Friday, April 27, 2007

In Curb Your Enthusiasm, Larry David often finds himself in trouble when he shrugs his shoulders and makes a noncomital noise when asked his opinion on something. Were he a finanical market economist, Macro Man suspects that he'd be making that noise in response to the GDP figs.

Spending was strong, but everything else was pretty tepid. The only real notable feature of the data was the high print on the deflator, which registered 4.0% q/q saar, the highest reading since the original George Bush was in the White House. The core PCE delfator was up 2.2%.

While bonds have taken their cues from the price data, this may be something of a headfake. Energy was the prime contributor to price gains, and the government deflator was 5.9%- recalling memories of the $500 wrenches purchased by the military during the Reagan years. However, bootstrapping the core PCE data suggests that the y/y rate for March (released on Monday) will be 2.1%- lower than expected and close to the Fed's comfort zone. Macro Man will therefore sit tight with his long bond position, though he may look to pitch it in the mid 108's.

UPDATE: So blah was this report, and inded the aftermath, that Macro Man neglected that your all time-high in EUR/USD is now 1.3684. The silence, however, is deafening. The slow-motion crash continues apace....

Posted by Macro Man at 2:07 PM  


CB market activity that you've highlighted (and that I've decried) so many times, which is the major contributory factor to the slow-motion effect, ohhh-so-reminds me of the MoFs equity market PKOs (price-keeping operations) throughout much of the 1990s .

Diddle they did, with the index measures not going down for the count until a decade-or-so after (though the real bear-market for the average security ended Q2 2000). Yet most objective foreign particpants, especially those studied in markets knew intuitively it was wrong, and would end eventually, inevitably with said financial instruments diminishing in value. So convinced were some that it typically comprised a lion's share of the fundamental short equityh exposure for the better part of a decade (and I am thinking of Robertson's Tiger Fund).

There were many tactical opps along the way, to be sure, but subconciously one knew that entropy would drag things lower. The PKO intervention to the contrary would generate a difficult to characterize unsettled feeling - the kind of annoying immune response one gets while cooking a low-grade infection or like that following a vaccine - and was constant feature to Japan in the nineties. For one simply didn't know for how long they would keep pissing in the wind, throwing good money after bad, in a vain attempt to change the objective reality which was NO ONE WANTED TO BUY THESE ASSETS AT THE PREVAILING PRICES AND THE VALUES THOSE PRICES IMPLIED.

Maybe this too will play out over years. But if there is one thing the comparison between the US handling of their thrift S&L crises vs. Japan's decade long twiddling over their own banking errr implosion, it is that generalized welfare is increased when systemic break-downs are dealt with stoically, boldly and forthrightly. This belief is extrapolated from the small sample sets we have sprinkled with my own Schumpetarian biases that believe more rapid adjustment is superior - both politically and economically.

"Cassandra" said...
3:35 PM  

I'd concur with just about everything you say here. I would add that the relative success of the MOF in USD/JPY PKO provides an excellent example that it is generally more possible to keep something artificially weak than artifically strong.

As an aside, one idea I am playing with is the notion that the US-China currency and monetary union, as Mr. Setser calls it, is being impacted by a conflict over which CB "wears the trousers."

The HKMA has been happy to defer monetary policy to the Fed. PBOC, on the other hand, has responded to the Fed tightening campaign by selling oodles of (USD + CNY) and buying oodles of non USD + CNY, while at the same time buying an absolute shedload of US debt. In many ways, China and Gulf related financial flows prevented US financial conditions from ever tightening, which has helped land us in the situation we'e in now...

Macro Man said...
3:49 PM  

japanee ccy mkt PKO efficacy is enhanced by, perhaps even predicated-upon, ZIRP & nearZIRP. And so long as one cares nothing about global spillover consequences, then the package is also sustainable for a reasonably long least until burning effigies of BoJ Gov Fukui emerge on the floor of the US House of Represenatives.

I sympathize that it's not Japan's fault that there is a glaring loophole in the operational details of our open Int. Monetary System that's being exploited for parochial benefit (both by Japan & leveraged specs). Historically, the mere threat of being put in "time-out" by authorities was sufficient to cause to punters and risk-managers to keep risk in earthly proportion. However both japanese authorities and The Market correctly sense that America's "Triffin Dilemma" is SO BIG and intractable, neither the Fed nor Congress wouldn dare to cause it to tip one way or the other by its own accord.

And that is the real shame: it in fact IS so large, and yet while 2nd bit players are doing their share (increasing USD holdings against their will, stoking their own domestic econs) the three with the keys (US CHina Japan) are frozen like a deer in the head-lights as the truck appoaches...

"Cassandra" said...
6:20 PM  

But if there is one thing the comparison between the US handling of their thrift S&L crises vs. Japan's decade long twiddling over their own banking errr implosion, it is that generalized welfare is increased when systemic break-downs are dealt with stoically, boldly and forthrightly. This belief is extrapolated from the small sample sets we have sprinkled with my own Schumpetarian biases that believe more rapid adjustment is superior - both politically and economically.

Russians burying their past and Boris Yeltsin quite vehemently disagree.

Tsar Putin has a rather high approval rating at home.

And the empirical evidence seems quit against the success of "shock therapies" administered by IMF and its ideological compatriots for 25 years.

Of course Japan has a sufficiently stable culture and system that financial liberalization would have been beneficial.

Let's not extend the lesson of that example excessively broadly.

Anonymous said...
10:27 PM  

I do agree with you to the letter though I think you inferred systemic to mean SYSTEMIC, when really the example and my point was referring (e.g.S&Ls) to sub-systems. "Revolutions" do have a rather poor record of late, for numerous reasons, and I eschew them under most circumstance for enlightened incrementalism, though its seems the "enlightened" is in short supply on the western shores of the Atlantic.

"Cassandra" said...
12:14 AM  

I think the point is that "systemic" crises are best dealt with promptly within the construct of the system.

Dealing with crisis by throwing an entirely new system at it (the essence of much of the Jeff Sachs-style shock therapy) has a less successful track record.

As an aside, the enduring and deep popularity of erstwhile comrade Putin reminds me of the fermented bean concoction so popular in Japan (and pictured on Cassandra's own blog recently): it's easy for an outsider to understand that it is popular, but difficult to grasp why.

Macro Man said...
9:50 AM  

Frirst New Zealand and then Mexico raise rates last week. New Zealand was expected but Mexico was clearly a big surprise. Could the U.S. do the same to cut out inflation before it has to begin cutting due to a slow down in the economy ??

Banker said...
1:08 PM  

On shock terapies and systematic crisis in Soviet Union:

We had a systematic crisis indeed, but it had to be cured by reforms, not shocks.

It's the basic law how complex system work - if you take one and destroy it, there will be collaps, havok and in aftermath the old system will reconstruct itself, but on lower level.

That's that we have in Russia - the unique mix on Tzarism, Soviet Union and a bit of western democracy on facade.

And it is now wonder Putin has high ratings - under him the counry saw less disorder, improved standarts of living, higher incomes, etc. People just do not care if it was for oil price or Putin himself.

And they saw only economic collapse, death of millons, poverty after shock therapies.

That's it and really i do not se how it is difficult to understand.

Anonymous said...
8:29 AM  

Fair enough. I think it's difficult for those of us who have never visited Russia to appreciate the degree to which the rule of law may have improved under Putin.

Most of the stories that one encounters still call to mind the Wild West, with plenty of shootouts, etc. Epsiodes like the recent plutonium incident in London and the banning of the Hermitage guy from Russia add to that impression.

I think there's also an implicit assumtpion that the benefits of the oil boom have been relatively concentrated amongst the Abramovitches, etc.

Clearly, though, if the average Russian feels safer and wealthier, Putin's popularity becomes easier to understand.

Banker, I think if the Fed tried to put up rates in the face of the housing market and below-trend growth, the outcry would prove to be very substantial indeed. Bernanke may well feel contrained by the old Keynesian maxim that it is better to fail (to control inflation) conventionally (by not tightening into a housing market downdraft) than to succeed unconventionally (by accepting the medicine of a rescession.)

Macro Man said...
9:45 AM  

MacroMan, not wanting to sound too much like the unwanted by often accurate Amazon recommender of similar books "others like you" have bought recently, I do think you might enjoy "Absurdistan" , by Gary Shteyngart ostensibly about the son of the erstwhile 1283rd richest man in Russia's personal crisis, but really about post-Gorbachev Russia, Oligarchs, the best & worst of America and the sad humour and churlishness of her politcal escapades.

It's not high literature, but it is well-crafted, with a lot say, a great read - especially for those that grew-up during Brezhnev, know their history, were old enough to realize the monumental nature of the dismantling of of the wall, and sufficiently adventuresome to want to go and see it firsthand as soon as they would let us....

"Cassandra" said...
12:55 PM  

Thanks Cassandra, I'll check it out. Ironically, given your lead-in, Amazon doesn't sell it direct...

Macro Man said...
1:17 PM  

Perhaps it is being censored. Like Russia today, it IS a bit raw...raw like Hunter Thompson Tangoing in Paris meeting Texas Chainsaw massacre, but not pornographic raw.

"Cassandra" said...
1:27 PM  

Well, it's ordered from We'll see if it ever arrives. From what you've said of it, it sounds like you might like another account of post-Soviet Russia, albeit of an earlier vintage: Let's Put the Future Behind Us, by Jack Womack. It's been years since I've read it, but I remember enjoying it enough to buy everything else written by the author....

Macro Man said...
1:32 PM  

What a phenomenal pseudonym...."Jack Womack". Think how many more books Elmore Leonard would have sold with a name like THAT!

"Cassandra" said...
9:12 PM  

I believe it's his real name. Part of the problem of riding under a nom de plume is that one assumes everyone else does, too.

"Random Acts of Senseless Violence" was one of the more disturbing books that I've read- kind of a violent, dystopian 'Flowers for Algernon'.

Macro Man said...
9:53 PM  

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