Amazing scenes

Well, that was an eventful night. No, not the Fed cut and the concomitant risk asset orgy that followed; Macro Man covered that in his last post. Rather, he's referring to some of the things he saw and heard when he went out to party afterwards.

It's a bit of a tradition that after staying late to follow markets during periods of extreme importance, one goes out to paint the town. You know, to decompress, let off some steam, and hopefully celebrate a profitable evening's trading.

So Macro Man and a few buddies made their way to a karaoke bar in Soho, looking for an evening's entertainment of firewater and off-key vocalizing. Imagine our shock and surprise when we got there and found Alistair Darling and Barney Frank knocking back tequila shots and monopolizing the mic! Who knew that those two were such rowdy friends.

In any case, neither one is much of a singer, especially after emptying the better part of a bottle of Cuervo Conmemorativo. Most of their singing was pretty garbled, but Macro Man did manage to understand one Rolling Stones song that they performed. Perhaps due to their consumption of tequila, though, they altered the lyrics. Here's what they were singing:

Under my thumb
The bank that once had me down
Under my thumb
The bank that once pushed me around

It's down to me
The difference in liquidity
Down to me, the change has come
It's under my thumb

Ain't it the truth man?

Under my thumb
The hard-ass bank that's just had its day
Under my thumb
Now they've cut rates and so changed their ways

It's down to me, yes it is
The way it just does what it's told
Down to me, the change has come,
It's under my thumb
Ah, ah say it's alright

Under my thumb
An inflation-fighting man
Under my thumb
I've just made him throw down his hand

It's down to me
The way it cuts when it's spoken to
Down to me, the change has come
It's under my thumb
Ah, money's easy babe
Yeah

It's down to me, oh yeah
The way it cuts when it's spoken to
Down to me, the change has come
It's under my thumb
Yeah it feels alright

Under my thumb
Its views are just kept to itself
Under my thumb
I can make it bail out someone else

It's down to me, oh that's what I said
The way it cuts when it's spoken to
Down to me, the change has come
It's under my thumb

Say, SPUs are up 40 now...

Says it all...
Says it all...

Money's easy babe
Money's easy babe
Feels alright
Keep it, keep it easy babe

As if that wasn't shocking enough, imagine Macro Man's surprise when he encountered the Deputy Governor of one of the regional Feds. This gentleman, kitted out in some rather natty casual threads, seemed rather emotional about the aggressive Fed move.

Macro Man managed to corner him and ask him if the Fed viewed saving the leveraged buyers of crappy credit as the rationale for easing. Did they realize who they were saving via this provision of liquidity? Here's how he responded:



All this is in good fun, of course, but the reality is that the aggressive Fed easing, with a veiled promise for more, ignites the "kick the dollar" scenario that Macro Man has been contemplating. Why buy US financial assets? Other stock markets are cheaper. Other bond markets offer superior real yields and safer credit. Other central banks provide a clearer commitment to protect the puchasing power of the currency.

Global investors largely shunned the US market in July as the recent crisis was beginning to percolate. With CIC coming into existence at the end of this month, what odds that the formerly reliable inflow of capital from China becomes a little more selective? Such is the stuff of dollar shellackings.

What's interesting is that the back end of the US yield curve actually sold off after the rate cut. Part of this may have been due to the placement of curve steepening trades, but some of the rise in yield must surely represent a risk premium against the Fed throwing gas on the inflationary fire. For headline CPI, base effect Nirvana will morph into base effect Hades in Q4, and it is eminently possible that we'll see a 4 handle before the year is out. Negative real yields on two year notes, anyone?

Macro Man finds it very interesting indeed that the Fed has cut rates and eased its inflation concern even as 5y/5y inflation breakevens have shot higher. This measure will probably provide a good barometer of Fed credibility (or lack thereof) moving forwards; a continued rise will be bullish for gold and very, very bad indeed for the dollar.

Unsurprisingly, the FX carry basket was triggered back into existence, sadly after most of the moves have already occurred. These trades were placed this morning. Elsewhere, Macro Man neglected to input the roll on his JGB position; that has now been done.

The collapse in FX vol has kept the portfolio in the red thus far this month, but the overall loss is manageable and there should be plenty of opportunity to make it up as Helicopter Ben's dollars drift down to earth.