Monday, June 16, 2008

Ireland's call

It's not often that developments in the political sphere bring a smile to Macro Man's face, but he has to admit that he enjoyed the spectacle of Ireland's rejection of the Lisbon Treaty, which was announced on Friday. Not necessarily because the Treaty is a bad idea; like 99.9999% of other European residents, he's not read the full 277 page document, and so is not able to pass an informed judgement.

But that's just the point; the European political elite has, in every country but Ireland, chosen to jam the Treaty (which fundamentally changes the political structure of the EU) through without a public vote. The Irish, who enjoy the constitutional right to referenda on such matters, answered the call of democracy and rejected the treaty- not necessarily because it was a good idea, but because they could. The rejection has prompted a hail of criticism from the euro elites, prominent among whom is Luxembourg's prime minister Jean-Claude Juncker. In what can only be described as a stunning coincidence, Juncker was in line to fill one of the powerful roles created by the Treaty.

All of which is perhaps a reminder that Europe is as bloated, corrupt, and sclerotic as it was in 2000-2001, when the euro was pummeled in a crisis of confidence. However, the loss of stature of the US, both in terms of its political leadership and its financial markets, has perhaps obscured the warts on the European project for the past few years. Nevertheless, with a change in political leadership around the corner in the United States, might longer term investors take stock of their positions and begin to close some long-standing dollar shorts?

Maybe. What does seem clear is that EUR/USD is approaching some pretty key technical levels, a break of which could spur a nice dollar rally.
However, it's probably premature to get too excited about buying dollars. Last weekend's G8 meeting whiffed in terms of being remotely relevant, and the market is still pricing some pretty punchy expectations for Fed tightening. Some commentators have suggested that if there were going to be a US recession, it would be here already.

Who's to say it isn't? The labour market has deteriorated to a degree that is typically only observed in recessions. Sure, the last unemployment reading may have been distorted by odd factors....but does anyone not think that the birth/death model isn't artificially inflating monthly payroll figures. And sure, recent retail sales figures were better than expected, reading a "whopping" 2.5% y/y gain. Of course, if we deflate it by the CPI (yeah, yeah, I know, there are different things in each basket), we get a comfortably negative volume reading...which we haven;t seen aftermath of the last recession.
So for now, Macro Man is content to leave EUR/USD to the mercantilists, spivs, and masochists. Now if only those guys would lave equity markets alone, perhaps there'd be some money to be made this summer!


Anonymous said...

Particularly galling has been listening to comments from the French political establishment chiding the Irish for voting the wrong way - given that the French govt decided this time to disenfranchise their entire population after the people inconveniently rejected the same proposals as the Lisbon treaty contained some years ago.

Macro Man said...

Juncker is the guy that gets me. He's on the tape constantly, whining about this or that. In reality, given the constituency that he represents, he should have as much say on the world stage as, say, the mayor of Fresno.

Anantha said...

"Now if only those guys would lave equity markets alone, perhaps there'd be some money to be made this summer!"

Do you think SWFs are up to some mischiefs in equity markets?

Anonymous said...

And with core EC cpi running at 1.7% yoy they'll need those wheelbarrows at the ECB....Fresno's too big for Juncker, I'm thinking more like Grootfontein...

Anonymous said...

macroman, I'd be interested in your estimate of SWF purchases of international equities (excluding their stakes in the big banks). I'd guess about $50b from China over the last 12ms and maybe $100b from the Gulf. Norway is known, more or less. sum it up and it is in the $200b range -- with $75-100b flowing into US equities. That at least is my very rough ballpark estimate. it incidentally is well above the portfolio equity purchases in the tic data ($35b over the last 12ms in the TIC data, counting around $25-30b of $ invested in US banks from Nov through February..)


Macro Man said...

Brad, I suspect that you know more than me on this one, especially in terms of the flow. BOK is a buyer of equities, as if of course GIC. To be honest, I don't think these guys have as much impact in equities as they do in FX, since their potential universe is much broader, their activities are much smaller, and in many cases I imagine they are disintermediated via third party managers.

D said...

You nailed it on disintermediation macro.

I have a client that is in commercial real estate that came to me to see if I had a recommendation on a REIT to buy...not the a few shares, the entire thing.

The SWFs put up 100% of the money, take a 40% interest in the LLC and want a 5 year exit strategy. Deal size? Minimum $50mm to talk, sweet spot $250mm and a $10B ceiling. The same type of deal is being structured on the PE side of the business too. Whether it's Russian, Asian, or Gulf money...they all want a local head to come after if it goes wrong.

Manager beware!


Sunlight said...

Another reason to believe we are in recession: I have to believe that the retail sales data have been goosed by the tax rebates. When the rebates are gone retail sales will reflect that.