Friday, September 05, 2008
Anton Chigurh: What's the most you ever lost on a coin toss?
Gas Station Proprietor: Sir?
Anton Chigurh: The most. You ever lost. On a coin toss.
Gas Station Proprietor: I don't know. I couldn't say.
- No Country for Old Men
Hunting season continues apace, with an apparently ever-increasing number of punters discovering just how much it's possible to lose on the coin toss of financial markets in 2008. Another morning has spawned yet another story about a hedge fund in trouble, and yesterday saw a significant volatility spike across a number of financial markets. With the coin toss that is the US non-farm payroll report looming in a few hours' time, it doesn't look set to get any easier.
Yesterday's rate decisions passed as expected, with no change, but the ECB press conference was momentous nonetheless. As forewarned in this space yesterday, the ECB changed its collateral rules, ostensibly for risk management purposes but in reality to stop banks from drinking too generously from the ECB liquidity milk-teat.
The Bank has increased the haircut on certain types of illiquid ABS (you know, the kind that banks are most eager to jettison) from 2% to 17%; as financial haircuts go, that's dramatic as going from this to this. While the changes don't take effect until February and there is some debate as to what the literal impact of the changes will be, the psychological message is clear: European banks are in for a rough ride, and they don't have a friend in the ECB. Indeed, Trichet hit the wires this morning proclaiming that "financial stability cannot substitute for price stability."
Presumably the Central Bank of Carthage was equally pleased with the price stability that ensued after the Romans sacked the city and sowed the soil with salt.
In any event, the impact on equities was immediate; the FTSE, for example, which had been up half a percent on the day, collapsed to close down 2.5%. Price action in continental Europe was just as bad; Macro Man sold a little bit of Ibex and was up 2% on the trade within 20 minutes.
What is interesting is that with global banks likely to come under renewed pressure (year-end funding globally, investment bank earnings coming up in the US, rollover pressures for European banks), the BKX is still a lot closer to the top than the bottom of its range since the panic lows of early July. While the past six weeks have been about the destruction of relative value plays in equity (the cops have busted the equity crack addicts), we may well start morphing into a phase where the price of everything goes down.
Certainly Macro Man is structuring his book away from a primarily FX focus back towards a heavier equity concentration. While there may still be good money to be made in FX from taking the other side of Mrs. Watanabe's trades, they've come a long way and the volatility has increased dramatically- at one point yesterday Macro Man saw NZD/JPY down 5% on the day.
For those punters who have only known a relatively low volatility, flush liquidity, bull-market world, some of the price action must come as a nasty shock. Yesterday's post inquired as to remaining pink flamingos out there and generated two broadly consensus responses: long BRL and long US fixed income.
The BRL has clearly suffered over the past couple of weeks, and on the chart below looks fairly dramatic. For those of us around in the 1990's, however, the recent rally (of less than 10%) doesn't even register compared to volatility in Asia, Russia, or Latin America.
What's interesting is that the despite being an evidently consensus trade (disclaimer: Macro Man had no sense that this was the case before asking the question), US 30 year yields are rapidly approaching their lows of the century. With a large looming bill for financial system cleanup (whether in 2009 or 2010, who knows) facing the US, you'd have to think the long bond will be worth a stab from the short side at some point.
In any event, out of the money calls (correction: puts) could be quite a nice hedge against an aggressive equity short.
Ultimately, what we are seeing is the separation of the investment wheat from the bull-market chaff. As many have noted elsewhere, a lot of so-called "alpha generators" are getting found out as nothing more than beta-loving bull-market babies. In a very real sense, this is no market for young men; most people younger than 30 haven't been in any sort of responsible position when it all hits the fan.
While his recent misadventures in NZD have given Macro Man a few more gray hairs, it's his entire collection of gray that's proving useful in this crazy market.
Finally, there's at least one story of distress that should put a smile on most punters' faces: Voldemort is apparently running out of money.