Monday, June 18, 2007
The world seems like such a happy place this morning that Macro Man is suffering from a severe lack of inspiration. Friday's data was, in the context of the way in which markets choose to view the world these days, about as Goldilocks as it gets. Core CPI and capacity utilization data where lower than expected, thus reducing the perceived threat of inflation, while the Empire manufacturing and TIC data were strong. What's not to like?
Certainly asset markets could find very little, as everything from the Turkish lira to JGBs have put in a nice rally since 8:30.01 EDT on Friday. Even more RBNZ intervention, a potential risk to the FX carry trade, was viewed as offering the kiwi dollar on sale, rather than a threat to the profitability of existing positions. A test of the RBNZ's will, via a market attempt to push the NZD higher, seems likely.
So, Macro Man finds himself in an unusal spot. His P/L is up very nicely indeed this month; even the table below understates it, as the SPY and XHB positions went ex-div on Friday. The combined future dividend flow represents another $300k or so of profit, which would take his YTD P/L up above 10%. The vast bulk of his short equity exposure rolled off on Friday, so his long exposure to equities has gone up substantially. He can find little reason to worry at the moment, and doesn't feel particularly inclined to re-establish equity shorts in the alpha portfolio. In other words, he feels fat, contented, and complacent.
And that's bad.
While there's not much utility in worrying for the sake of worrying, it's still important to be prepared for any negative developments in the pipeline. While there's no obvious catalyst that could take bond yields up and through the highs, there wasn't much of a catalyst that got them there in the first place.
So while Macro Man lacks the inspiration to dissect Friday's data (those interested in the TIC and current account data, both of which suggest a reduced imminent threat from external imbalances, should visit Brad Setser's blog), and fails to see any speedbumps on the horizon, he's less happy than he ought to be. It's harder to deal with a "crisis" that you cannot foresee.
For a natural worrier like Macro Man, this market is now so good that it's bad.