Silly season

OK, so here's what we've ahd this morning:

* A story that the Massachussetts DA, William Galvin, is going after UBS and Bear Stearns over subprime lending and the banks' relatoinship with hedge funds. Pardon Macro Man's cynicism in a post-Spitzer world, but doesn't this look like an electioneering politico trying to lump as many negative-touchstone elements together as possible? Hedge funds! Investment banks! Subprime lending! I'm the guy that sorted it out!

In Macro Man's opinion, this is one of the biggest challenges facing US financial markets at the moment: as soon as somebody loses money, the lawsuits fly. What happened to the culture of individual responsibility? Perhaps instead of attacking AIM and other markets, US worthies should ask themselves why they are losing listings abroad? Macro Man suspects that the absence of potential lawsuits would figure fairly prominently on the list.

* A widely circulated story that Citigroup will need to raise its provisioning for subprime losses rom $300 million to $5.7 billion, a cheeky nineteen fold increase

* A widely circulated rebattal, with claims that the story was 'fabricated by traders.'

* The realization that Goldman's "stellar" earnings last quarter didn;t include the last three days of February. In case you hadn't heard, asset markets had a tiny wobble in those days. In other words, the Goldman results were pretty meaningless. Macro Man wishes he could report his results in the same way...if he strips out his two worst real-world trading days, for example, his since-inception Sharpe ratio goes from 0.7 to 1.0! Lehman's results have come out bang in line...no word yet if there's been any 'selective disclosure.'

So how are we left? With the inclination to sell risky assets on rallies. Somewhat perversely, today's US current account data, showing a sharp improvement in Q4, is being taken as a signal to buy risky assets so far. If the US is buying less stuff from the rest of the world, how exactly is that positive for risk assets? And if we take the current account improvement at face value, why should the dollar need to go down at all?
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OldVet
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March 14, 2007 at 3:36 PM ×

Silly indeed, and I'm sitting around scheming about doing some more Shorts today down here in Tennessee, with plenty of time on my hands. To keep things moving my way, I email the Fed Governors from time to time to tell them what to do, namely shut up and stay out of the way of what has to happen to sober up America. You can too at:

http://www.federalreserve.gov/feedback.cfm

Irresponsible borrowing, irresponsible lending, and tightening credit standards = CRUNCH. It's about time. The next irresponsible thing that will probably happen is that Fed Governors, sobbing en masse like a Greek chorus, will declare their loyalty to "the people" and Congress will join them. They will either create more money to prop up consumption or subsidize the lenders in a bailout, as usual. I just hope the stock market tanks enough to remove that inflated prop from excessive consumption - which appears to have been the plan (via Paulson) all along.

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Anonymous
admin
March 14, 2007 at 9:18 PM ×

"... If the US is buying less stuff from the rest of the world, how exactly is that positive for risk assets? And if we take the current account improvement at face value, why should the dollar need to go down at all? "

As to the dollar you answered your own question:

"So how are we left? With the inclination to sell risky assets on rallies. "

If risky assets in the U.S. are sold by foreigners because of expectations of a significantly weakened economy (implied by the improving current account deficit) then the dollar should drop. Don't you think?

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Macro Man
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March 14, 2007 at 10:06 PM ×

A substantial portion of the US current account is funded by people who don't sell, i.e Voldemort and the other FX reserve managers.

Meanwhile, Mr. and Mrs. Joe Sixpack bought something like $200 billion of foreign equity last year.

And most global equity managers running an MSCI-type benchmark are underweight the US and overweight other, higher beta markets. If and as private-sector investment positions globally move closer to flat in times of risk aversion, I'd expect the dollar to appreciate.

It's one of the reasons the dollar went up in 2001, 1991, etc.

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