Summertime

Markets have reached a significant milestone, one reached nearly as rarely as a full planetary syzygy (there's your word of the week, boys and girls.) Yes, for the first time in quite a while, the ambient temperature in SE England is higher, in degrees Celsius, than the VIX.

Yes, boys and girls, summertime is well and truly here, bringing with it lacklustre price action and abject liquidity, which can produce the occasional step-jump in market pricing,
usually accompanied by hysterical rumour-mongering. Temperatures in excess of 30 deg. C may tempt all but the most driven of market punters to head for the exits, if not the beach, but Macro Man's English and Celtic readers should take particular care. He snapped the photo to the left at a Sussex beach over the weekend, with beach-goers showing the characteristic "English tan." Ouch!

Perhaps some of the sell-side analysts would do well to hit the beach and work on their tans,
too. Macro Man's inbox was full of more "green shoots" research this morning, as well as Goldman pushing some UK banks on its "conviction buy" list. As you can see from the photo on the left, these researchers are looking a little peaked, so it would be good for them to avail themselves of the good weather and get a bit of sunshine before the rain sets in.

Is Macro Man too cynical? Perhaps, though experience has shown that to be a substantially less costly error than being too naive. Regardless, headlines out of the independent Chinese business journal Caijing appear to confirm Macro Man's thesis that the recent commodity price "boom" was orchestrated by the Chinese and is now coming to an end. Unfortunately, the English translation is not yet available online, so we're forced to rely on Reuters headlines:

11:22 29Jun09 RTRS-CHINA WILL NOT CONTINUE BUYING METALS FOR RESERVES IN CURRENT MKT CONDITIONS -CAIJING QUOTING NDRC OFFICIAL

11:24 29Jun09 RTRS-CHINA HAS BOUGHT 235,000 T COPPER, 30 T INDIUM, 5,000 T TITANIUM, 590,000 T ALUMINIUM AND 159,000 T OF ZINC -CAIJING

11:32 29Jun09 RTRS-CHINA NDRC WANTED ENTERPRISES TO BENEFIT FROM STATE STOCKPILING, DID NOT EXPECT MIDDLEMEN WOULD BE BIGGEST BENEFICIARY -CAIJING

Perhaps Nemo or any other readers located in situ can tell us why a net commodity importer would use a stimulus package to support the prices of the very items that they import, because Macro Man is forced to admit that he's at a loss to explain this.

Anyhow, Macro Man's rather jaundiced view of the global growth outlook received a bit of support on Friday with the latest US personal income/consumption data. Once again, income rose substantially more than expected (don't economists realize that there was a stimulus package?!?!), yet spending was in line, yielding yet abnother sharp rise in the savings rate to a fifteen year high of 6.9%.
For years, JP Morgan's Bruce Kasman ran with the maxim that "if you give them income, they will spend." It seems quite clear that that chain has been broken, and US consumers remain firmly in savings mode to rebuild household balance sheets. Macro Man has long had a target of 10% for the household savings rate, and he's seen nothing to change that.

How the rest of the world, which has been as hooked on the US consumer as he has been on cheap credit, copes with a buyer's strike remains to be seen, but Macro Man is not particularly optimistic. Moreover, readers can judge for themselves what consumer spending is likely to do once stimulus checks quite arriving in the mailbox, and what this means for all the inventories that are currently being rebuilt.

Needless to say, Macro Man is not optimistic. But perhaps that's a story for later in the summer or even the autumn. For now, the sun is shining and prices are drifting. Summertime markets, indeed.
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37 comments

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June 29, 2009 at 10:02 AM ×

As to why you'd import all that product it comes down to 2 things:

1) Asian companies love punting inappropriately with their working capital. Too many blowups to mention but in recent history: Citic Pacific, Arpeni come to mind.
2) The companies don't buy the story themselves so they are buying something liquid they can sell down relatively easily rather than undertaking a lot of capex they know they don't need.

Have been reading a lot of latam history recently and am convinced the Brazil template fits quite well to China once you adjust for reserves. Macro blowup 3 yrs away, methinks.

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H(oratio)
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June 29, 2009 at 10:27 AM ×

Take your pick..

Summertime, and the living is easy. The lobsters are red, and the bottomline is high.

or

And if you don't love me now
You will never love me again;
I can still hear you saying
We must never break the chain.

Listen to the wind blow...
Down comes the night.
Run in the shadows...
Damn your love, damn your lies!
Break the silence,
Damn the dark, damn the light!

Just dug those two hundred cable pips in ten minutes on the strength of the 'zero conviction list?' or was it the mortgage numbers. Are these moves carried on the back of the absence of the usual punters, MM?

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Macro Man
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June 29, 2009 at 10:36 AM ×

Let's just say that I know a few guys who are either at the beach or in the back garden at the moment...

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Anonymous
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June 29, 2009 at 10:56 AM ×

The dollar acrobatics have been confusing lately, but the theoretical money flows lets us assume that a decrease in commodity chasing by China should lift the dollar. Long dollar again.
geert

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Anonymous
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June 29, 2009 at 11:08 AM ×

ur figures for china stockpiles do not seem very high - 590000T of alum only costs $590mm?

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June 29, 2009 at 11:30 AM ×

That's the core of this "metals as diversification" BS - you can't. There isn't enough physical trade to make even the smallest dent in China's reserve mix.

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Anonymous
admin
June 29, 2009 at 11:56 AM ×

H(oratio)

From what i can tell if any market maker gets an order they just ram the spot market and everyone gets right out of their way...whats the point... better off betting on the lions, at least its fun and somewhat sensible. Unless you see the flows, stay right out of this market, liquidity is minimal and spot orders from asia / middle east rule the waves.

i think todays cable move was order driven...why these clients ever go back to the market makers that jam them so egregiously is beyond me.

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Anonymous
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June 29, 2009 at 12:17 PM ×

I think thats the problem with the China myth. I had three people last week send me A report from Bridgewater ("the impact of Chinese demand on the world"). It looked like a crappy Wall St. Consensus which proves that no one on wall st., sadly, understands the rest of the worlds inner-workings.

The bottom line is the numbers from China simply arent big enough to matter in the whole scheme of things. They give the market hope, but not substance. Thats the difference betwenn a strip tease and an actual woman fuccing your brains out.

Chinese numbers arent as big as they need to be, and with $500B shaved off the US trade balance, they will have even less to throw at the economic crises.

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Anonymous
admin
June 29, 2009 at 12:47 PM ×

is that bwater piece on scribd?

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Anonymous
admin
June 29, 2009 at 12:56 PM ×

Not my subscription but it is subscription. I can fwd it to you if anyone wants it. Set up a new yahoo address or somthing if you want to be anon.

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Macro Man
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June 29, 2009 at 12:58 PM ×

It's impossible for me to be unbiased, given that my own analysis reached an opposite conclusion from Bridgewater, but I thought that piece was just pisspoor. The executive summary is: "Golly! Chinese imports are up since January! They're going to save the world!"

Nary a mention that...err....Lunar New Year was early this year and that economic activity in January (including imports) was much slower than usual this year.

I would take some exception to the notion that Chinese demand doesn't matter....in certain industrial commodities, they comprise upwards of 50% of global demand...that's pretty significant. I would obviously concur that no commodity market is big enough to be a part of China's FX reserve basket, but I do think that China can significantly distort commodity prices in the short/medium term if and as they choose to.

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Anonymous
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June 29, 2009 at 1:07 PM ×

Agree, the "Please Save US China" crap is over-done, but that is the Wall St. Consensus.

Im not saying China doesnt matter, but if no one buys all the crap they produce (i.e. loss of $500b on the US trade balance), then its a bad investment: Supply of Made In China exceeds Demand from Credit Card Carrying Americans.

So I am not saying that Chinese demand doesnt matter, but American demand trumps it. Exports to the US trump imports from Oz and Asia.

They have imported alot of crap in the last couple months, now who will buy the finished product? Domestic chinese consumption would have to grow at 500% pa to actually save the world. Good luck with that.

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Anonymous
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June 29, 2009 at 1:08 PM ×

Just use your Bloomberg. Look at the Worldbank's nominal GDP numbers for the US, China and the World.
Its weight is just too small to really compensate for the US and Europe. (and no - one cannot use the PPP numbers, because China would not be where it is had they not kept their currency down)

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Macro Man
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June 29, 2009 at 1:11 PM ×

Oh, I don't dispute that at all....that's the point I try to draw out with the comments on the savings rate. It just seems to me that China has helped drive up the prices of certain commodities with their non-economic buying. Given the unlikelihood that the US consumer makes a speedy return, it looks like a nice set-up for a commodity smackdown as China pulls the bid....

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Anonymous
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June 29, 2009 at 1:13 PM ×

Seriously, China is a still a poor country. Common sense among regular Chinese even. Since when do we need to come out and repeat every common sense here?

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Anonymous
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June 29, 2009 at 1:15 PM ×

tell that to german investors who cannot get there hands on enough commodity related investments, to hedge against runaway inflation...

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Anonymous
admin
June 29, 2009 at 1:15 PM ×

Agree, which would be an Aussie smack down (look at the chart of industrial commodities vs. AUD), Same chart, but AUD is 5x more liquid.

Another conspiracy theory would be: China is buying hard assets because in order to move inventory it needs to drop its currency value, no matter what DC says.

China needs a strong USD, or they are fuct.

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Anonymous
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June 29, 2009 at 1:23 PM ×

I made point above that the actual $ amount of commods they refer to is quite small, a couple of bn $. Oil could have been a much bigger driver, do we know what order of magnitude they have sotckpiled of oil??

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Anonymous
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June 29, 2009 at 1:27 PM ×

Depends on what you consider stockpiles...? Underground, in Sudan and Iran? Or physically in China?

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Anonymous
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June 29, 2009 at 1:37 PM ×

Of course China matters to some commodity mrkts. Copper's total phys annual output is bit over 18million mtons. That's pretty small compared to oil,iron ore and other 'big' commods. On top of that , the LME club is dominating the daily official copper prices. So 'China' is a driver in the copper market ,without a doubt, and the LME brokers use and abuse that situation on daily basis.

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Anonymous
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June 29, 2009 at 1:42 PM ×

But for the last 6 months the stockpiles of copper have mostly been moved from LME to China, but havent been used. They are still stockpiled.

If I have stockpiled green beans in my kitchen cupboard and I suddenly decide to relocate my stockpile to the cellar, should that really have any affect on actual supply and demand?

What matters is actual usage. The Chinese have a 14 year supply of vacant real estate. Thats another form of latent copper stockpile.

It comes down to underlying demand.

Yes, China has impact on copper, no argument there. But at this point people are still trading the previous bull market and not realizing that the demand no longer exists for final product.

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Anonymous
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June 29, 2009 at 1:46 PM ×

China's above-ground stockpile of crude? My guesstimate: anywhere between 100 and 150 mio barrels.
With 7.6 mmb day oil demand, that's 10 to 20 days worth of China's oil consumption. OECD's stockpile currently is bit more than 60 days of daily oil demand.

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Anonymous
admin
June 29, 2009 at 2:02 PM ×

Frequent reader... I'd appreciate a copy of the Bridgewater piece.

ace3299@gmail.com

Thanks.

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tom
admin
June 29, 2009 at 3:23 PM ×

Anon. @ 1.13
I think Chinese Cb gov. yesterday said, that to be a reserve curr China would need to run a deficit, but since China is still a developing nation, it's interest is in running a surplus

Anon @ 1.23
We do have some idea how much crude oil they are planning to / are stockpiling, they are already have two major facilities for the purpose of acting as a SPR, and they are building 3 more.
Yes, true, it's a bit tougher to figure out how many deals they have small ex Soviet countries, or in Africa to pick up oil supplies.
But, casual search on bloomberg will yield plenty of articles on this sort of info


p/s bridgewater's research conclusion is a confused mix between the "D process" and "runaway inflation eventually supporting 'hard assets' like gold"
imo

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Professional Gringo
admin
June 29, 2009 at 3:41 PM ×

Decent FX news week coming up.

Will the Senate pass the new Cap and Tax the be-jesus out of everybody? Just how does that figure into the consumer spending models? I have my Fred Flintstone coupe model picked out already.

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June 29, 2009 at 4:04 PM ×

Professional Gringo check le blog - some crazy stuff is getting an awful lot of currency amongst the chattering classes.

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H(oratio)
admin
June 29, 2009 at 4:17 PM ×

gbp/jpy ?????

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June 29, 2009 at 4:18 PM ×

No, the whole "its an AWESOME idea to charge Chinese exports for their carbon content."

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Professional Gringo
admin
June 29, 2009 at 4:26 PM ×

Avast Ye Matey...Nemo, I'm very much aware of what the fruit loops are up to.. the simple question is how to profit from it.

GBP/JPY? Damnable Yen never makes any sense to me.

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H(oratio)
admin
June 29, 2009 at 4:32 PM ×

Two bushmen in a bass boat with an Evinrude and a hunting rifle send up crude by $2. That one makes sense.

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Professional Gringo
admin
June 29, 2009 at 4:46 PM ×

I've informed the resident goddess creature that with all the new global warming legislation coming up, shopping will be reduced to simple colored used potato sacks and flip flops.

For the first time I see real fear in her valley girl doe like eyes. It's not a pretty picture.

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Anonymous
admin
June 29, 2009 at 5:08 PM ×

An evinrude and rifle? Is that all thats needed? I have some relatives in Michigan who could possibly manipulate the oil market. Too bad it wouldnt help GM or Ford...

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Anonymous
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June 29, 2009 at 5:30 PM ×

equity vol is cheap.
delta neutral pays - but do it after the long weekend

30 delta vix calls vs favorite equity names
3-4 mos out

mpm

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Anonymous
admin
June 29, 2009 at 5:36 PM ×

Ive go technicals that have ZAR going to 7.50 before going back down to 11.... Its the same trade as VIX (if you look at the charts) and has the same catalysts.

That shows we are 4 to 6 weeks from a major turning point.

Think VIX is a good bet.

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Anonymous
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June 29, 2009 at 9:28 PM ×

One complicating factor with China's recent commodity demand has been substitution from local production to imports. China also produces iron ore and coal (albeit inferior quality relative to Australian and Brazilian). The change in freight prices can also impact price and competitiveness of local versus overseas production. Freight prices collapsed last year, improving the relative price of key imports. That is changing again with freight and spot prices moving higher again.

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Anonymous
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June 29, 2009 at 10:02 PM ×

looking for bwater piece

juicedrage at yahoo.com

gracias

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