Caveat emptor

Macro Man doesn't have much to say about yesterday's Bernanke testimony on Capitol Hill. The one thing that really struck him, ironically, was that it provided another reason to regret the latter-years contribution of Alan Greenspan. The sight of Ted Kennedy haranguing BB, demanding to know the the Fed chief thought Congress should do, was particularly unedifiying, and a tribute to Greenspan's legacy of lecturing Congress on every subject under the sun. If only Ben had stared down his pompous interlocutor and said "the last time I checked, Senator, the Constitution grants Congress, rather than the Federal Reserve, the right to pass laws in the United States."

Macro Man continues to wrestle with what to do with equities. Longtime readers will recall that one of the key planks of his broadly constructive 2007 equity view was the notion that the reserve managers of the world (Voldemort, et al) continued to provide a font of unnecessary liquidity through their FX piss-taking. So imagine his surprise when he got around to updating his chart of reserve manager liquidity provision (as proxied by the growth in Fed custody holdings of Treasury and Agency paper for foreign CBs) and equity market trends. Typical Voldemort.....just when you need him to keep taking the piss, he cuts it out! (As an aside, it offers some support to Jon Anderson's calculations that marginal market dollar purchases by China are actually quite modest.)
Elsewhere, a truly surreal headline in today's Times: "Jerome Kerviel to sue SocGen for wrongful sacking." Evidently, flouting internal compliance rules and losing most of your firm's annual profits doesn't quite reach the threshold for getting fired under French labour law.

Still, it's a pretty surreal headline, don'tcha think? One would normally only expect to see it in company with stuff like:

"Chicago dominance continues as Cubs win another World Series"

"Iran to erect monument to Bush"

"Ken Livingston scraps congestion charge, admits London public transport is 'hell on earth.'"

"UK enjoys best weather in Europe"

Feel free to contribute your own. But between this timely reminder of the perversity of European labour law, the end of EMU asset outperformance (as demonstrated yesterday), and the mushroom-like appearance of multi-billion euro losses at European banks, let the buyer of euros and European risk assets at current levels beware.
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Anonymous
admin
April 3, 2008 at 11:15 AM ×

Does you analysis on Eurozone mean that it is time to be short EUR/USD? I remember your analysis indicated the fair value of the pair was more like 1.20.

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Richy Rich
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April 3, 2008 at 11:29 AM ×

Together with ..

"Brown agrees with the conclusions of one of his own commision inquiries"

" Alistair Darling says outlook for UK econ. is dire"

"Average journey times in UK to be slashed with introduction of minimum speed limit of 90mph on UK motorways"

Followed by
"London Congestion slashed as buses and taxis banned"

"European Union to scrap Human Rights Act"

"Putin hands Russian Oil rights to Western companies"

"BA ends its contract with Gordon Brown's PR advisors"

"Goldman Sachs to donate all its profits to Hamas"

"MM trades on a JFDI basis".

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MP
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April 3, 2008 at 12:02 PM ×

MM, I am wondering whether too much weakness is priced into the GBP and too little into the EUR. Any views on this pair?

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Anonymous
admin
April 3, 2008 at 1:08 PM ×

"UK alcohol consumption declines"

"Chavez embraces privatization"

"Bush apologizes for stealing 2000 election"

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Anonymous
admin
April 3, 2008 at 2:02 PM ×

MM, You wrote "Evidently, flouting internal compliance rules and losing most of your firm's annual profits doesn't quite reach the threshold for getting fired under French labour law."

How do you know that Kerviel did in fact flout SG's rules? (He claims that his supervisors knew about his trades.) How do you know that he lost anything at all? (He claims that the losses were incurred by the company trying to unwind his positions.)

Here's a little factiod for you: Kerviel was imprisoned for over a month, and unable to talk to the media; all that you have been reading is SG's rather self-serving spin. Why would give SG any credibility at all?

john e walker

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Macro Man
admin
April 3, 2008 at 2:13 PM ×

Did Kerviel act alone? Probably not. Did he act at all? If he didn't, then why have we heard his name in the first place? How was HE chosen to be the scapegoat rather than someone else if he was a blameless jubb?

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RA
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April 3, 2008 at 2:33 PM ×

MM,
the January official inflows into - especially - US treasuries have been huge, so I am a bit puzzled at how you can get a big drop in the growth rate of official bond accumulation? Or to put it otherwise,how exactly do you calculate your series which - I admit - very nicely correlates with the SPX.
Thanks, RA

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Macro Man
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April 3, 2008 at 3:09 PM ×

RA.....it's from the Fed's weekly balance sheet data.

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vlade
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April 3, 2008 at 3:17 PM ×

"Zimbabwe best investment of the year!"
(I dare anyone to beat the return on their stock index, in zim dollars.. )

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Anonymous
admin
April 3, 2008 at 4:12 PM ×

macroman --

i am a little surprised by the CB data. certainly the tic data shows a pickup in CB purchases in January. and i have been struck by how strong the increase in the FRBNY custodial holdings has been -- $50b is a big sum, and that is what I am seeing for march (a bit less), and annualized q1 looks to me to be over $500b. I haven't looked at y/y growth and the base is rising (especially as the rise in custodial holdings in q1 07 was big) but the data doesn't quite jibe with my sense of what is going on. i suspect if you plotted the growth in CB holdings in $ billion the results might be different -- and it isn't clear to me that $400b in 2004 doesn't have the same effect as $500b in 2008 even if the base has changed and thus the % increase has changed.

finally overall reserve growth hasn't slowed down -- it has picked up. so the FRBNY data may just not be a good proxy, especially with growing use of outside managers and the like

bsetser

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Macro Man
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April 3, 2008 at 4:30 PM ×

Brad,

Bear in mind though that US Treasury bonds have had an enormous price rise, even at the short end of the curve; the price of a 2 year bond has gone up by 5% over the past year. This was essentially the point that Jon Anderson was making in his recent piece...given the vehemence of the move in interest rates, you need to adjust you stock not only due to currency moves, but also to account for the increase in the capital value of bondholdings. Once you do that, he suggests (and my data at least appears to confirm), th flow is less substantial.

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Anonymous
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April 3, 2008 at 11:17 PM ×

macroman --

my strong sense is that china doesn't mark its bond portfolio to market, so the growth doesn't reflect valuation gains on its bonds. I have had extensive conversations with the world bank team and others on this. currency moves show up, bond market moves do not. that is i think generally true for most central banks -- with the important exception of japan.

but you raise a good point -- namely does the fed report the market or the face value of central bank holdings at FRBNY. I'll ask.

bsetser

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weatherman
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April 4, 2008 at 1:31 AM ×

I would imagine that Jerome's lawsuit is based on the premise that management tacitly authorized his obvious rogue trading by failing to stop him at an earlier date.

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Anonymous
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April 4, 2008 at 5:53 AM ×

"Bill Gates says software should be free; Linux way cooler than Windows"

"Britney Spears earns physics PhD with revolutionary 'thong theory', proves Hawking wrong about black holes. ``They're actually like rilly yellow.''"

"Dick Cheney: I'm giving up torture and joining Dancing With The Stars"

"Macro Man: I've found the missing bid! buy buy buy!"

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