Wednesday, November 12, 2008

Back of the queue!

While the newsflow continues unabated, market engagement remains tepid at best; as noted, many punters (and banks) seem content to limp into year-end.

The latest development from the US is, unsurprisingly, a broadening of the firms angling for a piece of the bailout pie. Yesterday AMEX filed to become a bank (and thus receive some sweet, sweet TARP lovin'), while Nancy Pelosi wants to divert a chunk of funding to prop up the US automakers.

Jeremy Clarkson's love for the new 'vette notwithstanding, it's not difficult to come to the conclusion that most of Detroit's offerings are uncompetitive in the global marketplace in terms of quality...and that's before you factor in the pricing disadvantage that comes from the Big 3's defined benefit liabilities.

Macro Man understands the political realities that make the bailout of Detroit an inevitability...but it does make him wonder where the line is drawn. Banking, insurance, real estate, financial services, autos....which industry is next in the queue for government handouts?

McDonald's (to ensure a ready supply of cheap, if unhealthy food, for the nation)? Televangelists (to ensure a ready supply of prayers on behalf of the nation)? Major League Baseball (MLB has a long and proud history of gorging at the public trough to pay for stadia)?

Macro Man doesn't know which industry is next in line, but he does know that the list of extended hands is growing by the day. As an exclusive to MM readers, he has managed to secure a photo of the queue to receive public funding through the TARP. Should you wish to apply, he's afraid you'll have to go the back....

But hey, enough of pickin' on the old homeland. While it's easy to blame the state of the economy and consumer confidence on the government and greedy Wall Street does that explain the collapse of confidence elsewhere? Take Japan, for example....where some leading indicators are actually pointing up, the government is, well, flaccid, and finance a go-go hasn't been seen in nearly two decades. Yet consumer confidence has collapsed there as well.
And the goings-on in Russia seem to have re-directed the market's attention to the fact that when the shit well and truly hits the fan, you really need to hold the world's reserve currency. After yesterday's "band widening" of the Russian basket, CBR reportedly burned through at least $8 billion of reserves yesterday.

Meanwhile, the DXY has broken through the top end of a wedge formation, suggesting further impulsive near-term gains for the buck. Clearly it's happening against some of the weaker currencies out there; USD/TRY, for example, has rallied 11.5% since last Tuesday.
With EM looking wobbly and stories circulating of yet another round of hedge fund redemptions in the pipeline, the market certainly feels as if it is short of liquid USD assets. Macro Man has added some tactical risk in some of his favourite EM short plays as a result.

The lack of flow information notwithstanding, this dollar does feel as if it may be poised to make a step-adjustment higher. It's almost as if embedded dollar shorts ask their banks how they can buy some and, by way of reply, are told to "get in the back of the queue."


Adrem said...

Schumpeter long ago described a recession as a destructive/creative process which forced resources out of those areas which were redundant into those with future promise. So a lot of noise we hear now is the clashing of gears not a steady downward slide into the abyss. This makes a case for holding the dollar - longer term.

Anonymous said...

i thought that the whole point is that the world is questioning the "future promise" of the US of A

Anonymous said...

Schumpeter talked about creative destruction.

Government bailout programs are all about creative conservation.

Cortex said...

I dislike the notion of state intervention in free enterprise just as much as the next guy. However, there is a distinction, apart from the obvious, between banks and GM on one side, and McDonalds on the other.

If government intervention is to be restricted to institutions that if they were to default would endanger the entire finacial system. Unfortunately, GM has become such an institution. Intervention should have happened a long time ago, before such an obscene number of casualties would be at stake.

This does not say that Washington should use a pool earmarked for the banks to save it.

Anonymous said...

Makes one wonder if consumer confidence is lead by or follows bailouts and interest rates cuts. Some new Central bank signalling perhaps.

Anonymous said...

Odd statements! Men usually make distinctions that serve their purpose. Nice example you gave.
The market was and is about power, not free enterprise. But we won't admit cause we want to fool ourselves with ideologies.
I prefer MM's cynism that holds no judgment, but looks like a way of coping with dilemmas.

Anonymous said...

Ahh - the "old homeland" - now is the new homeland - welcome to the People's Republic of America...
Surely, Karl is grinning a bit...somewhere.

Anonymous said...

Hey Macro-Man and other informed readers (err, traders of the blog),

What is your take on further moves on USD/TRY? Do you see other near term plays against other emerging markets?

Macro Man said...

Anon, I am not involved in USD/TRY as a) it's expensive to be long, and b) it's too volatile for my taste. There are a number of factors that argue it should go up a lot (capital starvation, fx debt in corporate sector), and a number that argue that it should remain resilient (very high real interest rates, lower oil is a massively positive terms of trade shock.)

For choice, I suppose I think it keeps going (there are probably quite a few unhappy TRY/ZAR longs at the moment)...but I also think there are more relaxing, higher Sharpe ratio trades out there.

Anonymous said...

MM if you were an American citizen who thought it might be a good time to take his dollars, pack a few cloths, and haul ass out of the US while the getting was good which county would you recommend?

Financial Calvinism said...

Perhaps Detroit would be more competitive if the BOJ had not been parking dollars and the jpy/usd < 75. Or if the US Treasury did not allow them to counterfeit the USD by spraying it all over the world at forty to one? Whaddaya think.

Anonymous said...

us dollar up, stock markets and commodities down, it's been a fairly tight inverse since september...with more dollar strength say into 90, then crude oil to 50, gold to 600-650, corn to 3 and soybeans to many tell me corn is dirt cheap down here, au contraire the commodities are still double the highs of their previous historical ranges right now

Macro Man said...

FC, that would explain relative price competitiveness between Detroit and Toyota....but it still wouldn't help US automakers a) improve build quality, which is dire b) improve styling, which is dire, and c) improve fuel efficiency, which is dire.

Foolish Jordan said...

Doesnt DXY only track the dollar against 6 or so major currencies so "weaker currencies like TRY" shouldn't be relevant?

Macro Man said...

FJ, yes, though the degree of correlation at the moment is quite high.

gramps said...

So we have a new government in the United States. Instead of bailing out poorly run banks, we are now going to bail out poorly run auto-makers.

I thought McCain was supposed to be the one continuing failed Bush policies?

When Obama talked about "change", evidently he meant he was going to change which cronies got to rob the taxpayers blind

Damcanu said...

How about bailing out poorly run coffee shops ??


from CNBC:-

The joke on the Street this morning is that Starbucks wants to be part of the TARP — that Peolosi and company thinks everyone needs a $5 latte in this economy.

cfarley said...

A quirky example of the liquid US demand spiral -- when general money market rates drop, people like me who have to sit on wilting cash in brokerage accounts tend to dump it into very conservative long positions in US Treasury funds (i.e. the SHV ETF) as a no-brainer.

Anonymous said...

last hedge fund notices due 11/15, but then they have 45 more days to liquidate, so a vicious tax-loss selling season seems to be on deck..
we had the dot.corn bubble over here as well, with ag stocks the momentum darlings(like MOS 31 in '07 to 162 mid-year '08 to 31 now)... look at this:
stocks of inorganic feed phosphates (IFP) have increased spectacularly on the back of falling demand. a vital raw material in the production of IFP is sulpher, and one sulphur price reference index - the Vancouver FOB - has fallen from highs during mid 2008 of US$840 mt to just US$30 mt at the start of November 2008. Sulphuric acid prices have followed suit.
...hard to step in front of hedge fund, endowment fund, pension fund liquidation in the commodities right now

Anonymous said...

Anon 1:56
While I'm not MM I'd say Scandinavia is about the safest harbor in this economic storm. If I had to pick just one country I'd say Norway.

Anonymous said...


NOK/USD is not very impressive right now. It's like a long oil, short USD position.


The more policymakers focus on system risk, the more system risk they will get. If they create incentives to get 2big2fail, the market will come out with companies that are 2big2fail. GM, Ford, AIG and banks all just follow the incentives.

If policymakers just concentrate on monitoring market mechanisms and allow failures, there will be nothing called system risk. Where is the system risk in the food supply of the US? Was Scottish banking inherently instable?

We are always in the long run, and today the problem with assuming we are dead is apparent. Congratulations all Keynesians.


Macro Man said...

Argghhh. I just wrote a long post concluding that I would recommend Spain, and it somehow got lost in the ether.

Anyhow, I'd recommend Spain- a n ice mixture of climate, culture, cost of living, and lifetyle...particularly if you stay away from the coastal areas filled with lobster-red Brits munching beans on toast and reading The Sun.

CB, if you're reading, perhaps you could render an opinion...

Anonymous said...

I know its late in the day so not sure how many still checking this before bed, but I've just watched another terrible day on Wall St, etc, etc. Bad news flow said to be driving markets, blah, blah.

But question. There are a lot of clever guys on the street, so what do these analysts do all day? I mean look if you're a trader the name of the game is to keep the P&L in the black by making the right call. So what is the deal with analysts? They totally missed the call on financials, oil was another (GS calling $150 I seem to remember). Then we got DBank analysts calling GM going to zero - well yeah a 5 year old can call that once the company themselves says they only have cash to last 6 weeks.

Am I missing something here??

Anonymous said...

"what do these analysts do all day?"

Sellside analysts are mainly a sales tool.

Anonymous said...

Do they help build relationships with clients!?

richie rich said...

country to go to??...i'd say canada...left coast...vancouver.....nice people....same subprime...good banking system...surplus's...conservative's a little paid for but rationed...can't have everything...home of west coast lifestyle hat, ski, sail...all in same day...not bad

patrick said...

not to nitpick the last comment too much, but, ummm, theres a wackload of subprime in vancouver, but its not as transparent as one would like it to be. Given that Vancouver is the least affordable city in Canada (and probably N.A. too) the ability of most to finance is based on some creative financing not dissimiliar to the U.S. experience, but perhaps not as standardized. I am fairly certain that NINJAs and negative am financing is alive and well, just not documented as such.

richie rich said... may have point about col in vancouver...but i guess when it comes to quality of life....gotta pay up....and you're buying cheaper subprime exp...i'm referring to cda as whole...whose financial sector,on a relative basis, has fared well...their banks are in better shape because they didn"t leverage up....afterall....the banks bot up all the brokers back in late 80;s after lbo they are already where US banks and brokers are headed...

Anonymous said...

"When Obama talked about "change", evidently he meant he was going to change which cronies got to rob the taxpayers blind"

Indeed. See this:

"MM if you were an American citizen who thought it might be a good time to take his dollars, pack a few cloths, and haul ass out of the US while the getting was good which county would you recommend?"

I can answer that (I have done it) in two words - NEW ZEALAND!

English speaking. Good weather (Auckland is closer to the Equator than San Francisco), though a bit wet in the winter. Friendly people (when is the last time you ever heard anyone say anything bad about New Zealand?). A relatively weak currency right now. Every outdoor activity imagineable. The perfect place to escape Armageddon in the rest of the world. Someone I know described it (relatively accurately, in my opinion) as "like California fifty years ago."

Plus new immigrants get a four year income tax exemption from offshore income.

Macro Man said...

In my original lengthy, lost post, I did touch on the Antipodes. The major demerit is that New Zealand is in the arse end of nowhere, so ancillary travel opportunities are less than ideal.

As for the kiwis themselves, I live in I hear plenty of bad things said about them whenever England plays the All Blacks.

Anonymous said...

"The major demerit is that New Zealand is in the arse end of nowhere, so ancillary travel opportunities are less than ideal."

You may consider that a demerit, but if we truly have a long upheaval followed by a big war (like the 1930s and 1940s), I can't think of any place in the world I would rather be.

The wife does gripe sometimes about the thirty-six hours of travel it takes for her to visit her family (although a century ago, people would have jumped at the chance to make such a long trip in such a short amount of time), and I will concede that frequent travel to Europe from here requires a lot of time and money. On the other hand, for someone who justs wants to find a nice beach to relax on, several countries (not too far away) will have places that meet that requirement.