Faster Than the Speed of Light

Thursday, September 18, 2008

Although Macro Boy the Elder is only six years old, he knows that nothing (other than certain properties of subatomic particles) moves faster than the speed of light. Nothing, that is, except financial market sentiment and pricing, which is changing at literally unbelievable speed.

News so far this morning is that the world's central banks have cobbled together a plan to provide localized overnight dollar funding. While this alleviates the worst of the near-term funding pressures, it does little to solve the more medium issues surrounding uncollateralized interbank lending.

The craziness can be observed in the price of the December 2008 eurodollar contracts, which have had a cheeky 80 bp range over the last three days. That is not a properly functioning market.
The panic is equally evident in gold, which has rallied $110 in a week. This is a market that is stocking up on shotguns, candles, and tinned beans, and is looking to place its fiat money in a hard, tangible asset. Macro Man is normally a "barbarous relic" man when it comes to gold, but given banking sector concerns he can sort of understand the appeal of gold at the moment.

Even the most sacred of cows has been taken to the abattoir. One year USD/CNY NDFs have traded as high as 7.18 (!!!!), pricing in a 4.7% depreciation in the RMB over the next year. Macro Man asked a couple of banks for some downside spreads to try and take the other side; while he received a nice price from one bank, the price from the other was literally unbelievable- he was being asked to pay out regardless of which side he traded.
European equities and short sterling have bounced strongly after CNBC aired a rumour that the BOE will cut rates today at 9.30 local time (20 minutes from when this post is being written.)

If they do, stocks will fly. If they don't, stocks should dump. In either case, prices could move at faster than the speed of light.

Posted by Macro Man at 8:46 AM  


It's not relevant every time a dog fails to bark, but I wonder what Sherlock would say about (what seems to be) an absence of bottom-callers these days...

Daniel said...
9:28 AM  

When I get some spare time, Holmes will make an appearance, but at the rate this is going it might be 2010 before that happens.

Macro Man said...
9:38 AM  

It seems like at some point exhaustion is going to take over near term. Year end funding for banks (shadow and otherwise) will be exciting, but it seems plausible we might get a week of nothing (ie +/- <1%) while everyone pulls back and checks for missing body parts. It sounds like folks are already taking a bank holiday in the derivatives/fixed income space.

P.S. Why the heck does blogspot call it "word verification" when it's never a word (at least not in anylanguage I know)

HoosierDaddy said...
9:52 AM  

Are we possibly seeing a major sentiment change here ? From the old "this too shall pass" bottom-calling to a more realistic appreciation of "not it won't, it's spreading and metastasizing ?" FWIW took a shot at a longer-term perspective and some of the fixes rapidly emerging, e.g. a resurrection of the Resolution Trust Corp. Of all things but a good idea IMHO.

dblwyo said...
10:29 AM  

Dear MM:

This comment frightened me:

John Chambers, the chairman of Standard & Poor's sovereign ratings committee:

Speaking to Reuters

he argued that the lack of "pro-active stance" by the United States in its “bailout” of AIG would have put pressure on the U.S.'s "AAA" rating.

He added: "There's no God-given gift of a AAA rating, and the U.S. has to earn it like everyone else."
(read the quote in BNYM website)

No one else I know to authoritatively comment on it.


ganesh mani

gsm_73 said...
11:45 AM  

May I authoritatively comment on it for the time being:

With metabillions of US tax money burned in bailouts – and with no way of backing all the smelly stuff it acquired – the USD system has a serious problem. With its HUGE structural deficits, the US would have to raise taxes, but it can't because this would be the last nail in the coffin. In effect, the USD system is doomed, and that is what Mr. Chambers perhaps wanted to say...

mikarsky said...
12:23 PM  

I think what S&P were really saying is "we would not have downgraded the US whatever they did because we are a US firm and therefore our interests are in conflict". At least S&P only have the US two notches above Japan, not four like Moody's. For our future, we are going to need lots of kids like Macro Boy with an interest in physics.

RebelEconomist said...
12:58 PM  

Hi MM,

I just finished reading a note on how XAU and EUR have been mirroring each other for many months now. How about starting to consider a possible decoupling in the future path of such assets? After all, latest moves in the gold spot market seem to have been driven more by fear than inflation concerns and the rationale for EUR to mimic gold seems increasingly flawed to me.

Read you later, AT

PS: Olimpique Lyonnais - ACF Fiorentina 2-2 (0-2 at half time...)

Anonymous said...
1:14 PM  

it has begun, MS down 10% in pre market

Anonymous said...
1:15 PM  

Dear Mika

the effect of a downgrade would be directly proportional to the reserves held by countries?

I am in UAE. :)


gsm_73 said...
1:20 PM  



Anonymous said...
1:20 PM  

NY Fed receives bids for $102 bio....
ECB receives bids for $101 billion....
BOE receives bids for $14 bio....

Which of these things is not like the other?

Macro Man said...
1:28 PM  


I’m not a specialist but AAA is a credit rating. If your credit rating is AAA, you’re relatively safe candidate to lend money to because you will normally pay it back. That means, people will lend you more money and the risk premium (interest) you pay is smaller. Usually, nations with advanced economies have AAA ratings. But some banana republic, where a few mighty use fiat to outdo economic and market laws, usually have lower ratings such AA or BBB.

Why? Because continued gov intervention erodes fiscal stability and borrowers’ trust in that country’s fiscal morale. Fewer people are inclined to lend to this country and if they do, they want higher risk premiums (interest). Meanwhile, erosion in fiscal stability, less money to borrow, and higher interest payments all increase the temptation to print new money. This depreciates the currency and could turn the reserves you hold into scrap paper.

In short, downgrade to AA = BAD.

mikarsky said...
5:47 PM  

Your CNY NDF call was a good one as it collapsed mighty quick.

~C. Maoxian

Anonymous said...
8:44 AM  

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