Wednesday, February 04, 2009

Signs of the Apocalyspe?

Macro Man is back in the saddle this morning and somewhat bemused to see that the world has gone China-recovery mad. Both the comment section of yesterday's post and his email inbox this morning are crammed full of observations about the bottoming of Chinese equities and the manufacturing PMI.

While it factually true that both have bounced, Macro Man is withholding judgement. After all, the Shanghai composite is closer to its recent lows than the US homebuilders index, and he doesn't see anyone falling overthemselves to call a recovery in that industry. More importantly, we should all remember that things don't move in a straight line forever, and China has cranked up a large inrastructure stimulus. Indeed, there will be a period of improved growth in the US this year...just as there was last year.

Looking elsewhere, Macro Man sees little else but doom and gloom. Indeed, if he were the religious type, he might be worried about the impending approach of the Apocalypse.

Yet another emerging market currency has been splattered today, as the Kazakh tenge has finally been devalued by 20% after months of pressure. The KZT was in vogue a couple of years ago as a sexy long....but another one of Macro Man's rules of thumb is never to trade a currency named after a movie character (the KZT is known as the 'Borat'.) The pressure on the KZT has been mirrored in "real" markets, where the CEE currencies such as HUF and PLN have been obliterated in the past few days, with market liquidity collapsing. So the Great Unwind has further to go.

Indeed, somewhat ominously, LIBOR rates have started to tick up, with three month dollar cash fixing some 14 bps higher over the past couple of weeks. Perhaps this is an inoccuous development...but treating previous upticks as such has been a very dangerous (and costly) proposition.
At the same time, US sovereign 5 year CDS surged 15 bps yesterday to 86 bps. To put that in's where Citigroup CDS was trading exactly one year ago. Remarkably, Macro Man could only find two other countries with double-digit CDS ratings: Japan (58), Germany (59), and France (69). Was it really only a decade or so ago that Japan's loss of a AAA rating amidst massive borrowing made waves? Now markets are essentially saying that the Japanese government (facing a massive demographic challenge) is the best creditor in the world.
Rumours that the devil is shopping for a mink winter parka are as yet uncofirmed.

More troubling is the prospect of a populist political backlash to the crsis. Populism is generally the enemy of sensible policymaking; in that vein, developments in Switzerland are troubling. We've had suggestions from the SNB that they might contemplate FX intervention as a tool in their policy arsenal; as currencies are a zero-sum game, that merely shifts pressure from the Swiss economy to someone else. But this weekend, the Swiss are voting on a proposed "economic freedom of movement" treaty with the EU. A certain cohort in Switzerland opposes allowing workers from some new "undesirable" EU countries into Der Schwiez. The imagery used in their campaign is truly scary, as to Macro Man's eye it is not dissimilar to that used in early 30's Germany.

Finally, there is a literally Biblical sign of the Apocalypse in Australia, as Queensland has been beset by floods of such magnitude that crocodiles are swimming in the streets. In typically Aussie fashion, however, afflicted citizens have homed in on the really apocalyptic aspect of the flooding: they're running out of beer.


NordicDude said...

Welcome back from the snowfest MM.

Not to be a pedant but it would appear that Norway is ahead of Japan in the title for the world's least worst creditor with 5y CDS of 42. I would suggest its something to do with their shared love of all things whale, but I guess Iceland throws a bit of a spanner in the works for that theory.

Also Finland is in double digit territory with 5y CDS of 60.

Happy trading,

Anonymous said...

another sign of apocalypse perhaps ?...good to see Gordon is big on details...

"In military and maritime tradition, displaying a flag upside down is a sign of distress and a call for help."

Good work Gordon...good work.


Anonymous said...

Some anecdotal signals from the CNY mainland:
Quite surprised about the strength of support that "rebound" is receiving, why is the free-float issue so rarely mentioned?
Cheers, JL

Anonymous said...

we've seen some terrible news articles of late and as MM points out, more to come.....but i was truly, truly shocked by the fact that a part of Australia could run out of beer.....Now THAT is where a government stimulus package should really be aimed......Hang in their Queenslanders, help is on it's way......

Macro Man said...

NordicDue, Mea Culpa. I was using the SOVR page on BBG, which includes Colombia, Ireland, and Egypt, for example, but not Norway or Finland!

Anonymous said...

Just three weeks ago Germany's 5-year CDS rate was 44, France's rate was 51. Going up, going up.

Anonymous said...

so the apocalypse will be revealed by the wisdom found in CDS's?
Don't think so..

Anonymous said...

With regards to the situation in Switzerland, the political party behind that campaign is known to use very scary imagery for their campaigns, that is not new. What is new is the support that party has gathered over the past few years. However, I do not believe Swiss people are so blind, as to believe that closing their borders even more would be a good thing. They need foreign workers way too much to allow that to happen. They remain sensible people when it comes to their economy. Also, bear in mind that all you need to get Swiss people to vote on a new law is 100,000 signatures (ridiculously low amount in a country with almost 7,000,000 people). Never say never, but I believe that law will be rejected massively on Sunday.

A Swiss reader.

Macro Man said...

I hope you are right....though I have to say it was a (half) Swiss chap in Zurich who pointed this out to me and suggested it could be quite a big deal.

gerry and the pacemakers said...

all the comments are negative.
* bonds shitting out.
* credit improving tbills, hyg, lqd.
* china rallying every day
* bdiy rallying every day
* stocks up on bad news - slb, dow, ups etc.
* market down 50% in line with worst recession in last 30 years. chart 74-75.

get long reflation.

Anonymous said...

hello MM. we mentioned dividend futures months back. they weren't really trading that much. but now that the market would rather face an exchange than a nasty bank....DEDZ0 Index CT on bloomberg. note liquidity has picked up quite significantly. god knows when equities as an asset class starts to grow dividends again but check out the strip. interesting stuff. certainly the 2014 must be getting to levels where you put it in the pension fund. aren't dividends driven by inflation longer term? PS: a black swan question. has a major derivative exchange ever failed?

Macro Trading Ideas said...

@Anon: about dividend swaps, DEC10 has been under big pressures, due to high market delta, noise steepening and particular a bearish view, and so on along the curve.. infact implied 2010-15 CAGR for Eurostoxx50 is 1,8%, really low. So an outright long on 2014 or a steepening trade seems a interesting idea.
Dividends before everything depend on profit and free cash flow, then we can think about reflation.

IF said...

It hurts me enough to make a fool out of me: "die Schweiz".

Anonymous said...

couple of things

libors are ticking up because overnight money has moved closer to the fed's upper band of 0.25% - there has been no meaningful change in 3m libor ois spread.

whilst the swiss poster does indeed send shivers down one's spine, i would argue that it was outdone by an earlier effort:

so in the spirit of punters who see two data points as the start of a clear trend (cf China, US jobs, production, etc) I'll say switzerland is becoming more tolerant...


Macro Man said...

The divvy strip looks very interesting indeed. I suppose for me the challenge is to structure a trade that maximizes liquiity and transparency...and I gotta say, buying a futures contract (Dec 14) with €58 mio of open interest is not particularly enticing.

Macro Man said...

Oh, and you're right melki. That earlier poster is absolutely shocking.

Anonymous said...

i'm still weary divvies just because of the one way nature of the market, its been my core short for the last 1.2years.

all the real exposure if from the exotic desks - i can't see retail 'unwinding' before maturity. (sure i can see that supply has dried up though)

the exotic desks are still long, as are the market making desk, hedgies, etc. Especially the frenchies.

Macro Man said...

...that would be the Frenchies with lower CDS than Uncle Sam? ;)

Yeah, those are the sources of my reservations. That having been some point, you just gotta write the check and take the bet that they won't go to zero. Dec 14 now around 60...that was 140 less than six months ago!!!!

But as I said, it is a trade that is intuitively appealing at these levels, but there is a lot of small priunt to be navigated before I woudl do anything.

Mencius Moldbug said...

Oh, come off it, folks. What did the Swiss ever do to you? Is it absolutely necessary for the global financial elite to browbeat these ignorant, funny-talking hill-Krauts into turning their pretty little country into Clichy-sous-Bois? Is it absolutely impossible for us to imagine a world in which Geneva is Geneva, Bern is Bern, and Timbuktu is Timbuktu? Must they all be shoved into one blender and set on "mulch"?

Go back to that SVP "black sheep" poster. Look at the proposal it's advertising - deportation of convicted criminals who are not Swiss citizens.

What is this, Holocaust II? If Switzerland already had this policy, would it surprise you? Would you be clamoring for the non-deportation of criminal aliens? And if you succeeded, what would you say to some poor Swiss woman who has just been knifed by a Nigerian heroin dealer with a rap sheet as long as your arm? "Sorry, Kraut lady, but we're trying to have a new world order here. Besides, he hardly nicked your spleen."

Okay, I'll calm down. I understand that the real problem is that these people are Nazis, and I am not a Nazi. But when you create a new world order and define anyone who has a problem it as a Nazi, you've basically got pretty much the ideal recipe for more Nazis. Especially when your new world order starts to be not working so good...

Anonymous said...

60 vs 140 six months ago, not my favourite logic when the world really has changed, rights issues, no financials in the index with huge payout ratios, yadda, yadda. you could have said the same thing about BSC stock at some point..

there'll be plenty of time to buy it on the way back up I still think.


Anonymous said...

these commodity buyers mostly were gold and oil:

LONDON, Feb 4 (Reuters) - Exchange traded commodities (ETCs)
saw strong inflows again last week, with $416 million moving
into the market, adding to record-breaking inflows of $581
million the previous week, ETF Securities said on Wednesday.

over here on the left side of the atlantic nobody thinks oil can lose $40

tastexperience said...

"The imagery used in their campaign is truly scary, as to Macro Man's eye it is not dissimilar to that used in early 30's Germany."

If you're going to accuse them of being divisive and sensationalistic, you ought not to be divisive and sensationalistic yourself (by invoking the Nazi bogeyman).

I really enjoy your blog, but all too often the political comments come across as cheap shots.

Macro Man said...

I call 'em like I see 'em...and that's how I see it: a highly unpleasant strain of xenophobia from a somewhat unexpected source.

Not that this particular Swiss party is along in their anti-foreign views; the Uk has seen demonstrations over the past few days railing against foreign workers, and hell; even the Obama plan is probably going to include 'buy American' restrictions.

All of this feeds through into my concerns about rampant protectionism materializing this year. It's something I have written about for 18 months, and it now appears to be materializing.

Perhaps those posters don't look like '30's Fascist propaganda to you; to me, they do, and merit comment in the context of the broader protectionist theme. Equally, I would expect parties like the BNP and Front National to do despressingly well in any national elections held. A popular (populist?) desire to reverse the forces of globalization and free trade could generate startling amounts of market and economic volatility of they are acted upon, and thus in my judgement merit close scrutiny.

drchaos said...

Fascist propaganda of the 1930's did not rail merely against (actual) foreigners----it rooted out people who had been living in their own countries for generations (citizens with passports) as effectively non-natives and secret allies of their nation's mortal enemies. And it advocated and implemented ctive discrimination in government and employment against these people, to the point of straight-up confiscation.

That's way, way, further than being restrictive and selective on economic immigration.

Mencius Moldbug said...


I didn't mean to disagree with you about this - the resemblance is perfectly clear. And homologous, rather than analogous.

The problem is just that a system which defines all its opponents as Nazis will, sooner or later, find itself opposed by Nazis. The only solution: don't put yourself in a position where you are wrong and the Nazis are right. I am not sure that European (or American) immigration policies have always followed this prudent constraint.

The wildcat strikes in Britain are a little different, as their main complaint is labor competition (among relatively skilled laborers, too) rather than public safety.

What we are seeing, more broadly, is that the modern European system of government is designed, whether by accident or intent, to be extremely unresponsive to public opinion.

If like me you are an opponent of democracy, you can only regard this as a good thing. However, in a republic which remains democratic in theory, misgovernment by the permanent civil service is quite dangerous, as the political arm retains the power to resume its full sovereignty.

Eg, by electing Nazis. I must say that if the Eurocrats want to keep this from happening, they're going about it in an awfully odd way.

As for protectionism: I used to think it was a bad thing, but I am less and less sure every year. Certainly, all the wrong people are against it. But many of the right ones are as well.

It's clear that with free trade, everyone gets better stuff - and I speak as the less-than-proud owner of an American car. The overall effect on national welfare, however, seems more debatable.

What would be the result for the US, if it banned imports tomorrow? Surely the question is at least worth asking, and it bothers me that we are not allowed to ask it. (Yes, I'm aware that autarky was a Nazi policy. But then again, so was antismoking.)

Macro Man said...

Let's be clear- I am referring to the imagery here, not the actual policies of the the party. To wit, the style of the posters. The use of simple colour differentiation ("white sheep good, dark sheep bad", and "these dark foreigners are looming over us") is rather distasteful in my book; if you disagree that's your prerogative.

But I find the mentality underlying the posters (be wary of anyone who's not like us) to be both extremely unsavoury and to highlight the growing theme on protectionism and xenophobia. That it comes from Switzerland rather than Detroit or Shanghai makes it that much more striking.

Mencius Moldbug said...

Should one be wary of "those who are not like us?" I dunno. I don't think the question can really be considered in the abstract. Who, exactly, are "those?"

Japanese, for example, are not like me, and yet I am not even slightly wary of them. Perhaps I should be more so, or less. But I feel the issue can be considered empirically.

I suspect if that I somehow found myself in Clichy-sous-Bois or Les Musiciens, I'd be wary. Wouldn't you?

There are of course many differences between Switzerland and Nigeria. It strikes me that the most important, however, is that Switzerland is populated by Swiss and Nigeria is populated by Nigerians. Curiously enough, my father (a US FSO) was posted to Lagos, then Geneva, in the '90s - so I have some understanding of the difference.

I am not an FSO, and if my government told me to move to Lagos, I would be a bit upset. So I find it quite understandable when people don't want Lagos moving to them. In fact, I find it a little creepy that, except for a few dedicated Albert Schweitzers (Schwyzers?), they would even consider accepting it.

And as for the graphic-design tropes - didn't America just basically re-elect Chairman Mao? Hitler wasn't the only mass murderer of the century, you know.

What the SVP and the Nazis have in common is very real - you are not wrong to see them as two examples of a similar phenomenon. But you would also not be wrong to see Obama and Mao as two examples of socialism. Indeed, if you're looking for 20th-century systems of government which did not reveal the potential for mass murder, you'll have to look on some other planet besides Earth.

Macro Man said...

MM, the problem, of course, is that any system which refuses to recognize any of its opponents as Nazis will, ultimately, also be opposed by Nazis. Again, not that these guys are literally Nazis, but I do think that it's worth recognizing the unsavoury nature of their imagery.

As for St. Barack, well, this is a market, rather than political, blog, and I have little interest in swimming in the deep waters of heated political debate.

That having been said, I think that I have been appropriately sceptical of the hagiographies directed Obama's way....though by the same token I would hardly compare Obaama to Mao at this juncture.

Anonymous said...

Hi MM.

I am a long time reader but have never posted a comment. But your mention of my home state (Queensland) has spurred me into action. The ironic bit about QLD is the billions of dollars spent on a brand spanking new desalination plant as dam levels had reached critical lows.

The state finances are now under the pump. They were already feeling the pressure after the federal government's guarantee on bank debt crowded out semis and pushed the semi curve over swaps, not to mention the imminent collapse in mining royalties.

When it rains it pours, I guess.


Macro Man said...

More importantly, Harry, have you managed to secure a fresh supply of XXXX or Toohey's yet?