Friday, January 16, 2009

Event Risk

Every time the ECB meets, you can count on two things:

1) Jean-Claude Trichet will come close to dislocating his shoulder as he pats himself on the back, and

2) A cohort of Macro Man's readers will spring to his defense.

Yesterday proved to be no exception. Macro Man is finding it difficult to escape the notion that Trichet is a spectacularly poor economist; what other explanation could there be for his apparent ongoing concern about wage pressures in Europe? And given everything we've seen over the past year and a half, Trichet's casual dismissal of the possibility of European deflation (as well as a European government default) was intellectually cavalier. A good rule of thumb in finance is that when someone says that something "cannot happen", they don't know what they're doing.

In any event, the major defense of Trichet appears to be "well, he's not Bernanke." Talk about damning with faint praise! There is no shortage of commentators, including your scribe, who have taken the Fed to task over the past year and a half. Googling "Fed" and "incompetent" yields neary 900,000 results. The ECB has been relatively unscathed from public criticism, however; the same Google search yields only 30,000 results, and most of them are about cricket. They certainly don't deserve a free pass, hence Macro Man's criticism.

Moving along, Macro Man's trade theme received further support last night with another piece of abysmal data, in this case Singaporean exports, which registered a worse-than-expected 20% y/y decline. Apparently, things are so bad in Singapore that the government is encouraging people to shower less; not exactly what you want to hear in a country where it's the middle of summer 365 days a year! Macro Man remains bearish of the S$ and other trade-sensitive currencies.

Meanwhile, equities and other risk assets finally put in a decent show yesterday after the straight-line drubbing of the previous week. We are entering a potentially treacherous few days in global markets, with event risk in adundance.

This morning sees the release of Citigorup earnings; given that they were teetering on the brink yesterday, the release could be a key driver of sentiment today. Then, of course, we have option expiry on today's opening, followed by a long US weekend for MLK day. And finally, Barack Obama is inaugurated next week. FDR's inauguration speech still resonated today; given Obama's undoubted rhetorical ability, would you be willing to bet against him delivering a speech that provides at least a short-term bump to sentiment? Macro Man wouldn't.

After its sharp downdraft, the SPX is perched just against trendline resistance, a break of which could spur a nice pop higher.
Treasuries provide some confirmation of the easing of "risk off" pressures, as TYH9 has broken trendline support.
It seems quite clear that macro punters at least have been positioned firmly for "risk off"- lower equities and bond yields. The correlation of the HFR global macro index with the SPX has been pretty close to -1 over the past month.
So with these punters having made a good start to the year, Macro Man wouldn't be surprised in the least to see profit taking and risk reduction into the event risk of the next few days.


ozone said...

"A cohort of ECBBasherMan's readers will spring to his defense." ?
Whaat ?
I used to read your blog a year ago, and I don't read it any more. Yesterday I came here and found a bigger number than ever of hostile posts againts the ECB.
It's not my problem, I stopped reading your blog.
But are you sure you are really a professional ? Do you really trade financial markets, or you primary job is bashing the ECB ?

The british press has become obsessed by the euro and the eurozone. Every day it attacks or insults the eurozone countries, even publishes false economic data. Don't you realize how ridiculous the whole situation is ?
If these are the arguments of the british finance, you have really gone down hard.

Macro Man said...

Don't let the screen door hit you on the ass on your way out.

Anonymous said...

Not that I hold the practitionneers of the Economic (dismal) Science in great esteem but I have to say that Jean Claude Trichet – which I would have to agree has comitted one of the worst decision in the history of Monetary Policy – is not an Economist by training but an alumni of France's infamous Ecole Nationale d’Adminstration (thr training ground for senior official at the French Treasury ) which has notoriously weak academic curriculum in Economics.

bsanchez said...

30:1 incompetence ratio between Fed and ECB seemed a bit excesive. So here go some more realistic and objective ones.

Google search on

"Bernanke" and "incompetent" = 69,400

"Trichet" and "incompentent" = 14,100

But they are both playing catch up to the legend

"Greenspan" and "incompetent" = 77,600

And finally out of interest, although I do not think they are directly comparable

"Mervyn King" and "incompetent" = 5,330

or "Mervyn" and "incompetent" = 12,600

pupkinus said...

Dear Macro Man,

I wholeheartedly support your style of commentary and your vision of ECB. Please ignore the impolite "macro bashers" and continue to delight us with your exceptionally witty commentary and writing skills. I am sure that there are plenty of us, civilized, respectful readers that silently read you day by day. The people who lack the politeness to express their dissenting thoughts in an inoffensive manner are a minority but a loud one.
Keep on the good work and thank you for the blog!

By the way, tell us, if the markets fail to rally even a bit after the Obama's speech, don't you think this would be a sign of extreme risk aversion in the equity land? If there is no rally after the speech is it reasonable to short SPX (a bit) ?

Most respectfully,

commodity trader said...

I agree with the previous speaker. I know a lot ppl (including myself) who really enjoy your commentary and analysis. Keep it up

Yohay said...

I find the criticism here against the ECB fair enough. It isn't about bashing Trichet, but about not agreeing with his policies.
And Obama's era sure brings optimism...

bsanchez said...

Am sure MM doesn't need the public show of support. His sitemeter stats say it all:

- average 25,000 monthly visits during the first 8 months of 2008;

- average 50,000 monthly visits since September.

I am one of those new 25,000 monthly visits and will keep reading as long as MM keeps writing.

Anonymous said...

Worth a share for those lyrically inclined, quite good I thought.
So C & BoA/MLs earnings are only 2x worse than expected and we pop 10%+ pre mkt, CDS tighter by 40bps... Oh Hank won't you give me some of that sweet TARP lovin. Fwiw see SPX res at 860.
Buckle up, JL

Anonymous said...

Oh, and the FSA is looking for lawyers:

Anonymous said...

The only criticism I have is a general one.
Most individualize the decisions of a central bank. It is the chairman who takes all the blame/praise.
Trichet is indeed un énarque where the focus lies on politics not economics (or even better who knows who).
However doesn't he and the whole board, rely on a battery of economists at the ECB?

Anonymous said...

To commentator OZONE:

Is that PLONKER Jean-Claude

Love Anonymously Merv

P.s.Ozone: from the greek word ozein meaning smell, from peculiar odour....sounds about right to much garlic hey Trichet

Macro Man said...

All, thank you for the kind comments, which I can assure you are quite unnecessary but nevertheless greatly appreciated. From the get-go I have derived quite a bit from the comments section in this space, and endeavoured to maintain a civil tone. The only posts I delete are spam, and I think I am receptive to legitimate criticism and debate. Gratuitous potshots receive a less warm response, as you can see.

As for the matter at hand...SPX will eventually be a short, but at this point I have no idea whether from 860, 900, or 1000. I haven't exactly see it well so far this year, so am flat and reserving judgment.

Geert, you are spot on that Trichet, Bernanke et al are merely the locus of a broader decision-making body. Word on the strasse, for example, is that it was Juergen Stark who pushed for the July ECB rate hike, not Trichet.

That having been said, Trichet/BB/King surely bear some responsibility for the way in which they communicate. So in laying into Trichet (or BB, or Merv the Swerve), I suppose I am 75% criticizing the institution, and 25% the presentation of the chief.

fajensen said...

escape the notion that Trichet is a spectacularly poor economist; what other explanation could there be for his apparent ongoing concern about wage pressures in Europe?

Economists like the rest of the civil servant tribe they are part of will naturally theorize that all workers salaries are subtracted from their own.

I.O.W.: If there are still salaries being paid anywhere to anyone it means that taxation is way too lenient!!

Macro Man said...

Now, now Anon 13.06....he's buggered off, so we might as well ignore him.

Adrem said...

Apparently, things are so bad in Singapore that the government is encouraging people to shower less...Sorry to add a comment that is very superfluous and light years away from any market wisdom..BUT...from my fuzzy memory of days in Hong Kong I seem to recall the Singapore government ordering that toilets should not be flushed more than once a day, something like that. It must have something to do with perennial water shortages... Water, water everywhere but not a drop to drink

Anonymous said...

You are playing short risky assets via EM exporting countries (i likey), but say youre flat. What do you find to be the best way to delta neutral your short risky asset position at this juncture?
SPY/Crude/Other risky assets/VOL?

Im most interested in- are you hedging via something you hate/ dont think is acting right (buy expensive)/ or just in spy terms?

Trichet is a fruitloop - but for some reason i like the old bugger.


Macro Man said...

Adrem, I lived in Singapore in the mid-late 90's, and never heard any guidance on whether or when to flush.

mpm, I am flat equities. My preferred portfolio construction technique is match value trades in both "risk" directions that will hopefully outperform in either risk environment. That's not always possible, of for the time being, for example, I have sold some duration against my short cyclical currency position.

Steve said...

Hey MM how about a job forum post, I am at a precariously ill bank and would appreciate access to more information on what is going on industry-wide.

I did reasonably well last year but it doesn't account for much these days. My understanding is that global macro is probably the best of the worst of the hedge fund lot.

Owe Jessen said...

@ Steve - my impression is that - at least from the point of view of returns, short bias was outperforming last year, and Managed Futures are the safest bet looking back the last 5-10 years.

Macro Man said...

@ Steve, I'm not really sure how that would work. What do you suggest?

@Owe, as always, the issue with managed futures/CTAs is choosing the right fund. John Henry had a great year last year...but only after a multi-year run of performance so execrable that he lost basically all external funds...

Steve said...

...and marketwise, two comments: I also like Trichet on a personal level. They got it badly wrong and will be at zero soon enough, but does it really matter? I'm not sure. 4%, 2%, 0%...the benefit accrues slowly, and meanwhile a $5 billion loss is an odd lot. To a BBB corp does it matter if they have to pay 12% or 14%?

On SPUs I am shorting Feb puts at the 830 level, agree there will be a time to short but in the bigger scheme of things think the mkt got ahead of itself, has to have time to digest life below 900 for a while. After all, we were at 1200 when TARP came to "fruition" (to use the term loosely).

Steve said...

Good question MM. Maybe who out there is looking for macro traders, what kind of people, etc.

For example I understand that the vogue is "high frequency" traders. I trade just like you do, MM: Small to medium core positions, lots of scalps here and there to pay the bills, and press it when I think it needs to be pressed. But after hearing what is in vogue, I am slanting my material more towards the shorter-term trades.

Anonymous said...

What does "sold some duration" mean?
On JCT, your criticism is understandable but given the nature of the crisis, what short term difference would the economically "right" rate decisions really have made? Imo, not much, so sending the right message was/is more important, regardless of the economics behind it when the tool does little economics-wise. Regarding the message his policy and statements send and his general jawboning, I think JCT has held up quite well.
love the blog, thanks.

Macro Man said...

Anon, "sold duration" means I sold some Bund and US 10y note futures.

Duncan said...

I see the BOE has embarked on quantative easing by stealth;

Anonymous said...

Dear Mr MM,
"Macro Man remains bearish of the S$ and other trade-sensitive currencies."
Pls xcuse my lack but what are the other trade sensitive currencies and what are not trade sensitive?

Anonymous said...

name one, only one current euro official who knows what they are talking about in economics. amazing what socialism can do to societies. and i think UK is on its way.
and if i remember correctly trichet makes 50% more than benyamin. but then again ben probably makes a fortune from insider trading so it evens out.

Anonymous said...

Nice cheap put with duration
How have you defined fixed income vol recently. Has it gotten smoked... think its due to the FED playing in mortgages or something else?


Macro said...

Mpm,to be honest I am a bit of an oik when it comes to fixed income vol.....I am a purely directional FI punter, and stuff either looks cheap or it doesn't. For the most part, the stuff that looks cheap to me are flies and condors...which suggests that vol is pretty high, in Europe at Least. I have stayed away from us fiuxed income for the last month or so until today, so no view there.

Anonymous said...

You're the (macro)man

Have fun with the macrofamily this weekend.

I enjoy'd the conversation

This mkt feels like garbage


Anonymous said...

and very well done in braz di. very well done.

You were not a happy blogger on 10/22. Way to stick w it. Impressive


Anonymous said...

any news on Barclays ?

hearing CALPERS Exited BCS ?

Anonymous said...

hope it's just CALPERS getting out any more views on BARC

Anonymous said...

Please, earth people, stop trying to demonstrate a point by saying a certain combination of words gets X google hits. Consider:

fed genius = 5,720,000 hits! Bernanke is brilliant
Bernanke superman = 50,400 hits. He will heat ray your ass.
George Bush penis gourd = 4,800 hits. The president may or may not wear a penis gourd. Ask again later.

Anonymous said...

Presumably you're shorting sgd against usd - any views on how gbp and eur instead would fare?

Macro Man said...

No ideas re BARC....we shall see.

Re SGD, the purest trade is SGD against the basket, but it's a lower-reward trade. Given the broad correlation between SGD and EUR, and my broadly bearish views on EUR, I do indeed have the bulk of my risk in USDSGD.

Anonymous said...

did you include all the european words for incompetent or just english? any presumably the fact that there are more americans than brits may be a factor in deciding the incompetence? how about GBPUSD as a measure of their competence - isn't currency stability supposed to be at least one of the fed's aims?

Zephyr said...

I used to think the ECB was wisely managed, largely because they were more cautious with their interest rate movements in recent years than our irratic Fed. However, with more time and data (and in light of the current financial mess) it nows seems that the ECB is oblivious to what is happening in the world economy.

DonC said...

As we say it here in showering-challenged, once-a-day-toilet-flushing Singapore:
Aiyah, donch anyhow bash us like that leh ! Friend-friend abit lah...

Being a pretty regular reader of MM, have noted his use of smaller, open and export-oriented economies like Spore's as a global trade bellwether.
Have always appreciated his perspectives and insights; including his humour and ribbing at any fair-game topic - including my tiny red dot of a country.

Fire away...

[Sniff sniff... seems my typing worked up a little perspiration - time for a shower.
D'oh!! Had my one-shower-for-the-day already!]