Thursday, December 25, 2008

Merry Christmas

Merry Christmas (Gregorian calendar) to all readers. Here's hoping Santa has been good to you.

Monday, December 22, 2008

Another One

Here's another one that was floating around last week...

Late one morning one December in a year we’ll all remember,

Writing Christmas poems had turned into quite a chore,

While I nodded, nearly napping, suddenly there came a tapping,

As of someone gently rapping, rapping at my office door.

“Tis some visitor,” I muttered, “tapping at my office door-

Only this, and nothing more.”

Open wide I flung the entry, stood there like an ancient sentry,

In there stepped a haggard trader who’d been up since half past four.

Not the least obeisance made he; not a minute stopped or stayed he;

But, with mien of lord or lady, walked in from the trading floor-

Stood next to a bust of Soros on a shelf well past the door-

Stood, and sighed, and nothing more.

Then this battered soul beguiling my sad fancy into smiling,

By the grave and stern decorum of the countenance he wore,

“Though thy P/L has cratered, you’ll get better soon or later,

Ghastly grim and somber trader wandering from the trading floor-

Tell me what thy problem is found upon the trading floor!”

Quoth the trader, “Nevermore.”

As he stood there slightly smirking, doubts I’d long felt vaguely lurking

My subconscience let emerge and push their way out to the fore.

“Though our P/L’s been stinking and our share price swiftly sinking

Surely I’m right to be thinking that the worst is in Q4?

When will we return to normal, back the way it was before?”

Quoth the trader, “Nevermore.”

“Come now, fellow,” I cried, shaken, “surely thou art quite mistaken!

There is sovereign wealth fund buying risky assets soon in store.

Banks will soon enough start lending, start consumers back off spending

Bring a swift and tidy ending to our all feeling quite poor.

Don’t you think that GDP growth soon enough will exceed four?”

Quoth the trader, “Nevermore.”

Was he simply trying to scare me, overwhelm me, or just dare me

To get out of my positions I’d put on the year before?

Though they trade at distressed prices, my sangfroid is cold as ice, as

I have made it through the crisis marking them at eighty four.

“Don’t you think if I hang on I’ll find a bid at eighty-four?”

Quoth the trader, “Nevermore.”

My portfolio’s diverse, moving on from bad to worse.

Managing a long-stock book had proven to be a chore.

As I glanced back at my screen I took on a pallid sheen

As the S&P careened below its key supportive floor.

“Will the Nikkei ever rally back towards where it was in ’94?”

Quoth the trader, “Nevermore.”

Then, methought, the air grew denser, perfumed from an unseen censer

Swung by Seraphim whose foot-falls tinkled on the tufted floor.

“Wretch,” I cried, “Satan’s thy master, he hath sent me to disaster

Tell me, who hath fallen faster, me or hedge funds shuttering their doors,

Causing panic on the streets of London, Moscow, and Lahore?”

Quoth the trader, “Nevermore.”

As the floor began to darken, a footstep I faintly hearkened,

Followed swiftly by another rapping beat against my office door.

In stepped an HR director, leering like Hannibal Lecter

‘Twas not my place to correct her as she told us what’s in store.

Then she escorted the trader by the elbow out and off the trading floor.

I saw him again- nevermore!

Friday, December 19, 2008

The Twelve Days of Christmas

It's Macro Man's last day in the office of the year, and hence time for a bit of holiday fun. While Macro Man hasn't the energy to concoct anything this morning, at least he can pass along the tune that the fellow next to him was humming on the train this morning.....

On the first day of Christmas, the market sent to me,
A huge loan from Ben Bernanke.

On the second day of Christmas, the market sent to me,
Two year swap spreads and
A huge loan from Ben Bernanke.

On the third day of Christmas, the market sent to me,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the fourth day of Christmas, the market sent to me,
Four margin calls,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the fifth day of Christmas, the market sent to me,
Four margin calls,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the sixth day of Christmas, the market sent to me,
Six banking bailouts,
Four margin calls,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the seventh day of Christmas, the market sent to me,
Seven day workweeks,
Six banking bailouts,
Four margin calls,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the eighth day of Christmas, the market sent to me,
Eight percent sell-offs,
Seven day workweeks,
Six banking bailouts,
Four margin calls,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the ninth day of Christmas, the market sent to me,
Nine dancing ladies (until the entertainment budget was canceled),
Eight percent sell-offs,
Seven day workweeks,
Six banking bailouts,
Four margin calls,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the tenth day of Christmas, the market sent to me,
Ten bp T-bill yields,
Nine dancing ladies,
Eight percent sell-offs,
Seven day workweeks,
Six banking bailouts,
Four margin calls,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the eleventh day of Christmas, the market sent to me,
Eleven ABX marks,
Ten bp T-bill yields,
Nine dancing ladies,
Eight percent sell-offs,
Seven day workweeks,
Six banking bailouts,
Four margin calls,
Three French banks,
Two year swap spreads, and
A huge loan from Ben Bernanke.

On the twelfth day of Christmas, the market sent to me,
Twelve hedge funds closing,
Eleven ABX marks,
Ten bp T-bill yields,
Nine dancing ladies,
Eight percent sell-offs,
Seven day workweeks,
Six banking bailouts,
Four margin calls,
Three French banks,
Two year swap spreads, and....

A huge loan from Ben Bernanke.

While Macro Man will not return to the office until January, he'll continue to offer occasional thoughts in this space over the Christmas period. He wishes all readers a happy holiday season and a prosperous new year.

Thursday, December 18, 2008

Lost For Words

People who are acquainted with Macro Man, either personally or virtually, will know that he is very rarely lost for words. This morning, however, he has reached that milestone, as he's watched prices flicker on his screen in slack-jawed silence.

Policymakers often reference a desire to avoid "excessive volatility" and the proper functioning of markets. Suffice to say that that we are now firmly in the presence of the former, with an utter absence of the latter. Regardless of your market view, right or wrong, you want to have a market in which to transact. The past couple of weeks, and the past couple of days in particular, has seen complete implosion of the market's ability to reflect transaction flows and fundamentals.

This morning, for example, the German ifo survey printed a lower-than-expected 82.6, it's worst reading since...err...ever. Regardless of what you think about the dollar, it would seem to be an excessive response for EUR/USD to rally 3 big figures in the ensuing hour.

Indeed, while the dollar has been the object of focus, this has probably been more of a euro mvoe this month than a dollar move. Indeed, the dollar has barely budged against the GBP this month. The chart of EUR/GBP is truly awesome, in the sense of awe-inspiring. Meanwhile, in a related note, Parliament has officially changed the name of the GBP to the Great Britain Peso.
Remarkable, given that the Noughties have been the "Decade of Dollar Decline", sterling is now weaker on a real effective exchange rate (REER) basis than the buck. As recently as July, sterling's REER had outperformed the dollar this decade by 20%.
That the euro has gone uber-bid against no5t only the dollar and sterling, but also Eastern Europe and the Scandis offers some suggestion that this month's fireworks are less of a dollar move than a euro move. Just what the world's largest exporter needs, especially as ancillary evidence of collapsing trade volumes continues to mount!

Indeed, as of this morning's trade, the euro's REER has probably reached a post-Bretton Woods high. Normally, this, combined with a swift return of European inflation back to target, might suggest to the ECB that there is perhaps a bit more room to open the monetary taps. Then again, given that ECB board member Juergen Stark is already talking about the need to revert to a restrictive stance....perhaps not.

Maybe the market would be somewhat less disjointed if chaps like Herr Stark were lost for words a bit more often....

Wednesday, December 17, 2008

Stepping In Front of the Steamroller

Markets have suddenly become moderately interesting again (though they remain bum-clenchingly illiquid), helped along by yesterday's Fed announcement of quasi-ZIRP and quasi-quantitative easing.

Perhaps Macro Man is alone in this sentiment, but he didn't actually see much new news in yesterday's announcement. Sure, the target Fed funds rate was a bit lower than folks expected, but given that the effective funds rate has closed between 0.10% - 0.20% for the past two weeks, the surprise on the target rate is largely irrelevant.

As for the "bazooka" that the Fed wheeled out yesterday, hasn't all that stuff been announced already? OK, fine, they laid out the commitment to maintain uber-low rates for an extended period for the first time....but anyone who's read the Bernanke papers on Japan and QE knows that that is just part of the playbook.

So it was with bemusement that Macro Man saw a lovely risk rally and the dollar sell off. Equities have frankly been fairly uninteresting for Macro Man recently, and the miniscule trading volumes of the past few days suggest that he isn't alone.

What was curious about yesterday's trading is that it brought Macro Man's risk appetite indicator (proprietary, don't ask) back into positive territory for the first time since the week before Lehman went bust.

So naturally, this morning's been filled with feel-good stories like another Russian devaluation, the Swedish national debt office starting to take currency punts on the krona because they're worried about SEK weakness, and Deutsche Bank failing to call a Tier 2 bond.

The real story of the past 24 hours or so has been the weakness o the US dollar. Macro Man wrote a few days ago that he was getting a bit worried about his dollar bullish stance (and thus brought his exposure back to neutral) but was not yet prepared to jettison it. Clearly someone has had no such reservations, as the EUR has traded up to a high of nearly 1.42 against the buck this morning. It closed November below 1.27.

Tempting as it may be to extrapolate a new trend of dollar weakness on the back of QE, Macro Man remains cautious. The scale of the move has been exacerbated by the abjectly poor market liquidity. What's interesting is that none of the many banks that Macro man speaks to has reported seeing much in terms of broad-based flow.

While Macro Man's old chums Voldemort and co. have evidently been active, in the private sector the real players have been trend followers, a cohort who could not care less about whether the Fed follows a policy of QE or PE.

And small wonder- CTAs are one of the few solid performers in the leveraged fund world.

But here's the thing- what goes around, comes around with the trend-following types. Aggressive buying today could easily be followed by aggressive sellign tomorrow, next week, or next month.

For the moment, Macro Man is happy to step aside and let the models have their fun. If 2008 has taught him anything, it's that stepping in front of a steamroller is not a particularly pleasant experience.

Tuesday, December 16, 2008

A Simple Desultory Philippic

It's the last work week of the year, and Macro Man is feeling the strain. After a skein of lunches, dinners, and assorted Christmas treats, he's begun to feel the inevitable expansion of the waistline despite his best efforts at the gym.

Yesterday he had lunch at Nobu with a couple of friends from a well-known (and, shall we say, "underperforming" bank.) It was an interesting afternoon, to say the least- not least because at least a quarter of the tables at the restaurant were empty. Long gone are the days of requiring several weeks' notice to secure a table...the reality of the recession is indeed beginning to bite.

But what stirred Macro Man's blood was the discussion around the current environment and the compensation expectations of staff in the financial industry. Without disclosing any details about the institution in question (so as to protect the innocent), it is fair to say that 2008 has not been a profitable year for his friends' institution.

Macro Man's friend in management has, for the past year or two, been fairly realistic about the environment that he's been living and working in- that is to say, he's been consistently downbeat. For the past month or two, he has consistently been attempting to talk down the bonus expectations of his staff.

Now, it is safe to say that the performance of this institution has been sufficiently poor that shareholders can legitimately question why bonuses are being paid at all. So Macro Man naturally assumed that "managing expectations" involved telling people that "your job is your bonus....if you actually get to keep it."

And yet there is, evidently, a small bonus pool, which has generated an unseemly political scramble to secure as much as of the scraps as possible. To call the scenario "Machiavellian" is an insult to the whole concept of political philosophy. None of this should come as a surprise, of course; bankers should always wear a stab-proof Kevlar vest at the best of times.

But what really got Macro Man's goat was the (unhappy) explanation that one mediocre performer will be awarded a disproportionately large share of the team bonus pool because, as his friend's boss's boos explained "so-and-so got a seven figure bonus two years ago and will be disappointed with anything less this year."

DISAPPOINTED? DISAPPOINTED? Are you effing kidding me? One of the reasons why bankers get paid so much in the good times is because of "the volatility of the cycle". Well guess what, the cycle has swung, and it's time to pay the piper (rather than the banker.)

To claim that you deserve a bonus because "we had a good year" on the desk blithely ignores the act that "you" collectively have become a watchword for incompetence and/or malfeasance.

Now, Macro Man's views here a coloured by his own experience. At the beginning of the decade he joined a start-up asset management company, where he worked for three years. Despite decent performance the firm never attained critical mass during his time there, so he went three years with no bonus, because there was no money with which to pay one. Indeed, the only change to his compensation during his time there was a partners' salary haircut.

So when he hears people complaining about getting paid "only" 40-50% of last year's bonus, he wonders what it will take for reality to bite. Particularly galling are the satisfied comments from staff at one UK bank that they "expect to get paid" this year. This is an institution that was arguably hours away from going bust earlier this year, and would have done so but for the injection of public funds (which we'll all be paying for in years to come.) So why the hell are employees getting any sort of bonus?

Listen, Macro Man knows it's been a tough year, and has plenty of sympathy for people like his friend yesterday that have been put through the wringer this year. But his three years with no bonus at the beginning of the year were hardly a walk in the park- quite the contrary!

Macro Man isn't trying to hop up on some sort of populist, "bankers are evil" soapbox- quite the contrary. He's merely disgusted by "heads I win, tails you lose" set-ups, or the complete denial of responsibility for one's mistakes- whether they come in finance, government, or private life.

It would be nice to see people who are handsomely rewarded when they do well (or even manage a year of mediocrity) voluntarily put their hand up and accept responsibility when the worm turns. Banks are hardly alone in this regard, as plenty of hedge funds have been exposed as corrupt, incompetent, or merely unbelievably venal.

By the end of yesterday's lunch, however, it finally started to appear like market pros are owning up to their true lot in life.

It's often said that bankers and fund managers are tarts because they'll do anything for money. So it's perhaps fitting that "financier" now appears on the dessert menu at Nobu!

Monday, December 15, 2008

5 Charts

It's said that a picture's worth a thousand words, so what today's post lacks in actual verbiage it makes up in "synthetic text."

1) Quant easing. The dollar is getting slagged, at least partially because of concerns about the long-term impact of the Fed's quantitative easing program. And while it's true that the size of Fed's balance sheet has increased dramatically over the last few months, the ECB's has also increased by quite a bit. Perhaps any readers who are experts in monetary economics can explain why the Fed asset increase matters and the ECB's doesn't?

2) Chinese IP. Oh dear. Year-on-year IP is up just wonder the government has stepped up to the plate with stimulus programs. As is the case elsewhere in the world, it looks like it's going to gt worse before it gets better.
Next, three charts from Google Trends:

3) Google searches for "McDonalds jobs". Thanks to reader Mitesh for pointing this one out. What's a bit scary is that the country with the biggest rise in searches for burger-flipping careers has come not in the United States, but Australia!
4) Google searches for "mortgage broker". Unsurprisingly, there isn't much appetite for the purveyance of fresh mortgage debt these days.
5) Google searches for "unemployment benefits" . It pretty much says it all , doesn't it?

Friday, December 12, 2008

Bad News

It's said that bad news, like late night buses, comes in bunches. That certainly seems to be the case this week, where a few days of lethargy have been punctuated by a firestorm of fresh Armageddon-fodder over the past twenty-four hours.

Where to begin? Macro Man has to confess that he may have overestimated the market nous of equity punters, given that news of the auto bailout failure served to catalyze a jump lower in stocks. Is it really the case that a Big Three bailout was supporting the market? It boggles the mind, given a) the small size of both the bailout and the market cap of the auto sector, and b) the abject failure of the TARP to buoy stocks since its eventual passage in October. Crikey, if $350 billion for the industry at the heart of the economic and financial maelstrom has failed to support Spoos, why did these donuts expect $14 billion to Obsolescence-R-Us to be a rationale for buying stocks?

More sinister is the Bernard Madoff situation, which serves as another poisoned dart striking at the heart of financial system credibility. Now, Macro Man had never heard of Mr. Madoff until a few hours ago, and neither had just about everyone that he speaks to. But the staggering size ($50 billion) and nature (bald-faced fraud) of Madoff's failure serves as a timely reminder that there are still plenty of rotten apples in the market's fruit basket. Then again, Madoff's sin- taking a relatively small amount of investor capital and levering it up via an investment strategy that had no prayer of long-term success- sounds awfully similar to the investment banking business model of the last few years. Perhaps Madoff should convert to a bank holding company and apply for a bit of sweet TARP lovin'?

More prosaically, the economic dataflow remains uniformly awful. Yesterday's jobless claims data suggests the labour market continues to deteriorate, which probably shouldn't come as a surprise to anyone with Internet access and a fifth-grade reading level. More troubling, however, were a couple pieces of bigger-picture data that have helped guide Macro Man's core views.

The US flow of funds data were released yesterday, and they were a shocker. US household wealth is now falling at the sharpest rate in the history of the series (which covers most of the postwar era), superseding the collapse of the dot-com bubble. Unlike 2002, however, there are no further bubbles to inflate to save the consumer's bacon. The confluence of collapsing wealth and a terrible labour market form the crux of what has been Macro Man's base-case view for the past couple of quarters- a bone-crushing, consumer-led recession.
A natural outcome of this view has been an expectation that US savings rates would rise (which they are starting to), global trade volumes would decline (which they are), and that the US trade deficit would contract sharply, thereby supporting the dollar. Here's where we run into a spot of bother.

While it's not Macro Man's style to jettison a core view on the basis of one data point, he must confess to being troubled by yesterday's US trade figures. Rather than narrowing, as he expected, in October, the trade deficit actually widened slightly, despite the collapse in oil prices. Indeed, exports declined more in dollar terms than imports, despite being a much smaller percentage of overall trade. That's not what Macro Man wanted to see.

Indeed, the deficit excluding petroleum seems to be widening back out thanks to the drop in exports. Could it really be the case that US exporters failed to hedge any futures receivables when EUR/USD was above 1.50? Macro Man isn't sure what to make of this, but it wasn't part of the game plan.
Nor, indeed, was a smooth money-market passage into year-end. Instead of squeezing higher, as has been the case over the past few quarter-ends, LIBOR rates are actually coming in hard.

Hmmmm. If the US trade deficit fails to narrow and there is no further funding pressure, two of the major supports for the dollar will have been taken away. Certainly the market is rendering this interpretation, as EUR/USD appears to have broken out of its little trading range of the past couple of months.
Of course, an alternative explanation is that it is December, liquidity is appalling, and some punters have decided to have a go at pushing the dollar lower with little to no opposition. Macro Man requires more data before he can render judgment on whether the dollar bull case has evaporated (though he remains highly dubious of the notion of EUR as a store of value), but he's seen enough to encourage him to flatten what modest exposures he's got.

Some of the moves he's seeing make little sense to him, and he's happy to run very little FX directional risk until the new year. No news is sometimes good news, as they say...especially when it comes on the stop-loss front.

Thursday, December 11, 2008

A Christmas Shopping List

There's just two weeks until Christmas, and Macro Man has yet to purchase a single present. While he knows what Mrs. Macro's "big ticket" present is going to be, he has yet to come up with a gameplan for the ancillaries. (Mrs. M. is largely taking care of the Macro Boys.) It behooves him, therefore, to put his thinking cap on and draw up a list of things that he thinks the missus might like. Being a generous chap, he's also drawing up a Christmas shopping list for certain people that he encounters in his professional life:

Train drivers on the Brighton main line: Fisher-Price Fun-2-learn teaching clock. The operators of Macro Man's morning train services have displayed such a singular inability to stick to the timetable that the only logical conclusion is that they can't actually tell the time. According to the product blurb, "these two very timely interactive friends help [users] understand both digital and analog time while relating to everyday experiences like lunchtime or bedtime." Hopefully they help with train tmes as well...

Sell-side equity analysts: A chart of the Dow Jones Industrial Average. Hard as it is to believe, most of the sell-side guys out there remain overoptimistic- in some cases farcically so (Macro Man has seen one end-2009 forecast of 1300 for the SPX, for example.) It seems as if these guys are still using old Christmas gifts like Dow 30,000 by 2008, Dow 36,000, and Dow 40,000. Perhaps s simple graphic representation of what is actually going on could bring them to their senses.

Ben Bernanke: A new monetary policy model. Ben has evidently run out of conventional options in the Fed policy game, so he needs another model with which to practice unconventional policy options. Te model to the left offers an inexpensive and attractive way to simulate quantitative easing in the comfort of his front yard.

Jean-Claude Trichet: An orienteering compass. Monsieur famously told us over the summer that he has but one needle on his compass; unfortunately, his seems to be permanently etched on his rearview mirror. It therefore seems appropriate to give M. Trichet another compass that might prove useful in charting a future course, rather than one that merely tells him wherre he has been already.

Hank Paulson: A Dr. Evil dress-up costume. Come January 20, Hank will be out of a job. Based on his handling of the financial crisis (as well as the piss-poor performance of a previous Treasury secretary in his role at Citi), he should struggle to get another job in banking or finance. Fortunately, he has an alternative career in the Austin Powers character lookalike industry, which this gift should help to kick-start. Hank will have to pony up some of his own dough to get the Mini-Me suit for Neel Kashkari, however.

Gordon Brown: 1984. As discussed earlier this week, Brown's Britain has turned into some dystopian hell. Little did we know, however, that the Ministry of Truth is already in operation; how else to interpret Brown's recent Parliamentary claim that he has "saved the world"?

Macro Man is a big believer that if you're going to do something, you should do it properly. So if Gordo is really and truly intent on destroying the fabric of Britain and ensuring that the state runs every aspect of life....well, he might as well learn from the best.

Hopefully the recipients enjoy their gifts. And if any readers have any suggestions (for either public figures or, hint hint, a certain lucky lady) all means pass them along!

Wednesday, December 10, 2008

That Guy At The Gym

And now for something completely different.

Macro Man hasn't got a whole lot of insight to add to another meandering session of holiday price action. Most prices on his screen remain well within established ranges; while there may be some marginal new news regarding an auto industry bailout and political corruption, it's hard to muster much enthusiasm.

December is traditionally a month of long lunches with market counterparties, ostensibly to celebrate another successful year's worth of trading together. While these occasions are probably closer to a wake this year, Macro Man has been surprised to see his calendar fill up relatively quickly. Without regular sessions at the gym, he'll be left feeling like the gentleman on the left.

Now, Macro Man has patronized a number of gyms in different cities over the years, and being an observant chap he has come to the realization that there are a number of standard characters, archetypes if you will, that one can find at most gyms. As a public service to those whose gym attendance is confined to the first two weeks of January, at which point the lure of the pub overcomes any further devotion to a new year's resolution, allow him to identify the cast of characters for you.

In the locker room

The Slob.
This guy leaves his stuff all over the floor, generally in a sweaty, un-bagged fashion. He doesn't bother putting his stuff away when he gets in the shower, and often drips water all over the place after he's managed to clean himself up. Macro Man always has to fight the temptation to stuff his crap into an empty locker when he shuffles off to the shower.

* "The Owner's Son". This chap doesn't spread his stuff all over the floor like the Slob, and he generally puts his things away when he's not changing clothes. What he does do, however, is spread his stuff all over the changing room benches, so that no one else can make use of what is relatively limited space at the best of times. This guy acts like he owns the place, and gets the hump if you dare to shift his stuff a bit to make room for your own bag.

* Narcissus. This guy demonstrates a singular inability to remove or don any article of clothing without gazing at himself out in the mirror. In locker rooms with sparsely spaced mirrors, Narcissus generally has to rein in his natural tendencies to check himself out; in Macro Man's current gym, however, there are plenty of locker room mirrors and a couple of egregious Narcissi. It's almost enough to make him want to wear a tie, so that he can tie it in front a mirror, thus blocking Narcissus's view.

* The Naked Guy. The man that modesty forgot, this guy stands and walks around naked for what seems to be hours at a time before bothering to get dressed. One particularly egregious example at one of Macro Man's old gyms used to blow-dry his hair naked, sending the odd blast of warm air "downstairs". It's always a downer to be changing next to Naked Guy and catch an unintentional eyeful as you turn to tie your shoes.

In the gym

* Mr. Myopia. Mr. Myopia must be cursed with Magoo-like ocular difficulties. Why else does he stand six inches away from a mirror whenever he performs a weight-lifting set, in many cases blocking access to a rack of dumbells or other equipment? The true answer, of course, is that Mr. Myopia is a mixture of Narcissus and The Owner's Son; such is his desire to check himself out as he exercises that he exhibits a blatant disregard for anyone else who might want to use any equipment.

* The Meathead. Perhaps the most stereotypical of all gym-goers, the Meathead is as wide as he is tall and looks like some of his muscles have come out of a syringe. What amuses Macro Man about the Meathead is the way that he walks with his arms sort of extended from his sides, almost like a cowboy in the Old West about to have a duel with a holstered six-shooter. The rationale, of course, is that the Meathead's arms are so big that they can't comfortably be carried at his sides like a normal human's. Yeah, right.

* Clark Kent. This guy aspires to be Superman, and piles way too much weight onto the bar whenever he performs an exercise. In reality, however, he is Clark Kent, and can only perform at most half repetitions with the overloaded bar. Clark Kent is the king of the bench press rep that stops eight inches above the chest, the squat with the barely-perceptible knee bend, and the bicep curl performed with bent-elbowed alligator arms.

* The Crowder. There is an unspoken code, an unwritten etiquette of the weight room, that you never come close to impinging upon someone else's space when there is room elsewhere on the floor. The Crowder blatantly ignores these rules, and will come and exercise next to you- perhaps even blocking your range of motion- when you are the only two people in the weight room. Oblivious to dirty looks, deaf to harrumphing, the Crowder is no doubt also a serial violator of urinal etiquette as well.

* The Madonna Dancer. While this guy is generally in pretty good shape, he seems to spend most of his time talking on the phone or "vogueing" in front of a mirror. All too often, the Madonna Dancer turns into the Naked Guy in the changing room.

* Oprah's Book Club. Did you ever see Lance Armstrong read War and Peace while riding in the Tour de France? Paula Radcliffe take in a bit of King Lear while running a marathon? Usain Bolt reading the Cliff's Notes to Wuthering Heights while setting world sprint records? Of course not. So why do some people think they can get a good cardiovascular workout on an exercise bike while reading a book or a newspaper? It boggles the mind. It's probably no coincidence that the only major athlete to read during a competition, Jim Courier (who once read a novel during changeovers in a tennis match), saw his career dwindle into medicority soon thereafter.

No doubt there are more; gym-going readers are invited to submit there own. Apologies to those readers looking for a reasoned, market-driven interpretation of China's November trade data, which showed a catastrophic collapse in volumes. Normal service will resume tomorrow. In the meantime, be comforted that the market doesn't care about data for the time being...perhaps they're all out to lunch?

Tuesday, December 09, 2008

Separated At Birth?

Try as he might, Macro Man has failed to muster any enthusiasm for the recent equity rally. Can it continue? Of course it can...perhaps markets will view a Big 3 resolution as a favourable outcome (though Macro Man will be sceptical of any resolution that fails to improve styling, build quality, and energy efficiency.)

That the Tribune Co. has gone bust is perhaps a timely reminder of the underlying economic forces at play; Macro Man expects more of the same throughout 2009. The S&P 500 closed yesterday at a level reached exactly two months ago; for all the sturm und drang of financial crises, bailouts, and stimulus packages, equities have been a lousy trade from both the bull and bear side.

One country at the forefront of bailouts and government stimuli is of course, the UK, Macro Man's adopted homeland. Somewhat bizarrely, Gordon Brown's approval ratings have started to recover as the economy falls off a cliff. This probably says more about the limp state of the Tories than any particular merit of the Labour government; David Cameron appears to stand for very little other than a vague desire to be PM some day.

Non-UK residents will struggle to understand the degree to which the government controls everyday life here in Britain. Highway safety is "ensured" by speed cameras, a revenue-generating bonanza straight out of 1984. Public safety is "ensured" by a police force that spends more time filling in forms than walking the beat. And worker safety is "ensured" by a series of onerous "health and safety" regulations that prevent the most of innocuous of activities on the basis that somebody might stub a toe.

At some juncture, there will be a public backlash against the imposition of the Nanny State and the dominating role of the government in everyday life. In the meantime, however, it just might be possible to see why big government bailouts are a vote-winner. More than a quarter of all employees in the UK now work for the public sector, a ratio that has comfortably reached record highs under the Labour government. Indeed, nearly half the jobs created under the Killer B's (Messrs. Blair and Brown) have been up the public sector variety.
What makes working for the government so nice in Britain is that you get a final salary pension, a defined benefit of the type that has rendered the US auto industry ludicrously uncompetitive in the global marketplace. And as the ratio of public sector workers rises, the future tax burden on the private sector (which itself has a massive funding gap in its pension system) to fund those defined benefit schemes rises very substantially indeed.

It's not difficult to imagine a scenario in which the UK is rendered utterly uncompetitive because of the tax burden required to fund its government obligations. While it is hard to begrudge NHS doctors a decent pension in their retirement, it is really quite scary to read about the emergence of so-called Soviet towns in Britain, where a majority of the residents work for the government.

And so it happened that Macro Man was struck by an epiphany when he saw a photo of a smirking Gordon Brown in the newspapoer this morning. Gordo is well on his way to turning Britain into some sort of Orwellian dystopia...and Macro Man realized that it is in his genes. For who does he resemble in looks, thoughts, and deeds other than Georgy Malenkov, one-time Premier of the Soviet Union?
The only way they weren't separated at birth is the age which case Gordo might actually by Malenkov's bastard love-child. Either way, Gordo is steering the UK down the Soviet path, both economically and socially. Sadly, it seems inevitable that the situation in the UK will get worse before it has any hope of getting better.

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.

Friday, December 05, 2008

Scenes from the Strategic Economic Dialogue

The Scene:

The Presidential Salon in an undisclosed government palace, Beijing

Dramatis personae:

Hu Jintao, President of the People's Republic of China

Wen Jinbao, Premier of the People's Republic of China

Hank Paulson, US Treasury Secretary


Hu: Welcome, Secretary Paulson, to Beijing for our end of year strategic economic dialogue.

Hank: Thank you, Mr. President.

Wen: We know you have a lot on your plate at the moment.

Hank: Yes, these dumplings are delicious! (Eats three dumplings noisily.)

Hu: So what would you like to talk about first? How many Treasuries we're going to be buying over the next few years?

Hank: No, why don't you start by telling me when you're going to allow the renminbi to appreciate against against the dollar.

Wen: I'm sorry, I can't tell you that.

Hank: Who is going to then?

Hu: Not necessarily. No decision has been taken.

Hank: Excuse me?

Hu: We have not reached a decision yet.

Hank: But Mr. President, when will that happen?

Hu: I am the president, and it will happen when I decide it will.

Hank: I was speaking to you sir. But can you tell me when?

Wen: No, you need to ask Hu.

Hank: But the president already told me it was his decision. I need to know when!

Wen: Really, sir. The president is sitting right here. Why ask me when you can ask him?

Hank: I did ask him. Who asked you to pipe up, Mr. Premier?

Hu: No I didn't.

Hank: Excuse me?

Wen: Listen, Mr. Secretary. The renminbi has appreciated sharply against other currencies in the last few months. Who knows when it will start appreciating against the dollar again?

Hank: That's why I'm asking him! Mr. President, will you let USD/RMB fall any time soon?

Hu: When the time is ripe for the renminbi to strengthen.

Hank: Thank you for your help and understanding, Mr. President! (Pulls out iphone surreptitiously.) Hey George, I think the Chinese are finally ready to play ball on the currency, so that's one less thing we have to worry about.

(Hu and Wen exchange glances and snigger behind their hands.)

There's nothing wrong with a bit of vintage Abbot and Costello on unenjoyment day. At this point, there's not much more to say about the data itself; Macro Man retains the view that the data will be crap, but perhaps not as crap as priced. Sadly, no obvious trade has surfaced on that front, though he likes selling the front end of Europe after comments from Mersch suggesting that further ECB cuts will be even more grudging than those already observed.

That Ben Bernanake now seems intent on not only putting conditions in place for an eventual recovery, but also to put an immediate floor under house prices is a worrisome development, but frankly Macro Man is too tired to tackle that one without a weekend's worth of rest.

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.

Wednesday, December 03, 2008

The Brazilian

One of Macro Man's favourite themes at the moment is the necessity and likelihood of EM policy easing in response to the global recession and disinflationary/deflationary dynamic. For sure, most EM countries have eased policy to one degree or another- some of them aggressively. But a few EM CBs have stuck to their guns....for now. Therein lies opportunity. One of the best out there at the moment is Brazil.

The land of the Amazon has been a favourite target of macro punters for much of the past three years or so. Until the third quarter of this year, most of that focus was in the equity and especially the currency markets. There was little not to love about the BRL- where else could you get a currency with double-digit nominal rates, high single-digit real rates, and a current account surplus/commodity tailwind to boot?

Macro Man took a look at the BRL more than a year and a half ago and concluded (erroneously) that there was relatively little opportunity left in the currency. How wrong he was, as USD/BRL tumbled 25% in the ensuing 15 months.

Since then, of course, USD/BRL has subsequently rallied more than 50%. Was this justified? According to Macro Man's metrics, no. His favoured measure of real fair value, a terms-of-trade adjusted PPP measure, has suggested that the equilibrium level of USD/BRL has risen somewhat...but nowhere near the amount of the recent spot rally. That, Macro Man would suggest, has much more to do positioning. Sure, there were some stale foreign longs in BRL, but those surely threw in the towel by 2.00. The real story (if you'll pardon the pun) is the toxic positioning in the Brazilian corporate sector, which drove spot aggressively higher and some companies to the brink of bankruptcy. Today, onshore punters are long dollars to the tune of $13 billion, according to data from the BM&F.

While short USD/BRL will (eventually) be a nice global recovery trade, the time for it could easily be eighteen months away. No, for the time being he prefers the fixed income market, where slowing activity and a levelling off of inflation pressures have been reflected in yields with...err..exuberance.

Since the middle of November, yields across the curve have fallen more than 2% in some buckets, a very sizeable rally. The front few contracts are trading close to flat with the SELIC rate, but none are yet pricing in a cut. With industrial production virtually stagnant on a y/y basis now and indicators of global activity plumbing new depths seemingly daily, in Macro Man's view it's only a matter of time before the BCB sees the light and cuts.
That having been said, it's difficult to add/establish after a 200 bp rally, with much of it coming in thin trading conditions. It wouldn't altogether surprise to see a 50bp-plus pullback in the Jan 10- Jan 12 part of the curve.

If any sort of priced hiking is re-introduced, however, it looks like a nice opportunity. What's been especially gratifying about this trade recently is that it has exhibited zero correlation with the SPX.

Traditionally, EM fixed income trades more like a stock than a bond, rallying and falling with risk aversion. Some time last month, however, the DIs (exchange traded swaps) seemed to decide that they are, in fact, bonds, and the traditionally negative correlation between yield changes and changes in the SPX vanished.
This has made it an especially attractive trade, as it has escaped from the "risk on/risk off" mentality that has assailed most other assets in one way or another. Speaking to other macro punters recently, Macro Man has to accept that he is hardly alone in this view. But the crowd, as they say, can't always be wrong...and this is a case where fundamentals, current pricing, and thematic relevance make it one of Macro Man's favourites in an environment where equities seem to run around like a headless chicken.

Tuesday, December 02, 2008

Commodities Are a Joke

Welcome to the new's the same as the old month!

Frankly, Macro Man isn't sure what to make of yesterday's price action. A week of low-volume aggressive rally is followed by a day of moderate-volume, aggressive sell-off. As he noted last week, it's difficult to discern any forecasting edge for short-term price action.

What we can say is that the bear market remains alive and well. Yesterday's shellacking made it onto Macro Man's list of top 15 worst market days since the end of the first world war. As a public service, he has created a "league table" of bad days, which he will endeavour to maintain on the right side of the website.

Somewhat ominously, Macro Man's preferred (proprietary) measure of risk aversion has started heading lower again, having consolidated in the second half of November at levels suggesting that markets were merely "very" risk averse, rather than the prior shotgun-and-canned-goods of aversion prevailing in October. It doesn't exactly augur for a quiet end to the year.
Yesterday was notable for a couple of other reasons, as well. The NBER has finally acknowledged that the US economy is in a recession; there is no word yet on a likely timetable for announcing the start of the depression. Ben Bernanke, meanwhile, sketched out a roadmap for further policy easing, a game plan that includes the outright purchases of long-term Treasuries to "spur aggregate demand."

As always, however, large government actions carry unintended consequences. While lower long-term rates may be seen as a boon to spending, they also substantially increase the net present value of pension fund liabilities. Coming at a time when declining asset performance has left a hole in pension funds' balance sheets, lower long term rates make the asset-liability mismatch even worse. Among those funds most adversely affected include, quelle surprise, the defined-benefit plans of the Big 3, who themselves are lobbying for fresh government bailouts.
Whether it's pension funds scrambling for duration or exotics desks scrambling for hedges, the performance of the 30 year swap in the US has been truly awe-inspiring. While 30 year swap spreads are off their lows, they still remain sharply negative; the latest print on Macro Man's screen is - 43 bps. Intriguingly, 30 year rates are going so low that asymptotic considerations may soon come into play. Assuming that LIBOR rates do not go negative (and they didn't for any observable period in Japan), your max loss from paying these swaps should be the nominal rate in any one year time horizon. So if you pay it in, say, $10k/bp, you won't lose more than $2.78 mio per year. You won't necessarily make that much per annum either, but Macro Man would argue that this trade is approaching a very high likelihood of ultimate success. Food for thought....
Elsewhere, one of the stories of 2008, when the history is finally written, will be the implosion of the "commodities as an asset class" investment theme. If the pension fund portfolio return chart above had included a 5% allocation to commodities, the returns would look even worse.

One of the silver linings of the commodity market implosion, however, has been the opportunities afforded to people of Macro Man's vintage to indulge in what can only be called "dad jokes".

Macro Man's colleagues cringe whenever commodities edge lower, as he is apt to come up with "gems" like the following:

* Oil is getting drilled
* Oil isn't looking too slick
* Nat gas is getting burned
* Gold has lost its luster
* Silver's looking tarnished
* Copper's getting smelted
* Wheat's getting scythed down
* Sugar ain't looking too sweet
* Coffee's getting roasted
* Cotton's getting put through the mill
* Soybeans have been crushed
* Cocoa isn't too hot

All in good fun, of course, and readers are invited to submit their own efforts. For anyone or any fund who bought into the hype in the first half of this year, however, the performance of commodities is no laughing matter.

Monday, December 01, 2008

Thanks, Alistair!

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.