Unenjoyment Day

Hard as it may be to believe, another US non-farm payroll day has rolled around already. Although US employment data is relatively unimportant in the current environment, where we are watching the potential collapse of the global financial system, the combination of the data and the House vote on the promise to make it another Unenjoyment Day.

While the ECB kept rates on hold yesterday, Jean-Claude Trichet appeared to have his own Unenjoyment Day. Gone was the smug demeanour and references to points on his compass; they were replaced by a grim tone, an acknowledgment that downside risks have increased sharply, and an admission that the ECB contemplated whether to cut rates this month. This is obviously quite a volte-face from his previous message; what is interesting is that he stated three times that the ECB could act at any time to ensure an appropriate outcome. This morning, he has stressed that he'll act as necessary to ensure European unity, the first real public reference to the potential fraying of the single currency area.

Now, some commenters in prior posts have maintained that:

a) Trichet didn't actually change his message
b) The ECB shouldn't cut rates
c) Interest rates have no forward-looking impact on the banking system and the real economy.

To paraphrase Willem Buiter's recent piece in the FT, Macro Man wishes them a good Depression.

For those of us who believe that the ECB should and will cut rates, focus shifts to the market implication. A rate cut could easily boost European equities, at least in the short term, so Macro Man will need to factor that into his investment calculus. Certainly the short European equity trade has gone from rewarding to intensely irritating this week.

As noted earlier this week, there should be some upside for European bonds, particularly at the short end. An obvious target for the Schatz future is 105.50, which still represents decent upside from current levels.
Moving on to the payroll stuff, Macro Man has a couple of thoughts. The decline in payroll employment has thus far been extremely modest relative to the last two recessions. Judge for yourself whether or not the current set of circumstances merit a milder than usual employment retrenchment; Macro Man knows which way he is betting.
Of course, the unemployment rate has reacted in a manner that is more consistent with the macro environment. Macro Man's favourite indicator, the "jobs hard to get" component of the consumer confidence data, suggests a further rise in the u-rate.

So why the discrepancy? Some of it could well be sampling error. We get the initial benchmark revision to the survey for the April 2007 - March 2008 year, where the BLS adjusts its previous estimates on the basis of more complete tax return data. No prizes for guessing which way these revisions are likely to point; as an example, for that period the household data averaged 58k per month worse than the payroll data. While there is no guarantee that the household data was right, of course, a downward revision of anywhere near that magnitude will certainly pain the US labour market in a different light.

Not that any of this necessarily matters for asset prices, of course; the TARP vote (and potential European bailout agreement this weekend) is likely to dominate market sentiment. It is eminently possible for the macro data to stink and for equities to rally.

To Macro Man, unfortunately, that would represent another kind of Unenjoyment Day.
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Anonymous
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October 3, 2008 at 10:32 AM ×

Quick question (which may become irrelevant if a Europe-wide guarantee is agreed) is: how can the Central Bank of Ireland's depository guarantee be described as 'rock-solid' when the CBoI can't print Euros?

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Macro Man
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October 3, 2008 at 10:35 AM ×

Two answers:

1) The Irish Treasury can issue debt to raise euros

2) In extremis, if runs on Irish banks become so extreme that Ireland cannot issue enough debt, then the guarantee isn't rock solid at all.

Of course, the deposit inflow that irish banks have enjoyed since the announcement have helped improve their financial standing, thus reducing the need to make good on the guarantee to begin with!

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Anonymous
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October 3, 2008 at 10:54 AM ×

So paradoxically the existence of a guarantee makes it less likely one is required. A bit like the GSEs in the US . . . . hang on

Well, all I can say about this is fortunately they had banned the short-selling of Irish Banks before annoucing the guarantee - otherwise I would have been turned over!

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Sean Maher
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October 3, 2008 at 10:54 AM ×

MM agree re ECB, but watch out for another blowup in US insurance stocks, after Senator Reid's careless comment yesterday that one was on the brink (MetLife denied it was them..hmmm). From today's FT re the Fannie& Freddie (Oct 6) Lehman (Oct 10)and WaMu (Oct 23) CDS settlement implications:
'...could result in billions of dollars of losses for insurance companies and banks that offered credit insurance in recent months. The recovery value will be set by auction. Usually, the bond that is eligible for the auction that trades at the lowest price - the so-called cheapest-to-deliver - is the one that sets the overall recovery value for the credit derivatives.'
These looming CDS market events are a key factor behind the current cash hoarding, aside from counterparty risk hysteria. Whether the hit is bigger or smaller than anticipated by bank models will be key to determining the market's course beyond October.

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mikarsky
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October 3, 2008 at 11:13 AM ×

Good point about NFP changes and U-rate. I (of course) would draw a different conclusion.

1) The lower momentum in the recent boom years shows that relatively fewer jobs were created. Hence slack was already reduced with productivity increasing. Those still in employment can't be laid off without ruptures in core activities.

2) The lower relative drop in NFP is due to people holding not just one job as in earlier decades but multiple jobs. Contracts are more flexible allowing firms to reduce working hours rather than direct layoffs. In turn, secondary or even tertiary employment (less well-paid) may be used as substitute. This explains the discrepancy to the (better paid) hard-to-get-jobs.

Hoping for an 'A' ...

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test
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October 3, 2008 at 11:14 AM ×

Hi MM,
could you add to your preferred chart "jobs hard to get" an indicator made by the difference between LHS and RHS?

bye

Al

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dblwyo
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October 3, 2008 at 11:33 AM ×

MM - you get such marvelous data. May one ask as to sources ?
You might want to run you employment back another decade or so for "depth" of comparison, i.e. we're early and once payroll declines tip over, well..
As to why it's not so yet, let us recall this is a lagging indicator and the general economy is just beginning to move from slowdown to tip over.
The more interesting question to me, since you turn out to be prescient about Eurobank weakness and fragility, is what happens when a continental, coordination rescue is required and there's no institutional framework ala Fed/Treasury ?

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Anonymous
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October 3, 2008 at 12:47 PM ×

Re ECB: great to see JCT implicitly admitting a huge policy error by telling they were discussing a cut 3 months after having hiked. Rate cuts cld help economy running towad recession, but also give some incentive to lend to banks, investetc, which is fundamental to unfreeze mkts. Why risk your money if you can earn 4.25 free risk?
Re equity: a strong payroll shldn't impact hard, given signals from other indicators, bud a bad number doesn't bode well for equity at all in my view... Paulson bill shld be approved and this is almost priced. Even Buffet's raid have a lower effect on equity as WFC WB deal shows...

sick trader

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Macro Man
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October 3, 2008 at 12:50 PM ×

db, as my background is in research- both strategy and economics- I have acquired a rather large personal library of data spreadsheets, that are populated by Thomson datastream.

Re Europe, there is a meeting this weekend, that will presumably try and thrash out a policymaking framework for Europe that will improve upon the current 'patchwork quilt' approach.

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bernard
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October 3, 2008 at 1:19 PM ×

macroman, in normal times and with conventional cyclical events, I couldn't agree with you more. For what it is worth, I have been expecting a European recession for many months now, like anyone who knows anything about the cycle.

However, these are not conventional times and conventional monetary policy will simply not work. To be sure, it will cheer up equity markets for a short while, but who the hell cares except for those who, like you, are in the business of managing money, a business I left some years ago.

The root of the problem is fear among financial institutions, not the slope of the yield curve, or real interest rates (at this point, I am quite sure that a lot of businesses, especially small and medium sized, would be happy to borrow at whatever real rates). I repeat that the urgent task for the ECB and other central banks is to restore order, ie combat fear, on credit markets. Rate cuts will be useful once, and only once, that order has been restored. Banks will have to disclose, will have to take their losses, will have to be recapitalised, and then the transmission mechanism can probably be restored. Right now, it is simply broken.

Full disclosure: I did a lot of work on Japan in the nineties

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Macro Man
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October 3, 2008 at 1:25 PM ×

Bernard...if you did work on Japan, then surely you recall that Mieno-san's reluctance to cut rates until more than a year after the bubble burst exacerbated the speed and vehemence of the economic depression in japan.

I can't help but observe that the financial crisis started more than a year ago....

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bernard
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October 3, 2008 at 1:34 PM ×

Well, as I remember it, the BoJ had wanted to pop the bubble and had quite substantially raised rates prior; what they had not realised, I suspect, was how violently it would pop, and the amount of ludicrous loans that had been made - remember the madam in Osaka ? that was a good one. Enough said, you will hopefully agree that it was not until quantitative easing and forcing banks to disclose fully that Japan gradually woke up from its funk.

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dblwyo
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October 3, 2008 at 1:45 PM ×

MM - would that quilting party involve any of the same people who put together a coordinate European Defense Force, orchestrated the bismarckian response to Georgia or...

IF Eurobanks in these times start collapsing it could takes months for an institutional infrastructure to be put in place. Hmmm..we're talking Brussels again ?! OOPS.

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SBG
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October 3, 2008 at 2:11 PM ×

Quick question for you Macro Guys. I understand the premise behind the carry trade, it's basically a banker's spread. However, I am a little confused as to why it implies economic growth. Since last Oct. we have seen the Yen strengthen as punters unwind the Yen carry trade and the brakes have been applied to global growth. I am just getting hung up on the logic.

TIA

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Anonymous
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October 3, 2008 at 2:30 PM ×

MM- What macro observations can be learned from looking at other great economic disruptions? Was there a way to make money in the Great Depression other than buying RE and Equities and waiting a decade or two for a return? The reason for my question is that I wonder, as I read your exc blog every day-- does the time frame for trades in the rest of 2008 needs to lengthen (maybe by a lot) to be in sync with market condition?

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Macro Man
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October 3, 2008 at 3:00 PM ×

SBG, there's not really a presumption of economic growth, so much as the presumption that forward interest rate parity does not hold, i.e. that the expected price distribution will be centered around the spot rate, rather than the forward rate. So the bigger the rate differential, the bigger the discrepancy between the distributions and thus the more attractive the carry trade. Changes in rates thus change those relative distriutons, and thus the relative attraction of a given carry trade. Right now, with rates markets broken, there is no attraction to any carry trade.

Anon @ 2.30, I am wondering the same myself. Thinking of reading up on the Panics of 1873 and 1907, as well as the Depression, for guidance. Bear in mind, of course, that exchange rate regimes were different back then, ie the gold standard, etc.

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Anonymous
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October 3, 2008 at 3:12 PM ×

So much for the weakness in EQT prompted from a bad payroll ... this mkt need a great deal of patience...

sick trader

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Macro Man
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October 3, 2008 at 3:13 PM ×

sick trader....not altogether unexpected,, viz. the last sentence of the post. Patience, young grasshopper, patience....

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RichL
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October 3, 2008 at 4:50 PM ×

I'm assuming that Trichet is watching the Congress, and won't make it easier for them to vote down the package by dropping rates.

If I were a treasury official, I'd push for a coordinated rate cut AFTER Congress approves the bill and it's signed.

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Anonymous
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October 3, 2008 at 6:29 PM ×

Patience... maybe that waiting for 5 months to see JCT and Weber to drop their hubris and swallow bitter i ran out of that...

Hope this is a tipical "buy the rumor sell the (obvious and discounted) fact ... but all this chatter about coordinated cuts dosesn't help the bears.

Still i think that the clearly visible H&S on DOW transportation is heralding the catch down that looms for non financial vs financial stocks...

sick trader

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gramps
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October 3, 2008 at 6:43 PM ×

MM: One minute you are shreaking for a rate cut, and the next you are preaching patience...

I think if you wanted to be intellectually honest, you should simply suggest the Fed/ECB/BoE lower rates to zero... According to Wall Street pundits, it is never a good time to raise rates, and there is always an excuse to lower them. So stop your silly nonsense babbling and just set rates at zero permanently.

Since rates aren't going to change from zero, and there is never a good reason (according to you) to raise rates -- we don't need to keep the Fed or ECB around.

And since there is no more uncertainty about where rates will be, we can further get rid of all the useless "analysts" on wall Street and their ridiculous attempts to forecast central bank policy.

Banks all around the world can replace their economists and "analysts" with lifesize cardboard cutouts of whatever super-hero they prefer ... and attach a little voice bubble that says "I think the central bank should lower rates!"

The cardboard figure costs about USD$50 (for a really good one), versus six figures or more for the human equivalent.

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Anonymous
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October 3, 2008 at 7:02 PM ×

Not really funny this attitude, Gramp.
It is absolutely clear that the last ECB move was a big policy mistake.
About zero interest rate policy... there is a fair chanche for your joke to become reality if global depression lasts enough...

sick trader

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Anonymous
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October 3, 2008 at 7:10 PM ×

About Japan. I have a maybe dump question on carry trade and macro. The carry trade makes Japan's capital very attractive to foreigners. We should see consistent money outflow to international markets. Then Banks always have their upper limits on lending ability. Thus it seems to me that the capital left to invest in Japan's domestic market decreases. Is this the reason that Japan's recession has taken so long so painful?

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gramps
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October 3, 2008 at 7:32 PM ×

sick trader:

Not trying to be funny... I am shocked at how short sighted the financial community has become.

We know there is no lending because of credit problems (I won't get my money back when you go bankrupt). So MBAs all line up to appear on the PIMCO network (CNBC) and advocate a rate cut.

Lets put aside the fact that Japan already discredited this idea. Analysts haven't demonstrated any ability to analyse events around them, so its unfair of us to expect them to learn from Japan's mistakes.

Instead lets ask them to explain why bonds with a lower credit rating (where investors think there is a danger of non-payment) trade at a HIGHER interest rate -- and yet these same geniuses think that non credit worthy banks ought to be able to borrow at LOWER interest rates?

All the "analysts" who think lower credit counter parties (banks) should pay lower rates are going to be replaced with cardboard cut outs.

Companies that fail to add value to their customers get run out of business -- and Wall Street analysts are not an exception.

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Anonymous
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October 4, 2008 at 2:26 AM ×

Gramps - was there a constructive comment in your post?

Thank you Macro Man for keeping this blog and entertaining and informing us. The fact that you try to participate in the discussions and answer questions is icing on the cake.

BTW - seems like the short ban is done.

http://www.sec.gov/news/press/2008/2008-238.htm

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Anonymous
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October 4, 2008 at 10:45 AM ×

When I compare Trichet's "greeem tone" with Bernanke's sweaty, leaned-on, shifty, hyperbole and I know who I would rather buy something from...

Nod's as good as a wink to a blind man...

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sharpe_mind
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October 4, 2008 at 1:34 PM ×

Maybe it might be too obvious, but an interesting trade here is short EUR vs a basket of USD, GBP, CHF, and JPY as a play on the increasing strains on the Eurozone. This is really the first test. Monetary unions historically have done well during times of plentiful liquidity, but it's times of scare liquidity when they suffer. The spread between 10Y Germany and Italy is starting to get alarming.

As a correlary, I think EUR/GBP is right now finally going to break out of this range it's been in for the last six months, to the downside.

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sharpe_mind
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October 4, 2008 at 1:54 PM ×

One more thing- I know Japan is the last thing on people's minds these days and no one really cares about it, but, price action-wise, I find it pretty interesting that JGBs haven't been able to rally very much in the last few weeks.

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"Cassandra"
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October 4, 2008 at 2:34 PM ×

MM -

Since Bernard mentioned the "Osaka Madam", and since everyone probably needs some cheering up, here is a piece I did on her that I reckon is worth a read and that you'll find amusing....

Nihoncassandra on Infamy

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gramps
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October 4, 2008 at 8:32 PM ×

Anon 2:26 am

Yes -- mine was a constructive comment, even if you don't realize it yet.

Sometimes you have to play adult and tell your kids "no" on something they really want -- it helps them learn. Sometimes, you have to tell a really good employee that they screwed up -- it helps them learn.

And sometimes, Wall Street desperately needs some tough love -- especially when it manages to lose $400 billion and counting.

Wall Street isn't going to recover if it blames high interest rates for its problems. Risk management, making sure borrowers provide good collateral and that they have skin in the game, making sure trader's compensation is alligned with the firm's, making sure that the reward is at least high enough to justify taking the risk, etc -- are all tenets that served Wall Street well in the past, and could serve it well in the future.

Charging banks with doubtful balance sheets prime (and lower) borrowing rates makes no sense. There is a lot of risk in lending to institutions that completely ignored risk management for years and have dubious balance sheets. Interest rates charged need to reflect that.

This is why Buffett "had" to charge Goldman 11% on the preferred, and it is why Goldman was willing to pay it.

Coddling Wall Street with bureaucratically set interest rates and excuses isn't doing anyone any favors

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gramps
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October 4, 2008 at 9:06 PM ×

Goldman is interested in remaining a force on the global stage -- so they are demonstrating strength (and integrity) by paying a market rate. Even if it is a bit too high in the short term, it demonstrates (1) an ability to actually pay and (2) a willingness to adapt to changing markets, rather than whining to mommy to make the other kids stop being mean.

Most of Wall Street has mentally given up. They are keeping up appearances, GM style. Did the Chrysler bailout really help Detroit? Or did it allow GM, Ford and the UAW to pretend everything was OK and life could continue without the need for any painful reforms?

So now Toyota and Honda (and BWM, Volkswagon, Hundai, etc) are eating Detroit alive. We'll waste another $25 billion pretending GM is still viable, but it is still circling the drain. GM is no longer competitive, and they know it.

We could make the same statement about (former) US steel companies, that refused to adapt and insisted on government bailouts instead.

There is nothing special about banking. Demanding protectionist policies from the government will not make Citi, B of A, RBS, UBS, or JP Morgan be able to manage risk properly.

Goldman doesn't want to be the next GM, and I have to applaud them for it.

The rest of Wall Street had better grow up, or else get used to a long slow decline just like Detroit and big steel.

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Anonymous
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October 6, 2008 at 5:33 AM ×

Ha ha Gramps ...very funny! Then trader could try and corner the cardboard market...

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mikarsky
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October 6, 2008 at 8:47 AM ×

GRAMPS, you hit the mark with pointing to parallels in others sectors. Outrageous institutional support of firms undermines adaptability and long-term survival. The financial sector as we know goes the way of the dinosaurs. It's time to look ahead. I remember you had a blog or else would be great to get in touch (gmail)

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