Monday, December 08, 2008


Macro Man had a new experience yesterday, playing golf on what can only be termed an ice rink. Never before has he shanked a fairway iron because his right foot slid on the ice (there are normally more prosaic reasons) or seen a beautifully-arced eight iron shot hit the front of the green and bounce like a ping-pong ball off the back.

Macro Man and his companions were only the only frozen things in the market, however. Friday's US employment report confirmed that hiring across businesses has been well and truly frozen, as November job losses were the worst since December 1974, when Macro Man was but three years old.

Unsurprisingly, the lowest stratum of the labour force is suffering the worst. One of Macro Man's favourite indicators is looking at US unemployment rates by educational cohort. The u-rate for those workers who failed to complete high school has now breached 10%, well in excess of the peak during the last recession. That rate troughed in late 2006, providing an early warning of the waning momentum of US growth. Somewhat curiously, the unemployment rates for the two lowest educational cohorts remain below their peaks in the early 90's recession, despite the fact that these workers are ostensibly those who are competing with Chinese labour. The moral of the story? There's probably more pain in the pipeline. Also frozen this morning is financial market liquidity. Macro Man is looking agog at his futures trading screen: Bunds are two ticks wide, 40 up, and US long bonds are two ticks wide, two lots by one lot. Markets (fixed income, equities, and currencies) have moved quite a bit this morning, but it would appear to be more a function of illiquidity than a sober re-appraisal of market fundamentals.

Sure, India cut rates and the US president-elect has promised to restore American prosperity by installing new windows in public schools...but colour Macro Man sceptical that this is a reason to buy stocks. Yet there was the Eurostoxx future, up 7% on the day when Macro Man walked in. As Macro Man keeps saying (with a regularity rapidly approaching ad nauseum), seven percent rallies don't happen in bull markets.

All this having been said, Macro Man does have some sympathy for the sell off in bonds, however poor the liquidity. US long bonds have rallied 20 point in three weeks, essentially immediately pricing in the imposition of quantitative easing. While this may ultimately end up being the right trade, Macro Man can't help but think that it's come too far, too fast.

It's broken the uptrend line of the last ten points, so technically looks ripe ffor a bit of a pullback. Macro Man's had a bit of a flutter, in size appropriate for a market that can trade 2 ticks wide, two lots up.
Tempting as it is to just freeze all risk until the new year, December often presents opportunities for those in a position to trade. So Macro Man is continuing to make a few bets, even if the market is as hard as the greens he played on yesterday.


Anonymous said...

with your permission, MM, how about a little straw poll? who says this price action is profit-taking and who thinks - as some would argue - it is due to st obama's anticipated largesse..?

Anonymous said...

i cant help but notice the market for comments is quite illiquid as well today.. maybe there's a correlation ?

Anonymous said...

I second the poll idea, though in general. Important econ data polls, CB decision day polls, etc. Would be nice to see just how accurate your reader consensus is. I'm sure you know there are several free, good poll/survey services out there so this would take very little effort on your part (compared to your daily post), though of course you may not like the idea. I would further suggest that the poll take the space of the "worst dow days", even if intermittently so.
Thanks for the blog.

Macro Man said...

It seems safe to say that the market is long lunches, short blog reading.

I have indeed done polls in the past (the banking dead pool poll over the summer was particularly prescient)....when the fancy strikes me, I'll do another...

Fred said...

Only 8-10 years ago, "all" economists agreed that 6% unemployment in the U.S. was the floor -- if unemployment went lower, the "experts" all agreed it would trigger significant inflation.

Fast forward to present times, and we have every drama queen -- sorry Wall Street "analyst"-- claiming that 6.5% unemployment is start of the end of the world.

We have debt induced "growth" (is that real growth?) for the past 20 some odd years. any "analyst" worthy of the title would have to anticipate that debt could not grow faster than the economy indefinitely...

So we are having a recession - and debt availability is reverting back to historical norms. Like every other recession of the past 6000 years, it will be economically painful.

But the sky is not falling. The horseman of the apocalypse are no where to be found.

The big difference this time is that many (most?) people lived way beyond their means during the debt binge. So there is the very normal (and healthy) pullback in the economy, plus a psychological impact when debt addicts can no longer get their fix.

Withdrawal symptoms are painful -- but it is ridiculous to liken them to an economic depression.

Anonymous said...

You blamed it all on the ice on the green. You should see today's Naked Capitalism antidote du jour for a more legitimate excuse for missing a putt.

Macro Man said...

Did I say ice? I meant, er, lions and tigers racing towards me at full speed. Yeah, that's the ticket!

Alex said...

Macro Man,

Thoroughly enjoy your blog. I must tell you how nice the courses are playing in sunny Sydney at the moment.

Not a bad bet on the long bond. However, the curve flattening trade seems formidable. A few were caught out towards the end of November.

Agree completely about the sucker's rally. Still short gold, long USDBRL. That's about it - much cheaper playing golf at the moment.


RichL said...

With respect to the comment on lower educated labor rates staying stable, there are non-tradable services that are stable, e.g. haircuts, dry cleaning and such. Any firm that hasn't already outsourced what they can to China is dead from the neck up. In fact, there is a trend toward hard to ship product returning to US-Mexico plants.

RJ said...

Thanks a lot for the insightful graph on education cohorts. It would be interesting to compare the current situation with that of 1973-75 (for example, Prof. Hamilton's blog