Wednesday, February 27, 2008
Macro Man isn't going to write about equities this morning, because it seems quite clear that he doesn't understand what's going on there. Whether it was his time off skiing, the slight illness that he's currently nursing, or the fact that it's a leap year, this newfound dynamic of "equities rally on all business days ending in 'y'" is certainly peculiar.
No, there are other fish to fry this morning, as the dollar is once again getting beaten like a rented mule. EUR/USD, for example, has finally and decisively breached the psychologically significant 1.50 barrier; while there are some intermediate targets at 1.52 and 1.53, the longterm goal is 1.63, still nearly 10% away.
While Macro Man has spent the last five months decrying the dollar and telling anyone who will listen (and many who won't) that it is toast, he finds himself in an unusual (and irritating) position. At an investor rountable a couple of weeks ago, he was bemused to find that the majority of the attendees were bullish dollars (or at least bearish EUR/USD), a circumstance that he found difficult to reconcile with negative real rates in the US and a hawkish ECB. At the time, EUR/USD was 1.45, towards the bottom of the range of the prior few months.
Clearly, this appeared to be a set-up for a nice move lower in the greenback, which in fact is what has occured, against things as diverse as oil, the euro, the New Zealand dollar, and the Taiwan dollar. And did Macro Man slap on a position and reap the profits that his view deserved? NO!
Even worse, he has found himself actually LONG dollars, courtesy of a) the Powerball strip b) the sterling basket trade, and c) the USD/JPY option hedge, which expires today. Macro Man had toyed with hedging the last of these earlier in the week at 108, and missed the boat....so he sold $25 million at 106.93 earlier this morning.
Ay caramba! Is there anything worse than having the right view and not making money? In Macro Man's defense, he has been away from the market, both due to his skiing holiday and for other personal reasons, for much of February. Still, it's galling to be, in the words of Trent from Swingers, "so money" and yet end up with "no money." Don't you hate it when that happens?
Today sees everyone's favourite Jim Henson character, Ben Bernanke, step up to the mic today to freestyle on the state of the economy. It's hard to imagine him saying anything other than "we're buggered", particularly if durable goods orders come out in line with the rather bearish consensus expectation.
Consider yesterday's data. The house price data was better than expected, but still pretty awful. Given continued high levels of supply, it seems likely that time, rather than interest rates, is the only thing that can resolve the situation.
Meanwhile, consumer confidence cratered, a decline caused in no small part by increased pessimism on the job front. As discussed in this space before, the jobs hard to get component is one of Macro Man's favourite tells on the labour market data....and as the chart below inidcates, it's suggesting another very weak number next week. Meanwhile, the "business outlook will be better in 6 months" component registered its lowest reading since April 1980.
So surely the Fed needs to cuts rates more, right? Not so fast, my friend. PPI inflation registered its highest reading since 1981, consistent with the high level of import prices, which are at a similar extreme. With oil at record highs and global food prices continuing to surge, it's hard to see this trend coming to an end any time soon.
As Macro Man has mused on previous occasions, what makes the current environment so tricky for the Fed is that for the first time in 30 years, the US is not a price setter for global commodities...it's a price taker. In the 1980's and 90's, when there was slack in global commodity supplies, the price was set on the basis of marginal demand....and more often than not, that demand came from the US.
These days, however, there are genuine supply shortages, which means that lower US demand has little impact on the price...particularly when it is other countries that are showing the largest demand growth for energy and other industrial commodities.
All of this hearkens back to the 1970's, which was a terrible time for bonds and, if anything, an even worse time for equities. All of which makes the recent resilience of stocks that much more puzzling. Perhaps if today's unconfirmed rumour of a UK bank in trouble proves true, equities can finally reverse course. In any event, Macro Man cannot help but think that near term equity risks remain to the downside...not only because of the toxic data mix noted above, but also because of the horrible March seasonals which kick in next week.
Damn. Macro Man's ended up writing about equities after all. Don't you hate it when that happens?