Thursday, December 04, 2008

Financial Limbo

Today is all about financial limbo. No, not the zombie-fied state of most global banks, or a state of non-being after dying in sin (an apt description of all too many funds these days.) It's more a question of "how low can you go?", the motto of the stick-clearing dance which saw its heyday ion the 1970's.

It turns out that the governors of the Swedish Riksbank (one of whom is pictured, left) are pretty darned adept at the dance, as they cut rates by a resounding 1.75% this morning, substantially more than the consensus forecast of 1.00%. This, as far as Macro Man is aware, is the largest one-shot rate cut from any country other than Iceland, which frankly at this point is little more than a ward of the international community.

Far from his image as a claret-quaffing, pot-bellied City dweller, Mervyn King proved his limbo credentials last month with his resounding 1.5% easing. While he may not do the same again, (and then again, maybe he will), chances are the BOE drops rates at least another percent. Certainly that's the message from Macro Man's one-factor base rate model, which suggests that rates are heading to 2%.

Less adept at playing financial limbo is, of course, the ECB, which disappointed markets last month by only trimming rates by half a percent despite ample evidence that nominal GDP growth has hit a brick wall. Recent leaks from an ECB member (pictured, left) suggest that the bank is disinclined to do more than 50 bps today....hardly a recipe for success in new game of financial limbo.

Then again, the slogan on the T-shirt is a decent description of the attitude taken by European policymakers for most of the financial crisis, so perhaps it's not surprising that they're crap at the game.

There is a slightly different version of the game that will play out tomorrow, when the US employment report is released. After ADP and the ISMs, Macro Man has received a raft of forecast downgrades for tomorrow's payroll number, with some suggesting it could print -400k and one chap even suggesting an outside chance of -750K!!!

To be sure, the dynamic of the labour market continues to weaken, and the unemployment rate is likely to print somewhere just south of 7%. But the payroll figure is a real crapshoot; even if the "true" number is -350k, it is well within the real of statistical probability that the figure could print -200k, which would be a real surprise given recent survey data.
So Macro Man is on the hunt for low risk, low-cost plays on a better-than-expected number. Something of a holy grail, it seems, because the pickings are unsurprisingly slim. But Macro Man has learned this year to be surprised by nothing and to be wary of one-way bets; from his perch, that's what this payroll figure seems to be. He can't shake the feeling that playing for a -500k will be yet another exercise in "how low can you go"....of the P/L kind.


Sean Maher said...

Whatever about your macroeconomic credentials MM, anybody who's a Fatboyslim fan gets my respect...agree re payrolls, we're due a 'positive' surprise and equities are in the mood to rally large given the slightest excuse.

Anonymous said...

A race to the bottom by every country around the world to see who can make their currency worthless the fastest.

Anonymous said...

we've been due for a positive surprise for a long time now and have been disappointed with extraordinary regularity. further i think market psychology at the moment is such that a better jobs print would be widely seen as a red herring (of course any one NFP print is almost invariably a red herring but as we all know the market focuses on different things at different times). the bond rally is massively due for a pullback but pretty sure one data point will not be the trigger for a meaningful selloff. so not a bad punt but not a juicy one either,

Anonymous said...

A 500,000 print would be equivalent to peaks of 350,000 seen in past recessions and it would indicate that the end is close at hand, according to econobrowser.

Anonymous said...

Shame the CME dropped the economic auctions. Difficult to play for a positive NFP surprise otherwise, as it's unclear what the market reaction would be (given stocks rallied off ISM yesterday)...

Anonymous said...

hearing that USD/JPY is leading the SP around by the nose again this week, similar comments were so prevalent in the SP run to 1576 sept/oct 2007...

ADBE DD MRK warn, continuing claims ramped up, however perhaps thansgiving holiday can influence the non farm number

is this anything dept: The 3-month Libor/OIS Spread up to 1.86%, from 1.66% on 11/24

mcclellan osc fully overbought:


spagetti said...

if you guys have access to some sort of economic surprise index, you will see that after being on the positive side till mid-year (equity market rally that none of us understood) it collapsed and is now at very low levels.

we could indeed start to see a period when data comes in better than forecasts (not in better per se) and that would turn sentiment around quickly.

Anonymous said...

I just watched Bernanke's speech and I really wanted to cry.

I was one of the people who laughed and mocked a Wall Street strategist (was it Byron Wein?) who advocated buying farm property and having an escape for when society breaks down

But if Bernanke is allowed to continue penalizing the prudent to bail out the stupid -- its hard to figure out why anyone will ever act within the rules again.

Lever yourself to oblivion 100% of the time. heads you win. tails, the suckers who played by the rules get hit with the bill.

I am sure MM is going to babble something about us all standing in soup lines if central bankers don't slash rates to zero... but it really looks like Bernanke is going to put us all in the soup line one way or the other

Problem is: why would anyone bother to make soup? Some govt bureaucrat will just order you to give it away for free or else it will be taken.

The markets have become a completely rigged game -- and the smartest thing to do is stay out. Unless and until meritocracy is restored, markets will not recover

Macro Man said...

Anon @ 6.20, rest assured, I will not "babble" or in any way object to policies that fail to prevent your arrival in a soup line.

I will, however, however, continue to call a spade a spade, and Trichet's self-congratulatory incompetence has ensured his swift descent towards the bottom of the central banking league tables. One wonders if he requires an army of forecaster and back-patters to ensure him that, as today is a Thursday, tomorrow will, in likelihood be a Friday. He certainly appears singularly incapable of performing even the most basic of forecasts himself.

Not that this excuses Bernanke, of course. He seems singularly unable to distinguish between credit channels reopening slightly and the immediate cessation of all house price declines. No matter how many turds the Fed chooses to purchase in the open market, it will not obscure the fact that time is a necessary component of any resolution to this crisis. There is little he can do in the near term to halt house price declines, and much harm that he can accomplish attempting to do so. Unfortunately, he appears intent on pursuing the latter course of action.

Anonymous said...

MM (this is anon 6:20 again)

Trichet looks like a hero to those of us on the U.S. side of the pond -- probably because we are less effected by his actions.

Bernanke has made it very clear that he is working against us. Spending taxpayer dollars to prop up vaporous economic entities (sell side firms who cannot spell "risk management", auto companies, or mortgages to insolvent borrowers for houses that were never economically viable).

Trichet will never hit the bottom of the central banker pile -- the position is now named after Greenspan and occupied Bernanke.

The crisis is bad enough without having to cope with the knowledge that your own central bank and Treasury are working against you.

No amount of monetary easing is going to make poorly run companies viable. No amount of monetary easing is going to allow a guy making USD50,000 be able to afford a house for USD800,000. In essence, that is what Bernanke is trying to do. He can never succeed, but he can cost the rest of us trillions of dollars while he fails.

Paulson is just doing whatever he can to protect Goldman Sachs and screw the rest of the world.

Macro Man said...

Well, for all Bernanke's faults, the housing bubble has many more culprits than just him, who came to the party relatively late. Greenspan, politicos, corrupt bankers and mortgage brokers, and of course the donuts who bought the houses they knew they couldn't afford are much more at fault.

An d it's not like Europe hasn't had property bubbles; just ask anyone in London, Dublin, or the coast of Spain.

And at least Bernanke doesn't appear on TV every month declaring that a) whatever he has done is by definition correct, simply because he has done it, and b) he has decided once again that YOU, John Q. Public, are not allowed to have a pay rise.

Anonymous said...

MM (anon 6:20 again -- I will figure out how to get an ID soon)

its true Bernanke doesnt tell us his actions are right by definition, but we do have Paulson telling us (not asking) that he be given $700 billion of OUR money to spend however he likes, with no recourse.

John Q Public isn't getting a raise. He is getting laid off with a month or two severance (hopefully). Bernanke and Paulson are completely insultated from the possiblity.

Paulson will be gone (THANK GOD!!!) in January, but when he became Trsy Secretary, he got to sell his Goldman stake tax free. I don't remember the exact number anymore, but various pundits have estimated that this saved him at least USD60 million in taxes. His tax savings (not his total comp) is more than upper middle class Americans make in 15 lifetimes. That's a lot of compensation for over-leveraging Goldman. My dog would have happily over-levered Goldman for a dog biscuit.

As a banker, I am all for paying people millions when they earn it -- but it doesnt take any talent what so ever to get over levered. Plenty of foreclosed home owners managed to do it for free.

It was Greenspan's stupidity that allowed, and later encouraged, over leveraging. Outside of technology, consumer prices do not go down -- the threat of deflation was always a product of Greenspan's senility. He lowered rates way too far for too long to fight a problem that wasn't fixable by lowering rates... sorry, but there is no Fed funds rate that would make the dot-com "industry" viable. Most didn't even have a business plan.

There was no deflation problem, and the economic problem that did exist (dot com implosion) was not fixable using interest rates.

On top of that, Greenspan created the "Greenspan Put" by blowing bubbles into the market whenever they went down, but sitting idle when they went up. Sorry, but that is flagrant market manipulation.

For Bernanke to repeat any of those failed policies is foolish. There is no interest rate solution to the end of tulip bulb mania, even if the tulip looks like a house.

Then he adds insult to injury by changing the rules mid game -- so that the highest expected return is for failure.

Well run companies get their credit lines pulled, while failed companies feast on USD 3 trillion (and counting) in taxpayer credit.

Rewarding cronies and failure while penalizing prudence is a policy normally associated with African dictatorships and banana republics.

Bernanke should move to Zimbabwe where his "solutions" are more matched to the country's modus operandi.

Perhaps you think Trichet should be sent as well...

Anonymous said...

MacroMan, might one point out that the European region (with the exception of London, Dublin, Spain) was largely spared property bubbles? And might that possibly be due to the ECB's tight money policy?

I have been saying since at least a year ago that the crisis was not going to be solved on the monetary side. This is and always has been a case that can only be resolved by increasing demand-- on the fiscal side. I think Trichet has done the right thing.

Charles of MercuryRising

clydeglyde said...

wicked photos mate.
words worth it as well.

seen this yet?

how bout a blog pool who ZIRPs first?

an ounce of gold to the winner.

d.alig said...

For such defects, and not for other guilt,
Lost are we and are only so far punished,
That without hope we live on in desire.

Inferno, Canto IV

Anonymous said...

The who's to blame game goes on! Why not go back further? The Vietnam war, Reagan's (military) deficit spending, the Gramm-Leach-Bliley Act signed by Clinton, low interest rates granted by Greenspan, ... were any of those actions (isolated) wrong at that time or did they make the ultimate difference?
I prefer the words Roussaux spoke after the earthquake that destroyed Lisbon: "It's civilisation" (in the sense of all of this is the result of the Enlightenment where man domesticated fate and started to pave his destiny). Anyway we crossed the Rubicon.