Thursday, March 19, 2009
For basketball fans, the sweetest two weeks of the year-the NCAA tournament, aka March Madness-begins today.
Those of us in financial markets, of course, have been living with March Madness for a bit longer, ever since the Bank of England kicked off an orgy of quantitative easing just two weeks ago. Macro Man can now report, on an exclusive basis, on some of the deliberations that took place amongst central bankers at last weekend's G20 meeting:
QE or not QE? That is the question.
Whether tis nobler in the mind to suffer
The slings and arrows of a vanished fortune,
Or to buy bonds against a sea of troubles,
And by inflating end them?
At this juncture a PM has to make a couple of decisions. What does he think the world will look like in, say, three to six months? And what does he think the market will think the world will look like, which is another way of saying what trades will the market do?
Contrary to some, Macro Man doesn't think last night's shock and awe necessarily spells a catastrophic descent into the abyss for the US dollar. On the contrary, last night's actions will merely go some ways to filling an abyss that represents a lack of dollars in the shadow banking system.
However, it seems quit clear that tactically, the market will wish to push the greenback lower. A brief stroll down memory lane to see what happened to sterling after the BOE decision may prove instructive. After an initial 48 hours of uncertainty, the market has pummeled the pound, and EUR/GBP is now up more than 5% in two weeks.
A similar short-term spanking of the dollar seems eminently possible, if for no other reason than there seems likely to be a disproportionate supply of dollars from people who like to make bets on currencies: hedge funds, real money managers, etc.
And while Macro Man is no fan of the euro-quite the contrary!- the fact that intra-European tensions are easing somewhat (BTP/Bunds spreads have narrowed some 25 bps this month) have restored some of the, ahem, "allure" of the single currency.
One view that seems to be overwhelmingly consensus is the bullish case for gold. Having sustained a Satan's finger-style reversal yesterday, the yellow metal is left near its highs of the last couple of weeks with positioning a fair bit cleaner.
Macro Man accepts this, and acknowledges that the bull case looks solid. But consider the uber-bull case. In a world where gold trades at $2000, where is the oil price? Last year's oil rally was largely a demand phenomenon, some of which was real and some of which was speculative.
But gold at $2k will pretty clearly be a monetary phenomenon, one which should impact all hard assets fairly similarly. When you throw in the multipliers that work in the oil market, via the monetary impact on the factors of production, Macro Man would submit that you should see a disporportionately large rise in energy prices. If you throw in the market pricing in an eventual recovery in demand volumes, the price impact could be explosive.
Gold may well be the superior trade for a 20% move. But Macro Man reckons that mid-curve oil is a far, far better trade for a 200% move.
And in a world of March Madness, that's the way he's thinking right now.