Thursday, September 11, 2008

Free fallin'

Another day, another disappointing lack of collapse in European equity markets. While Macro Man is trying not to tick watch and remains firmly committed to the bear trade on a medium term basis, he has to concede that the lack of instant gratification has been frustrating in an environment where mistakes are swiftly punished.

One market where gratification has been instant is New Zealand, where yesterday's surprisingly aggressive 0.50% rate cut has sent NZD/USD 2 cents lower in fairly short order. Not that there hasn't been a sting in the tail; as noted at the end of yesterday's running diary, Bloomberg misreported the move as a 0.25% cut, in line with market expectation. Misreported central bank activities happen with surprising frequency on Bloomberg; Macro Man is coming perilously close to purchasing a tin foil hat with respect to Bloomberg News. In any event, he has been dragged back into the short NZD trade; one of his most profitable analytical frameworks has been to sell those currencies where CBs go for growth, which the RBNZ has.

There are, of course, other markets in free fall. While Macro Man doesn't really trade a number of these, it is still interesting to observe the value destruction that's going on.

Remember when precious metals were the only "real" store of value left? How much retail money poured into metals ETFs? Silver is down 50% (!) from its highs in March. 50%! That's truly impressive.

Oil is now back to last year's closing levels; if it doesn't bounce soon, the base effect on inflation data will lead to a significant reducton in CPI prints globally. To a degree, it's already happening; Chinese CPI is already surprising to the downside. While Macro Man was happy to trade an inflationary theme earlier in the year, it's pretty obviously been the wrong way to look at the world for the last few months. Fortunately, he hasn't thrown much, if any, money down that particular sinkhole, though the bid for US 30's might reflect something of a deflationary trend.

One market where the collateral damage has been significant is Russia, where the equity market is down nearly 45% over the past few months. It just goes to show that if you actively seek to screw over investors and stick up two fingers at the rest of the world, your markets will eventually get punished. This begs the question, of course, of why the SPX isn't 20% lower.
EUR/USD, meanwhile, remains in free fall as well. This has been something of a source on consternation to Macro Man, as he's felt a significant opportunity cost from not really participating. On the other hand, his expectations for the dollar have so far been wrong: it hasn't settled into a range trade like he thought. So from that perspective, not making money in a move that he didn't expect is no reason to beat himself up. Regardless, we are approaching pretty critical levels in the dollar. EUR/USD is now back at the level prevailing when the Fed first cut rates a year ago; the year on year change in the pair looks set to turn negative for the first time in two and a half years.
On a longer term basis, 80 was a critical long-term support for the DXY for 20 years; when it finally broke last autumn, the follow-through was swift and dramatic. The DXY is now retesting the 80 level, which should act as staunch resistance. If the USD is going to fail, it should start very soon. If it keeps going and closes this month above 80, it will be a powerful signal that the seven year dollar bear market is over.
At this point, Macro Man is trying to remain flexible on the dollar while retaining conviction on higher quality trades. Hopefully, this modus operandi will keep the most important number on his screen, the P/L, from free fallin'.

31 comments:

gsm_73 said...

Another interesting and red day in GCC, Indices down, select scrips saw no buyers at the end of the day, my target prices are touched and breached every day.

Goldman sounds somber on UAE real estate.
I will this way end up with no chart data to give target price(s).

gsmani@gmail.com

Anonymous said...

"...it's pretty obviously been the wrong way to look at the world for the last few months..." - I'd rather say "in the last few weeks"!. The "gestalt shift" from inflationary to deflationary concerns was completed in a matter of days between late July and early August thanks to main commodities moving down. Now markets seem to trump those CBs actively engaged in fighting downside risks to growth and not inflation-comes-first CBs... The question is: how come the USD is now seen as a safe haven?

AT

PS - Sir Gianfranco Zola for West Ham Utd? Surely better than "right-wing" Paolo Di Canio! Meanwhile, my boleved Fiorentina is awaiting its first Champions' match after eight years...

Macro Man said...

Yes, the shift seemed to occur when I was on holiday. As for the Hammers: while di Canio's politics are regrettable (I'd use 'fascist' rather than 'right-wing'), as a player he was a legitimate West Ham hero, whereas Zola was....not.

Either way, both were great players, and both are great gambles as managers.

t said...

Looks like you may have your day today, MM.

Anonymous said...

Actually, I first wrote "fascist" but then thought it was rude and inappropriate. Let's say that both names would be more suitable in a higher risk appetite environment...

AT

Corey said...

mm, being a fan of chess too, i'm wondering how many moves you think out: 1) dollar well off lows, 2) crude about to break 100, 3) gold/silver signaling deflation, 4) cd swaps near their highs, 5) vix starting back up, 6) US unemployment over 6% (and rising), and 7) US stocks about to handily break their july lows (witness MER lowest close yet)...

i think everyone needs to prepare for an emergency fed cut before tuesday morning, when Hank Paulson testifies before the senate hearing on fnm/fre bailout...Hank won't want to be answering fiscal policy questions with the markets in free fall when we have a monetary tool still available. its an option, and a potential move.

Anonymous said...

"This begs the question, of course, of why the SPX isn't 20% lower."

I have to wonder how long it will be before the headlines in the US read: Traders see signs of government intervention. Option expiration next week I agree with Corey. The only thing is one day that isn't going to work and the desired effect will be the opposite.

Anonymous said...

Yesterday was tough and I drew comfort from MM's diary. Misery loves company. For my part, bets on LEH, US equities and the USD were wrong. Zero out of three ain't bad. Today's US market, however, looks bad to the bone.

E said...

if this MER price action continues they're going to have to change their logo from a bull to a bear...under 20 USD now and still in freefall...ouch

E

Anonymous said...

I agree with an above on the possibility of an emergency fed cut over any weekend from here on (especially on expiration weeks)....

The Jan rate cut demonstrated that supporting economic growth means asset prices....so holding short over the weekend has elevated overnight risk.

However, holding short over a bad Friday into an ever worse Mon/Tues has been $$$$ during past panics.

Good luck all it looks like Godot may finally be here.

Anonymous said...

I wonder that CB's roles in EUR/USD' free fall?

Macro Man said...

Twofold:

a) They have sold a bit

b) Much more importantly, they have not been in the matket as a price insensitive buyer of last resort.

dblwyo said...

What happens if the US economy relatively stronger thesis unravels ? Right now it looks to me as if the $:everything runup was a weltanschaunng shift to a new but wrong paradigm. Wouldn't we see an equally surprising jumpshift the other way ?

Anonymous said...

JPY, at last! Is it FEAR?

AT

Anonymous said...

To dblwyo:

I also think that the new paradigm is wrong, since US are in no better shape than most other economies, but the FED is a few miles ahead in the monetary policy cycle than ECB and that's good for the dollar, right now. When "the US economy relatively stronger thesis unravels" currencies like JPY or CHF should benefit, since Japan is on the same boat with US and EMU (and UK, and NZ...) but their banking system has supposedly not have been infected by latest credit crunch waves and Switzerland... well, Switzerland was created to provide a shelter on the way!

AT

Anonymous said...

Chuckled long over the zombie bank comment from yesterday, MM. A little comic relief in an otherwise grim landscape. Am a veteran of many financial wars, but this one seems to defy all analysis.

Anonymous said...

I tend to buy inot the relative US strength argument. In actual fact we are just following previous cycles--US goes into recession first (and drags everyone with it), US comes out first. Decoupling, no. Status quo, yes.

THe US has a large internal economy, very flexible labour force (although undereducated) and monetary and fiscal policy growth focused. These all equate to a fast recovery compared with say Europe, which only ticks one of the three boxes...

Anonymous said...

In case you haven't seen this...

http://www.nakedcapitalism.com/2008/09/lehman-end-imminent.html

dblwyo said...

anon @3:15 - thanks. CHF ?

anon@4:27 - well you'll be the other side of our trades, eh wot ? :)

BUT...the argument would be correct if US economy doesn't weaken further. My argument would be that we're just crossing the tipping point into the real downturn and all we've seen so far after been the ripples of the credit breakdown.
Try these on for fit and see if they make sense to you:
http://tinyurl.com/5qae55
http://tinyurl.com/6r6pwm

If they don't then the US stronger thesis holds; if they do then not

mikarsky said...

AT 10:54 AM
“Now markets seem to trump those CBs actively engaged in fighting downside risks to growth and not inflation-comes-first CBs”
CBs and Govs trump markets. Markets at least at the moment are just an aggregation of little sheep scared-to-death by – I like that – Satan’s Finger (leading to confusion and erratic moves). The better question is:

Anon 2:25 PM
“I wonder that CB's roles in EUR/USD' free fall?”
Nobody except the US had an interest in a weak dollar. Now, after subsidizing US exports for a while, calls for stronger USD materialize in action. BTW, the Eurozone just got 15% more competitive during the last few weeks. My feeling is that the dollar is simply not allowed to fall for various reasons.

DBLWYO 3:03 PM
“US economy relatively stronger thesis”
A thesis usually has arguments – I haven’t heard a single one that is convincing to me.

DBLWYO 4:43 PM
I find the not-stronger-thesis more convincing. Simply because they put forward some good arguments while I don’t know of any good counter arguments. Does anyone???

BTW, at least for a while and with nerves of steel, why not trade as IF it’s convincing, because that’s what everyone seems to be doing. Expectations and perceptions shift slowly which gives you time to switch course. Given the momentum, it may well be that faith only breaks after actual GDP for QT1&2 2009 becomes available. But more realistic would be indicators showing that EU growth is accelerating. EUR depreciation certainly is one step.

mikarsky said...

PS: I'm not trading at all at the moment and the As-If thing only refers to FX and commodities used as USD hedge.

dblwyo said...

mikarsky - we're very much of a mind. I'm strongly in the US isn't stronger just looks that way camp (cf the links) but take your points about trading that way/weigh. Also the nerves of steel.

The catch would seem to be that after months/years of predictability there was a sudden 180' reversal out mental models and one would therefore suspect the same once economic realities set back in. In other words Satan's fingers would get you again with no warning.
MM may either really regret enshrining that image or trademark it.

Mencius Moldbug said...

Fundamentals, people!

1. "Commodities" are not an asset class. When you go long wheat, you are betting that you know more about the wheat market than the people in it now. Why would you do that, if you didn't know anything about wheat? Diversified ignorance is still ignorance.

2. Precious metals have no "intrinsic value." They have a sustainable monetary premium, which can and does fluctuate wildly. Ie: they can sustain large, growing stockpiles in which supply perennially exceeds demand. But that doesn't mean they have to.

3. Agricultural and industrial raw materials (other "commodities") cannot sustain a monetary premium. If Mr. Market lump them all together under the vague category of "stuff," and pushes money into them, supply will exceed demand. And Mr. Market will be sorry.

4. Until Mr. Market figures out (1), (2), and (3), which he shows no signs of doing, (2) and (3) will go up and down together. PMs will decouple from raw materials and OECD currencies when, and only when, Mr. Market figures out the difference. Knowing how much hot air remains in individual commodity markets - or even if some are oversold - varies per commodity and requires actual understanding of that commodity.

5. "The dollar" is not a meaningful concept. It's a numerator without a denominator. When we say "the dollar rose," what we mean is, "the dollar rose against a basket of OECD currencies." At present, Mr. Market believes that dollar/OECD rates should correlate with dollar/PMs and dollar/raw materials. There is some justification for the latter correlation and next to none for the former.

6. The fundamental feature of the BWII universe is the hemorrhage of dollars out of the US and into Asia and the Gulf, blowing out money supplies in the latter and causing global inflationary phenomena. Small fluctuations in the basically stagnant OECD economies have only small effects on this bleeding. The difference between 2% growth and 2% recession is not terribly significant. Eg, the PRC already has its foot jammed on the brake, and can pull it off any time (and is).

7. Clotting this wound would require real austerity, with high interest rates and balanced budgets. Good luck with that, kids.

mikarsky said...

DBLWYO 6:55 PM
I agree, there was a 180 degree reversal towards pessimism. Does it imply a 180 degree reversal towards optimism – at one point perhaps. But it’s very hard to pinpoint the exact sources for US optimism, for growth in the US. All indicators that could be contributing to growth are further deteriorating.

Mencius Moldbug 7:45 PM
Thanks for Economy 101 – it sometimes helps. But in markets driven by fear, investors won’t philosophize about the ontology of value. Economic fundamentals are negligible – actions create facts, e.g. new price horizons that may become tested if Bernanke’s “recovery” promised for the 2nd half of 2008 turns out to be just another clueless utterance. But we already have a replacement, the “relatively stronger thesis” set to debut sometime 2009 : )

Mencius Moldbug said...

C'est vrai! You can invest fundamentals. You can't trade fundamentals. In the long run, sentiment converges on fundamentals. But the pressure to converge is weak, weak, weak...

Anonymous said...

Best post and comments. Thanks, all.

dblwyo said...

mikarsky - perhaps I'm not entirely clear but believe we're saying the same thing. Without replicating the detail the blog posts cited in my earlier comment are my de-construction, so-to-speak of the b-cycle and our crossing the tipping point.
Fundamentals if you would but the points about sentiment vs fundaments is true as well. In the case of the dollar I think somebody hit the Optimism toggle on the relative economic performance argument and further that once the realities sink in it'll be switched off. BtW - YoY US real GDP growth was 2.5% and 2.2% while Gross Domestic Purchases, which net out trade impacts were 1.1% and 0.4%. That's a recession by most modern standards but you wouldn't notice from the headlines.

Anonymous said...

MM like the running diary, again?

Fullcarry said...

The Dollar carry trade got a push and shove from the official sector into unwinding.

It was a brilliant move and helped squelch "inflation expectations."

mikarsky said...

dblwyo - You're right we're on the same page Re: crossing the tipping point. It's sounds a bit too apocalyptic though. Let's call it contraction that skims the global demand surplus generated by the US housing bubble.

Re: US Recession. The low GD Purchases show how vital USD depreciation was to drive exports and overall GD Product. Reduced EU growth was a direct consequence - true friendship so to say.

Anonymous said...

If anyone wants to take out Eddie Lampert, here's your chance.
Seriously, did Eddie even set foot in a Sears before he bought the place?

Ug. No one will shed a tear should Kmart/Sears disappear.

IMHO, SHLD is begging to be shorted back down to <70. YMMV.