Thursday, May 28, 2009


For all the talk of "green shoots", "second derivative improvements", "positive feedback loops", and "Chinese stimuli", perhaps the most important economic development of the year thus far as been sharp fall in credit costs to the US private sector (demonstrated by the Merrill Lynch indicator below.). Putting aside the issue of whether you can borrow your way back to prosperity (hint: you can't), this development (itself a product of the Fed's panoply of programs) has been a critical one. Frankly, Macro Man hasn't paid enough attention to the issue, which is why he has remained considerably more bearish than is good for his P/L.
Because unsurprisingly, there has been a strong correlation between private-sector credit costs and the SPX. Since Obama strode into the White House, even a simple chart overlay demonstrates that the trend in credit costs has been mirrored by the trend in equity matrkets.

So what, then, are we to make of recent price action? Yesterday's five-year auction didn't come off too badly, and indirect bidders once again stepped up to the plate. (We'll see if they have an appetite for today's seven-years.) Yet price action in bonds remains little short of execrable. 30 year swap rates have jumped 50 bps in a week, , and conforming 30 year mortgage yields are now litle more than 50 bps above the equivalent Treasury yields.
Sure, the bond sell-off could just be the usual cheapening ahead of supply, but the scale of these moves suggests something deeper (including convexity hedging.) Heck, even LIBOR has started to tick up.

So what does this imply for private sector borrowing costs? And what does that, in turn, suggest for the green shoots/second derivative/confidence boost and, more importantly, for the direction of equities?


Posted by Macro Man at 9:44 AM  


What about today's Germany unemployment numbers? The official number ticked up only 1k (as opposed to 64k estimate), but the number that almost no one pays attention to - the number of short-time workers (read people who companies cannot fire yet, but pay them less money to sit at home and do nothing) jumped by more than million (up to 1.2 mil) - long term average is only 147k. BBG GRUEPSHT Index
If I understand it correctly, most of these "short-term workers" will be unemployed just after the elections unless the situation gets significantly better between now and then (i.e. good enough to create 1 mil of jobs compared to today). Happy to get corrected by anyone with direct knowledge of German working laws.

vlade said...
10:12 AM  

I want some answers as well. What does a 1.68% addition on the usd/jpy mean to you? Why are the Antipodes aud/usd moving opposite of cad/usd? And why is eur/usd jumping half a penny when Frankfurt starts trading, while crude goes up a hundred pips and the ES fifty pips? What is going on here?

H(oratio) said...
10:17 AM  

Perhaps but this Treasuries are killing the "rally" may be another 5 sec. macro-theme. Consider this TNX chart:$TNX&p=W&st=2008-01-01&id=p62809652890

All we're really seeing imho is a return to normality after fear drove a flight to quality. For the backup meme of inflation to be a serious danger (where the period '75-'80) is the exemplar not anytime since '81 we've have to see a huge flood of unrequited and monetized liquidities. Unlikely.

The other side of the memes is that is US consumption is no longer the leveraged engine it was then the other source of potential inflation, the exporting economies demands for commodities, will be significantly lower as well.

Which doesn't stop all this from being tradeable of course :) !

dblwyo said...
10:49 AM  

And don't miss the Baltics. They are close to throwing in the towel I think. Or at least, evidence points in this direction I would say.


CV said...
10:50 AM  

crude oil is also nearing its top. expect new low in crude oil.

Sahil Kapoor said...
12:12 PM  

Concerning the 10 yr. treasuries, could the selloff be a reverse operation twist by the Chinese. Selling the 10's and buying shorter duration?

Anonymous said...
12:32 PM  

in this same vein durable goods orders... headline number 1.9% up MoM! WOW!! BUY!!

oh wait the March number was revised from -0.8% to -2.1%.... err... BUY ANYWAY!!

Anonymous said...
1:34 PM  

lets keep this simple. we have come out of a world that was focused on capital gains and owning assets. especially on credit. the more you could get the better. that is gone now until the next leverage crisis. so whats next? well i can't see inflation quite yet, but if it does happen people will buy commodities/equities/property. that is an unlikely scenario, but possible. Low inflation/deflation fighting more low rates on savings means focusing instead on yield. people have already been shipping in credit and 2 year treasuries. but what about equities? in the stoxx 600 (pan europe) there are 25 companies with a div yield over 5%. and they are index heavyweights in many cases. european 1 year yields are at 1% approx. the amount of money in cash and money markets is only heading one place. and the sell off will disappoint the macro funds who are on average short S&P as MM rightly pointed out. there are pension schemes in continental europe that are at less than 10% weightings in equities. as cerebral as we can all be about the outlook for the global economies and japan versus 1869 versus 1930 versus 1970 etc etc the man on the street (and the financial professional when you take him away from his bloomberg screen) is looking for a place for his cash now that he has taken the credit card bill, mortgage pain, reduced bonus pain. the sell off in equities while due will disappoint. people will not want to miss another chance to allocated to equities at a lower level. this does not mean equities are going up a 100%. for some that mean buying a telecom stock on 9% div yield instead of 8%. Charles Schwab has $250bn under management. They are only one retail provider. 10 largest macro funds in the world combined are at $250bn. Throw in money market funds (MMFA Index for bloomberg users). The overbought treasury market. and you've got the long term capital flows. what about bank shares? well lets assume the silliness in credit started in 2002. from what i've heard most banks could go back to what they looked like in 2002 (not an exciting era of economic growth) and i think you could argue similar levels of profit and multiples. so lets assume you can get to similar share prices. i think that is 75% upside for european banks. The public has not owned equities properly since 2000. Pension schemes (outside of UK) are weighted towards cash and property and fixed income. Money market funds are up 100% since their 2005 low. $3.7 trillion. the US equity market is $10 trillion. if money market funds decline by 20% that is $750bn of risk capital that needs to find somewhere over next year. people who are playing S&P for a 10% or 20% sell off are missing the bigger picture.

Anonymous said...
3:08 PM  

Previous poster - thanks for your commentary. Just curious, if you see low inflation/deflation coming, then how do you explain the move in gold/oil (but more to gold) at this point?

Anonymous said...
4:05 PM  

Guys and girls, anyone seeing possible connection between oil spike and North Korea threats? Just curious...

Stefan said...
4:38 PM  

Huge draw in crude inventories + unsubstantiated mumble about the Fed buying $10 bio MBS look like the culprits to me.

Macro Man said...
4:53 PM  

You seem to be desperately seeking negativity.

Anonymous said...
5:32 PM  

i can only assume that, as today has shown again, the US is willing to pull out all stops to provide a bid to treasuries and the mortgage market. that means printing $. that will mean gold finds a bid. of course that could lead to people purchasing energy/industrial commodities. but ultimately they require end industrial demand and not just financial community purchases of ETFs/index linked products etc. we found that out in early 2008. the financial market price diverged from the physical delivery price. ultimately commodities require end user demand. perhaps asia can pull a rabbit out of the hat. but the decoupling camp have not been successful so far.

Anonymous said...
5:34 PM  

I would say a move up in borrowing costs would not be constructive for equities. Despite all the ostensible reasons being offered, maybe the back up in yields is trying to tell equities something?

Difficult to see why mortgage lenders would continue offering "cheap" rates should treasury yields continue their upward trajectory.

More ominously the reads on mortgage delinquencies for prime and sub-prime home loans hit all time highs the 1st qtr. of 09'. This rise occured even before foreclosure moritoriums expire which suggests to me mortgage delinquenies will accelerate in the coming months.

Things are so fickle at the moment but my gut tells me risk appetites are about take a hit here in the short to medium term.

fodacadillac said...
5:43 PM  

Sterling, ahem, commentary today all. Like the K flows argument as it grates, but find that low volume indicators on this rally really give the lie to that story. Think GM on Monday could be the bearish catalyst my med term ptf needs, but trying to keep as nimble and tradable as possible, despite schizophrenic consequences. Cheers all, JL

Anonymous said...
5:45 PM  

JL, given sterling's performance today, was that meant to be a compliment or an insult? ;)

Macro Man said...
5:49 PM  

geithner is in china.
be long

reporting from barcelona

mm get on the party boat. choo choo.

Anonymous said...
7:38 PM  

regarding the point on volume. one member of the technical community, who is very well regarded, said the idea that rallies on low volume are less meaningful has not been reflected in his analysis . it often points to low supply. regarding earlier point. who is long equities? 1) retail - some punters but not in a meaningful way. 2) institutions - in some geographies - but not in a meaningful way. i'm told the asset under management gap between equity mutual funds in the US and money market funds has never been this large. 3) hedge funds - equity long/short - yes, but assets depleted ; macro - no (short). 4) sovereigns? china not a bean in equities. i'd say they're regretting not allocating a fraction of their treasury position to equities earlier this year. when does that change?

Anonymous said...
7:40 PM  

and final point on volume. people often refer to cash volumes. futures volumes have been pretty decent. which is probably reflective of quant/macro trading. the real cash volume will come in to buy on the next leg down in the market. all the big asset allocators are waiting for it. they can't afford to be in money market (no returns) and treasury market has been on the ramp for 20 years.

Anonymous said...
7:44 PM  

to the comment above... what makes you so sure there is another leg down.

there wont be. u are over analyzing the minutia (sp?). volume real vs volume not real. whatever. its going up

bull mkt, tiptoing is a mistake


Anonymous said...
7:53 PM  

one simple baromoter. the VIX, volatility index, it tends to mean revert. it is getting to very oversold level. it will have a decent 10 point rally at some point. not sure when. probably matter of weeks. on that move market is a buy. i'm not even going to mention an S&P target on upside downside as ask 10 people and you'll get 10 answers. but people like pull backs to buy into a market.

Anonymous said...
8:04 PM  

bid to cover is a flawed stat. The PDs are required to bid and surely told to bid aggressivily. The auctions tell you nothing about the state of the Treas market.

S said...
2:19 AM  

anon, your meme aboutbull markets ad equities going up may or may not be true. In this sad state of affairs that is left to the central committee. Bulls love to talk about normalized earnings. What are they for the S/P? Lets se no job growth since 2002 and nno wage growth, yet $4T more in GDP? Perhaps this is the productivity miracle so many speak of. color me skeptical. THe S/P may come in somewhere in the $45 or so range and if I nromalize for the bank earnings in Q1/Q2 whcih are a farse, that number is lowerr. Now lets be aggressive and assume 10% EPS growth in what the Fed now concedes are European growth rates, which would be by the way ahistorical. Where does that leave the S&P? Vastly overvalued until about 2015 or so. Hussman has it right. The market is not massivily overvalued at these levels but it is clearly bking in the rosiest of rosy scenarios on rebound. That sets up for a big move down. You assume that everyone is clamoring to get into equity and yet you profess low inflation. If that is the case why would you not buy high grade and IG wides and lock in your return with cap structure advanatage as opposed to taking structure risk and the accompanying margin compression that looks certain as companies confront stalled top lines, rising commodities and the fewer cost cutting opportunities? Arguments like everyone is waiting for a pullback therefore...are best left for yahoo boards. if you think equities are going up make a compelling and reasoned case outside of cash on the sidelines and underallocated, whatever that means. I guess that makes equity funds overallocated (or is the rightly allocated) dduring the elevator down? Timing calls aside, what is the fudnamental justification for owning equities notwithstanding the commodities call. There is none. Momo is having its day, and housing and tech teach that invetsors are like sheep. So you may be right and equities may rise. But like .com & Subprime the washout will arrive unscheduled and you will be back here writing how equities are for the long run, sit tight. Rinse wash repeat.

S said...
2:48 AM  

hmmmmm,Stockholm syndrom anyone ?

The index you look at is a simple average of
jumbo mortgage rates , new car loan rate, home equity loan rate, 5-year ARM, 3 month LIBOR, High yield bond rate and bank rate (5-10 year duration).

For the first one, with high-end property market tanking, lenders are asking big initial payment to give a loan. Plus very few homeowners were able to lock-in low rate before the current bond market bloodbath check this post at Mark Hanson's blog.
The second is skewed by automakers incentives (it is akin to price deflation in cars, not a very reflating signal !)
The third is based on a rapidly dwindling notional because of bank appraisals getting lower.
Fourth and fifth are essentially the same thing, as banks are not lowering their spread over funding costs (actually they tend to increase margins). You are right to mention that it is thanks to central banks. As some people say, LIBOR is not the rate where banks are lending to each other, but rather the rate at which they borrow at the discount window.
Finally, the last two are based on market sentiment, so it is difficult to see a causal effect with the level of stock market. I can certainly believe they are coincident. As you mentioned in an earlier post, correlation is one nowadays...

To summarize, fundamental components do not seem to be particularly relevant, and "market components" just follow the sentiment flow. What then is the informational value of this index?

Charles said...
3:15 AM  

Post a Comment