Friday, March 27, 2009

Struggling For Inspiration

What a rubbish week.

Markets have been dominated more by positioning than so-called fundamentals, Macro Man's carefully-constructed has seen its correlation structure go awry, and he's bled away the accumulated work of the previous three weeks.

So he's understandably lacking in inspiration.

Look at Treasuries, for example. As Macro Man observed a couple of days ago, if you bought after the FOMC announcement, you lost money. Going into yesterday's seven year auction, the "ten year" future (which is really a seven year future) fell enough to take out most of the longs...including your frustrated scribe.

So naturally, the auction went much better than the earlier five year auction, futures rallied smartly, and now markets are looking at several buyback sessions before the next bout of supply.

Should Macro Man have expected this? Yeah, maybe. But when everything else is going awry, it's pretty natural to excise the most obvious losers. That's the way you keep a small drawdown from turning into a hemorrhage.

Perhaps the difficulty that Macro Man is having is that markets have, in a sense, caught up to his bearish worldview. While it is true that some pieces of data have turned around in an absolute sense, albeit in very modest form (and well within the boundaries of statistical noise), the real issue is that the outturns are no longer disappointing expectations.

Citigroup is one of a number of institutions that calculates an "economic surprise index", which measures data outcomes relative to consensus expectations. The real economy aftershock of the Lehman collapse generated a steady skein of worse-than-expected data. More recently, however, analysts seem to have "caught up", and so far this year the data has, in aggregate, come out in line with expectations.

While this more balanced data outturn may have contributed to the recent bounce in stocks, Macro Man has been unable to extract a consistent forecasting relationship between the surprise index and future equity returns.

So it's back to the drawing board. Perhaps the best thing for Macro Man to do is to keep his head down, write off the next two days' price action as month end paper-shuffling, and get ready for an April that will hopefully offer a bit more signal and a bit less noise.


Anonymous said...

Hi MM..

Sorry to hear your losses, but they are a part of this game! I wish you much better in April because that's good for your readers as well.
I personally had a satisfactory result in USD-INR this month.

From India..

Anonymous said...

Hey. Any news about quarter-end buying of the big guys??

Anonymous said...

bears had hoped mcclellan summation would fail at flatline, it's still going:

tim redeemed himself yesterday it seems, getting dollar and treasuries back up

obama and the banks meet today!


Anonymous said...

MM, first time post from a 'lurker'/novice who enjoys your blog none the less.

I can not make sense of the current rally in equities when credit markets, the target of all the rescue operations, are still pricing in disaster. Are the credit markets too liquid to reflect what equities are telling us?

Perhaps a basic question but your insight would be appreciated.

Macro Man said...

Anon, I wish I knew. If I did, perhaps I would have avoided the short equity position (based partially on the credit issue that you flag) that has contributed to my frustration this month.

My only explanation is one of positioning....i.e., the wakest hands were short, not long, and have been squeezed.

Anon @ 12.32, there has been some mumbling about $ selling (monthly rebalance) and equity buying/bond selling for quarterly rebalancinbg. But I'd charaxterize it as low-quality speculation rather than an informed forecast.

John East said...

With EOM next Tuesday, and M2M/uptick rule discussions due in Congress on April 2nd and April 8th, a sizeable bear rally is on the cards. Even in the great depression we had rallies to the 200ma, and if we are to have a repeat in this great depression the next few weeks is a good a time as any.
I'm long the S&P and looking for 950+ by the mid to end of April. Then it will be time to short into the autumn.

Anonymous said...

Please understand: talk to structured product quants on the Street, they will explain that bonds held on bank balance sheets were marked UP eggregiously when they were first issued. Senior management wanted the PnL, they wanted to get PAID off those insane marks.

Fast-forward to today. Now we see bonds only slightly marked down. What's happened? Banks have only marked down that initial bogus PnL mark when the bonds were first issued. This does not apply to all bonds, of course, but to a substantial portion of bad debt out there it does.

THAT'S THE DIRTY SECRET. That's why Crittenden is moving to London. All the big insiders at banks know this, the quants will tell you. Subpenea the quants and they will talk, they were the one's who marked the bonds up, they know what they are worth now. Geithner HAS to know what's going on, it happened on his watch at NY FED.

Christ, I feel like I'm talking to Bob Woodward in a basement parking garage in Washington, D.C., circa 1973.

Somebody's gotta get this info to the right people. Ask the right questions and Cuomo might see what a scam this is. Geithner's plan is the biggest scam. FOLLOW THE MONEY, GIVE THE QUANTS IMMUNITY, THEY'LL EXPLAIN IT ALL.

Jeffrey D. Benson said...

I've got a direction....short USD. The printing presses are pumping. The economy should get moving (slowly) at the expense of foreign faith in USD and associated paper. Globalization starts to reemerge from more organic roots, with the US consumer taking moving to the passenger seat and IMF interests, Euro, and China pressing forward. The end of financialization.

Yohay said...

April will also be noisy - the G20 summit will supply lots of noise.

maximus said...

I really enjoy your blog but...

You might want to consider a name change to Micro Man if daily noise is causing you pain....


hopefully anon said...

riddle me this, macro man:

securitization market dropped from $10t to $2t.

the fed steps in and reflate in order to avoid civilization collapse.

given free cash, corporations keep people employed but inflation is flat due to velocity. this goes on for say, 5 years.

is that it? is there a free lunch out there? can we print our way to the good life? i know money is not wealth, but if bernanke can keep this fine act long enough, could it work out w/o inflation?

what am i missing?

Macro Man said...

I suspect that the payback comes in the form of inflation. Activity will remain dire until velocity turns around (albeit with the odd quarter or two of growth)....once velocity turns, there is little chance, in my view, of the Fed negotiating an inflationless recovery is about the same as me replacing Geithner as the next Treasury secretary.

hopefully anon said...

so theoretically he could do it.
he can push on a string until
we switched from fossils to electrons
and if
we get a productivity boost because of it
and if
SS obligations don't come in too much/too soon
and if
there is political will
the SOB could pull it off.