Monday, March 02, 2009

Coining a Phrase

They say that it's always darkest before the dawn. If that's the case, then the bottom must be near*, because Macro Man feels like Corey Hart looking at a new-moon sky at 3 a.m....through tinted windows. It may be a new month, but the newsflow is as dismal as ever.

Where to begin? No doubt most readers of this comment will have seen St. Warren of Omaha's latest missive to shareholders, wherein he details Berkshire's worst performance year of his 44-year stewardship. While Mr. Buffett is clearly a spectacularly successful investor, his track record as a macro punter is less impressive. Following on the heels of his ill-fated bet against the dollar in 2005, his decision to short long-year index puts just before the market crashed was also less than prescient. While Mr. Buffett may indeed have exploited a credibility loophole by avoiding having to post margin on these positions, and thus, in his lingo, procuring a cheap "float" for the life of the puts (which are, incidentally, likely to exceed the life remaining to both Buffett and his sidekick Charlie Munger), this was likely a one-time only phenomenon. It will be itneresting to see if any of his acolytes at the meeting ask him to reconcile Berkshire's "Gibraltar-like" financial standing with its "Turkey-like" CDS spread.
Whatever the losses on Berkshire's investment portfolio, however, they are in all probability still superior to that of most other "actuarial investors" such as pension funds. Indeed, in running his naive domestic portfolio simulations for G3 pension funds, Macro Man reached the somewhat disturbing conclusion that pension funds in the US, Europe, and Japan have eached registered that worst one-year risk-adjusted return in at least a quarter century.

Meanwhile, Eurozone leaders have predictably pooh-poohed a blanket bailout for Eastern Europe, preferring to address support on an ad hoc basis. One need not be any sort of Eurosceptic to conclude that the European Union is facing the gravest crisis in its history, and how it proceeds will be critical in shaping the Continent's long-term economic future. While talk of a new "iron curtain" may be scare-mongering, the fractured policy-making approach render intra-European economic and financial protectionism an uncomfortably high risk.

And so it is perhaps unsurprising that EUR/USD once again finds itself at the bottom of the range that has held for the last three years. The DXY already seems to have broken out to the topside, but experience has demonstrated that it takes more than a Monday morning's worth of price action to signal an acceleration. However, if EUR/USD could ever sustain a break of 1.25 for more than a day or two, Macro Man cannot shake the feeling that it could go a long way in a hurry as the spring uncoils.
Interestingly, the BIS has penned a special report on one of Macro Man's pet issues, the shortage of US dollars in the global financial system. To his mind, the dollar's rally against all things non-yen since last August has borne all the hallmarks of forced position liquidation, a belief that appears to be validated by the BIS' banking statistics analysis.

And the trend continues apace; the buck made new highs against a number of Asian currencies overnight, including the Indian rupee, the Malaysian ringgit, the Korean won, and the Taiwan and Singapore dollars. The latter gapped more than half a percent on the Asian open, perhaps spurred by weekend remarks from the PM suggesting that GDP could shrink 8% this year. Ouch.

Well, it was either that, or karmic price action. Macro Man isn't totally concersant with feng shui, but he's gotta believe it ain't a good sign when your national symbol, the "mer-lion" gets damaged by lightning over the weekend.

To coin another popular phrase, sometimes art really does imitate life....

*Macro Man doesn't actually believe this


gsm_73 said...

Dear MM,
Hope the knee surgery went off well and you will recover soon.

all the best ,


Macro Man said...

Yup, it went pretty well and I am hobbling about without crutches. Cheers! said...

Well MM you're doing better than I did after twisting my ankle in a Mexican bar;spent several months on crutches and canes. Hope that makes you feel better but it's a great (ahem) bar story. :)

Speaking of which about surgery on the markets....just how much time do you spend writing these posts ? They're nicely lengthy and chock full of interesting charts that one presumes are already in your toolkit ?

Whatever the case the effort and education is very much appreciated. When do you open your own hedge fund ?
And in case you're interested here's my take on the US markets:

dblwyo said...

Somehow that didn't quite work well. Fat-fingers ? Good thing I don't trade per se. Let me try again:

FX said...

Along your stronger USD theme, Cable broken down today and looks like it could suffer this week. The HSBC price action also a UK bearish impetus. BOE on Thursday will also surely hurt GBP some more.

Close below 1.4090 today is a bearish confirmation and opens up a move to 1.3500.

Greg said...

I don't remember the exact quote, but Einstein reportedly said something to the effect that insanity is doing the same thing over and over and expecting different results.

For the last two years, every time the Fed or US Treasury needed to consult an outside party on how best to screw up the financial system, they repeatedly picked three firms: Goldman, PIMCO, and Blackrock.

Goldman continues to advise the government on AIG -- in spite of a textbook case of conflict of interest as well as being wrong by tens of billions, several times.

PIMCO has used the non public information it gets from "advising" the government to its own advantage. Insider trading? Nah! So just to make absolutely sure the game is rigged, PIMCO will now be advising the government on BofA.

Of course, the same Bernanke and the same tax cheating Geithner continue to skipper this circus.

I don't see how anyone can expect different results when we don't change any of the inputs

Brian said...

Whatever the case, the Merlion trade worked well for USD/SGD before ...

Anonymous said...

When the dollar unwound in November vs the eur and jpy. What happened? What is your take?

i have a couple hunches, but cant peg it... here are a few thoughts. 1. us negative rates 2. cny 3. just cause 4. bernanke

Macro Man said...

dbl, it usually takes about 45 minutes. The charts I pull from a relatively extensive library that I maintain, and as for the prose...I find it an extremely useful discipline to spend 45 minutes organizing my thoughts daily...and of course the act of doing so with regularity ensures that I can be fairly productive with the time I spend doing the blog.

mpm, I think the dollar decline last December was largely down to a big flow from China (which suckered in trend followers) and (unfounded) worries about the impact of QE. Those factors were exaggerated by the abject market liquidity in place at the end of last year as well.

James Cullen said...

A new twist on when it's always darkest...

Macro Man said...

Can't forget

Anonymous said...

mm -
at first glance - this question im going to ask is easy to answer. but take a moment to think about it.

Is china in a position of strength, or are they in a position of weakness? mpm

Macro Man said...

mpm, I think the answer is "both".

China has an abundant labour force, giving the country a huge comparative advantage in many, many labour-intensive industries.

China has a huge under-utilized rural labour force, which causes the country's political elites to adopt sub-optimal economic policies in an attempt to maximize employment (and thus stay in power.)

China is the largest creditor of the US government, which is dependent on continued Chinese buying to finance its budget deficit.

China owns waaayyy too many US Treasuries and cannot sell off any significant portion of its stock oh holdings without obliterating the value of the remainder.

China maintains a highly-regulated exchange rate regime which ensures that its products remain competitive on global markets.

China has painted itself into a corner with its FX regime, the maintenance of which requires massive intervention every month. Oh, and there is no exit plan.

The strength of China's position depends, I think, on your perspective.

M. Dumoutier said...

See now, a reference to Corey Hart is the reason I keep coming back.

If you're looking for more Canadian 80's pop references that are relevant to the current environment to salt your posts with (and I heartily encourage the practice), I suggest:

"Standing in the Dark" / Platinum Blonde

"Don't Forget Me When I'm Gone" / Glass Tiger

"Strange Animal" / Gowan

"Pop Goes the World" / Men Without Hats


Anonymous said...

thanks mm.
this game is getting more and more serious by the minute.

An interesting post out of you would be "ways out".

Rich said...

I've said this before, but, IMHO, the USD is strong because it was borrowed to finance all the previously sure-thing investments in items denominated in other currencies for MANY years. That's why the dollar acted so badly for so long. Now, what was a better no-brainer investment than Chinese Real estate financed with US dollar debt; a China growth play funded with a devaluing currency!

Now the repo man has arrived, and he wants his dollars back. No apartments in Shanghai, thank you. US dollar Debt liquidation is a primary and continuing source of bids.

Anonymous said...

So what does Mr. China do to ease off of the magic elixir called Treasuries? I can't think of a good strategy for them. You captured it well that they own too many and any attempt to unload kills their book. Do they rotate and buy physical commodities? If they pursue an alternative to T-B & Notes don't they further put pressure on their exporters? Seems like they are over the barrel.