Tuesday, January 13, 2009

A Tradeable Theme

One of the challenges and pleasures of being a (lower case) macro man is the intellectual challenge of finding tradeable themes. Sometimes they fall into your lap, such as last year's "implosion of the world financial system" theme. In other environments, things can become a bit trickier, not least because timing is just as important as direction in implementing a trade.

One of Macro Man's core views for the past several months has been that following the gradual waning of the financial crisis, there remains a bone-crushing recession to cope with in 2009. One of the direct outcomes of the hit to global domestic demand is, unsurprisingly, sharply falling trade volumes.

Last summer, the Baltic Dry Freight Index collapsed, a move which at the time was characterized as somewhat overdone. Since making a low late last autumn, the index has essentially flat-lined, implying that there is little to no fresh marginal demand for shipping.

Trade data around the world has subsequently confirmed the message from the BDIY. Taiwanese exports fell 41% (!!!!) y/y in December, while trade figures throughout the rest of Asia have shown similar weakness (if not quite of the same magnitude.)

Now, there is a popular view that while current data is poor, the stimulus packages in China will bail out the Asian region if not the world. Macro Man is sceptical. Indeed, the greatest risk to asset prices is that the Chinese stimulus is a damp squib. And if you need any reminders of what that means for the world, check out the chart below, which shows China's trade balance with the rest of Asia. China usually runs a tasty deficit with Asia, as they import components for onshore assembly and re-export. Observe how China has managed to shift demand abruptly lower with Wal-Mart style ruthlessness.Even Japan has started to suffer, as its trade balance has moved into deficit for the first time since the late 70's. The difference between now and then, of course, is that over the past few months Japan's terms of trade have improved sharply, whereas they were awful in the late 70's.

Continued weakness in global trade is one of Macro Man's favourite themes. The question then becomes how to play it. He likes being short SGD as a proxy for pan-Asian trade volumes, plus there's a kicker from a possible devaluation in April (the MAS policy easing mechanism.)

He also likes being short the Australian dollar, which in a sense is more of a pure China play via the commodity channel. Of course, Australia has its own domestic recessionand collapsing housing bubble to deal with, which should further erode whatever erstwhile yield support that the Aussie has enjoyed.

Of course, one of the occasional frustrations about this industry is getting the economics spot on but failing to realzie that via the trade that one implements. However, both of the trades above appear to be gaining market traction this weak. In honesty, Macro Man isn't quite sure what to hope for with today's release of November trade figures in the US....well, other than lower volumes all round, which is after all at the core of his view.


Anonymous said...

Macro Man

I, like many bloggers (perhaps including yours?)think the world has entered into a deflationary cycle circa Sep.08.

By MSM, typical pump-only-pump self serving WS analysts, first it was a shock, disbelief, now hoping for a quick recovery (09'year end) will have to accept the cold truth again by way of real economy being in near frozen state.

I don't see any recovery in industrial commodities perhaps exception of crude. Which brings me to shorting AUD, one of the few places still largely in la-la land thx to its relatively small size and excluded economy.

I am more clueless on typical FX plays such as TRY and Brasilian real? What say ye...



Anonymous said...

pothoonsNZD is also a short macro, s and p put us on neg watch today and will watch our budget in june/july (will post dates later) if fiscal position looks to worsen then they will cut and we will fall more then 5% on the day if past is a good indicator of future response.... and NZ will always be weaker then aussie.

Mr Risk said...

It's instructive to watch the sectors that have led us down in the current downcycle.

XHB, XLF and IAI ($XBD).

Also, moving lower faster is the small caps, (see IWM). Regional banks also weaker (RKH). Retail (RTH)

Even commodities like oil (XLE, USO) and Gold (GLD) have given back their new year's rally.

Mr Risk said...

The scale back in China is very noticeable. After everyone I know who lives in China tells me that the prices have fallen and everything is "ON SALE!," I barely see many people at the malls or shops buying like they were just a year ago. Prices may be lower, but there's a deafening silence. And business owners have definitely become miserly now. It's not just the big corporations and industry; it's Mom and Mao.

Anonymous said...

Mr Macro, apol but I cannot differentiate the lines on the chart of Japan. But is it forecasting a c/a deficit this year???

if so then JPY surely is a sell at these lvls, plus the risk of intervention...

Macro Man said...

The current account is still in a decent surplus, given Japan's large income surplus. I can see an argument to be bearish yen....but I think those factors won't come into play for another six months or so. In the near term, Japanese institutions are shifting their asset allocation away from foreign stuff back to JGBs..which is yen positive.

Anonymous said...

MM: Since making a low late last autumn, the index has essentially flat-lined, implying that there is little to no fresh marginal demand for shipping.

The index doesn't say anything about the demand (or lack thereof) for shipping.

It tells us there is no export credit market and no acceptable letters of credit with which to finance global shipping.

No conclusion can be drawn about shipping unless you hold all else constant. If shipping demand is off (it might be) -- the change is slight. The reduction in solvent banks however, is enormous.

Baltic Dry Index is not a shipping index at the moment -- it is an insolvent bank index.

The marginal batch of Walmart trash from China to the US is arguably no longer needed, but much of what the world ships is food and energy -- both of which are and will remain in demand as long as there are humans blogging.

Despite the ridiculous "sky is falling" speeches from Wall Street, global crude oil demand (just as an example) is off -- at most -- 1.8%. That is the worst *projection* by major economists, actual numbers (so far) are off less yoy.

Insolvent and poorly run banks being propped up by delusional central bankers is the biggest problem facing the world right now.

Manc Trader said...

"... gaining traction this weak"

a freudian slip?

Anonymous said...

excuse my ignorance but vat iz SGD?

Anonymous said...

SGD = Singapore Dollars.

Dear MM,

When SP downgrade the soverign debt of Benelux and EUR gets crushed..what would happen to your SGD , AUD shorts ?

Are you not losing sleep over the EUR Crush possibility ?

Charles Longfellow said...

Freud slipped on the slope of the USD/JPY. A yen for the Yen.

Anonymous said...

Actually MM (and we do capitalsie it), anon at 3.17 has a point. All those I've spoken to in the industry say that charter rates have begun to recover far more than what is shown by the index, which is just a spot rate. Nevertheless, thanks for the provocative post!
Is the MoF really organising roadshows to stir up international demand for JGBs?
Cheers, JL

Anonymous said...

genauer says:
After my earlier posting that
SGD just looks like a smoother,
half way replication of the EUR,

I ll did some correlating, involving some 20 currency and other variables, and what you get:

SGD = 0.316 + 1 EUR + 0.06 CNY

everything else and more digits are
completely irrelevant !