Pressure points

So much for traction. Macro Man was just starting to get excited yesterday at lower equities and USD/JPY, then at 3.10 pm London time every market in the world seemed to put in a V (or a lambda.) In the end, the traction that Macro Man and others experienced in the "re-emergence" of Q1 trends resembled that of the chap on the left.

Yesterday, the TSLF was undersubscribed...which must mean that everything is sorted, A-OK, and hunky-dory, right? If banks needed liquidity, surely they would have bid for it?!?!

Not so fast. Macro Man isn't sure what is wrong with the TSLF, but he's pretty sure that something is wrong with it; the participation rates have, in aggregate, been much lower for the TSLF than the TAF. Moreover, this week's TAF was heavily oversubscribed and awarded at a level ABOVE prevailing LIBOR rates. What that means is that banks were so desperate for liquidity that they were bidding for secured borrowing, with a haircut, from the Fed at a higher rate than they could ostensibly borrow sans haircut and collateral from each other. No wonder modern-day accounting is so screwy!

Moreover, there are interesting things afoot in the UK. Sure, the Bank cut rates yesterday down to 5%....but LIBOR isn't moving. Indeed, 3 month LIBOR is indicating today at unchanged from yesterday, and at a tasty 92 bps spread to base rates, the highest since two prior climactic crisis points. So unfortunately for everyone who bought the front end of the short sterling strip on the basis that the UK economy is buggered, while they may be right about Britain, they're still losing money.
The G7 meetings this weekend will no doubt look to address the issue, but at this juncture it's uncertain what they can do. There's a fascinating paper from John Taylor and John Williams on the FRBSF website suggesting that counterparty risk is what's driving spreads, and that the TAF is having no discernible impact. Macro Man stands by his view that the endgame here is the US and other governments writing a bit fat check to buy all the unwanted crap off of banks' balance sheets and holding it til maturity.

Further signs that the worm has turned in the global economy came from China's trade data, which showed a rebound in the surplus....but still left that surplus much smaller than the levels prevailing in 2007. China appears to be getting hit by twin headwinds; not only has demand slowed in their export markets, but their terms of trade has deteriorated markedly. The spread between export and import growth is at its most disadvantageous level since 2004, and export growth on its own is at its lowest level since 2002, when the world was slowly emerging from its last recession.
At the risk of beating a dead horse, by linking their domestic currencies to the dollar at undervalued levels, mercantilists and oil producers are forcing the required USD adjustment to manifest itself in other ways...not only against other floating currencies, but increasingly against commodity prices via the invoice currency effect. At some point, this will become a real public policy issue for China, the Middle East, et al., when they realize that not only is inflation not going away, but that an increasing cohort of their populations are struggling to feed themselves.

Perhaps then we'll finally get the badly needed multilateral buy-in to facilitate the currency adjustments required to rebalance the world and, ironically enough, enrich the developing world.
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April 11, 2008 at 11:40 AM ×

GE profit warning: what a pleasure!!
And guidance cut!!
And now truth comes out!!

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jdc
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April 11, 2008 at 1:04 PM ×

I have this crazy notion that serious UK interest rate cuts could stiff the banks, as they get in less from longish-term tracker mortgage customers, but still have to pay high rates on their borrowings and savings accounts because of a shortage of outright cash at whatever rate, and a desire on the part of those who have cash to put it somewhere safer than housing lenders.

Am I mad, or is there a thing there?

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Macro Man
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April 11, 2008 at 1:09 PM ×

Jdc, I think it depends on the size and duration of the tracker market. For example, yesterday's move will take my mortgage rate down to 4.69%...which sadly runs out early next year.

Bear in mind, though, that a lot of "tracker" mortgages track the standard variable rate, not base....and Nationwide and Alliance & leicester, for example, both raised their SVRs yesterday.

In any event, my impression is the vast stock of mortgages is of the 2 year fixed variety....or shall we say, the six month fixed variety, sine a wave of them roll off over the next six months. What LIBOR tells you is that those poor sods are going to get buggered senseless.

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Anonymous
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April 11, 2008 at 1:21 PM ×

just borrow from a muslim. hes forbidden by his religion to ask or take interest.

then go long crude.

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jdc
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April 11, 2008 at 2:17 PM ×

We thought in the pub the other day that we had a scam whereby Islamic mortgages offered protection from negative equity,, since you're not the legal owner anyway. Sadly we found a way we think the bank could retrieve any shortfall.

SVR Trackers - really?! I know a lot of subprime mortgages track LIBOR, but I've never consciously noticed a tracker mortgage, sold as such, which tracks the SVR - I'd be very sceptical of taking one out, given that the SVR is within the purview of the bank to shift in any direction at any time.

But yeah, both my friends and my Leading Indicator (the Moneysavingexpert.com mortgages, housebuying and debt forums) tell me a lot of people are facing something jolly unpleasant. Meanwhile the most I have to fear is my rent going up (hasn't happened since October 06) and my savings interest going down. Just got 6.5% fixed to May 09 on a chunk of them so...

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Anonymous
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April 11, 2008 at 4:25 PM ×

Where do you think $-index will end up at year-end 2008 ? Seems like the gulf currencies as well as china will have to make at least a 25% upward revaluation to the $, but what impact will have that on the other cross rates and where that leaves the $. What's your view ?

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Anonymous
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April 11, 2008 at 6:22 PM ×

Why did you think there was traction???

Short term investment myopia has caused a little pop in equities, but that doesn't mean that the locked up credit markets and MEW-dependent US consumer are on the rebound...

What exactly does "Macro" mean? Big picture?

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jcg
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April 11, 2008 at 6:43 PM ×

One idea I haven't seen anyone else take up: y'day TSFL was 50bn, while mkt had guessed 25bn if asked/pressed for a figure on wednesday. Maybe the right way to think of the auction was that it narrowly averted a 1.3 bid to cover at who knows what sprd. Sinve there doesn't seem to be a commitment much in advance to a particular auction size, the Fed can easily make some phone calls, figure out how much is needed, then provide a comfortable cushion on top. Furthermore, making sure that it isn't fully subscribed insures that the auction clears at 25bps (the min sprd) and masks any real need/stress in the actual bids.

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Macro Man
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April 11, 2008 at 6:55 PM ×

Anon 6.22: Macro manager performance over the last month has been broadly crap, precisely because intuitive macro themes have failed to gain traction, swamped by positioning. So when one observes reversals such as those observed yest, it is legit to wonder aloud if we've reverted to f*** you mode.

GE today suggests that for today at least, the obvious earnibgs shortfall is a tradeable theme. But if today is a low volume selloff, there's every chance for another eff you spike on monday. Knowing when you.re in macro mode and when in spiv mode is, I firmly belive, one of the keys to achieving good risk-adjusted, low-drawdown returns.

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Jesse
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April 11, 2008 at 11:50 PM ×

Rumours amongst the trading desks that a major financial institution is on the edge explains the reluctance of banks to seek lesser rates through inter-bank lending.

The lenders are picky, picky, picky.

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