Tuesday, January 29, 2008

Life in the UK

Yawn. Another 1.75% day in the S&P 500, this time to the topside. It's all getting to be old hat, really. Those days when people were highlighting the lack of volatility seem a long time ago, indeed.

Yesterday's rally could easily have been a paper-shuffling exercise ahead of tomorrow's FOMC meeting. There appears to be some evidence that popular shorts were being squeezed and that quant models of various description are once again coming under the cosh. Macro Man's own equity RV trade, the large cap/small cap trade, has given back all of its monthly gains and now is sitting slighty in the red for 2008. However, he still believes the rationale behind the trade. He'll give it another day to unwind, and then look to pull the trigger on adding tomorrow ahead of the Fed.

What made yesterday's stock market rally curious was the execrable set of macro data that accompanied it. New home sales, and there's no other way to put this, sucked. Not only were the sales figures the lowest in a dozen years, but those weak figures came in the context of tumbling prices as well. While the median sales price data is subject to significant distortions, dependent as it is on the geographic and value mix of the monthly sales, it is nevertheless telling that the y/y figure fell nearly 15%, the lowest since at least 1970. And the monthly supply of unsold homes made a new cyclical high as well. So naturally, the homebuilders spiked higher yesterday.
Anyone not believing the "quants getting squeezed" explanation for yesterday's action might instead offer the explanation that the data was so weak that it has cemented a 50 bp rate cut tomorrow. Why that should be a near-term benefit when the prior 1.75% of easing has failed to meaningfully buoy the market over the last few months is something of a mystery.

One source of hope cited in some quarters is the recent rise in mortgage refi applications. To be sure, the recent decline in interst rates across the curve has prompted increased demand for refinancing credit, as show in the chart below. Macro Man has a few thoughts on this matter.
While it is the case that refi apps have surged, they remain well below the levels observed a few years ago. It's curious to note that apps for purchase have also rebounded recently, though as yesterday's data demonstrated, that has yet to translate into increased buying activity. Meanwhile, Macro Man would question the very desirability of spurring further mortgage refis. It was that very process that ultimately landed us in the current pickle, so why start a new cycle while we're still picking up the pieces of the last one?

Finally, we also need to distinguish between demand for credit and the supply credit. While it may well be the case that Mr. and Mrs. John Q. Public would like to borrow large sums at the the rates they read in the newspaper, most professional investors can tell you that the rate you see on the screen ain't always the price you get in real life. That's particularly the case in the current environment; the securitization market is still seized up, and banks' willingness to take fresh mortgages on balance sheet is pretty low at the moment. So applying for a mortgage is all well and good, but there's no guarantee of success. After all, Macro Man could apply to be the new England football manager in 2010 after Fabio Capello leaves in a huff following the World Cup, but there's no guarantee he will get the job.

Speaking of Mr. Capello, today Macro Man has the dubious pleasure of taking a test on life in the UK. He's doing so as part of a Home Office requirement to attain permanent residency, a status which confers a few marginal benefits and opens the door to obtaining a passport (which itself confers the benefit of enabling him to choose the shortest passport queue when flying into the UK.)

Sadly, Mr. Capello does not make the list of required knowledge about life in Blighty. Among the requisite items of knowledge, however, include the following:

* What proportion of the UK is Buddhist? (0.3%)
* In the early 1950's, the UK held a recruiting drive in the West Indies for which profession? (Bus drivers)
* How many members are there in the Scottish parliament? (129)
* When did women win the right to divorce their husbands? (1857)
* On April Fool's day, one plays tricks on other people until which time of day? (noon)

To prepare for taking this test, Macro Man was forced to spend £9.99 on a Government-issued handbook. For the pleasure of taking the 24-question exam (average time taken to complete a practice version: 2 minutes), Macro Man incurs another £34 charge. And to actually get the stamp in his passport, he has to fork over £950. All in, that's a £993.99, just to keep getting taxed by Gordon Brown. If ever there was a statement about life in the modern UK, that is it.


vlade said...

Mr. M, I share your pain on the UK (although I have an EU passport).
One thing that cheers me up that so far Mr. Brown looks like a very nice example of "be careful what you wish for lest you get it".

Macro Man said...

Indeed. And as you can see, I broadly concur with the point you raised in the last post re: securitization and new mortgage lending.

vlade said...

Indeed. I read this post only after I replied, otherwise I wouldn't have.

Macro Trading Ideas said...

About mortgare refi I think that can happen in two ways: in first case you can change your type of interest payment (doing a swap for example), going from fixed rates to floating rates. In these case you don't need probably to pay all your debt, or eventually you pay your old mortgate with new mortgage, but in this way you do that on an asset depreciated.
Or alternatively you close your old mortgage and apply for a new one, but in this case you need cash.
I think that a subprime person that can't pay monthly rate difficultly could renegotiate!!!
All the mortgage refi that we're seeing comes from good standing people, people that can have access to credit. But however two basic point remains: you refinance a depreciated asset (you obtain less and so you need cash) and you have to post more cash now, you have to obtain the new mortgage and you want to keep your home (absuming that your house costs more than your mortgage).

Brian said...

Did you ever consider a Tortola passport? It might not give you all of the marginal benefits a UK passport would, but there are many other tangible benefits of having a BVI passport..

RebelEconomist said...

Good luck with the exam! (if you pass you deserve to get in - the only one of the example questions that I could have answered is the last one)

Charles Butler said...

If you're from some non-euro place, getting a Spanish resident permit also involves a test - of mettle and patience.

1). Apply for and receive a resident 'visa' from the consulate in your home country.

2). Pack up and move.

3). Apply for a resident 'permit' (different department with different requirements and no guarantee) once in your new 'home'.

4). Wait whilst you see things like your drivers licence fail to be recognized.

5). Once received, this entitles you to the delights of renewing it every so often, the time it takes to do so leaving you without any legal documentation for five or six months but requiring you to make three trips to your nearest foreigner office - in my case, 90 km one way.

Then, of course, you might decide to become a citizen and have the luxury of claiming it via your predecessors and they...

1). Change your name and identity number rendering, once again, all your prior documents null and void.

A one question test - What percent of the national population work in the civil service? - would more than suffice.

Macro Man said...

my preference would be an irish passport (everyone loves the irish, save in certain parts of ulster), but sadly i don't qualify. In any case, i passed the test, so gordon's smothering embrace awaits. Cb, sorry but not surprised to hear that spain is just as bad. At least the croydon bureaucrats gave me my result straight away rather than making me wait 42 minutes as per protocol!

Jin said...

How about today's durable good order number? Really promising, isn't it?

CDN Trader said...

Anecdotal evidence on mortgage demand vs. supply -- I have heard of a few Canadian NHL players who recently moved to the US and were unable to obtain mortgages to purchase property (despite million $ salaries).

Charles Butler said...


That would be because they show a stint with the Leafs on their employment history.

Macro Man said...

surely if these nhl geezers have been earning cad, they could pay for a us house in cash? Cb, it could be worse- you could be a pittsburgh pirates fan!

Quarrel said...

There has been various talk in the press about the credit crisis being over, and quoting current LIBOR rates as evidence that it is.

(There has also been lots of talk about it not being over of course.)

LIBOR rates do seem to have settled, yet it seems to me that you'd be a brave man to assume that losses in the finance sector are now all known and settled. Is this just confidence in the ability of SWFs to continue to strengthen the balance sheets as needed? Shouldn't lower LIBOR rates naturally reflect stronger faith from the banks in the solvency of their peers, and shouldn't that naturally flow to NHL players wanting mortgages?

(as an aside - not lending to someone may not be a statement so much about their ability to pay, as it may be about the underlying asset being able to hold its value. In normal times banks are happy to take the property deeds as sufficient collateral, but these are not normal times)

Where is the disconnect between ready credit and LIBOR rates?



Meanwhile, on national tests, here in Australia, we have been having a similar debate on the front of our newspapers in recent days.

"Who was the greatest Australian cricketer of the 1930's? Is it Sir Donald Bradman, Sir Hubert Opperman or Walter Lindrum?"

(why they'd limit it to a decade is ridiculous - one cricketer stands above all on any reasonable metric)

A comparitively easy question for Indian's, and other Commonwealthers, but does it help new citizens in any possible way?

The whole idea of citizenship tests is pretty silly it seems to me. Any person of reasonable education can pass a basic test, and if you just want to discriminate against refugees, then come out and say so. If your goal is to charge the MMs of the world 1000 quid, then just set the price without the subterfuge, and let everyone know you don't want poor people, or at least want to force them to sell kidneys.

The tabloid press has a field day with their 'innocuous' questions about why shouldn't a newcomer know when Europeans first came to Australia? (hint - they don't want the answer about the Dutch guy, just the British guy..)

The idea of a citizenship test is new here, and we've just had the first stats published. There is a 90+% pass rate apparently - unless you're a refugee in which case it plummets..


MM - if nothing else, if they don't already have them, you'll be doing the Macro Kids a big favour if they get EU passports out of it all.



Quarrel said...


[src - Bloomberg via Toro]

I think the above chart actually answers most of my question - it is about the quality of the asset (CMBS in this case, NHL players houses in another) more than anything at the moment. Although LIBOR still seems to reflect confidence in the general finance sector that is perhaps high? However as others have pointed out recently the amount of TAF sourced money floating around is rather stupendous..


Macro Man said...


The other issue re: the NHL players is that a) their mortgages would be "jumbo", and thus fall outside the warm embrace of the GSEs, and b) as damned foreigners, all of their documentation would be unreliable.

I was speaking to one well-to-do foreign chap a couple of months ago; despite being a highly successful financier, he only qualified for an Alt-A mortgage, thanks to the size of the loan and his sketchy background.

I like the sounds of that Oz test...even I know it's Don Bradman! The cynic might argue that if the pass rate plummets amongst refugees, then the test is doing its job.

Fortunately, the Macro boys already have Irish pasports, by virtue of having been born there!

Mike said...

Nice Blog !!!!!!!!!!

I am from India. My son is working in Australia. This summer I decide to go Australia ,what is procedure for visa application in India .let me know.