Thursday, December 06, 2007

All I want for Christmas....

Ah, the festive season! Christmas trees are springing up, nativity plays are being performed, carols are pouring out of the radio, and all across the City copious amount of rich food and expensive claret are being consumed at lunch and dinner time. It's enough to bring a tear to the eye, especially amongst those whose bonus checks will be signed by Ebenezer Scrooge this year.

Macro Man has yet to start on his Christmas shopping (any suggstions for cool presents for Mrs. Macro gratefully received), as he has been busy writing his annual letter to Santa, complete with Christmas wish list. This year's list included the following:

1) Comeuppance for currency piss-takers. Or, put another way, a messy collapse to the Bretton Woods II arrangement. Now that the inflationary consequences of wildly inappropriate currency policy are being felt from Beijing to Bahrain, Macro Man would like to see these effects intensify until China, the GCC, and others are forced to abandon or significantly alter their pegs. Remember, chaps, those who refuse to get off a sinking ship have no right to complain if their feet get wet.

2) The correct reporting of inflation. Is it really too much to ask that the cost of living be accurately reflected in government statistics (and by extension, reflected in the price of inflation linked bonds)?

3) Policymakers admitting when they f$*& up. It's hard to know whose stock has fallen further this year: Northern Rock's or Mervyn King's? The unedifiying spectacle of the UK authorities' passing the blame for the Northern Rock debacle was surpassed only by Swervin' Mervyn's subsequent claim that the Bank of England had performed better during the crisis period than either the Fed or the ECB. Uh, Merv? No.

In any event, the BOE has an opportunity to atone for recent gaffes by doing the sensible thing and trimming rates today. Will Merv defy common sense just to make a point to the man who will get rid of him next year?

4) World peace, a car that runs on water, and a cure for cancer. See, Macro Man is not totally selfish.

5) A BMW M3. Or, more to the point, clearance from the control tower to purchase one. Assuming that the car that runs on water is not immediately forthcoming, the elder Macro Boy has now goaded Macro Man into trading in his trusty old Golf for something a bit "cooler."

6) A middle/back office that understands its place in the organizational hierarchy. Namely, that it is a service provider, not the centre of the investment universe. (Small organizational grumble here.)

7) The return of alpha. Financial market de-coupling is one of Macro Man's themes for 2008, when value will out and investors will be forced to choose quality and sell rubbish, rather than just buy everything and sell everything. While this may spell doom for Macro Man's beta strategies, he hopefully has enough market acumen to more than benefit via the alpha portfolio.

8) Getting on the distribution list for "the memo." In the event of Christmas wish number 7 not being granted, Macro Man would like to start receiving "the memo." You know, the memo that the market seems to receive early in the day that says "we're going to buy risky stuff today" or "we're going to sell risky stuff today", which leads to a host of apparently unrelated items all doing the same thing at the same time. If subscriptions to "the memo" are unavailable, a phone call from The Economist's art department the night before they put the dollar on the cover would suffice.

9) The immediate writedown of all subprime and other structured credit turds to fair value. We know it's coming, we know it's in the pipeline. It can either be done slowly, in drip-feed fashion, with rumours and speculation rampant.....or it can be done in one fell swoop. It's a situation very similar to the GCC currency peg, insofar as ripping off the band-aid would ultimately be better than trying to peel it off slowly.

10) The ability to remain objective, keep a clear head, take necessary losses, and cach up on sleep at the weekends. 'Nuff said!


jdc said...

"Will Merv defy common sense just to make a point to the man who will get rid of him next year?"

If you got your other wish about inflation being measured honestly, then I imagine we'd be looking at a 1% hike!

Macro Man said...

I am labouring under the assumption that everyone outside the City is stuffed, and half the people IN the City are stuffed. Merv apparently agrees....

Bruce Chadwick said...

MM- you said for the 9th day of Christmas: "The immediate writedown of all subprime and other structured credit turds to fair value. We know it's coming, we know it's in the pipeline. It can either be done slowly, in drip-feed fashion, with rumours and speculation rampant.....or it can be done in one fell swoop."

I've been thinking about that... but would we even recognize that this has happened, if it happens. I mean... suppose there is a big writedown in the next week or two... would we then be convinced that it's all over, or would we have more rumo(u)rs that it must be even worse than all that?

Macro Man said...

Given that this is all wishful thinking anyway, I suppose that a widespread knowledge that the writedowns are legit is embedded.

In the real world, one would presume that GS will be the last one to write anything down, so once they do you know it's over....

Linda P. said...

Why not a Porsche for Mrs. Macro?


Macro Man said...

She already drives a much nice car than me.....

Anonymous said...

Hi Macro Man,

I'm new to currency trading and a new subscriber to your excellent blog. Do you have any links to sites that explain the difference/theory behind alpha/beta portfolio(s)/trading.

You bang on about it quite a lot!


Macro Man said...

B, this article is a reasonable primer.

Macro Man said...

Whoops! Try this instead.

Anonymous said...



tb said...

yep the m3 is a great car (i own one). you HAVE to get the SMG gearbox if you get one. although clarkson seemed to think the audi rs4 was EVEN better...

oh and i think you are right about half the city being stuffed as well, everyone i work with leveraged up in property just as much as the rest of the country, at EXACTLY the worst time...

Macro Man said...

Yeah, SMG II 'box is de rigeur. Funny, though only guys willing to talk property these days are the renters...

Alberto said...

An xmas present for a good guy:



CV said...

@ TB,

Not to make this a car show but I think MM is talking about the NEW M3 with 420 bhp. The question would then be whether it be a coupe or a sedan. I think you would have to wait a bit more for the latter option. In any case, a fine piece of automobile indeed. I of course am an Audi buff so I would go for the RS4 but that is just me being me.

In any case, I completely agree with MM. You can't have Macro boy running around being socially excluded because his old man drives a Golf :).

As for the more serious matters it will indee be interesting to see whether 2008 will be one of the first years out of many where alpha really rises to the main. The current tends would seem to conform with this I would say.


Macro Man said...

Actually, Claus, I am looking at a used one. Even with newfound appetite for autos, I cannot justify buying a new one off the lot. A side benefit of downturn in the City is that prices on used M3s is coming down! And given I am rolling in a 110 bhp Golf, the 360 bhp old model will still seem like a rocket...

Plus, Mrs. Macro wants a new kitchen, so there's that to consider as well...

James said...

Its astounding that China is still sticking to its current monetary policy in the face of possibly 50 percent increase in FF rate. China equities are going to explode and the economy is going to overheat even more. They must being thinking that they are unstoppable which is proabably similar to the US in 1920's. Dangerous situation.

Jin said...

I do not think the equity market in China matters that much in real economy. Furthermore, the equity market is in the correcting mood now for a few weeks. The overheating part in the economy probably comes from the fixed investment driven by state owned companies. You would expect that the old fashion political and planning policies can effectively stop that. The only thing can make China appreciate the value of its currency probably is the protectionism in US and EU. I see no reason to change the exchange rate and capital control systems now, given how the Japanese's lesson is understood in China.

Macro Man said...

Jin, I think there's a compelling case to be made that the Japanaese lesson has not only not been learned, but is being repeated in China.

To wit, in response to an (economically justified) appreciation of the excahnge rate, in the mid-late 80's Japan ran a ludicrously easy monetary policy that inflated asset bubbles like carnival balloons.

China, in order to forestall an economically justified appreciation of the exchange rate, accrues massive FX reserves, which are only partially sterilized, thus flooding the system with liquidity. That a 15% nominal growth country, and one with massive productivity gains to boot, has a) an exchange rate that is basically stable on a trade weight5ed basis, and b) low single digit interest rates, is going to cause big distortions, the genesis of which we are starting to see.

Jin said...

That is why I said "given how the Japanese's lesson is understood in China". Basically the common knowledge there is that Japan's lesson is that you cannot open the gate too abruptly and let yuan apprecaite too fast. You need to give real economy sometime to adjust. The central bank has tools to curb that but they still need political wills. Except for Beijing and Shanghai, the real estate markets in several big cities are slightly corrected, following some non-economic policy moves. You should notice another difference between China and Japan. Japanese domestic labor and goods market was protected very well, which made the adjustment more painful. Also there are people talking about the weight of the capital market in GDP.

Macro Man said...

Jin, I'd concur that at this juncture, a popping of the Chinese equity bubble would not be catastrophic from a macroeconomic perspective. That being said, the equity market does have a much higher profile today (in terms of contribution to corporate earnings and in household wealth) than was the case a couple of years ago. I suppose one could argue that the greatest impact of a bubble bursting would be on confidence rather than a direct wealth effect mechanism.

There are of course big differences between China and Japan of the 1980's. One is that China competes in a much wider range of products than Japan did 20 years ago; China is involved in very low end stuff as well as high value added. The problem is that the appropriate exchange rate for those two sectors is very, very different, and the absolute size of each cohort is massive.

Another difference, of course, is the absolute size of China, and its footprint in markets where it participates. China accoutns for something like 40-50% of global demand for stuff like copper and iron ore; Japan never had that sort of impact.

China has burst onto the scene in the global economy over the past decade. From the outside, it looks as if it is still making up its mind whether it wants to join the world financial system using the rules that have been put in place by the industrialized world- namely, allowing exchange rates to adjust.

For now, China seems content to cherry-pick those aspects of the world financial system which suit her- punting EUR/USD, buying government bonds, etc.- while ignoring those that don't, such nas allowin g exchange rate appreciaiton in the face of a massive increase in the trade surplus.

At the end of the day, no one has a more protectionist policy than China...and if that is no changed, the end result will indeed be trhe erection of trade barriers elsewhere, top the detriment of all.

OldVet said...

I'd suggest a copy of Studs Terkel's "Hard Times" for you, along with a set of shoes with triple leather uppers. These are perfect for protection during periods when you use your own foot as a dartboard during losing streaks. You can borrow mine, well used, but pls return later.

Why not satisfy Mrs. Macro gift with that #5 BMW which also satisfies #4 World Peace and any need for further unselfishness?

For Macro Boy, a rich selection from
should provide that special something, as it did my kid when she was younger.

Jin said...

China did allow exchange rate to adjust, slowly and controlable, against to USD. From 2005 to now, 2 years to appreicate 11%. As a comparison, EUdollor/USD uses 5 years to rise from nearly 1 to 1.45. (Correct me if I am wrong here) The annual growth rates are not that different. EU is whining mainly becasue they cannot do anything to Americans. So they turn to China.

You are right about trade barrier, which I had mentioned that in my previous posts. Here I want to point at the difference between Japan and China again. We seldomly talked about joint venture or foreign investment in Japan back in 1970s and 1980s. But in China, direct and joint investments are the key to the economic development. This made some American and European's wealth on the stake too, which made trade barriers more difficult and take more time, plus the gradual appreciation. Slight degree of trade barrier might even help. I hope this will allow them to buy more time to solve the deep flaws in the system.

Anyway, the Chinese problem in monetary policy is a piece of cake compared to other issues, which are off topic here.

Macro Man said...

Jin, I'd concur that there are other issues that are more pressing to China's government and people than the exchange rate, which is why it is given relatively short shrift.

While you correctly note that USD/RMB has indeed fallen over the last couple of years, EUR/RMB has risen quite a bit- and China now exports more to Europe than the US. THat's obviously down to the rise in EUR/USD...but at least part of that is a reault of PBOC purchases of euros against the USD, which have totalled in the hundreds of billions over the last few years- hence the European irriation.

You are right, though, that China has been more welcoming to foreign direct investment than Japan ever was. This will hopefully allow common sense to prevail on all sides before the mistakes of the 1930's are repeated.

Edward Hugh said...

Hi MacroMan,

I would like to express my wish all your xmas dreams to be fulfilled - as I would wish the same to all your readers (yuletide greetings and all that, bla, bla, bla) - but I do ask you to think carefully about the implications of one or two of the items in your ideal gift set.

"The correct reporting of inflation."

This, of course, is very important, and especially down in Argentina, where they are systematically rigging the numbers so as to massage the capital value of their index-linked bonds, much to the irratation of those to whome they owe money, but much to the glee of those who vote for them time and time again, even allowing for the worries of those who feel tomato prices are not being accurately reported.

But the surprising thing here is that we are not seeing "once bitten, twice shy" at work here, and despite some wobbling from time to time, people are still lining up to lend them money.

Even more interesting is the fact that they are doing this, controlling their currency rise against the dollar, and growing as strongly as they have ever done.

Interesting "braincracker" this one, for all those who think that economic growth is only about institutional quality, I think.

"It's a situation very similar to the GCC currency peg, insofar as ripping off the band-aid would ultimately be better than trying to peel it off slowly."

Well I will readily pass on the GCC situation, since it isn't something I know a great deal about, but you have also been making similar suggestions about Russia, and I think as far as this one goes, I would certainly say you need to be very careful what you ask for, especially when it comes to what you might actually get.

Basically I would say that the outer limit to the current wave of global expansion (or if you like the endgame supply side constraint) is population supply in China and Russia. Since both of them buckled their population pyramids three decades or so ago (one of the inetntionaly, the other by accident), both of these are going to have difficulties with labour supply to fuel growth at some point.

My initial back-of-the-envelope type calculations suggested that push-to-shove time would have come in Russia over a 3 to 5 year window, and China over a 5 to 10 year one (although the inflation inducing impact of a sustained Chinese expansion against their constrained labour supply may hit global markets rather sooner than this, as Alan Greenspan, among others, has been indicating).

However, if capital controls come off in China and the Rouble is allowed to go into "free-rise" all this will be accelerated, and we could be talking about numbers as low as 1 to 3 years in Russia and 3 to 5 in China.

I mean, I think you are only getting part of the inflation story. Basically those societies with rapid closing of living standard gaps, and age structure related population shortages (ie we are NOT talking about Turkey, India or Brazil, for eg) are going to be exporting inflation at some point due to the proportion of their CPI basket (as you indicate) which is food related. This is part of their long march upwards, and as they march living standards rise, and given the important role they now play so do global food prices, in a way which is not simply proportional to the overall pace of global expansion. Same issue energy, obviously as we have been seeing.

So this gives us the apparently anomolous situation that we can have rising currency values and accelerating inflation at one and the same time, depending on the pace of capital inflow, and the available slack in the labour market. Poland and the zloty would be a good current example of this, and the cb now seems to be in 2 minds (ie they are divided amongst themselves) about the advisability of raising rates further, as this may actually only drive inflation up. The Czech Republic will also bear close watching in this regard, but I think Poland will give us the best "fix" on what might happen if they broke the chains completely in Russia (talking of breaking chains, you will recall that they recently released prisoners from their jails in order to get the motorways built in Poland, and that their government representatives have been desperately scouring India in the hope of finding some spare construction workers - ie some who are not already hard at work in Dubai - to build the stadiums for Euro-football 2012).

So basically:

"The return of alpha."

Absolutely, but do remember that - as MSs Marcelo Carvalho recently pointed out - the future isn't what it used to be - and the whole issue now is what is alpha and what is, using your rather uncharitable expression, "rubbish" (since we are talking about countries here, or, for example, property in, eg, downtown Tokyo or Berlin, and of course, however reprehensible it may seem when you look at their political class, Argentina - as I am hinting above - may actually be about to enter the Alpha category, while poor old Hungary may be eternally condemned to the "rubbish" bin of history). History is, as they say, seldom kind.

Incidentally, if you aren't convinced on the Russia front, I have detailed argument up earlier in the week on both Afoe and GEM.

Best wishes, and you are a super read (but I'm sure you already know that).

In fact if I can just add one more xmas wish to the list, it would be that more economists were able to write like you can. But come to think of it, that is what has always distinguished the good economist from the "also ran", an ability to write. This is, at the end of the day, what alpha is all about. So yes, bring back alpha!


Macro Man said...

Edward, thanks for the interesting post. I have admittedly not done the work myelf, but from what I have read the population "crunch time" for China is many years longer than the figures you noted.

That having been said, it is clearly already informing economic decisions in China, i.e. the high household savings rate. From my perspective, however, that is all the mroe reason to allow the currency to find its "true home"; if households need to maintain high levels of domestic savings in the absence of a social safety net, why not grant them higher internaitonal purchasing power so that their non-saved income can purchase a larger basket of goods (if not services)?

Moreover, one of my primary beefs with exchange rate regimes in the BWII world is not the levels, but the mechasisms of these regimes.

The mechasisms distort economic signals domestically, which is unfortunate but certainly a sovereign right, but also abroad...which is less acceptable. That's not to say that BWII piss-takers were repsonsible for shoddy subrpime lending standards; to the contrary, that brand of stupidity was made in the USA. But FX reserve flows DID distort the level of market interest rates in many countries, but particularly the US, which helped create the current mess.

As for my perhaps politically-incorrect terminology, I fear I am a simple man who prefers to group things in easily-understandable terms. Mentally classifying an asset or a currency as "rubbish" simply provides a shorthand instruction of "buy this thing last and sell it first".

Argie linkers are a case in point for the reasons you articulate, though I confess to having carried a small long peso position in real life for the last few months: Viva alpha!

Edward Hugh said...

Hi again,

"I have read the population "crunch time" for China is many years longer than the figures you noted."

Well my advice is don't believe everything you read on this topic. Basically noone really knows, but this is all happening so quickly at this point in time that it is very hard to call on any of it.

But rather than reading others, why not go across to the US census Bureau, IDB Population Pyramid page, select China, and run for say 2000 to 2020 (if you read anyone who starts off "by 2050 country X will have a bla bla bla.. close the file/or book since they have no idea what they are talking about, from here to 2020 (eternity) is more or less the intersting period, all the deals will be done over this horizon I think, and my only worry is that we may have to revise this window down considerably if BWII unwinds in a messy fashion).

When you have the pyramids, click the "Extract data from IDB online aggregation" button in the bottom left of the screen, and then take a look through the progress of the 15 to 19 (key labour force entry cohort) and how it evolves from 2006 peak of 124 million. By 2012 we are down to 99 million, and this drop is very rapid, 20% in 6 years.

So while I agree that the really big issues come further ahead, when say the key 25 to 49 age group starts to decline, I think from a global economy perspective, China's inability over a fairly short horizon to keep piling on inputs, and a move to depending on TFP growth for GDP growth, will be noted elsewhere, and as I suggest, we could have the rather strange scenario of a steadily rising yuan and a China with higher than comfortable wage inflation, all of which will be noticed.

Essentially I hadn't realised myself quite how dramatic all this might prove to be till I went and performed this operation, having been duly alerted to the possible threat by what was happening in the Baltics. The Economist describe them as "pipsqueaks", but I do think that turning up your nose at people is not always the best practice, since they do offer a nice little testbed. And on all this (ie the Baltics and Iceland). Danskebank's Carsten Valgreen's The Global Financial Accelerator and the role of International Credit Agencies paper makes a good read (just google his name and Iceland).

His point was what happens when the cb loses control of monetary policy in a small open economy, you ask a similar question today about the UK and the BoE, and I ask what happens when the cb loses effective control in a large, and in many ways not that open, economy like Russia's?

Basically this is why I think Russia is so important, since seeing what happens next in Russia - about which I freely admit to having very little clear idea - will enable us to see what might then happen elsewhere. Maybe it isn't very PC either to treat a country with a population of 140 million or so as a "calibration" experiment, but there we are.

In any event, on China, I do imagine that the chains will be cut, and that we will have Prometheus unbound, and we will get to see the exciting part of what exactly happens next. Up to now we have been having to content ouselves with curtain raisers, and trailers.


"That having been said, it is clearly already informing economic decisions in China, i.e. the high household savings rate."

I see that you too have been reading Modigliani :)

Stf said...

Hi MM,
Do you want a cure for cancer ...
Yes ..
the money cannot do everything ...

the problem is like investing ...
You must believe it ...
Do you feel more true chemotherapy, that is a poison that kill healthy cell and ill cell on the same time , and do not have foundation because they do not know what is the real cause that generate a cancer and they do that for $$$$ and justify chemotherapy with the false % of recovery ...

Or the fact that every medicine contain soustance of plant ?

This is if you can believe it ...
I'm sorry it's all in Italian language ...

Giuseppe Nacci - doctor surgeon on nuclear medicine .
free book of why !!!

Aloe - recipe of Padre Romano Zago

Vitamin C
Linus Pauling -
Why big quantity of vitamin C intravenous injection prolong life and cure cancer ...(oral is 1/10 efficacious than intravenous)

Use of a diet that eliminate animal proteine to eliminate sustenance for the tumor but not for your survival.
It's chemistry you must dissociate element to do not obtain animal protein (amino acids).

Vitamin B17 Laetrile ...
He noted that the SOLE diseased cells are rich of anticarcinogenic glucosidase. However, taking Vitamin B 17 or Laetrile, this vitamin, ONLY in the presence of this enzyme and UNDER THE SAME of, releasing cyanide reacts which destroys the diseased cells containing the glucosidase while healthy cells, failing this enzyme are not why not attacked any reaction split from laetrile to cyanide.

the best plant in the world.
Graviola ...
Rain tree nutrition ...

Use google translate

I have 2 family members dead for chemioteraphy ... nevermore ...

chemioteraphy , no thanks !

the truth hide of the chemotherapy

Find Dott.Giuseppe Nacci Trieste ...

Macro Man said...

Talk about something completely different....

ANyhow, thanks for the tip, Edward. I last visited that site in 2001, when I was doing a study on Japan's population pyramid. I'll check it out.

As for test cases of large, closed-ish economies who have lost monetary policy sovereignty, might I humbly suggest that we have a test case- the Fed, courtesy of the reserve accumulators' condundrum and the explosion of securitization and structured credit.

So far, it doesn't look like ending terribly well.

Edward Hugh said...

"Talk about something completely different...."

Yes, well quite. Some people wouldn't know what a decent conversation looked like even if they saw one :).

"ANyhow, thanks for the tip, Edward. I last visited that site in 2001, when I was doing a study on Japan's population pyramid."

Well the thing is amazingly better now, since they upgraded a couple of months ago, and you can basically select and run whatever you want. I think it is fascinating, since I am sure very few people have ever looked at some of the - eg historical - data they have there. A nifty at US median ages from 1950 to 2000 makes very interesting reading I would say, but then I spend half my day (and most of my sleepless nights) looking at this type of thing.

Really I hope I now could spot a good set of population pyramid marbles when I saw one.

What I think MM is that we are so privileged, as a generation I mean. Take all this data. I mean we are definitely standing on the shoulders of giants, but none of them ever had access to the volume of data we can get our hands on (you should see my hard disk).

I think that is real alpha, being as good as they were, with so little to go on. Keynes especially. Now it is comparatively easy... "look ma, no hands"....

I have long been struck by the fact that Petrarch seems to have been the first person to actually climb a mountain just because it was there (or gaze on nature simply because it was beautiful, and not simply an imprint of the almighty or something. The local peasants thought he was balmy according to his account). In-so-doing he inadvertently set off the modern trend in mountaineering, trekking and hiking etc.

So what I am saying is that we are in a similar situation, since we are now able to look at data simply because it is there, and gaze upon it simply because it is intriguing (or something). I still can't get over this. Even Greenspan, who was a renowned data freak, probably never knew anything like this.

OK, enough of indulging myself, and filling up your comments column. Nice chatting, and keep it up.

Oh, and btw:

"As for test cases of large, closed-ish economies who have lost monetary policy sovereignty, might I humbly suggest that we have a test case- the Fed, courtesy of the reserve accumulators' condundrum and the explosion of securitization and structured credit."

Point taken. Interesting times, Johnny, interesting times. Now it's back to Hungarian GDP for me. If only I could understand why Hungary was so different from the rest of the EU10........

stf said...

"Yes, well quite. Some people wouldn't know what a decent conversation looked like even if they saw one :)."

Yes , maybe :-) ...
It was only a provocation to say that some people for Christmas need less, only survive with or without cancer, nothing else.

Excuse me, maybe i'm not so sensitive to realize how much is interesting analyze enormous quantity of data in a period like this , where every data is manipolate and revised from the FED,BCE etc .., to try to bail out the errors of the corrupted financial company(by BUSH support) and determine this low level quality of the markets and the lower quality of life of all the other people ...

Anyhow , what i post it's functional anticancer ,that is what every people try to search when they need ,but don't find (or can't because they do not know)...
It's part of the request of point 4 ...

the cancer was defeat the 3 July 1946 , thanks to Doctor Max Gerson but the lobby obscure that.
The Gerson therapy. The amazing juicing programme for cancer and other illnesses

Have a good Christmas....
All the people !!!