Nine things I just don't understand

Every so often, Macro Man is accused (often by friends and family) of being a know-it-all. As regular readers will have no doubt deduced, he does tend to have strongly-held opinions, and is often less than subtle in his manner of expressing them. But one thing that he takes special care to avoid is overconfidence, and a willingness to admit that he does not know something has saved him from loss and embarrassment on a number of occasions.

As Macro Man scans the world around him, he sees plenty of cause for confusion and head-scratching. Among the things that he does not understand are the following:

1) What, if anything, is the C&I loan data saying? Amidst the "worst crisis in 25 years", commercial and industrial loan growth has soared. Some of this no doubt represents a substitution effect (i.e, bank borrowing rather than CP or bond issuance), but the very fact that banks have been willing to lend suggests the fears of a financial system implosion were overstated. Indeed, current y/y C&I loan growth is the highest in-you guessed it-25 years.

Given the braodly cyclical nature of loan growth, that would appear to suggest that the US economy is as far from recession as you could get. Yet the indicator appears to be a lagging one; in the last economic downturn, for example, loan growth didn't turn negative until July 2001. So is the C&I telling us about the cycle, liquidity, or just the substitution of bank borrowing for issuance?
2) In the aftermath of the first bank run since the 19th century, how can the UK Government be so popular? Regardless of where one sits on the political spectrum, it is hard to escape the notion that the Northern Rock fiasco could have been handled better. Normally, scenes of lengthy queues outside of banks would spell disaster for the current government. Yet Labour, led by the heretofore intensely uncharismatic Gordon Brown has, if anything, seen its approvals ratings rise, to the degree that Gordo is contemplating an early election. How has this happened?

3) How has the Ireland rugby team become so bad, so quickly?

4) Why, on the day that Goldman Sachs reported blow-out earnings ($6.13 versus $4.35 expected) and Bear Stearns reported awful earnings ($1.16 versus $1.71 expected) did GS stock fall $1.97 while Bear stock only declined by 18 cents?

5) What are GCC countries waiting for? Kuwait has revalued the dinar by another negligble amount this morning, yet other Gulf countries have remained steadfast in their dollar pegs. What are they waiting for before they float/revalue? The current policy regime is pretty clearly highly suboptimal, and as things now stand the macroeconomic impact is only going to get worse. With oil at 80 bucks, it's not exactly like the Gulf countries are going to run out of cash any time soon, so why wait? Is it because they wish to avoid speculation on their domestic currencies?

If so, the permit Macro Man a derisory snort, given that Middle Eastern institutions are among the more predatory speculators in the G4 currency markets.

6) Why are short-dated inflation breakevens in the US so low? In case you hadn't noticed, commodity prices are en fuego recently. And these tend to be the primary driver of changes in headline CPI. The weak dollar has attracted a bit of attention as well., and we know that China is no longer exporting deflation. So why are short-term breakevens (proxied below by the 1 year inflation swap) near their lows of the last six months?

7) Why, when Macro Man's normal morning train has been cancelled, do the railway workers not announce this until the following train (which offers an indirect service into London) has come and gone, thereby stranding passengers for half an hour? Is it really that difficult to tell us in time to catch the next train?
8) How weak for how long does European data need to be before we start to see "re-coupling" research emerge? H1 growth rates in the US and Euroland were virtually identical. Business sentiment in both regions has seen a similar decline in H2. Japanese growth remains unimpressive, to say the least. US leading indicators are stronger than in either Europe or Japan. At what point do markets begin to focus on G3 cyclical convergence, and what are the implications?
9) What sort of blog post prompts a strong reader response? Macro Man has been writing in this space for a little more than a year now, which he finds difficult to believe. His primary objective for the blog was and remains a forum for organizing his thoughts, trying out new strategies, and improving his performance in his "real job." But he's been pleased to see his readership grow, and come to value the interactions in the comments section with fellow bloggers and market participants.
One thing that he cannot figure out, however, is what sort of post prompts readers into commenting. Sometimes, he'll dash off a random thought and find that it generates quite a bit of discussion. Other times, he'll write something that he finds particularly thought-provoking or amusing, only to find little reaction.
Perhaps it shouldn't come as a total surprise; after all, many readers are fellow participants in financial markets, and those aren't always easy to anticipate either...
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V&A
admin
September 25, 2007 at 11:13 AM ×

The lack of comments means we agree with you :)

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September 25, 2007 at 12:00 PM ×

I was waiting for you to mention the poll again. It was a contrarian's dream signal, doncha think? And yes, your comments section's been a little thin since mid-August. Perhaps your fans thought that lolling about on the beach while the roof caved in back home was, well, unexpected.

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Agustin
admin
September 25, 2007 at 12:32 PM ×

Macro Man.You Ain't Seen Nothing yet. I predict that Argentina will beat Ireland by 15 points or more on Sunday.

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Macro Man
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September 25, 2007 at 12:48 PM ×

CB, I tried to touch on the poll yesterday when referring to the lambda and W scenarios as extinct. Perhaps the allusion to Linear B was a tad too obscure. In any event, the combination of a nonfunctioning laptop and, fortunately enough, stellar real world returns in early August conspired to ensure both the lack of posts and the lack of urgency in hastening back to the office.

Agustin, I think your prediction might flatter Ireland on current form.

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Anonymous
admin
September 25, 2007 at 1:56 PM ×

As part of my lame lifestyle, I try to keep track of comments as a measure of hits. I find that there is about a 1%-3% comment ratio vs. the number of views of a message on most message boards. Do you fall in this range?

Big John

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tmcgee
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September 25, 2007 at 1:56 PM ×

for what it's worth, i voted for 'v', contratrian and optimist at heart that i am. and believing that the troubles were more of a financial intermediation problem that could be sorted out without too much distress, while impressive. and some of that is happening. on C&I, i wonder how it's measured. obviously there was some switching to loans from CP and bonds. but then again, US high-grade bond issuance was pretty robust in august. maybe some of the conduit backstops being triggered feeds its way into C&I? it's hard to imagine that lending as voluntary in times like these.

where does that 25 year comparison come from? our internal one has been 20 years, or AT LEAST 20 years. but mine is an industry that reaches for hyperbole when it's least helpful, not that it ever is...

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Macro Man
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September 25, 2007 at 2:07 PM ×

Big John, yeah, I am within that range for most posts. I suppose the point I am making is that I have no idea whether it will be 3% (occasionally a bit more) or 1% (rarely, a bit less) based on the subject of the post.

Tim, I was a W man, as you know, based on a now-demonstrated-as-faulty reading of the tactical trading landscape. The 25-year comment was thrown out by someone, I think a guy at Bear Stearns, on a conference call a few weeks ago. I've seen in repeated in a few quarters since.

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Anonymous
admin
September 25, 2007 at 2:33 PM ×

MM,

Your posts are always a welcome read in the morning before the New York open. I'm sure if you check your web view log, I'm not the only religious reader of this blog.

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Macro Man
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September 25, 2007 at 2:41 PM ×

Oh yes, the readership is quite steady, by and large. It's the comments that tend to fluctuate. I'm more than flattered by the number of hits this site gets, so this post was not a "nobody loves me" lament- far from it. The last item was merely an observation on the unpredictability of the exercise...

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Alejandro
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September 25, 2007 at 2:42 PM ×

MM, I read you every day, keep the good work, it is helpful!
Btw, Pumas will destroy the Irish and bring Scotland on baby!! It is pretty amazing that a country like Argentina has a chance to get to the semis, isn't it?

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Macro Man
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September 25, 2007 at 2:51 PM ×

Yeah, the Pumas have been excellent this tournament. Frankly, it would be good for the game if Argentina and Tonga were to go through (and it would be highly amusing to read the flagellation of the England team in the UK press should they fail to progress through the group stage.)

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OldVet
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September 25, 2007 at 4:00 PM ×

On C&I activity, note that stock buybacks have been massive in recent years, so stock issuance is less likely as a means to get working capital. Bond issuance with rates rising in the mid/long term is also more expensive than it was. Banks however, looking for a substitute for mortgage and mortgage related lending, may be ripe for corporate lending. Corporations have strong earnings, unlike US consumers, and cash balances on their books. Make sense? It's speculation on my part.

What is driving me crazy is this: is the carry trade on or off? It seems to change every week, marking JPY against EM stock indexes. I've done fine with SFR, but the underlying question remains. Thanks for your posts, by the way, I'm a regular visitor.

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Macro Man
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September 25, 2007 at 4:13 PM ×

OldVet, I think the carry trade is performing within the realm of expectation, just about- namely that the returns may be positive, but the risk-adjusted return will be a helluva lot lower than has been the case for the past few years.

To me, the big currency trade has morphed away from pure carry, per se, and towards more pure dollar weakness. Who needs to screw around with AUD/CHF if the USD is gonna take it on the nose?

And thank you for weighing in with the occasional observation/insight.

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Anonymous
admin
September 25, 2007 at 5:24 PM ×

fab blog. Always read it even though I never post comments - 'til now anyway.

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Ben Chua
admin
September 25, 2007 at 6:12 PM ×

I have to confess that I voted for W as well - an indicator perhaps of a propensity to be pessimistic. In any event it appears that I totally misjudged the situation. Fortunately I was aware (given the many precedents) of the limitations in my predictive powers and was somewhat prepared for an alternative more positive scenario.

Incidentally, I am afraid that your blog constitutes part of my daily reading diet - interruptions in service (beach vacations) could lead one to gorge on less than satisfying press reporting! And yes, I do wonder what determines the quantity and quality of reader comments. And is it always between 1% to 3% of page views for all bloggers.

What is the response rate for Brad Setser's blog? Any idea?

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T
admin
September 25, 2007 at 6:16 PM ×

I try not to comment unless I have something vaguely enlightening to say or to ask a question (though I do break this rule, eg now). If other readers are like me, the consequence is less comments on the 'deeper' or more difficult/interesting posts. Whereas we have lots of comments on the rugby, where everyone has an opinion.
I suppose this could mean the more interesting a post, the less comments are drawn.

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CV
admin
September 25, 2007 at 6:36 PM ×

Hi Macro Man,

Sorry to hear that you got stranded at the train terminal today.

As far as the questions go I only have something useful to say about number 8 I think.

In short, did we ever actually get to de-couple? I mean, it certainly does not look like it to me. This whole idea of de-coupling and re-balancing is a bit weird in my opinion. Clearly, the global economy has seen a re-shuffled of the cards in the sense that there are now other trains pulling forward the global economy than the US (e.g. China, Brazil, Turkey, and India); of course China's future pretty much shores up in the US (and vice versa of course) which suggests that the US economy still offers a pretty good yardstick for assessing the state of the global economy. But please ... Europe and Japan?! When did they ever de-couple? I think that people have a very short memory here since it has only been 1 1/2 years since Japan ended ZIRP and this was sort of the time when all seemed to agree that now was the time to mop up all that excess liquidity. Now, as we might remember this ended in Q3 06 as far as the US goes (it really didn't ever begin in Japan did it?) and only in Europe did Trichet stay on the high horse! Then we got Q4 2006 of course which saw almost incredible growth rates in Europe and Japan which then brought out all the 'de-couplers' ... but since then as they say, the rest is history.

As such, I don't buy de-coupling one bit and in many ways the world has never been so tightly coupled as it is now. Of course, the current EUR/USD debacle is a very real test on this which also means that I am waiting for Trichet to come out of that ivory tower any day now, and of course if he does not; watch Italy!

Also and this is the very final niggle why don't we also look at the data for a bit in terms of the Eurozone. The c/a balance is virtually neutral but more importantly the trade balance is POSITIVE. I know that EU27 is running an external deficit but then what is the difference between the Eurozone and EU27 ... well UK is one but then you also have Eastern Europe and the Baltics and how sustainable is growth here again?

Ok, rant over. What I am trying to say I think is that I can see (as everybody else really) that something seems to be changing now but I just don't see how the process can continue without it having some pretty serious consequences for key parts of Europe and of course Japan where I am fairly certain that any sustained bet on the Yen would see the BOJ back into ZIRP or other drastic measures. In fact, I am pretty sure at this point that many countries Eastern Europe are set for a hard landing and then you need to factor in German's relative export dependency on this region. In short, the fundamentals just do not support de-coupling at this point, at least not seen from my desk but then again there are an awful lot of desks out there.

As regards to actually research on de/re-coupling I had a note up on Global.Economy.Matters a while back on de-coupling

http://globaleconomydoesmatter.blogspot.com/2007/04/deciffering-de-coupling-change-in.html

Not in particular my emphasis on demographics as an explanatory variable.

Keep up the good work

best wishes

Claus

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Macro Man
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September 25, 2007 at 6:49 PM ×

Thanks for the insights guys. I have to confess that I hadn't really thought about comment/view ratios before, though I suppose that some constant range across sites makes some sense.

To be clear, I am not complaining about the comments section of this site; while I enjoy the interaction and find it useful, I am especially grateful that the tone is generally both intelligent and civil.

I'd much rather keep that 'vibe' than have more but lower quality (e.g., troll-like) comments.

It's really just my singular inability to anticipate what will provoke a response that I was commenting on; maybe the film-makers really didn't know that bombs like Ishtar and Waterworld were going to fail until they were released...

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Macro Man
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September 25, 2007 at 6:57 PM ×

Claus- exactly. Good points. Though these days it's not easy to dismiss the Eurozone's trade deficit with the UK..if memory serves, it's now running at roughly the equivalent of $10bio/mon th, which ain't exactly chump change...(and which also begs the question of why EUR/GBP isn't 0.75!)

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EEngineer
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September 26, 2007 at 3:47 AM ×

9) Most of your readers are atypical. They tend not to post a reply unless they actually have something insightful and intelligent to say that hasn't already been said. It's a burden that you'll just have to learn to bear...

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JulienG
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September 26, 2007 at 6:17 AM ×

Well i’am European and i can tell it to you there is no de-coupling in sight
Spain is in deep trouble with housing, France and Germany are seriously cooling down.
Maybe USA is poised for a recession but half of Europe is set for a pretty hard landing too.
We’ve lost the soldier private pound pretty early in this subprime battle and the infection is on the road, don’t be fooled by our strong currency the eurozone is weak now.
And the yuan/euro is telling me that china will not let us go.
If there is a kind of decoupling it will be during the next economic rebound, all i see now is just happy three friends playing together.

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