20 Questions

Yesterday, the offices of Dr. Market, DDS, did a roaring trade as a good many people got their teeth kicked in. EUR/USD went up, then it went down....in a hurry. Bonds went down, then they went up, then they went down. Stocks went down, then they went up, then they went down, then they went up. Fun for the whole family! Markets are currently feeling a bit bettter after the strong close and the stellar results from Apple. However, would you really be surprised if things turn round again? With this much noise in the market, Macro Man finds it useful to step back and play another round of 20 Questions:

1) How bad will tomorrow's announcement from Merrill Lynch be? So far Macro Man has heard rumours of an $8 billion write-down and a $14 billion write-down.

2) The HKMA is intervening at 7.75. Does anyone really think the HKD peg will go?

3) Is Macro Man the only one who feels like the expected value of any trade in markets like yesterday's is negative?

4) What, exactly, is the US Congress attempting to achieve with this Armenian genocide bill? The alienation of one of America's few Islamic allies?

5) What's next, a bill calling on the EU to apologize for the sack of Constantinople in the Fourth Crusade?

6) Is Macro Man the only guy in London wondering how he is going to reconcile the Fed announcement next Wednesday (and the attention that it merits) with taking his kids trick or treating?

7) What is the SNB trying to achieve by injecting 1 week repos into the market at 2.05% when their policy target is ostensibly 2.75%?

8) Does Macro Man's unpopular constructive risky asset view mean that he has unwillingly joined the ranks of the DOTW?

9) Is the Japanese branch of the Dipbuyers of the World starting to run into trouble?

10) Why is it that no matter how carefully one stows an iPod in one's pocket, the earphones become entangled in a Gordian knot by the time you next want to use them?

11) Is the ECB talking tough so that they don't have to put up rates, or would they really hike with EUR/USD on a 1.40 handle and leading indicators rolling over?

12) How many research pieces will be written next week that have some sort of "trick or treat" theme in the title (referring to the outcome of the October 31 Fed meeting)? Macro Man reckons the over/under for pieces that he personally receives is 4.

13) Now that the Communist Party Congress is over, isn't it about time for China to let the RMB get jiggy?

14) It seems like US curve steepeners are a pretty consensus trade...and yet the pullbacks have been very shallow indeed. Is the rest of the market waiting along side Macro Man for a dip to slap on the steepener?

15) Will the London Olympic committee get taken to a UN human rights tribunal for forcing all visitors to experience the hell on earth that is London public transport?

16) Is there a more depressing moment of the year than when you walk out of the office for the first time after daylight savings "falls back" and see that it's pitch black outside?

17) Why does the "Iris scan booth" at Heathrow airport NEVER EVER WORK?

18) Is oil actually in the midst of a "slow motion" superspike up to $100?

19) Will the New England Patriots lose a game this year? Will the Miami Dolphins win a game this year?

20) How bad would you feel if your boss at Merrill Lynch told you: "We've dropped a load of money this year and there's no bonus pool because we've spent the reserve on muppets." Kids, the wort of the day is 'redundancy.' (Note that Macro Man has kids and is generally supportive of socially munificent corporate behaviour....but his friends at ML are bordering on suicidal.)

Bonus question 21: What's the real story behind the super-SIV?

Bonus question 22: What does Ben Bernanke think of Alan Greenspan? Godfather, sage, or serial reflationist who won't shut the f*&^ up?

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Anonymous
admin
October 23, 2007 at 11:33 AM ×

RE: most of the 20 questions and particularly the last:

http://youtube.com/watch?v=BUu6biubvLs

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Anonymous
admin
October 23, 2007 at 12:12 PM ×

Re: Congress/Turkey/Armenia, it's just the Democrats tossing a banana peel under W's foreign policy, in a way so that if/when there's a problem, W gets blamed and not themselves. It's dastardly or brilliant depending upon you political stance.

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October 23, 2007 at 12:13 PM ×

MM,

4). One marvels at the manner in which the most insignificant interest groups can manage to get stuff on to the political agenda in the U.S. Witness homosexual marriage on the Democrat election platform when the risk to the country (not to mention the party) was the election of George Bush.

8). No problem with the take, but expect it to be very narrowly based with a certain bubbly aspect to it. Equal weighted goes nowhere, in other words.

11). Will the ECB pay attention to the IMF's super-ugly prognosis for Spain (the country that floated the EU for half a decade)? Or will they see it is Rodrigo Rato's parting gift to the opposition PP five months from general elections?

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Macro Man
admin
October 23, 2007 at 12:44 PM ×

Anonymous #1 : I'm not sure I want to know where you found that, but it probably does sum up the feeling at merrill quite nicely

Anonymous #2: Clearly electioneering and pandering to the strangely powerful Armenian lobby (data as yet unavailable on size of Azeri and Abkazh lobbies)....and exemplifying the reason I don't vote: they're ALL arsewipes


CB: Part of the take is that reflation and Voldemort lifts most boats other than the leakiest...which is perhaps the raison d'etre for the pushback

Re: 11, one doubts it. After all, the US has ignored the IMF comment that the buck is overvalued by continuing to stress the desirability of a strong dollar... (yes, that is a joke)

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jdc
admin
October 23, 2007 at 1:01 PM ×

"Clearly electioneering and pandering to the strangely powerful Armenian lobby"

I'm not sure it's that powerful, though they're in the right places. They also have something of a point. The Daily Show's offer to downgrade the larger 20th century atrocity to a Halfocaust in return for German support in the War on Terror was, I think, sound.

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Anonymous
admin
October 23, 2007 at 1:09 PM ×

Hey, when do we get the answers to these? :)

2). It has to go eventually, but I don't think it will in the short term. I see huge opportunities in pegs likely to break (USD/SAR, EUR/LVL). I would love to hear your thoughts MM.

4). Don't you know that Congress has its own foreign policy now? :) Like seeing an obvious mistake by the Democrats. The U.S. probably expects other countries to have the same thick skin they do (would anybody care if some country in Africa for example, condemn the U.S. for slavery?).

6). Probably not (oh the joys of working with markets in non-local time zones).

8). Count me as another one with a negative view of risky assets. I just see all kinds of downside risks, and muddling along at best on the upside.

9). Fallout from the subprime mess keeps turning up in unexpected places (and will continue to do so). Count this as a reason to support my view in the previous question.

11). I guess talking tough (much easier than actually having to do something).

14). I am waiting for a pullback, too. :)

15). I have never been to London, so I can't answer (thanks for the warning, though).

16). We just started summer time, and I enjoy it not getting dark so early. :)

17). See 15.

19). I don't follow U.S. football any more, but I would still guess yes. :)

21). A way to avoid recognizing the losses (do they get to keep it off of their balance sheets this way?). Another great act of hypocracy from those who (correctly) lectured Japan to write their bad loans down as quickly as possible.

22). Finally, an easy one! The answer is "serial reflationist who won't shut the f*&^ up."

KG

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Macro Man
admin
October 23, 2007 at 1:10 PM ×

I don't think there's much doubt that some nasty stuff went on and that atrocities were committed. However, I'd suggest that as both the perpetrators and victims (deportation-wise) are pretty much all dead, dragging up the issue in 2007 is distinctly unhelpful to those of us alive today.

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Macro Man
admin
October 23, 2007 at 1:15 PM ×

KG, I too expect pegs to break...in the middle east more so than anywhere else, given the economic justification for doing so. HKD is a political rather than economic issue and I have no special insight other than when Joseph Yam says "it ain't happening", he tends to be right....

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jdc
admin
October 23, 2007 at 1:17 PM ×

I don't know. The timing is odd and certainly I agree that from a US self-interest point of view they'd be better off upsetting Armenia than Turkey - but I think Holocaust denial would still be a bad thing in a fairly important way in 2030, notwithstanding that there will be pretty much no eyewitnesses left.

If it were being promoted, legislated for and sponsored by the state that did the wrong in the first place, then even more so.

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"Cassandra"
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October 23, 2007 at 2:41 PM ×

Too many q's to tack at once, but all perceptive.

While I know you prefer the micro of Brad, to Dr Roubini's, Dr. R's latest discussion is both cogent, sobering and worth a look, for it's useful in helping separate the noise from the secular action.

And it begs the question: What asset allocation mix best preserves capital during such a sustained tempest scenario? Despite the late 70's prec-metals run-up, by tail-end of 70s through early 80s, cash trumped all. Then, deleveraging was caused by central banks, though this time, the markets are doing it on their own, having reached the systemic and structural limits tolerable. But "deleveraging" is the germane point in asset value determination, not official tightness, but the impacts of similar deleveraging, upon risky-asset prices, across the board may be similar. For this is his primary point: the world is - for the foreseeable - deleveraging, somewhat unsurprising given the sheer scale of the new-millennial bubble in credit itself.

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Macro Man
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October 23, 2007 at 2:59 PM ×

At the risk of beating a dead horse into the ground, I contiue to believe that there is one financial market participant that is is leveaging up: Voldemort, et al, who are taking on increasing local currency liabilities to purchase foreign currency assets.

One might also suggest that the Japanese are also engaged in a bout of levering-up, if not literally than figuratively (cashing in bank deposits to buy risk assets.)

Significantly, a similar process is only starting to get underway in China, with bank deposits grossly outweighting equity holdings. With QDII quotas likely to continue expanding, Mrs. Wu (Shanghai equivalent of Mrs. Watanabe) may, over the course of the next few years, become a force to be reckoned with.

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Anonymous
admin
October 23, 2007 at 3:51 PM ×

MM,
So, at bottom, you believe that foreign CB's will floor risk assets?
RJ

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Macro Man
admin
October 23, 2007 at 4:05 PM ×

In extemis, RJ, yes, via the SWF phenomenon. More realistically, I just think that CBs will provide liqudity conditions that one miht normally associate with levering perods, rather than deleveraging periods.

And my research suggests that macro liqudity is just as important to risk asset returns as 'risk aversion' or similar measures of de-leveraging.

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"Cassandra"
admin
October 23, 2007 at 4:05 PM ×

MM - I agree.

But they need conduits (no pun intended) to translate their apparently growing liquidity and appetites to on-lend to all manner of ill-conceived leveraged enterprise and/or undertaking. But the deleveraging is occuring on the part of intermediaries who no longer like the odds (with their own capital), and the regulators who are arightfully concerned with taxpayers left with the bag. And Voldemort and friends do not seem keen to be bag holders of anything other than outright FX exposure. And as for risk-taking, in previous large-scale recycling, capital (arab oil states) were not so canny, nor independant. The combination means that while the capital will be ultimate opportunitistic buyers of assets, there is less hope of short-term altruistic support of the type needed to prevent a full-on credit rout and deleveraging. Can you see Voldemort or SAMA ponying up to a Super-SIV or a MLEC-'o-MLEC?

Now, most folks seem to be betting that Asia and EM world will weather all. But the implosion of existing large-scale leveraged enterprise in US & EU with all attendant capital hits and resulting un-virtuous credit spirals, combined with household wealth effects, and both real and imported inflation seems to indicate that we are on the cusp of something larger that even Voldemort can only sit and watch.

Perhaps you envision a stagflationary recession, but one where intermediaries regain their courage to pursue anew yet more leveraging, along with lower US rates, massively steep curve, crashing dollar, high & rising inflation, continued soaring commodity prices with Voldemort all the while, persisting with the liberal kerosene for all at least until the US, EU (along with non-pegged EMs like India & Korea) prepare a full-on multi-lateral assault.

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Macro Man
admin
October 23, 2007 at 4:35 PM ×

C, but they can of course drive down the risk free rate, then take on a modicum of credit risk in the name of yield enhancement.

Sans intermediaries/multipliers/facilitators the effect may not be as powerful, but it is still there.

Put another way, prostitution would still occur even if every pimp on the planet ditched their purple-feathered fedoras and '75 Eldorados....

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flipper
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October 23, 2007 at 8:03 PM ×

Is there any real reason to expect awful numbers from Merril?

I had impression they are the least prop oriented on the street.

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Macro Man
admin
October 23, 2007 at 8:26 PM ×

Flipper, Merrill, like other i-banks, is heavily involved in underwriting and issuing debt for customers, some of it structured stuff. There's almost always a lot of inventory on the balance sheet.

Merrill already announced that it's writing offseveral billion dollars as it marks down the value of the turds on the balance sheet...but stories, including this one, continue to do the rounds that more is forthcoming manana. (N.B.that will likely be the last time I ever link to the NY Post as a source of financial news...)

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Anonymous
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October 23, 2007 at 8:57 PM ×

Dastardly and Brilliant in any sentence is juicy

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Anonymous
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October 24, 2007 at 2:33 AM ×

5) What's next, a bill calling on the EU to apologize for the sack of Constantinople in the Fourth Crusade?

And supposing the EU still insisted that its sacking wasn't actually intended or ever ordered, it just happened spontaneously, that its residents decided to loot it on their own.

Seriously the point is wealthy Armenian campaign donors, especially in Los Angeles. (They're the "new Jews").

It's both obviously reiterating the truth, as well as being a strategically very bad idea.

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Anonymous
admin
October 24, 2007 at 2:46 AM ×

Witness homosexual marriage on the Democrat election platform when the risk to the country (not to mention the party) was the election of George Bush.

Lookie, lookie how well the Republican mind-control propaganda worked.

Actual fact:

Barely any Democrat running for national office outside the safest Democratic areas is publicly in favor of homosexual marriages.

Johns Kerry and Edwards were against.

In truth, it was the mayor of San Francisco who started the issue by permitting the city to issue marriage licenses. He was of course being responsive to his own constituency, and wanting to get re-elected.

But it was the Republicans who turned it into a successful and insane national issue. When of course the Federal government has little control anyway, and there *already* was a Federal law---signed by Bill Clinton--- prohibiting recognition of gay marriages of any state in any federal issue.

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wcw
admin
October 24, 2007 at 6:21 AM ×

On politics, google 'interest group capture'.

On risk assets, I have been looking for opportunities, though I retain hedges. The time to lever up probably will come on another day. Today saw a long-expected and -telegraphed announcement juice a 15x-sales mo-mo fish another 10%. I don't like buying on days that happens.

That said, I started sneaking into 10- and 30-year Treasury puts. A small loser on the day, but I think the right play as steepener (and indeed one of the cheaper ways to be 'long' risk assets -- I doubt equities can run without bonds easing a good bit).

In re airports, my recent flights have convinced me that I need to fly much, much less often. Ugh.

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October 24, 2007 at 10:06 AM ×

Anon 2:46 - I'll accept that version of it, but the point still stands. The fact that the Democrats were not able to defend themselves against the image equally underlines the ease with which narrow issues, dangerous if only for their utter irrelevance, make it to the top of the agenda.

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Anonymous
admin
October 24, 2007 at 12:47 PM ×

And the winner is.......

Trick and Treat: Reinstating a Halloween Fed ease
Bruce Kasman, Chief Economist- JPMorgan | 270 Park Avenue, 32nd floor, New York, NY 10017

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Macro Man
admin
October 24, 2007 at 12:57 PM ×

Yes, and I quite like Kasman too...very disappointing!

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flipper
admin
October 24, 2007 at 2:56 PM ×

Merril has written off 8 billion and the marcet cap is down one billion.

That's what i call multiple expansion:)

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