Friday, November 07, 2008

Hats Off


Macro Man tips his hat to Merv the Swerve and the Bank of England's Monetary Policy Committee. Your author has been critical of Mr. King in the past, but is pleased to see that Merv has belatedly seen the light; namely, that policy easing is required to prevent depression, not recession.

Despite the fact that Macro Man's indicator suggested that the BOE should ease dramatically, he was skeptical; so much so that he had put on some small bets on disappointment, per yesterday's post. Still, it's a case of better late than never when it comes to grasping reality, and it seems as if Merv and co. have finally realized that there is no demand-driven inflation pressure in the UK economy.
On the other hand, the smuggest man in finance saw no need for extraordinary measures; unsurprising, really, given that a) he doesn't believe that there is any sort of credit crisis in Europe, and b) he still appears to inhabit a bubble where 320 million people think he's a diamond geezer. Most punters that Macro Man knows would disagree on both counts.

In any event, UK base rates are now below Bundesbank rates for the first time since 1993- your author's first year in financial markets. Perhaps it's a coincidence that UK growth was double that of Germany over the ensuing five years....then again, perhaps it isn't.
Speaking of growth (or lack thereof), today is the latest iteration of the statistical folly that is the US employment report. After a skein of truly putrid employment indicators, including Wednesday's ADP report, the street is probably expecting a decline of 200k or more in payrolls, well under the supposed consensus of a 65k loss.

As always, Macro Man is focusing on the less noisy unemployment rate; his favourite "tell" on that is suggesting that the rate will soon be knocking on the door off 7%, well below the latest reading of 6.1%.
None of this is good news for risk assets, of course. Macro Man was frankly bemused to see Eurostoxx futures down some 8.5% on the day by yesterday's NY close. At this juncture Macro Man has tilted his book very slightly towards a "risk off" regime, though he could easily tilt back towards "risk on" should circumstances warrant.

Perhaps more importantly, he continues to run a relatively low risk profile- only 20% of max. Given the Brownian motion of most asset market prices this week, he is content to run mostly slow-burn, medium-term macro trades; trying to trade the noise will only result in him getting his hat, let alone his face, ripped off.


Damcanu said...

Blog question:-

What do MM and Mr Obama have in common ?

They are both West Ham fans .....


West Ham are to invite US President-elect Barack Obama to watch a game at Upton Park when he next visits the UK.

Obama saw West Ham play during a visit to see his half-sister Auma in 2003.


MM, you could end up sitting next to him and chat economics during half-time :-)

Macro Man said...

Oh yes, I know! As I said to our resident Arsenal supporter: "We've got Obama and you've got Osama!"

Guilherme Diaz-BĂ©rrio said...

In any event, UK base rates are now below Bundesbank rates for the first time since 1993- your author's first year in financial markets. Perhaps it's a coincidence that UK growth was double that of Germany over the ensuing five years....then again, perhaps it isn't.

Just one small issue MacroMan, with the comparation between the UK growth and German growth in the early 90s: East Germany Reunification (1990) costs...

The UK didn't have to absorb a former communist country, who was, in pratical terms, bankrupt.

So, of course the UK grew more in the early 90s, then Germany!

pej said...

I can't see how forcing credit to people drowning in debt and also destroying a currency can be the right thing...

Oh, and you might want to read this:
Next two bubbles to crash - (hyperinflation?)

Macro Man said...

Guilhermo- UK and German growth were identical in 91-92. So unification matters more in, say, 97-98 than it does immediately after?

The main difference is that in 1991-92, the Bundesbank made monetary policy for the UK- from 93 onwards, they didn't.

Anonymous said...

Hey Macro Man you mean that geezer that lent lend billions of cripy Euros gainst your banks mortgage craplateral?

You are welcome to give it back early....

b said...

Re: GDP growth Germany - UK

UK: Housing bubble, building boom, hi growth.

GE: No Housing bubble, no building bomb, lower growth.

UK: Big housing bust, big GDP fall

GE: No housing bust, some GDP fall

Anonymous said...

Nov 7 (Reuters) - Ken Griffin's Citadel Investment Group is being asked by several major banks to post additional collateral to cover big losses on its investments, the Wall Street Journal said, citing people familiar with the situation.
Citadel has fallen nearly 40 percent this year, prompting the firm to hold conversations with lenders including Goldman Sachs Group Inc Deutsche Bank AG and Merrill Lynch & Co that finance its trades, the paper said.
Citadel executives said the calls for more cash are a normal part of business when securities they hold fall in value and emphasized that they have significant amounts of cash to satisfy their lenders, according to the paper.
The executives said they have met all the demands for collateral, according to the paper.


Anonymous said...

Keynes 1 (King 3')
Schumpeter 0

Anonymous said...

As for the growth differential between GB and Deutschland the currency devaluation of 1992 "Black Wednesday" may have played a role in stimulating growth in the mid-to late 1990's when the UK was knocked out of the ERM. The pound dropped from 2.95 to 2.25 to the Deutschmark. This helped stimulate exports, tourism, competitiveness and ultimately the asset market. Its EURO adjusted DM rate from 2005 is about 2.85 DM to GBP.

tongzilla said...

what do you mean by jobs hard to get?

Anonymous said...

Guilhermo- UK and German growth were identical in 91-92. So unification matters more in, say, 97-98 than it does immediately after?

Macro Man, I´d say yes.
Because you shouldn´t forget the pent-up consumer demand in former East Germany back then. Nicely helped by the generous (political) exchange rate transforming worthless East German marks into Deutschmarks. A lot of savings went into new cars, consumer electronics etc.
This domestic boom for a time hid the true costs of reunification.


spitz said...

It's ludicrous comparing the ponzi-scheme UK economy built on real estate, and the sound German economy.
b @3:26 PM, I totally agree, UK is having bigger and bigger problems, not even comparable to those of the eurozone.
Macroman who likes to mock Trichet, should turn off the Bloomberg terminal and look out of his window.

Macro Man said...

Detlef- if that's the case, why was German growth so much stronger in 1994-98 than in 91-2?

Spitz, I am looking out my window now and see beautiful countryside. You're right....the German economy has been a dullard for most of the deacde, which is why ECB rates were kept low for a lengthy period (sound familiar?), spurring property bubbles (sound familiar?)in the PIGS. Now that the bubble is burst, Trichet is still making policy for Germany.

Perhaps the ECB should just change its name to the Bundesbank, and the Eurozone to the Weimar Republic, since the Bundesbank mentality is still informed by Germany's experiences of 80 years ago.

spitz said...

You British gentlemen like to mock "PIGS" and ECB, but this time it is all coming back to haunt you, be careful who will laugh last.
Our business is in Italy, and from what we see and what our numbers tell, we are in much better shape than UK. Our business is correlated with constructions and real estate, and we keep on working, our turnover didn't decrease much, customers keep coming, October was a good month and November begins well.
I'm sorry gentlemen, but, AFAIK, ECB policy is right even for Italy.

Oh, BTW, UK banks are too big to be saved, they are too leveraged and too big with respect to UK GDP, just like Iceland (sounds familiar?).
You have a Ponzi-scheme mortgage&remortgage real-estate that is crashing, like in no other european country. Did you know that e.g. in Italy we can't remortgage, or you believe that all countries are like UK/USA ?
You know how ponzi-schemes end up, UK will need an hyperinflation in next years to make it through.
We don't, and I thank every day the Deutsche Bundesbank and Germany.

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