Tuesday, December 04, 2007

Five Points

1) Hammerless Hank has a plan! As soon as the US housing market turned south, it became pretty obvious that it would morph into a platform for political grandstanding. We've seen quite a bit of that already, with the latest installment focusing on the workouts for borrowers with more willingness than ability to pay. Both Treasury Secretary Paulson and Senator Hillary had something to say yesterday, but since the former is the one with the power to do something (for another thirteen months, at least), he's probably the one worth focusing on.

The details of the plan remain vague, other than involving a lengthy extension to teaser rates, but the asset-backed market seems to have taken heart. Note that the rally in the 2006 -1 BBB- tranche, on the left, has actually been larger than than the equivalent AAA tranche, on the right. But in truth, the BBB- is more of an option than investment at this point. Some might wonder why a workout plan is good news for these securities, given that the expected yield will be cut. Macro Man is far from an expert on the construction and valuation of these securities, but he supposes that the explanation must lie in the fact that a 7% yield on something is worth more than 11% yield on nothing. Source: Markit

As an aside, as a UK mortgate-holder, he was pretty stunned to see the sort of rates noted in the Paulson article. Small wonder the US housing market is crumbling if borrowers face double-digit mortgage rates!

2) What should China buy? Lou Jiwei and other Chinese authorities must feel like contestants on one of those "Supermarket Sweep"-type game shows. They have a fat sack of cash and an empty trolley, and are preparing to race down the aisles of the global economy to grab items off the shelves.

Brad Setser suggests that they have a butcher's at Countrywide, which would sort of fit in with recent comments from Mr. Lou that CIC could act as a stabilizer to the world's financial system and economy. However, the (ahem) return on the Blackstone investment has not exactly met expectations, so it may prove politically difficult to execute another risky transaction with Countrywide. Why a long-term investor like CIC should give a crap about the six month return on a strategic investment is a question for another time.

In any event, it looks as if China has set its sights a bit loftier: Bloomberg reports that a consortium of Chinese steelmakers and "the government" are looking at bidding for Rio Tinto. If true, it would significantly raise the stakes on China's participation in global markets and, in Macro Man's view, probably increase protectionist pressures globally. How Australia would react to bid from subsidized steelmakers and, one would presume, mercantilist-generated FX reserves is up for debate, but the Woodside Petroleum precedent of a few years ago would suggests that the new government would probably say "thanks, but no thanks."

3) Janet Yellen is the president of the San Francisco Fed. Perhaps that means she channels 60's counterculture music stars on a regular basis:

I'm just mad about rate cuts
They're just mad about me
I'm just mad about rate cuts
They're just mad about me

They call me mellow Yellen
(Quite rightly)
They call me mellow Yellen
(Quite rightly)
They call me mellow Yellen

4) It seems as if Macro Man's "open letter" has been marked "return to sender." The GCC summit is about to wind up and, if the official comments are to be believed, talk of the region's currency pegs wasn not even on the agenda. This of course begs the question of what the regional leaders have been chatting about for the past couple of days: "Man, it's hot out there, isn't it?"

In any event, a coordinated change in regional currency regimes looks like it ain't going to happen for the time being. Whether there remains scope for unilateral changes remains to be seen, but the rationale for adjusting regimes remai ns as strong as ever. Yesterday Saudi M2 was reported up 21% y/y, and today CPI inflation in Kuwait (the one regional economy that has done somethign with its peg) rose to 6.2% y/y. A pullback in USD/AED in particular remains an attractive sale.

5) Oil to the rescue? The recovery in the dollar has coincided with quite a lurch lower at the front end of the crude curve, with both WTI and Brent now trading on an 80 handle. The macroeconomic impact of the move to date should be relatively limited, as Macro Man's gas-price model still looks fairly valued (and near its recent highs.)
That said, the direction has turned lower, and if oil continues its downward march (admittedly a big if), this could provide US households with a boost to disposable income just as the labour market appears to be wobbling a bit. It's worth keeping an eye on....


jdc said...

A mortgage on the average US home at 10% is still cheaper to pay off than a mortgage on the average UK home at 6%...

Anonymous said...

How so, if you don´t mind my asking? You´re throwing in dollar depreciation?

a. goldfish

Anonymous said...

MM, you forgot to add Middle East to your Supermarket shoppers list. Hence, I don't think oil price lower (unless low as in 20-30 buck low) is going to make much of a difference to your consumer. The world NEEDS oil price high (but not *too* high) to maintain the status quo of the so-called automatic stabilizers. Thus, I think oil lower means only one thing: U.S. recession. In other words, the U.S. consumer is already screwed, you are just seeing the confirmation from the oil price. To make a long story short, I don't think any bullish individual (such as presumably yourself, given your previous posts) really wants to see oil price lower.

Macro Man said...

It depends on the cost of the house and incomes. Payments on a place in the Bay Area would cost more than an equivalent pile in Scunthorpe or Grimsby, almost regardless of mortgage rate. The inverse would hold true for London and, say, Whitefish, Montana.

What struck me though was the level of these mortgage interest rates, including the "teasers."

In 1995, when I took out my first and only mortgage in the USA, 10 yr Treasury rates were ~ 6.5%....and I got a 30 yr fixed at 8%. This was for an investment property, mind you.

I find it remarkable that the "teaser" during the period of the lowest interest rates in two generations is higher than the 30yr fixed rate was six months after the biggest bond market rout o the last 25 years ended.

OldVet said...

anon, GCC accepting heavy investment in oil production or Australian acceptance of investment in Rio Tinto both beg the same question: How do you know the suppliers of raw materials will continue to receive a market price, if they are selling to related parties in China? You don't. Happens all the time, every day, in the tax world called "transfer pricing."

jdc said...

Yes, I'm with you on all that, but that's why we have averages, as a wise man recently said (well, Roger Bootle).

Whitefish will be cheaper than Grimsby, and Bay Area cheaper than Kensington. Meanwhile people will (on average) be earning a little more, and paying tax a little less.

30-year US rate currently claims to be 5.6% if you believe Bankrate, so I'm not sure about some of this. I heard about teasers at 2/3%, and rolled into the capital.

druckenmiller said...

Now that the Shadow MPC has "voted" for a rate cut , possibly by up to 50 bp's , does BoE follow with same this week ?

Bruce Chadwick said...

I always loved the mello yello song. Congrats on a good adaptation of a 60's classic. I feel like financial markets are having a recovery (well, hangover really) from their summer(s) of love...

Anonymous said...

Macro man --

Stephen Jen should get credit for suggesting countrywide. I only relayed the suggestion with a bit of commentary! I see the logic of internalizing your mortgage supply if are buying a ton of MBS, but, well, that doesn't really mean I think it is a good idea.


Anonymous said...

why you arent long yen macro?it seems it would fit your view that correlations are going to end and volatility is going up

Macro Man said...

jdc, I don't even k now if housing in Grimsby is more expensive than housing in Whitefish in relation to local incomes. The US is odd insofar as it has the MOST overvalued house prices relative to incomes in the Anglos Saxon world, and also the LEAST expensive. So I might take issue with Mr. Bootle on the utility of averages in what are, at the end of the day, a series of interconnected but nevertheless largely localized markets.

Anonymous, I don;t necessarily agree that lower oil would spell doom for the world. It would be a positive income shock for most of the world's largest economies, and another $20/bbl wouldn't necessarily impact the consumption of the oil producers. Yes, there might be less money flowing into treasuries and other govvys, but that money ain;t exactly making its way to households and coroporates at the moment anyways.

Stan, I think the MPC should go- Mervyn's self-congratulatory "we're the best CB on the street" line the other day was nauseous. The BOE has done very little other than directly bail out a lender that deserves to go bust. I am positioned for a cut in real life, and while acknowledging that it might not happen this month, it's inevitable very, very soon.

Brad, point taken. Your post was a handy summary of the "China should buy financials" argument, to which a potential Rio Tinto bid is an obvious counterpoint.

Anonymous, in the blog portfolio I am long yen, via the 120 straddles expiring the day after Xmas. I've hedged some of the deltas at current levels, but there is still a small residual long yen position (short $10 mio.)

Dale said...

Macro Man,

I am still astounded that you called the top in gold at $845 or thereabouts. I am glad to hear that you are now long yen, given that it is my second-largest position after gold.

Macro Man said...

Dale, the exit level from the gold trade probably proves nothing other than that the old saying about blind squirrels and acorns contains some truth.

As for the yen, I've had the long straddle position for the last five and a half months, and since August it has pretty much acted just like a short USD/JPY position.

Of course, if the carry basket ever gets triggered back into play, then the portfolio will actually have a small yen short. All in, I find it pretty difficult to have a really strong view on the yen at 110.

Josh said...


where gold from here?



Macro Man said...

Josh, I really have no strong view on gold at the moment. I suppose if the Fed does 50 next week it will take a hard look at re-testing the highs, though I imagine it would probably be safer to buy a new high (target $1k?) than to buy $50 below the old high.

But really, no view, no position, and no cares on gold for the time being.

Anonymous said...

Dear MM,

Are you serious when you say FED is going to do a 50 next weeks ? Are these the odds ?

What will happen to $USD ?

(Now USD is going to become the carry trade currency....borrow dollars and spend to glory)

Do you think 50bps cut is priced in ? or market will rally immensely.

Macro Man said...

I don't think the Fed will do 50, but the possibility remains, in my view.

Anonymous said...

> The US is odd insofar as it has the
> MOST overvalued house prices relative
> to incomes in the Anglos Saxon world,
> and also the LEAST expensive.

This doesn't make sense to me. For example, the Australian median home price exceeds that of the US by seventy percent. Do you mean to say that Australians have incomes more than seventy percent higher than Americans? I don't believe that they do.


Macro Man said...

No, it means that median prices in overcooked US markets (Honululu, Bay Area, Palm Beach, SoCal, etc) are higher relative to median local incomes than they are in Perth or Sydney or anywhere else in Oz. That "70% higher" figure sounds spurious- what's the source?

Anonymous said...

Yes, it sounded spurious to me too, and I know one shouldn't believe everything one reads on the internet, but it does come from Bloomberg:


"The median price for a house in Australia is now A$423,900, roughly 70 percent more than in the U.S. and almost triple the median of A$141,600 when Howard was first elected."