The Alternative Universe Newswire

Thursday, January 29, 2009

There is a theory in particle physics, known as the many-worlds hypothesis, which posits that there are an inifinite number of universes, with a new one created whenever a particle's qunatum wave function "collapses." Readers of Philip Pullman's His Dark Materials trilogy will be familiar with one "practical" interpretation of the hypothesis, wherein similar but slightly different universes overlap each other.

Macro Man can confirm that this is in fact the case, as he possesses a rather unique newswire that feeds in from one of the alternative universes. He usually keeps it under wraps in the bottom of a drawer, but sometimes feels compelled to have a look at it when real-world news headlines leave him scratching his head. He finds that the alternative universe newswire sometimes offers a fresh, more truthful perspective on events than his everyday sources of news.

Recently, he's taken to looking at the alternative newswire with depressing frequency. Consider the following real-world headlines that have crossed his screen recently, and compare them with the alternative-universe newsfeed:

Our world newsfeed(OWN): Russia, China blame woes on capitalism

Alternative world newswire (AWN): Wen, Putin admit Martingale forex strategies "misguided".

In gambling, a Martingale strategy is one in which one's stake is doubled after every losing bet until he finally wins (or loses all his money.) If one possesses infinite wealth, this strategy will deliver a profit of the original stake when one finally wins; in the real world, however, its practitioners usually bust before finally winning.

In markets, the term refers to adding to a losing trade to "improve your average". Unsurprisingly, market punters usually achieve similar results to roulette players in using the strategy.

And in macroeconomics, it has come to mean an endless cycle of buying foreign exchange reserves to maintain an artificially weak exchange rate, regardless of the negative externalities of such a policy. To be sure, the US is culpable for a great deal of the current global economic stress, but this does not absolve either China or Russia for pursuing their own misguided policies which have generated a collosal misallocation of resources.

That the ongoing travails of the rouble has impaired the kleptocrats' financial standing in some small degree provides at least one small rainbow in an otherwise never-ending torrent of doom and gloom.


OWN: Brown says UK was right to sell gold in 1999, says UK bought euros by selling gold

AWN: Brown admits selling XAU/EUR below 300 was "collossally stupid"

The high print in XAU/EUR in 1999 was 270. It is now 632. Macro Man isn't sure what is worse: that Gordon Brown is too stupid to understand that that is a bad trade, or that he thinks that YOU are too stupid to understand that that is a bad trade.
OWN: "We foresaw economic downturn," Trichet says.

AWN: Trichet reveals ECB forecast model (pictured, below.)
OWN: Brown defends economic record, blames global crisis for downturn

AWN: Brown admits that UK is buggered

OK, maybe it's not fair to pick on Gordon twice. But the gold headline above was literally unbelievable, and the graphic below (which amde the rounds yesterday) is too good not to share.


Posted by Macro Man at 9:21 AM  

24 comments:

Your martingale comment on Russia seems misguided. They spent years sselling rubles to buy dollars accumulating their reserves, and are now buying back rubles at progressively cheaper levels...Nice trading

Anonymous said...
12:11 PM  

MM - need to broaden your reading a tad. Several of the headlines had it as Putin reaches out to West, including the Moscow Times. Listened to a bit of his speech myself and, thru the rough translation admittedly, that was the expressed sentiments, coupled of course with some milder and rather well argued sentiments. There was also one of the better pieces in years in yesterday's WSJ oped on China's growth, savings, investment, trade and exchange rates. Relates Yuan more to these structural factors than deliberate currency manipulation and was well worth you and your readers time.

dblwyo said...
12:29 PM  

Anon....ah, but you forget about all the EUR/USD that they bought in the 1.40's, 1.50's, and (gulp) 1.60's, which they're now selling in the 1.30's and 1.20's. So they are making a profit in a toilet paper currency (RUB) and a loss in hard currency. Not good.

Macro Man said...
12:49 PM  

I dont forget...:
First trade: sell rub buy basket of USD and EUR (and some other stuff)
Second trade: buy rub sell basket or USD and EUR (and some other stuff)

They are buying back RUB at a net cheaper level as the basket has devalued. Theyve made a profit and they can hold this profit in whatever currency they choose.

Anonymous said...
1:33 PM  

MM, the Russians seems to be selling their gold to support the rubble.

- (RU) Russian Central Bank Gold/FX Reserves: $386.5B v $396.2B prior week

Christian said...
1:34 PM  

@ALTuni

Banks own world goverments

Anonymous said...
1:46 PM  

Dear Mr Man...

Thank you for the belly laugh(s) !

Mike said...
1:55 PM  

I wouldn't have any faith in ol' Gordon if he was looking after the finances of my local scout group, let alone be in charge of one of the world's biggest economies. The UK is looking likely to slip down the world's league table quicker than Liverpool FC.

On a similar theme, Nassim Nicholas Taleb said last June that he wouldn’t trust Fed Ben to even drive his car.

Damcanu said...
2:01 PM  

could not agree more with you mm; as i right this russia is selling euros in the market.

Anonymous said...
2:13 PM  

mm you forget that Gordon got some interest paid
for his euros, he would miss that in gold
Though still the trade was a loss, but
less colossal than you suggest

Anonymous said...
2:44 PM  

Good point re interest...though I'd submit that the opportunity loss of his trade is still collossal.

Similarly, the CBR has had to finance its rerserve holdings, which I would submit have likely created a loss for the bank.

Macro Man said...
2:55 PM  

re interest, gold can be leased.

t said...
4:04 PM  

over 10yrs he'd need about 7% per annum compounded to double his money ..to counter the 300-600 XAU/EUR move

Despite JCT's best efforts to hike Europe back to the stone age we havent seen anything like 7% average euro yields.

So lets diss that idea..

HOWEVER... GB could have invested it in a Standard Life CASH fund
And maybe eeeked out a reasonable cash performance..
Right up to the point it turns out NOT to be cash but some "Cash like" non cash product. At which point he'd have dropped another 8% in a day or so.

SO nope that doesnt work either ..

So Agree with MM .. whichever way you look at it .. he's f*&ked it>

Is there some law protecting MPs from prosecution if they are standing in the House of Commons when they lie?

PS .. check out www.thedailymash.co.uk for a lovely piece on IMF/UK/ Darling interaction ..

Richy ( not so) Rich said...
4:29 PM  

WHAT IS YOUR POINT ABOUT RUSSIA YOU DICK?

THEY HAVE ENOUGH CASH TO DOLLARISE THE MONEY SUPPLY.
THEY ARE BUYING BACK RUBLES CHEAPER THAN WHERE THEY SOLD OVER MANY YEARS. THEY TOOK DOLLARS FROM FOREIGNERS ON THE WAY IN IN EXHANGE FOR RUBLES AND THEY HAVE SUCCESSFULLY PREVENTED SYSTEMIC RISK BY SELLING DOLLARS BACK TO LOCAL BANKS AND RECAPITALISING THEM WHILE TAKING OUT A NICE SPREAD ON THE FX. THEY RESISTED PRESSURE FOR MANY YEARS TO DIVERSIFY THEIR RESERVES OUT OF TREASURIES INTO EQUITIES AND RISKIER FIXED INCOME INVESTMENTS. NOW WHO IS LAUGHING?

Anonymous said...
5:16 PM  

Someone's testy today...

Anonymous said...
5:29 PM  

I am, actually, because a)unlike the klepocrats, I don't own any of their crappy domestic financial assets that are swiftly approaching zero in hard currency terms, b) unlike the kleptocrats, I can make money without stealing it, c) unlike the kleptocrats, I don't have to worry about getting thrown in jail or shot if I get on somebody's bad side, and d) unlike you, I possess the triple digit IQ required to read and turn off the CAPS LOCK key.

Macro said...
5:37 PM  

about the last one: one (who said krugman) could do the same with GWB, or whatever combination of left wing-right wing alternation you can find among the industrialized world.

so this make me wonder if governments really count that much for the economy...

carlo

Anonymous said...
5:52 PM  

MM,

1. What was the correct strategy for CBR during all these years? What should CBR do now?

2. Same question regarding an Eastern European CB (Poland, Hungary, Romania)

3. Could you recommend a good book on exotic options?

Anonymous said...
8:24 PM  

1) Well, I think more concern about domestic inflation and not allowing the money supply to balloon 50% y/y (which occurred courtesy of CBR's intervention policies), and less about trying to prevent foreigners from making money on your currency (which was sustaining a tremendous positive terms of trade shock) would have been a really swell place to start.

In the case of the C and E Europeans, perhaps attempting to discourage the pandemic of foreign currency borrowing that has occurred (Hungary in particular is notable for this) might have been/would be a good idea.

3) Not personally, though I imagine the BBG website has a decent one listed.

Macro Man said...
8:42 PM  

Wonderfully entertaining post. The rear view mirror was a nice touch. Thought you were a little hard on Gordon, though I understand you were at him for politico-lying rather than being unable to see the future.

I thought you were going toward China not Russia. They at times seem determined to own every dollar in the world rather than let the RMB appreciate.

jonathan said...
9:15 PM  

Carlo and Jonathan: re the last point, I did provide an admittedly small disclaimer that I was being a tad harsh. While the performance of the FTSE is driven by more than the quality of the politicians in charge, it is the case that Gordon has spent most of the last dozen years crowing about putting an end to boom and bust...which he clearly has not.

And so, as I said in the post, I thought that the little chart (not created by me, mind you) was too good not to post...

Macro Man said...
10:08 PM  

MM, you were clear enough. I'm not a fan of blairites either... I was just pointing out that the chart can be used by any kind of opposition party. For example that kind of argument is used in Italy against Berlusconi (who had the luck of being elected just before the last two bubble bursts) exactly by the same opposition party who happens to be inspired by Gordon and Tony.

I'm not a fan of Berluska either, but i find it funny. That's all.

Carlo

Anonymous said...
12:08 PM  

I hear ya, Carlo. The reason that it is so easy to take potshots at Gordon is that he would tell anyone who would listen (and plenty who wouldn't) how great he was at running the economy and elinimating the "Tory boom/bust cycle."

And I guess if Gordo is going to blame the UK's travails on 'the global economy', we should probably withdraw some of his prior kudos for just coat-tailing the global economy as well!

Macro Man said...
12:53 PM  

Re: exotics books --- in what asset class? For FX, probably Wystup's book. Just bear in mind 1) different structures are popular in different markets (e.g. var swaps in equities or barriers in FX) and 2) prior to July 2007, the pace of innovation meant books quickly became outdated.

MW said...
7:23 PM  

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