Thanks, Alistair!

Monday, December 01, 2008

Thanks, Alistair!

Macro Man was pleasantly surprised today when he purchased his morning coffee-and-a-smoothie on his way into work. Forgetting that the VAT cut took impact today, he was flabbergasted to see that the cost of his morning necessities had been trimmed by a handsome ten pence, all the way down to £3.90. At this rate, the positive income shock from that 10 p a day will enable him to get a "free" coffee-and-a-smoothie ever eight weeks.

With deals like that, the recession will soon be a thing of the past.

Speaking of recession, the flow of data remains very grim indeed. A host of PMIs have been released today....and among those from China, Switzerland, France, Germany, South Africa, and the UK, only the Swiss have managed to notch up even a 40 (and that was only barely!) Apparently cuckoo clocks are the Christmas present of choice this year.

One outcome of today's execrable data, whether intentionally linked or not, has been a sudden and (relatively speaking, of course) sharp devaluation of the RMB. Having been an oasis of stability (against the USD) for the last three months, the RMB has weakened more than half a percent against the dollar....which looks very sharp indeed on a six month chart.
If this is the result of a deliberate policy change on the part of the Chinese authorities, this could kick-start another leg of dollar strength, led by USD/Asia. After all, most of the Asian economies keep an eye on each other's currencies, with China as an erstwhile anchor of stability. If the RMB goes, look out above!

Unless, of course, quantitative easing submarines the dollar. As Macro Mac noted last week, he is skeptical. While it's undeniable that that the monetary base is increasingly, this is not feeding through into broader monetary aggregates...which Macro Man would suggest is a precondition for QE to feed through into asset purchases/sales.

Observe, for example, how the 6 month annualized change in the monetary base has shot higher....offsetting a sharp deceleration in the 6 month growth of MZM (money of zero maturity, which also includes demand deposits). MZM growth had been rising steadily for the previous two and a half years...coinciding with the disastrous decline in the dollar. Coincidentally or not, EUR/USD and MZM growth both peaked in July and have come off sharply since.
This, Macro Man would suggest, is a perfect example of Ricardian equivalence at work. The time to sell the dollar on the back of QE will come when the velocity of money begins to rise again; i.e., when QE gains traction and begins to filter through into strong growth in broader monetary aggregates.

Until then, trading the buck on the back of QE is likely to be as effective as Alistair Darling's temporary VAT cuts.

Posted by Macro Man at 9:38 AM  

14 comments:

get short your coffee shop - correct price should be 2.5p off per 117.5p

Anonymous said...
1:11 PM  

commodities can't handle that recession data thus far...seems the last and first sessions of a month have been terrible in commodities for quite a few moons, that suggests the outflow by the index funds...everything in 'nr7' mode over here, implies a trend day try in ES TY GC
-deac

Anonymous said...
1:33 PM  

Hey MM,

Michael Pettis had a good piece today (not that he has bad pieces, but he's been on fire of late) suggesting that President Hu himself might have suggested an RMB devaluation was in the offing:

http://mpettis.com/2008/12/china-isnt-losing-its-competitive-edge/



--Q

Quarrel said...
1:49 PM  

oh my ft got the ball rolling:
"FT said that hedge funds are hit by fresh wave of withdrawals. Notes a host of names which have limited or suspended redemptions."
oh my deux:
"Paul Tudor Jones’s hedge fund firm Tudor Investment has temporarily suspended redemptions from its $10 billion BVI Global Fund."
sorry for the delay, it's still barely 6am out here in calif., hee hee
-deac

Anonymous said...
2:25 PM  

3.90 for a coffee? Good to see rip-off Britain is alive and well!

Anonymous said...
2:29 PM  

This is quite bad for Asia in the near term....the most populated trade across ALL assets and across ALL markets has been the Chinese Yuan. In the last 3 months amidst the crisis it was a safe haven (and rightly so). And this provided a sort of cushion for the rest of the "CNY proxies across Asia" (such as TWD, MYR, HKD, etc)....now the game has changed and with a weaker CNY capital will LEAVE the region...
It will be interesting to see the pace of CNY depreciation if indeed we get one (the CNY continues to be fixed at stronger rates versus the other main ccys so yes versus USD is weaker but on a NEER and REER basis it has strenghtened dramatically)...

i believe that the authorities do not realise it yet, but this weakness in the CNY will cause an exodus of capital which will contaminate toward the other Asian economies)....

Nevertheless in the long term when we do get the recovery in the USA, this will have the result of leading the Asian economies to a bubble but that is a story for another day....

Anonymous said...
3:22 PM  

Average price for a coffee-and-a-smoothie, here in Italy, is generally below 2.00€... let's say 2.50€ if you're having breakfeast in glamourous Milan (btw, never seen the Special One being interviewed by Italian so-called journalists? Gee, what a match!), but at least it's real C-O-F-F-E-E, and not some kind of a long drink smelling like coffee...

Re VAT... Our beloved PM recently raised VAT taxes for SKY's clients (quorum ego) from 10% to 20%... I once thought that Silvio and Rupert were best friends...

AT

Anonymous said...
4:04 PM  

China over-balanced their economy towards exports for far too long and now they pay the price - riots in Guangdong over toy, textile and other export-orientated closures. Those who run that country have an ineffable belief in the superiority of their thinking. It's an illusion. They should have started revaluing and building up home-grown consumption years ago with better health care, hospitals, pensions and infrastructure. If they try to backtrack on the RMB now they are lost.

Anonymous said...
4:04 PM  

Let me clarify one thing: "coffee-and-a-smoothie" is two separate beverages, a £1.70 coffee and a £2.20 fruit smoothie (which goes a long way towards covering my "five a day"). While there may well be a necessary quality adjustment, these days £1.70 is €2.00 on the nose....

So it's expensive, but not quite as egregious as some of you might believe...

Macro Man said...
4:09 PM  

Thanks for the clarification --- the coffee and smoothie prices are actually in line with those in NY ($3.50 for a medium latte and $3.40for a smoothie).

Anonymous said...
5:27 PM  

hail to the new entrant in the worst top 15 dow days of all time

Anonymous said...
9:06 PM  

Yes, I was thinking the same thing. Welcome to the new month...it's the same as the old month!

Macro Man said...
9:08 PM  

just checked the russel- WHOA 11,85%

Anonymous said...
9:47 PM  

I just paid 0.85€ for a coffee, or some 0.72 GBP...

I actually thought that "smoothy" referred to some kind of croissant. Well, you can have one for 1.00€, or some 0.85 GBP...

Frühstuck Gesamtpreis: some 1.57 GBP...

AT

Anonymous said...
11:54 AM  

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