Tuesday, March 24, 2009

Channeling the 80's


Macro Man was sceptical of the PPIP yesterday and sceptical of the early-doors knee-jerk rally in stocks. He was short. He was wrong. His stop having been executed above 800, he can now sit back and survey the damage to his portfolio. Fortunately, his equity short was appropriately-sized, so the pain has been more intellectual than monetary. He is suffering through one of those irritating periods of correlation breakdown that are the cost of managing money the way that he does. It's frustrating, but hopefully it'll be short-lived.

Macro Man was admonished last night not to repeat his mantra about 6% rallies. Coming so soon after the last 6% rally, there would appear to be little utility in doing so, so he won't. Instead, he'll cue up the Smiths' "Stop Me If You've Hear This One Before". The 23% rally off the recent lows has been impressive, but let's remember that it's the fourth such rally of similar magnitude of the last six months.....many of which have been centered around policy developments. So while he's retreated to the equity market sidelines, nursing his wounds, Macro Man retains a less-than-enthusiastic outlook moving forwards.
The question he has re: the PPIF is not why an asset manager would participate, but rather why a bank would sell assets at a level that would be economically viable for the buyer. While it is true that fund managers will be putting up a small sliver of equity relative to the assets that they can buy, what this means is that if the managers overpay it will take only a small decline in the value of the assets to completely wipe out that equity. If these investments are placed in specially-crafted vehicles, this will encourage them to drive the hardest bargain possible. Would you invest in a fund that has an equal chance of doubling its money or losing all of its equity/ Neither would Macro Man. It will be worth following ABX to see if markets start getting legitimately excited. So far, it's been met with a yawn.

Elsewhere, the debate about the dollar's reserve currency status rages on. A UN panel has suggested a move to a multilateral framework, though why the UN is opining on the matter is open for debate. Most likely because it's the only organization that will give a platform to some of the "experts" quoted in the story, who have made a career out of not udnerstanding the functioning of currency markets.

Still, you can't deny that many of the largest holders of FX reserves, including some of the worst of the serial piss-takers, are getting restless. China appears to be a Huey Lewis fan, as they've recently started playing "I Want A New Drug"* to fuel their FX reserve-buying habit. Now, Macro Man would argue that the current arrangement is useful, insofar as when the limits of economic rationality are pushed to extremes (like having $2 trillion of FX reserves), it provides a built-in disincentive to continue mercantilist behaviour.

Another consideration is that if a new FX reserve currency is going to be managed/arranged through the IMF, there should be some sort of quid pro quo. You know, like oversight of misaligned exchange rates. Such as when a country runs, oh, the largest trade surplus in the world, and offsets more than 100% of it with FX reserve accumulation, as China did in 2008.

When faced with an oversight condition, something tells Macro Man that PBOC will be serendaing the dollar with another Huey Lewis tune....."Stuck With You."

*Thanks to Bobby D for passing this one on.


Anonymous said...

Re. your question: if the bidder is the bank (the seller) a "losing" trade takes on a whole new meaning. Much more so if said bank uses funds previously (or even newly) obtained from the Fed or the TARP which they have every reason to believe they will never have to repay.

Now, I know it would be tempting to think there is no way the powers that be would allow such a scam, but then again at least the folks here know that the whole point of the exercise is to obtain cover for handing out free taxpayer money to corrupt banksters (a redundant term?)

It looks like the longs believe this latest round of looting will be successful. I hope they are wrong, but I'm not optimistic enough to be short.

Anonymous said...

"The question he has re: the PPIF is not why an asset manager would participate, but rather why a bank would sell assets at a level that would be economically viable for the buyer."

Can you say "gaming?"


Other buyers just need to hedge their exposure by loading up on bank stocks.

This represents yet another truly brilliant scheme to transfer money from the taxpayers to the buffoons who created this mess.

Macro Trading Ideas said...

I really don't understand why US thinks that all we need is leverage.. isn't enough double/treble digit returns on cash buying distressed assets? or a 10/20% return versus a 0% money return??
I can assure Geithner that if i judge that assets really cheap i'll go to buy them without his leverage!
And then, what's incentive for a bank to sell that assets? i sell if i need liquidity or if i judge that assets not valuable, or because someone tells me to do it (stress test??) And then again we come back to the same old problem, bank solvability!

Yohay said...

There are some good news in the markets. Not everything is bad...
Yesterday's Existing Home Sales in America and today's PMI data from Europe were better than expected. Hope?

Anonymous said...

It seems Mr Geithner has chanced on a new approach to policy: announce something quite complex, ensuring few people will bother with the details. Then get Fink and Gross to sing your praises (the same Fink and Gross, by the by, who are raking it in through their management of current government programme money and are dead certainties to manage the new PPIP).

I'm not saying PPIP is not going to work, but odds are stacked heavily against it. There's no way the current level of optimism is justified, and disappointment, as we've seen, is very painful.


Anonymous said...

The U.K. inflation rate unexpectedly rose in February after higher food costs and the weakness of the pound sustained price pressures even as Britain’s recession deepened.

Consumer prices climbed 3.2 percent from a year earlier, the Office for National Statistics said today in London.

Nothing like watching a bunch of Keynesian fools destroy their currency. Between inflation of necessaries and higher taxes these poor bastards will be scratching around in the dirt looking for bugs to eat before this is over.

“the burden of government is not measured by how much it taxes, but by how much it spends.”
Milton Friedman

MW said...

Speaking of not understanding currency markets, Bob Mundell thinks EURUSD should be managed such that it trades 1.20 / 1.40.

Anonymous said...

The story will become more and more about inventory. Wait till the next set of economic data published.

Adrem said...

It smells; it smells to high heaven. See Steve Waldman's take on Naked Capitalism. Guaranteed to be the first of many. Thank the Lord for the blogosphere.

Macro Man said...

Adrem, I guess I have a little difficulty believing that PIMPCO and Blackrock would take any haircut. OTOH, I have no difficulty whatsoever in believing that there is some conspiracy at work.

Anonymous said...

MM the whores in DC are bought and paid for no conspiracy necessary.

Clive Corcoran said...

Always enjoy your thoughts.
Methinks the Chinese proposal to set up a new reserve currency can only gain momentum in the coming months.
Intellectually a currency beyond the printing presses of any one nation is a winner - politically as you suggest there is a real battle to be fought. But with energy rich countries like Russia also keen to push this agenda we will definitely have some hardball tactics to look forward to.

Ben said...

Macro Man

You say "While it is true that fund managers will be putting up a small sliver of equity relative to the assets that they can buy, what this means is that if the managers overpay it will take only a small decline in the value of the assets to completely wipe out that equity" Not sure I follow this?

Colleagues and I were discussing this is just a call option. Put up small amount of equity (premium) receive leverage in form of FDIC loan guarantee and all you lose if asset cheapens (to zero)is your inital stake. You get all upside of 6x or is actually 12x leverage (hmm guess Treasury get 50%). Sure you do not want to overpay.

My anxiety if I was a HFund is that any profits made, is that when the ever increasing hand of the State comes knocking at my front door I will pay all my gains back to treasury anyway. Ahhh, or is that the plan. God Bless Ayn, I mean America

Anonymous said...

We already have a supra-national currency in the Euro (the ECB indeed cannot easily buy back sovereign debt), but apparently MM is not a fan?

wcw said...

What Ben said. This is offering a leveraged position at a favored interest rate with a free put option. The market-clearing price of the bank assets should, then, roughly be the current market-clearing price plus the value of that put option. Given market volatility levels right now, I'd say that free put is very valuable indeed.

hopefully anon said...

and you see how well euro has worked for spain/greece/eire etc so far. the whole point of leaving the gold standard was to print your way out of a mess. i guess we could switch back and forth every 50 years or so.

freude bud said...

For a darker, more nihilistic buzz, you should try The Cramps "New Kind of Kick" ... as an alternative to Huey, and all those American Psycho connections.

Anonymous said...

"When faced with an oversight condition, something tells Macro Man that PBOC will be serendaing the dollar with another Huey Lewis tune....."Stuck With You."

Empires come and empires go and the thing that brings them all down is they all go broke from overspending by a corrupt government. The US empire is getting old in the tooth.

Robert Johnson said...


I do read your blog regularly and learn quite a lot about how you organize your perceptions of market behavior and strategy.

I am interested what in your mind qualifies someone as "understanding what goes on in currency markets"? I am asking because I am a member of the UN panel you seem to denigrate and I am always interested in removing my own blind spots.

Macro Man said...

Mr. Johnson, I do not know you or know of you, and thus could not comment on your understanding of currency markets.

I do, however, know the currency investment track record of the individual quoted in the linked Reuters story. It is execrable.

I also know of what that individual said in 2005, a period of rising interest rates in the US: he said that those who bought dollars during that period, and thus benefited from the appreciation of the USD, were "dumb", while dollar bears such as himself were "clever."

The failure to understand the significance of interest rate differentials as an exchange rate determinant would, in my view, disqualify an individual from understanding what goes on in currency markets.

That this individual exaggerates his educational achievements and is held in almost universal disdain by the community of currency market professionals has no bearing on his comprehension of exchange rates or lack thereof, but it certainly renders observers such as myself more likely to point out his rather dubious track record.

Anonymous said...

what happened to all the gold bugs of the shock and awe column, quite silent quite soon

clive c posted above, his daily free emailout is great!

a number of instruments held at 50MA today, some being INDU GLD XOI(oilers) DAX while FTSE RUT TLT the 50MA was about the high of day and closed below

the deacons' position on the united nations would have to be 'all wrong all the time' until we can cue up the doors 'this is the end my friend'

Anonymous said...

is this the same robert a johnson who achieved great success with the palindrome?

Robert Johnson said...

I gather from your comments that it is the individual in question rather than our specific recommendations that are the basis of your objections. That I cannot address.

I would be happy, if you like, to discuss, or write to you to illuminate the substance of what we are suggesting in the UN report on currency issues. I do believe it is well grounded in economic theory and practice in the currency markets and follows a long tradition of thinking from Keynes, to Robert Triffin and Peter Kenen. My email is rjocean@gmail.com