Monday, January 05, 2009

Marking 2008 To Market

Happy new year to all and sundry. It feels good to be back in the saddle (no thanks to the British rail system) after a relaxing couple of weeks off. While Macro Man had every intention of scribbling down a few thoughts while he was off, his break was so relaxing that he couldn't bring himself to do anything much more mentally taxing than setting up the Wii that Santa finally brought the Macro Boys.

In any event, 2009 is here, and with it a big fat "zero" in the Y-T-D column. The challenge is now to figure out how to get the year off to a good start. For the time being, the market seems to want to buy risky assets out of the block, though whether that is an active decision or merely a passive "putting cash to work" allocation remains to be seen. Macro Man has some sympathy for the view, if only for a short-term punt. Vote for yourself in the poll on the right-hand panel.

In any event, before figuring out what's in store (or not) for 2009, Macro Man feels compelled to take one last look back at 2008. (This was the piece he originally intended to write over the break.) Long-time readers may recall that Macro Man doesn't do predictions, but he does do non-predictions. At the beginning of last year, he scribbled down a list of things that he expected would not happen in 2008. How did he do? Let's find out.

1) Oil will NOT rise 60% in calendar year 2008, or 100% peak-to-trough during the year. For the first six months of the year, this looked like a catastrophic error. Indeed, in a mid-year review, Macro Man conceded that this was a glaring miss. Ironically enough, the second half of the year proved him to be ultimately correct, though he will cheerfully concede that he didn't expect to see $40 oil at any point during 2008. This was a poor Sharpe ratio call, but he will give himself a HIT on this one.
2) VIX will NOT hit single digits again. In the original post, Macro Man wrote that "If you see VIX hit low teens or below in 2008, buy all the index options you can." While the VIX didn't quite get that low, it's safe to say that 2008 was a year characterized by elevated equity market volatility. Amazingly, this non-prediction received a "jury still out" in the mid-year review. With the benefit of looking back on the entirety of the year, this was a resounding HIT.
3) Inflation will NOT die as a macroeconomic issue. This one was more or less the opposite of the oil call. It looked great mid-year, but that chart below is all you need to see to call this one a glaring MISS.
4) China will NOT step-reval the RMB. It's amazing to think back that in April, at the apex of the dollar down bubble, USD/RMB NDFs were pricing effective Chinese interest rates at -10%. That seemed excessive then...and that was before the global economy fell off a cliff and the Chinese decided that USD/RMB wasn't going to move any more. Would you ever have thought at this point last year that the market would be pricing a one year 10% devaluation in the Chinese currency (which was priced in early December) during 2008? HIT.

5) The BOJ will NOT hike rates in 2008. It's amazing to think that the market was even contemplating BOJ hikes at any point last year (though it was really a residue of the 2007 view.) HIT.

6) GBP/USD will NOT make a new high in 2008. While the dollar down bubble was the story of the first half of 2008, and EUR/USD exceeded previous highs by 7%, cable didn't get a sniff of its 2007 high. Indeed, the story of the last couple months of the year was the demise of the Gordon Brown Peso. While the non-prediction was a HIT, it didn't do Macro Man any good; having been bearish the £ for the previous eighteen months, Macro Man went flat and watched in slack-jawed wonder as sterling got the bejeesus sold out of it.

7) We will NOT see an honourably fought US presidential election with the outcome determined by the issues. The election actually wasn't as bad as Macro Man had feared, though the dearth of quality of the vice-presidential candidates on both tickets is enough for him to mark this as a PUSH.

8) We will NOT see a US recession in 2008, as defined by the NBER. Macro Man conceded in Q1 of last year that this was a horrible, horrible MISS, and the ensuing ten months or so provided a veritable Everest of evidence in a straight line.

9) Japan's MOF will NOT intervene in currency markets in 2008. Macro Man is pretty proud of this one. You wouldn't have had much support for the notion that USD/JPY would trade from 114 in late '07 to 87 in late '08 with nary a dollar bought by the Japanese authorities....and yet it happened. HIT.

10) The Shanghai Composite will NOT rise another 100% in 2008. While this may not have been going out on too big of a limb (though the Shanghai Comp had doubled in 2006 and 2007), it was a pretty clear HIT, as the chart below illustrates. So there you go: seven hits, two misses, and a push- a slight improvement from the mid-year record of 6-2-2. While some of these non-predictions may seem ludicrously obvious in retrospect, bear in mind that fully half of the non-predictions have been marked differently today than they were in the mid-year review.

While this says nothing about what's in store for 2009, it does provide a pretty clear illustration of the folly of forecasting. Which, at the end of the day, is why Macro Man does non-predictions rather than predictions! Look out for the non-predictions for 2009 later this week, and good luck to all readers in 2009.


Anonymous said...

Let me be the first to say welcome back, and I look forward to this year's non-predictions.

Sean Maher said...

Welcome back MM, here's my non-prediction: the Euro will not sustain parity against the GB Peso as investors wake up to the emerging market write-off Tsunami that will soon swamp European Banks and that the ECB has fallen dangerously behind the growth curve...Athens won't be the only Eurozone city ablaze in sustained rioting.

Anonymous said...

Is anyone else having problems with the poll after voting? I could see the results right after voting, but ever since I see only blank space with "Total Votes: 1" in both ie and firefox.
I really like the idea of a monthly poll of this kind. Even multiple concurrent polls for other data.

Macro Man said...

Anon, I am as well. I can see it by going to the poll's source, but no one else can. I might try and post separately and see if that works.

Greg said...

For all the nonsense back in 2001 (when Greenspan feared deflation and Bernanke earned his helicopter license), deflation never ever happened and was never even close. Even CPI (which is engineered to report a low number) and Greenspan's PCE deflator both stayed positive

In hindsight, many market observers say that US rates were kept too low for too long.

Something tells me this latest deflation scare will prove to be nonsense also. CPI and PCE are still very positive. Major consumer costs (food, healthcare, education) continue to have price increases.

Traditional money supply measures are growing (not shrinking). The Fed's balance sheet has exploded.

The only place where we have "deflation" is in real estate. "fake" credit (MBS securities and derivatives) were used to buy bubble priced real estate. Sure, this credit is being destroyed (which some claim is money supply contracting) -- but the housing market is contracting by the same amount

Bond market delevering is not the same as deflation. Its everyone realizing the fake real estate prices and the fake "securities" used to finance them are, well, fake.

Anonymous said...

Inclined to agree with Greg, think that #3, inflation, could make a fearsome return later this year. Many of the structural bottlenecks wrt to foodstuffs are still unresolved, and much of the underlying population dynamic for commodity boom is still in place, we've just had the bubble pricked. Either way, de or inf, its sure to be the play of the year. Congratulations on those non-predictions, looking forward to the next batch, I can only assume (alas, since your numbers are no longer published) that your 08 was good. Cheers, JL

Anonymous said...

I agree with Greg and Anon 3:07

As a trader, I think its great when Wall Street "analysts" forecast nonsense -- the sell side gets to charge everyone a "toll" to play the bad forecast, and then a second "toll" to get out of the bad trade.

But lately, the central bankers and regulators who are supposed to focus on long term trends have abdicated their responsibilities and blindly followed Wall Street's misdirection.

After pointing out Wall Street's "irrational hubris", Greenspan then bought into it hook line and sinker -- and caused the dot-com bubble.

Then to fix his earlier mistake, he flooded the system with excess liquidity to fight imaginary deflation -- causing the housing bubble.

And now Bernanke is repeating Greenspan's mistakes -- its only a question of where (not if) the next bubble will appear

Even if there is deflation in the next year (which I doubt) -- the 10yr and long bond are pricing deflation forever more... that definitely will not happen

Anonymous said...

Over the weekend, voting Fed member Janet Yellen said:

“It’s worth pulling out all the stops to ensure those outcomes don’t occur,” Yellen said.

“But many of the new approaches are experimental, and there is a great deal of uncertainty concerning their likely effects.”

“Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely,” she said.

So even the Fed acknowledges that they don't know what effects their actions will have.

And even with "vigorous" Fed action, the recession is going to happen anyway.

The futility of their actions not withstanding, the Fed is going to print money anyways...

Yohay said...

Good to see you back in the saddle.
This retrospective on 2008 is fascinating.
I think that the pound will continue to fall, but I'm only a "micro man".
Anxious to read your non-predictions for 2009.

Mr Risk said...

If the Fed has no clue, then I've got a snowball's chance in hell of predicting the markets and economy right one year out.

Easy Predictions?
1) Fed will not go out of business
2) ECB will not go out of business
3) BOJ will not go out of business
4) Fiscal stimulus will not be timid
5) Greenspan and Bernanke will not grow more hair (anywhere)

martin said...

Thanks for the updated daily vol chart. Sort of visually suggests we may have more of same ahead w/ perhaps a few even more brutal down days (ala 1930s). That is if history repeats and markets are not reliably random (pace E. Fama).