Thursday, January 08, 2009

Ten Non-Predictions for 2009: Part II

And now the second half of this year's non-predictions, following on from yesterday's first five:

6) EUR/GBP will NOT trade at par. This non-prediction is less controversial than it was a week ago, given the 5% sell-off in the cross. Macro Man must confess to feeling slightly bemused about sterling; having felt for years that it was bum-clenchingly overvalued (viz, last year's comment that cable would not reach a new high), it now looks farcically undervalued against other European currencies.

While this is clearly a result of the ongoing market and economic implosion, and the resultant easing policies pursued by the BOE, from Macro Man's perch it has overshot. After all, at least UK policymakers have (belatedly) realized the nature of the problems they are confronting. In the Eurozone, meanwhile, the economic pity party is just getting started. In December, Germany registered its first rise in unemployment of the cycle- something tells Macro Man it won't be the last. With the possible exception of the Swiss franc, the euro remains the most overvalued major currency in the world...and the lesson of the past year and a half is that that which is overvalued eventually gets nailed. Ultimately, EUR/GBP at 1.00 is just flat-out wrong, and Macro Man doesn't think it will happen.

7) The DXY will NOT make a new low in 2009. The DXY is mostly the euro, so this is really just another way of saying that EUR/USD will not trade meaningfully above 1.60 this year. From a technical perspective, the DXY rally has yet to reach meaningful retracement targets, so Macro Man would expect the buck to rally from here, taking the DXY to somewhere between 90 and 100, From a market perspective, Macro Man remains skeptical that years of dollar borrowing and leverage can be unwound over a few months, especially in an environment of impaired market liquidity. And from a monetary perspective, Macro Man believes that QE is an irrelevance for the dollar until the velocity of money starts to rise other words, until those dollars "dropped from Ben's helicopter" make their way back into the system. For now, they are merely going to shore up holes in balance sheets.
8) China will NOT stop taking the piss in currency markets. In Macro Man's ideal world, China pulls the bid in USD/RMB, slashes its FX reserves by 75% and uses the money to fund the beginnings of a domestic social safety net, and thus buggers off from trading EUR/USD. His ideal world also entails the Pittsburgh Pirates winning the World Series and West Ham the European a cursory glance at the sports pages will confirm that we are pretty damned far away from that ideal.

While there has been a bit of sturm und drang emanating from Beijing recently about the inutility of accruing more reserves and/or buying more Treasury bonds, there is also the small matter of the economic downturn and the desire to maximize net exports. Macro Man suspects that the latter consideration will prevail in domestic policy circles, which makes sense given his views on the dollar and US bonds. As the chart below demonstrates, the rise in FX reserves in China has been inexorable (if you don't already, tune in to Brad Setser for ongoing analysis of this issue.) So for better or for worse, we'll all have to continue living with Voldemort, the cockroach of global finance.
9) High grade credit spreads will NOT reach their wides of 2008. There are three dynamics at work here. First, dealers and punters had every incentive to mark this stuff as wide as possible to end 2008; after all, no one was getting paid last year, so it didn't really matter if it cost you more money. Whereas this year, there's at least a hope you get why not start the year with an extremely favourable mark? Second, the Fed is now targeting spread product, specifically MBS. As mortgage spreads tighten, yield-seekers will eventually be forced to move slightly out the credit curve. And finally, high grade credit generally bottoms first...certainly before the stock market. Observe how in the last cycle, AAA spreads made their wides in mid-2000, before the economy really went into recession. Sure, they remained elevated for a number of years afterwards.....but they didn't make new wides. Given the implied default rates in high-grade credit at current pricing, the asset class looks pretty cheap...especially in comparison to stocks. It can remain cheap for an extended period, of course....but Macro Man reckons that the chart below will not make a new high this year.
10) The approval rating of Gordon Brown and Barack Obama will NOT be as high as they are now at the end of 2009. The last yougov poll that Macro Man can find puts Gordon Brown's approval rating at 38%, substantially higher than its October lows. In Macro Man's view, the bounce has less to do with GB's "vision", "leadership", and "saving the world" than it does with the ineptitude of the Opposition. Given the likely trajectory of the UK economy in 2009, Brown's own ineptitude will eventually re-emerge as a factor in his ratings.

As for the president-elect, it strikes Macro Man that he would need to cure cancer, walk on Mars, and score the winning touchdown in the Super Bowl (all in addition to resolving the financial and economic crisis with the stroke of a pen) to meet expectations. So even if Obama does a good job (and it's in everyone's interest that he does), the grim reality of the 2009 recession is likely to reduce his approval rating from the the current 67%.


Charles Butler said...

When does your poll expire? Will it be before that vacuum between 800-900 gets filled in?

Happy New Year

Macro Man said...

Closed now.

Anonymous said...

I voted in the poll (from New Zealand), but it looks like it never showed up (it didn't seem to register at the time, and I don't see any votes from New Zealand). :(

Forex Watcher said...

The "O" man's lustre has already begun to dull; thus far progressives have been battered by Rev Warren and a strong dose of Clinton redux, the elderly by he pronouncement to 'reform' social security and the ongoing saga of Gov Blagovitch and now Gov Richardson.

67% is his zenith but where will his nadir be?

Macro Man said...

Anon....sorry about that. Putting the poll into the sidebar somehow screwed it up. The technology is free....and, like this blog, you get what you pay for!

Anonymous said...

MM, do you think MOF will intervene in 2009?

Anonymous said...

Another Pirates fan! I thought I was the only one left.

Yohay said...

Very interesting insights.
The Euro sure is overvalued, but I think that also the pound hasn't reached the bottom. The British economy isn't in an optimistic state.
Regarding Obama, 67% is a lot, but I think he won't lose too much approval. I think he'll stay above 60%, and I'm very optimistic that he'll do a good job.

shtove said...

Macro Man isn't perfect, so I appeal to a higher authority: how does Mrs Macro Man see £/$ for the rest of the year?

Macro Man said...

She forecasts 1.65 by year end, with considerably less volatility.

Macro Man said...

Anon@17.37, I was born in Pittsburgh, ironically enough in a year they won the World Series. What's your excuse?

Mr Risk said...

#6 - So, how many are short since 0.9806? Show of hands?

#7 - The race is on. US, Eurozone, US, Eurozone, US, Eurozone, neck and neck. Who will finish with more juice in the machine.

#8 - If you have ever lived in China or been born a Chinese, then you'd understand why US and Eurozone reserves over the Shanghai discount any day. Safety net... hahahaha.

#9 - Tail wagging the dog.

#10 - Which pollsters are you going to use? Should we give you the bid or offer on that spread? :-)

HoosierDaddy said...

From the little I've seen of Mr. Brown, he seems to do alright for himself when there's a calamity about. It doesn't take long after things settle down for the public to sour on him though.

Obama is going to be really great president or a really lousy one. After all the hype he'd better be a Lincoln, not a Ford as it were.

Anonymous said...

The Non-Predicitons read like a treatise on probabilities.
Very agile!

Anonymous said...

the dollar will collapse in 2009, everybody will get tired to finance a country whose main industry is printing money. Fiscal deficits are expected to be 9% of gDP the next 2 years and you expect dollar will arise. Not in my time.Treasuries of course will go down, expect to se 4 more million of unemployed people the next 2 years. Credit party is over.