Gas on the fire

That's what it is.

Macro Man covers his ESU7 short at 1501 and buys another €20 million at 1.3925 spot basis.

Let the good times roll.......hangovers are for suckers, worriers, and the sad bastards who don 't live under the warm embrace of friendly central banks.

Damn the torpedoes, full speed ahead!
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Anonymous
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September 18, 2007 at 7:58 PM ×

MM,

I'm curious as to why you chose to punt on ESU7 rather than ESZ7 when most of the liquidity is already on the Z contract.

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Corey
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September 18, 2007 at 8:03 PM ×

I'm upping my mid-October target on gold to $850 at which point I'll be taking profits. I think this up move will take four more weeks, so time and price will dictate the final price peak... i.e. if gold hits $850 next week, I'd up my target b/c time has a ways to go.

I've been basing my trading around the fed sticking at 5.25% with a sell-off in assets as being buyable. I don't see any dip happening now, and I see a whole lot of chasing.

Good luck!

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Macro Man
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September 18, 2007 at 8:15 PM ×

Anonymous, the SPX futures play was always intended to have a finite lifespan, i.e. this Fed meeting. The trade was established on the expectation that the FEd would disappoint if prices were up here, and I expected to ride the sell-off and accept my cash settlement. Given that the view has proven to be spectacularly wrong, I am happy to be out of the whole thing altogether and not wear another three and a bit days' worth of potential price rises.

Corey, I've been looking at gold as well. What's constrained me fropmm adding futures/bullion is simply the resistance at 729/730, which held twice in 1980. Once that goes, it looks like plain sailing til your price target, and I'd expect to hop on board in more meaningful style.

Weak dollar + abundant liquidty = higher gold, as far as I can make out.

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Mickson
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September 18, 2007 at 8:23 PM ×

Maybe I have been hard-wired to be contrarian. I love the fact that you guys are throwing in the bearish towel. Me says sell some more E-mini's, any buyers???

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"Cassandra"
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September 18, 2007 at 8:26 PM ×

Who woulda' thought that liquidity was analgous to a light switch rather than a garden hose?

OK maybe its a garden hose and Jul-Aug just saw it "kinked" there temporarily stopping flow, and building pressure, before unleashing it all again (in teh face of shorts peering into the hose, no less!)

At this rate, the Fed will have to decisively undo the decisive undoing of its decisive actions leaving us back where we started. It's a good thing the FOMC is not remunerated in "piece rates" by the number of policy moves....

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Macro Man
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September 18, 2007 at 8:36 PM ×

Of course, situation normal is that the withdrawal of emergency liquidity is much more gradual than its provision, thus helping inflate a Montfgolfier-sized bubble. Commodities? The dollar? Come on down! You're the next contestants on The Price is Right (But Will be Even More Right 2 months and 10% From Now)!

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"Cassandra"
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September 18, 2007 at 8:44 PM ×

it is pretty cool that in a nanosecond the FOMC can xfer something north of 100s of billions of dollars from savers to borrowers.

it is no mere coincidence that each capitulation by monetary authorities to the "smartest guys in the world" results in larger and more animated bounces in risky asset markets and more and more yahoos do the trade, comforted by the notion that uncle b is only a phone call away. CHeck out PKX US Equity, or FCX US Equity on the dailies. This time around they managed to get US commerical real esate and GS and the IB's back on the feet (See s15real INDEX GPC" ),

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Macro Man
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September 18, 2007 at 8:52 PM ×

All well and good for the dollar-based investor, of course, but why should the other 95% of the world care? There are plenty of other countries with great stocks which offer a competitive interest rate and a commitment to safeguard the purchasing power of the currency.

I note that Barney Frank is 'surprised' that the Fed even bothered to mention inflation. Tells you everything to know about the pressure BB is likely to face now that he's opened this rather unattractive can of worms.

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"Cassandra"
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September 18, 2007 at 9:40 PM ×

I am on the same page as you visa-vis precious metals and naturally suspicious of gold bug crackpots having worked at the top bullion dealer out of uni. That said, watching the action of risky-asset markets (particularly the equity side of things), the next blow-off in precious metals will be a doozie, and as when THAT happens, it will coincide with slaying of the USD long bond. Gold cannot explode without the bond yields blowing out too, and if it does, it will be short-lived.

I reckon for this to progress, the bond market must puke. I just can;t picture an orderly slide in the USD without mayhem at the long-end. Help me visualize it....

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Macro Man
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September 18, 2007 at 9:51 PM ×

The steepener is the real obvious trade. The only problem at the moment is that 2's on a 3 handle in yield hardly look attractive...

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t
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September 18, 2007 at 10:45 PM ×

"I reckon for this to progress, the bond market must puke. I just can;t picture an orderly slide in the USD without mayhem at the long-end. Help me visualize it...."

Will the CB's stick or twist at the long end if that is the case? Will they continue their stabilising feedback?

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Anonymous
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September 18, 2007 at 11:05 PM ×

MM,

Regarding gold, it may be crowded with leveraged players from what I can gather. The price action during the August market turmoil certainly suggests some deleveraging by market participants. Thus in a crisis situation, the price action might be the exact opposite of what doom mongering gold bugs expect. As an inflation trade it'll probably do fine, but I think there are better assets out there to buy. What are your thoughts?

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September 19, 2007 at 2:13 AM ×

There's only one difference between gold and all the other risky assets in the world: gold is a stable monetary standard. It can absorb all the monetary demand in the world.

Or at least it once could, and there is no particular physical reason to think it couldn't again. Certainly the ratio between the price of gold at present and the price of gold under a full-reserve commodity standard is much lower than for any other good.

Although this transition is politically very unlikely, especially in the near term, it changes the financial game theory of the bubble.

Because a bubble in any other good has to pop. What goes up must come down. Housing, stocks, wheat, bizarre synthetic securities, all are behaving like little baby monetary systems trying desperately to be born, as the exchange rate between them and currencies floats moonward.

In the end, however, there can be only one. And it probably won't be palladium, even though you could build a perfectly fine monetary system on palladium, or cobalt, or anything that doesn't decay in storage and is subject to diminishing returns on mining costs. It's a pretty straightforward case of multiple equilibria.

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September 19, 2007 at 2:30 AM ×

Mayhem at the long end strikes me as unlikely, because so much of the dollar's support is at the long end.

As long as the dollar keeps wanting to fall, exporters will keep wanting to prop it up, and will thus compel their central banks to continue their export subsidy scheme, which generates dollars as a byproduct. The latter will be lent long because central banks have no time preference at all.

And, because this feedback loop is a product of political power rather than technocratic policy (since it is obviously such bad policy), the only changes that can break it are political changes. It starts to get tricky when the dollar is falling apart so fast that the exporting nations experience blatant symptoms of rampant monetary dilution, but there is certainly plenty of room for moderate yuan appreciation without China totally cutting off the dollar's crack supply.

The Fed tried a little experiment in which they thought they'd hold the dollar up at the short end as well. It was certainly an interesting experiment. Unfortunately, the results were negative and the trial has apparently been cancelled.

I simply don't see anything coming down the pipe that could conceivably persuade the reserve accumulators to change their ways. Reserve diversification is a red herring - the problem is the pegs. If they try to sell their dollars, the CBs just have to make up for it by buying more dollars. And the fact that they prefer long over short strikes me as unlikely to change, especially since flat and inverted yield curves seem like they'll be a footnote of history once again.

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Macro Man
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September 19, 2007 at 1:19 PM ×

Mr. Moldbug...I'd argue that what's likely to be differnt about nthe future than the recent past is that a) China, at the very least, will become more price sensitive, via the channelling of reserves to CIC. I think they're unlikely to follow the "buy the highest-yielding point on the curve" stategy with the same vigour as in 2003-2007 b) inflation is becoming a real problem in China and Russia, partially as a consequence of the over-easy currency policy. While I doubt the pegs will be abandoned or significantly modified any time soon, I would expect the pace of the crawl to appreciate..and thus the pace of FX reserve accumulation to decline.

Finally, per today's post, concerns over inflation might actually revive, Lazarus-like, that heretofore extinct species knows as a 'term premium.'

So while it may not be mayhem, 1994-style, I suspect that a steepening still remains on the cards.

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September 19, 2007 at 9:17 PM ×

I certainly agree with (b). As for (a), it depends on a lot. From the standpoint of financial signaling it is ideal for sovereign "investors" to only buy T-bills, as this keeps their non-market incentives from contaminating risk signals.

I'd be slightly wary of assuming that "inflation" in the CPI sense of the word has anything to do with the yield curve. It's certainly not obvious how the price of bubblegum affects the supply or demand for future money, and to the extent that there is causality much of it is probably through the political mechanism.

It's certainly an error to assert, as many often do, that savers "demand compensation" for "inflation." Savers will always prefer a higher rate to a lower. Monetary dilution tends to be associated with higher rates because it makes entrepreneurs more profitable, at least in "nominal" terms, and thus allows them to offer more future money in exchange for the same amount of present money.

But, frankly, this is all academic. In a modern, 21st-century economy, interest rates are set by the government. Orwell said that when he looked at the future, he saw a boot stamping on a human face - forever. When I look at the future I see Angelo Mozilo being bailed out - forever.

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Macro Man
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September 20, 2007 at 6:40 PM ×

a) remains to be seen, of course, but my contacts suggests that CIC at least has no intention of lending money to the US government at off-market rates to nearly the same degree as SAFE.

I am beginning to wonder if the dual mandate isn't at the root of the problem. In stead of having the sole mandate to protect the purchasing power of the dollar, the full employment aspect of the mandate is, by its very nature, dilutive.

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September 20, 2007 at 6:53 PM ×

I will defer to your contacts - knowing always beats guessing.

As for the dual mandate: yes. Actually, if you believe the Austrians (which I mostly do), the whole idea of stabilizing the "purchasing power" of the dollar is inherently both procyclical and dilutive. It causes the problems it claims to be solving. It's the financial equivalent of therapeutic phlebotomy.

But it's not going away any time soon...

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