that the Germans have over France going forward. The private sector money that would have funded these banks but has now been crowded out will have to go somewhere.

The second point, of providing incentives to longer term investors to buy Eurozone government bonds is not there yet. The treatment of the ECB in the Greek PSI is particularly important here, to avoid markets confirming the suspicions they already have regarding de facto subordination. While the ECB's LTRO provides time, and the promises of "No More Greeces" with respect to the approach to PSI which is supposed to be "over" evokes the post-Lehman policymaker consensus, only actions (in the form of ECB participation, or an explicit lack of PSI in the upcoming second Portuguese EU/IMF programme) will convince longer term investors.

The Fiscal Compact, while rightly criticised as being too centred on austerity, is a structural reform (iii). Additionally, the measures in Greece and Italy in particular will raise medium/long-term potential growth and aid rebalancing. More needs to be delivered here, but each incremental measure will help. By far the most important, in TMM's view, is the enactment of structural debt brakes in national legislation, to cement the credibilty of fiscal restraint in the future. In particular, TMM would regard the French enactment of this as the most important structural measure that lays the groundwork for future fiscal union. Of course, Sarkozy has delayed this until after the April election and, with the Socialist Francois Hollande ahead in the polls stating that he would renegotiate the fiscal pact such that France would not cede sovereignty, this is a significant hurdle for markets. TMM cannot get BOLIVIAN bullish until this is passed, but it does seem like much of the plan is coming together.

Finally, the growth outlook (iv). Markets are discounting machines, and they have already discounted fiscal austerity in Europe. The PMIs have begun to move higher which shows the exit... Greenshoots 2.0, the fabled second derivative. Late last year, the Squid published an excellent piece of research comparing Asia in 1998 with the current situation. TMM found particularly interesting the conclusions they came to, which were that market underestimated significantly the degree of demand weakness in those countries at the epicentre (ASEAN). However, the market also significantly overestimated the impact of the crisis upon the rest of the world, resulting in a grab for risk assets in late 1998 and especially in 1999. This is all of a sudden seeming all too familiar... the economic performance in the Euro-periphery has continued to disappoint, while that in Germany & France, the US and increasingly the rest of the World has exceeded expectations.

To sum up, while TMM expect the new month to bring a new bear attack on Portugal, they fear that they have been too cautious on the risk front. The strength in US equities, despite a relatively tepid earnings season, speaks volumes. And if the liquidity emitted from the upcoming 3yr LTRO is indeed large enough to restart animal spirits, then it is not hard to imagine equities finishing the year a lot higher.

TMM will finish by noting that GDP fell in most countries in 2009, yet equity markets and risk assets in general put in an incredible performance. It is not about what is happening *now*, it is about where markets can see we are going. And it increasingly looks like they can see the exit. TMM think that while just about anything US cycle linked looks cheap (Spoos, Korea, SGD, TWD, you name it) there are some things that have run on just about nothing - spec longs in AUD being case in point. TMM wouldn't advocate going BOLIVIAN but we think the equity perma-bears are in for a rough couple of months.

But first the markets - Someone threw an Apple into the works last night that delayed  our expected roll over, but it looks as though it is underway and having had that failed test higher we are more confident of our call. As for Apple (So THAT's where all the QE ended up)  TMM are still amazed at the awe within which its results are held. Imagine the outcry if that was a bank, BP or your local utility company -  Vince Cable and his baying mob would explode in a cloud of hyperbole.

But as nothing else has changed. We are still pretty bored but will fill in with some more non-predictions for 2012 . Here are the random ones

Ed Miliband will NOT be leader of the UK Labour party by the end of the year. A rollover bet. the theme of him being pretty useless has not changed but Blair's changes to leader selection during his term has made it pretty hard to push incumbents but we think the pressure will increase for him to go.. Interestingly it was the BBC and Guardian who were the ones earlier this week shouting most about the increasing Tory lead. TMM might be over suspicious but perhaps they are embarking upon a push for change.

And talking  of the BBC, they will NOT stop linking any injustice anywhere in the world to UK Government spending cuts and they will NOT stop generalising anyone working in a bank as evil but will manage NOT to generalise all journalists as phone tapping, family destroying, moral bankrupts.

Consultants will NOT find life easy. Shareholder backlash to senior management pay will NOT leave middle management untouched. A  crackdown in inefficiency will lead to more focus on the production of the final product and less spent on the luxuries of  "corporate awareness" and all the associated "consultants". And as for financial Head Hunters ..

However IT and HR departments will NOT lose any of the control they have over the business lines they are meant to serve. Their cancer is too far progressed to cure.

Obama will NOT lose the US elections. Whilst massive amounts of airtime are being poured into the upcoming US elections TMM really aren't that bothered. OK, if the Republicans get in they will most probably tighten fiscal policy and so growth would be lower but with Romney's tax rate at 15% and Gingrich's general divisiveness we think it very unlikely that either make it the whole way. In general TMM feel that politicians globally are losing their grip as opinion formers and are having to scrabble more and more to catch up with populous opinions forming and swelling through social media rather than main stream press. Whoever gets in as US president will be subject to the same under-pressures and unlikely to be able to drive their own agendas much further than out of the garage.

The Olympics in London will NOT be the disaster many expect yet during them manned flight to Mars will NOT be harder than getting to Canary Wharf. However the Olympic tradition of the host nation losing money on the whole event will NOT be broken.

Greece will NOT stop taking the piss with pricing in tourist restaurants. As shown by their inability to change their macro economy there is little chance of micro Greek economic theory changing.

Kate Middleton, Duchess of Cambridge will NOT announce that she is expecting a baby. Sentiment indices are far too high on this.

The Mayan predicated end of the world will NOT occur in 2012. - TMM are offering believers immediate delivery of ayuverdic tea and Himalayan pink salt lamps against Dec 22nd  delivery of all their worldly goods (excepting their tea, lamps, wind chimes, tin foil beanies and Peruvian woolly hats)

We have that nagging gut feeling again. Ok, the data continues its trend of "better than expected" surprises with the Euro PMIs but there are factors appearing that leave our post of yesterday of a generalist "it drifts higher" ramble in need of a tweak. Our concerns aren't linked to news flow or the usual developments in Greece, Iran or whatever bad twist the blogosphere has dug up about imminent disaster (we see Barclays has started looking at Skyscraper building as the next portent of doom, especially for China), but the butterflies we feel in the stomach are as follows:

1) The last few days have seen a rush of more spivvy "get me in" euphoria. Nice start to our bigger-bullish view, but nothing goes in a straight line and this phase may be over.

2) The technicals. Soothsayer signals (see glossary) abound with turn signals in the Dow, EuroStoxx and various European index components (DAX, MIB, CAC) and noticeably in a raft of AUD crosses with their normal equity correlations. The shape of most risk asset climbs have been getting thinner in sharp wedge like manners. Dojis spotted?

3) Recent highs in many equity indices means stops have been driven. Leading back to point 1).

4) It's Tuesday. We like Tuesdays for turns. As the run has been up then the turn should be down.

5) Momentum change leads to model driven accounts changing direction and we still think that January has seen the models dominate market moves more than usual as "real" players have mostly sat on their hands and core beliefs unless been forced otherwise. Spivs excepted.

Now the above are hardly Macro and it's not easy when the Heart says buy yet the Gut says sell, but the above are worrying enough to make us want to get out of shorter term longs and take a breather. So despite us remaining general bulls we are going to tune positions and prepare for a shorter term down swing to allow us to re-accumulate longs before (we hope) resuming the grind higher.

TMM have been away last week skiing in the Italian Alps. Wow, what a surprise re prices! A coffee up the mountain is cheaper than in a provincial UK town. Yes, cheaper. The snow was great, the sun was shining, the resort was pretty, deserted and delightful, the locals were friendly and accomodating leaving us feeling that it's time to leave the French and Swiss mega-resorts to the Russians. Austria, however, will always have a place in our hearts due to its apres-ski madness. (By the way, US readers, which is the best US resort for apres-Ski? We have struggled to find any in the few resorts we have tried)

Returning to the markets, the last week hasn't really seen any game changing news, just the continued ingress of "better than expected" data dripping on to the fire of bearishness. It appears to be working in extinguishing some of the flames and we have returned to find some of our favorite permabears now wondering what new news they are missing to explain prices being higher. We'd like to suggest,- "What you were missing in the first place". Prices don't have to keep falling on old news. Change is what counts and the change is in the background data vs expectations.

In the immortal words of the Jackson Five -

If you look around
The whole world's coming together now
yeah..
Can you feel it, can you feel it, can you feel it? (da daa daa dada)

Well maybe the whole world isn't coming together quite like that but the bears are finding it hard to extract value out of their well chewed bear food, unlike the bulls who, as ruminants, find it easier to extract value from regurgitated low quality good news.

Our problem is that we are find it pretty difficult to get excited by anything at the moment. Our long term views remain intact ( as per our slowly apperaing non-predictions for 2012) but short term influences still leave us pretty unexcited. So we are happy to play the upward drift of all things risk, hopefully accelerating thru old highs, until the next tape bomb. But to be honest immunity to tape bombs feels pretty high and it will have to be something pretty nuclear to knock things lower again.

So we hope the "risk on" grind will continue, even if it is doing more damage to some of our hedges than Edward Scissor-Hands on speed.

Knowing what to write apart from "s'goin up innit" is pretty hard, so we'll leave it at that.

TMM note that with the rapidly changing policy mix in Europe from “suicidal” to “Die Hard”, making calls on commodities is first and foremost a question of how much QE there is: if the deflationary environment and crisis risk is kept at bay in Europe it isn’t as if things are going to be peachy in Europe but risk assets will run, not least of all because last time we saw this much of a policy response from November 2008 to March 2009 commodities ripped.

Now, TMM would note that if the US continues to recover with Europe at least stabilized and housing in particular continues to recover we could get to year end and be talking *gasp* rate rises and not just fiscal drag which just might turn the USD from a legally acceptable form of toilet paper to legally acceptable tender. So folks lets be honest: there’s commodity fundamentals and then there’s central banks that can do a lot to make fundamentals not matter in the slightest. So with that caveat (“all non predictions subject to global M3”) we present our Commodity Non-Predictions:

1) Platinum will NOT under-perform Silver.

TMM have covered platinum before – the macro context of the world’s largest producer here and the threat of electric vehicles to Platinum Group Metals seems to be handily suppressed which can mean only one thing – cost push inflation plus a demand recovery = this should go up. Now TMM can’t rule out Eurostupidity so we are going to offset this with Silver which is sitting at ~300%+ of cash costs unlike Platinum which is only about 50% above cash costs and which as previously discussed seems oversupplied if one discounts the tinfoil beanie brigade. Oh, and it’s a really pretty chart from the long term:

The shorter term:

And realises high teens vol versus the hi-ho silver 45% whipsaw show.

2) Copper Is NOT Going Anywhere.

TMM think that copper is in no man’s land. To wit:

• expanding supply coming online end of 2012 and 2013 (-).
• China committed to property controls (-).
• While also loosening credit (+).
• US building recovery being priced into equities (+).
• But little follow through in OECD demand yet (-).

To that end we think copper is not going anywhere exciting this year, so buying OTM anything in copper seems rather unappealing to TMM.

3) Oil Vol Will NOT Disappoint.

TMM think Oil is the complete opposite of copper this year. In TMM's minds, there are three things that could happen this year, all of which mean Oil will move a lot:

• Iran blows up, Oil goes to $150, global growth collapses.
• ECB-driven reflation, more growth, demand sends Brent back to $120+.
• ECB-driven deflation, double dip, $90 oil.

To that end while crude vols have ticket up somewhat they still look appealing at ~23% to TMM, right in the historical complacency zone.

And with that, TMM will try and motivate themselves to come up with some Equities & FX Non-Predictions.

For instance, creative writing, arts instruction, and other “soft skills” are not always as amenable to rule-based software or distance learning. We concur with Rhode Island School of Design president John Maeda’s vision that a move from STEM (Science, Technology, Engineering, and Mathematics) to STEAM (adding Arts to the mix) is the right vision for boosting innovation. The technology and systems for education have to be compatible with that vision. In particular, softer skills like leadership, team building, and creativity will be increasingly important. They are the areas least likely to be automated and most in demand in a dynamic, entrepreneurial economy. Conversely, college graduates who seek the traditional type of job, where someone else tells them what to do each day, will find themselves increasingly in competition with machines, which excel at following detailed instructions." - Race Against the Machine 

Decouple benefits from jobs to increase flexibility and dynamism. Tying health care and other mandated benefits to jobs makes it harder for people to move to new jobs or to quit and start new businesses. For instance, many a potential entrepreneur has been blocked by the need to maintain health insurance. Denmark and the Netherlands have led the way here. - Race Against the Machine 

Eliminate or reduce the massive home mortgage subsidy. This costs over $130 billion per year, which would do much more for growth if allocated to research or education. While home ownership has many laudable benefits, it likely reduces labor mobility and economic flexibility, which conflicts with the economy’s increased need for flexibility. - Race Against the Machine 

Take these two trends (Diminishing Consumption, Diminishing Labor in Production) to their extreme. We are in the year 2025. Because of advances in production technology, much of the path from extracting the required renewable resources through to the production and distribution of most of the items we demand can be accomplished with automated methods overseen by a small cadre of engineers.... The main items we demand, beyond food, clothing and shelter, are the nth generation game systems.... The entertainment industry has disappeared; it is all free, operated with the same open-source ethos that spelled doom for most commercial software enterprises over the past decade. Which also means no more advertising. We pretty much know what we want to buy, and depend on those in our FriendWeb™ (version 4.6) to guide us....If you look hour by hour at what anyone is doing, it is hard to differentiate the super rich from those a few rungs above subsistence level....If you look hour by hour at what anyone is doing, it is hard to differentiate the super rich from those a few rungs above subsistence level....