Tuesday, February 17, 2009

All the King's Horses

Now that Macro Man has gotten his sob story out of the way (thanks to all for your kind comments and advice), it's time to get back to focusing on the market. After all, Macro Man may be housebound, but market opportunity doesn't accept sick-notes.

When he left the office on February 6, markets appeared to be starting a romance with recovery. Hopes were high for the Geithner plan and the Obama stimulus, the bounce in the BDIY and Shanghai were fingered as auguring an improvement, and the world generally seemed content to play "Shiny Happy People", perhaps the worst song in the entire R.E.M. ouevre, in a continuous loop.

What a difference a few days makes. The administration announcements were predictably short on detail while the ancillary newsflow has been less than rosy, particularly with regard to the credit quality of peripheral European sovereigns, both inside and outside of the Eurozone.

Indeed, a week and a half after the market wanted to look on the bright side of life, Humpty Dumpty appears to have taken a Macro Man-style tumble, and is struggling to get back together despite the best efforts of all the King's horses and all the King's men.

And with that, a number of financial market prices have reached very interesting junctures indeed. The euro, for example, has borne some of the burden of the unraveling of the European periphery, no doubt helped by the "shocking" admission of the ECB that the situation now merits further serious policy attention. The impulsive sell-off in the dollar last December seems like a long, long time ago, and EUR/USD has now broken decisively back below the 1.27 support level. From here, a re-test of the lows would appear to beckon. Spoos, meanwhile, look perched on the brink of a precipice. Now, we have seen this set-up before, and it hasn't necessarily amounted to anything but a painful squeeze higher. But still, you have to be suspicious that futures keep testing this 800 level; the more visits are made, the more likely it is that the next one will resolve into a (potentially cathartic?) downdraft in stock prices. Like many punters, Macro Man is watching this one closely.
When Macro Man left a week and a half ago, the market was piling back into China. To be sure, the Shanghai composite has put in a decent show, though Macro Man still believes that it is dangerous to draw macroeconomic conclusions from onshore Chinese price action. Perhaps more tellingly, a Chinese offical was quoted as suggesting that USD/RMB could trade back to 7.00 after flatlining around 6.83 for the past seven months. Unsurprisingly, punters have scrambled to get out of the 1y NDFs that they put on a couple of weeks ago; Macro Man wouldn't be surprised to see it squeeze quite a bit more.
Meanwhile, bonds have recovered their sheet, most particularly in Europe. To a degree, this reflects the dovish language from the ECB, singalling further rate cuts ahead. In addition, the rally in German bonds may also reflect intra-European spread trades (Irish CDS now trade above Morgan Stanley!) But surely there must be an element of recognition that the real-economy newsflow is dreadful. Japan's Q4 GDP printed a Depression-style contraction, and data on global trade continues to sink into the abyss.
And with the whiff of financial crisis still floating all around us (you can now by a share of UniCreidito for less than the cost of an espresso in Milan), small wonder that the "return of capital" trades are starting to find favour again.

Eventually, of coourse, things will recover, if perhaps not in the guise with which we are are familiar. But it will take a heck of a lot more than all the King's horses, all the King's men, and all the King's stimulus and rescue packages to effect that recovery. More than anything, it will take time; and that is a commodity that currently seems to be in short supply.


Anonymous said...

I vascillate between your "things will recover" position and a "the game is fundamentally changing" position. Defaults in the European periphery and likely a possible tsunami of US debt in the $5+ trillion level coming into the market over the next two years are big worries. However, I end up soldiering on, because it is the "known," rather than cashing out. Still, I think of Kenny Rogers' ditty-- "You gotta know when to hold 'em, know when to fold 'em, know when to walk away, know when to run..." Hope recovery is sppedy and pain free. Best

Damcanu said...

The FTSE seems to holding up fairly well recently, when compared to the S&P. Perhaps it is finally finding it's defensive feet.


MM, very sorry to hear about your off-piste accident, maybe on your next trip you should move over to the board. Less likely to bust a knee but then more likely to damage a wrist or arm, which is not good. At least now you are able to type and move a mouse.

Good luck on your recovery and if you need any exercise tips or advice let me know and I'll have a chat with my wife who is a Physio with some ACL knowledge.

Charles Butler said...

Where to fit the ZEW into all this?



Macro Man said...

about three degrees of freedom away from actual economic decision-making. I'd submit that the improvement in the expectations component was capturing the identical (literally) bout of optimism that was percolating when I went away. That the "current conditions" component reached a new cyclical low received rather less attention that the headline, though I am not sure if it is any less meaningful (if indeed that's possible.)

Donlast said...

Perhaps Irving Fisher's deflation and the rising debt burden is more apposite to the current situation than any desperate Keynesian hand waving. So there is no clarity for markets until Mr Geithner gets his act together and nationalises the big zombies. The will lift at least one heavy weight off the market.

CV said...

@ Charles ...

I am having the same discussion with some of my friends from the investing community; there are a couple of ideas flying around;

- ZEW is known to be contrarian?

- The recent spat of horrendous news from Europe means that the ECB will finally kick in the towel and lower rates more than expected come March? Hence, the uptick in sentiment (but that is probably not viable in terms of timing).

- Macro Man's point ... look at the actual report and see what it says :); i.e. the current conditions component did in fact decrease.

... other than that I have no idea; I can say though that it is completely bogus since Germany's business sector is about to go the same way as Japan's in terms of decline in output.


Vasastan said...

A bit unfair about "Shiny Happy...", perhaps - after all, it does have some vocals by Kate Pierson.

Macro Man said...

Nah, it still sucked. I always preferred the unreleased "Me in Honey", also featuring the delightful Ms. Pierson.

pecanpaj said...

ZEW expectations tend to correlate well with equity markets, German gov. curve (5y-min.bidrate), and the Sentix economic sentiment gauge. All suggested quite a hefty rise today, although not of this magniture. I personally believe the rise was mostly due to improving sentiment in equity markets.

CV: Where ECB meeting is going to go is a big question. For what it's worthy ECB Stark, Mersch and Weber are still kinda hawkish. Maybe you have all growth tired of Stark's mad rants, but I'd guess he still carries some weight within the GC.

Today(?) he argued that there were no risks of inflation undershooting and also made the case for "gradualism". God, what is he smoking. For instance, my own estimates suggest core inflation at 0.5 percent yoy, and that is with a prognosticated rebound of GDP come early 2010. What if that doesn't occur? But I digress.

That said, in a meeting recently (European Banking somesuch) ECB Stark argued for keeping rates at 1 percent of above since this crisis is structural, and not a business cycle crisis. Sounds like Buba to me.

After all, BOE, SNB, FED, BOJ are already at QE/ZIRP or close. (Swedish Riksbank have talked a lot about "the foolproof way" of avoiding deflation recently). (Even though EO Svensson is stuck in a ceteris paribus world sometimes...)

Let's hope Orphanides and Ordonez get to decide in coming meetings.

Orm said...

Seems to me that we should all be talking more about what mechanisms there is that will/would counteract the current downward momentum.

Given the fact the rate cuts seem to have little impact on anything but the currency and have proven their inaptitude as direct economic stimuli we should be hoping that the devaluating effect on the non-asian currencies will be the straw that broke the Chinese camels back. This indirect anabolic has worked well for Sweden at several occasions. Maybe some of the countries around the Atlantic can start exporting manufactured stuff again?

jonathan said...

We're suffering to an extent from instant punditry ... just add gin ....

The markets guess at today and then they glance ahead and shudder and back and forth, when the reality is, as others have noted, we don't know how bad it will be. If demand continues to collapse, then it's not that all bets are off but that most bets will be losers. If this proves to be hard but short, then we should all break out the good stuff and toast good fortune.

Anonymous said...

the loss of confidence in Washinton is shocking , but well-earned , even after 4 weeks