Consider Yourselves Warned

Friday, July 31, 2009

Consider yourselves warned.

Conditions seem relatively benign, albeit noisy, and equities appear to be floating on the swells of a veritable sea of liquidity. Vols are near their post-Lehman lows, and it all seems to be pretty good.

It can't last. For Macro Man has an indicator that presages market volatility that is so successful, so powerful, that it commands respect from all who behold it.

Today, he flies to South Carolina for his summer holiday.

Relative newcomers to this space may not be familiar with the predictive power of Macro Man's warm-weather holidays, so a brief history lesson is in order.

In 2005, for example, he took a trip to the US in May and June...and while he was gone, France and the Netherlands voted down the EU Constitution and EUR/USD got taken to the woodshed.

In 2006, he went away in June, and the second leg of a global EM meltdown occurred- USD/TRY from 1.50 to 1.75, USD/MXN from 11.0 to 11.50, etc.

In 2007, he went away at the same time as this year- the first two weeks of August. Consider the following changes that happened during his absence:

* NZD/JPY was 89.78 when he left and 79.76 when he got back.

* The 3 month TED spread was 0.53% when he left and 1.75% when he got back.

And last year, with equities and EMFX grinding higher in late July and interbank spreads fairly calm, it looked like markets were finally ready to break the hoodoo, despite the ECB's recent bone-headed rate hike.

Ahh, but that was before the Russian tanks rolled over the border into Georgia, destroying not only Macro Man's tranquility but also the profits (and more!) of his long RUB basket position, kick-starting a sharp depreciation for the remainder of the year and into early '09.

And the euro, which was only a couple of percent away from its all time high when he left on holiday last year, was nearly 10 big figures lower when he returned 2 weeks later.
And even his little trips seem to work; a long weekend in Madrid for his wedding anniversary last September happened to coincide with the first announcement of the TARP plan. Fortunately, Macro Man had learned from his past experience; he was long some SPX calls that were some 40 points out of the money when he left the office on Thursday, but were somehow settled nearly 70 points in the money on option expiry the next day.

You can rest assured that Macro Man respects the power of the holiday, and has left his portfolio stuffed full of option lottery tickets.

So, too, should you: consider yourself warned.

Macro Man returns to the office on August 17, but will check in from time to time as he manages his book from the Carolina sea-side.

Posted by Macro Man at 8:00 AM  


We wait in hope for some excitement. Cutting a lot of long stuff before national day in China, policy announcements often follow and I'd have to think that the risks are to the downside.

Nemo Incognito said...
9:05 AM  

Sounds like it could be an interesting couple of weeks. Have a good holiday. Later.

Anonymous said...
9:40 AM  

Thanks much for your contributions. Have a good holiday, sir.

Anonymous said...
9:52 AM  

macro you should really take vacation more often ;)

andriy said...
10:13 AM  

Have a good one Macro ... and indeed, fireworks to be expected.



CV said...
10:16 AM  

You know, stuff always seems to happen when I'm out of the office too--sample bias?

Have a great vacation.

But What do I Know? said...
12:30 PM  

Chortle. Enjoy the break MM. Ta, JL

Anonymous said...
1:40 PM  

have a good one cobber

Anonymous said...
3:23 PM  

Gold just popped over 955 in anticipation of this telegraphed holiday. Rumors circulating that MM is short...

Have a good holiday!

Anonymous said...
5:05 PM  

MM, seems the holiday jinx is still on you. IMF: USD is 'moderately overvalued'.

Enjoy your holiday!

Gregor Samsa said...
5:06 PM  

I-Man will be holidaying in SC next month...

Edisto Island.

Cant wait. Long palmetto.

Have fun MM!

Anonymous said...
7:01 PM  

MacroMan - Alright, I can see a deflationary GDP report giving a bid to long Treasuries. But why did the dollar collapse this afternoon? Inflation would be a greater threat to the dollar, I would think.

I'm long the dollar and I wonder whether people expect this move to persist. I expect deflation and if that's going to kill the dollar I need to rethink my positioning.

Anonymous said...
11:57 PM  

I almost thought you were going to say at last you went long risk...

Anonymous said...
4:24 AM  

Anonymous: re the dollar etc, there was some strange month end action on friday.

I am struggling to reconcile the USD weakness. an obvious excuse is that it was near pretty tough resistance (i.e. look at cable) and that was enough to run some stops, but the strength of the move suggests that there was more to it.

EWI have had some analysis around for a while that they are waiting for a 5th wave down in the dollar (happening right now) as part of a multi year bull move so there is possibly quite a risk being short if that roadmap is correct.

I can reconcile rallying treasuries, rallying gold in this deflationary (IMHO) environment but seeing the dollar getting smoked I find a bit odd.

Anyone else care to comment?

Anonymous said...
9:58 AM  

Anon, if I may...

No point in dipping too far into the deflationist/inflationist argument here. There are things happening not only within the US, there is a world outside as well.

In the end it comes down to trust, and the US is rapidly losing the trust of investors worldwide.

Gregor Samsa said...
3:04 PM  

bonds up, equity down and oil was turning down after that lousy data ... all fine there ...

then there was a Market news story suggesting that ECB (in the wake of deflationary and poor credit supply data) was ready to cut rates and buy corporate and government bonds ... so the threat of the QE boogey man came
back out ... so oil and gold promptly shot back ... so that's my theory at least for the price action.

oil/gold spike mixed with month end FX fixes that were US dollar negative all consipired to drive down the dollar.

and thats the perversity of the FX market ... threats of more QE (ECB, MPC, BOJ) will drive folks to buy oil/gold/commodities on fear of currency debasement ... but USD gets smoked when that happens due to strong negative correlation to oil.

we are entering a severe deflationary period and all the mongaloid central bankers will achieve is in driving up oil which will further cut disposable income of folks. maybe its not a coicidence that the SEC is looking at comodity position limits. soon, they will be confiscating gold.

the only hedge to deflation is holding govenment bonds. just ask the japanese.

Anonymous said...
8:20 PM  

The rationale; when u leave office we get more to do :-))

makes sense

12:37 PM  

Swing by Charleston.....I'll be here all year

Anonymous said...
2:29 PM  

I'm in Isle of Palms...and have, somehow, managed to get stung by a jellyfish. A small price to pay for the usual holiday lows for the $, carnage in the reds...I love it when a plan comes together....

Macro Man said...
4:19 PM  

MM, Remember watching a Friends episode which revolved around the theory that peeing on a jellyfish sting takes the sting away.....incase you are still smarting from the jellyfish encounter.

Anonymous said...
1:24 AM  

In your neck of the woods, today, Macro Man. I assume you are based in Mayfair, where LB is writing this morning from his homeland. LB finds the mood in London eerily reminiscent of that in New York. V-shaped recovery, risk-on, housing market bounce etc.. all very odd. At least EUR:JPY has turned down this morning.

LB is also short gold - there is no inflation, no deflation and no imminent prospect of the sky falling. All that would appear necessary to trigger a nasty sell-off in the metal would be the US$ showing even the faintest sign of life, a breath even might suffice.

Of course LB picked the worst exchange rate of the year to come over... and the Aussies saved the game as well. Bugger it.

Enjoy the vacation. Beach? Golf? All of the above?

leftback said...
10:00 AM  

Have a read of Andy Xie's latest on the Caijing web site. At the risk of confirmation bias, it is excellent. Enjoy the holiday MM

Great Save by Australia :)

Skippy said...
1:37 PM  

Skippy the Bush kangaroo.... ???

leftback said...
7:46 PM  

Have a great vacation.
Waiting for you posts

boat speed said...
9:23 PM  

Have a great vacation.
Waiting for you posts.

boat speed said...
9:24 PM  

MM has been stone cold all year.
The rally will continue with all you "smart guys" left behind.

Underinvested said...
9:41 PM  

Well, I may have been stone cold all year, but despite that and taking six weeks out of the market following knee surgery, I've still managed to put together a Sharpe ratio > 2 this year. I guess that's what makes one a "smart guy" opposed to the donuts who got it wrong last year.

Macro Man said...
11:39 PM  

Uninvested, the year's not over yet. Make sure you don't trip over your own hubris....

leftback said...
11:50 PM  

LB, you'll be pleased to heat that I've secured a tix for the Saturday of the 5th test at the Oval...

Macro Man said...
11:55 PM  

It never fails to amaze how every now and again some random people feel the need to give it the big one about how well they are doing and how wrong everyone else is...You'd think they'd be too busy counting their cash whilst being quite grateful that there was someone else willing to be on the other side of all their winning trades. On the other hand, and more likely, its some 12 year old in a back bedroom of their parents house..

Regardless, MM did you break a mirror with a dead black cat?? These holiday's of yours seem bad for the health!

Anonymous said...
7:38 AM  

LB... Yes it is Skippy the Bush Kangaroo.. England will snatch defeat from the jaws of victory in this Ashes series as well... :)

I wish I could be there...

Skippy said...
7:56 AM  

The Oval will be great, MM. LB will catch bits of the 4th Test in a pub in Shepherds Market before his return to NY.

Brett Lee will be steaming in trying to save the Ashes for Oz while Freddie will somehow patch his body together to bowl at 90 mph for England.

EUR:JPY almost flat at the open today. I suppose EUR:USD can go higher to 1.46, but LB would prefer that it not do so.

There are now increasing numbers of "tools savants" appearing on bearish blogs claiming that the market will continue to move up every day until the end of time. Are we close to a top?

leftback said...
8:58 AM  

They say Aug is seasonally toppy, but given Q3 GDP turning +ve it might not be (heard GS yest revised their est from .1 to 3%, wtf?!). I don't see how its possible to get so enthusiastic when the economy is so obviously weak (esp the C side of the equation) and will continue to be so weak, but my difficulty lies with trading counter to that. Well, we reached S&P 1000 just as you left, so what treats are in store for us now?
Good luck all, JL

Anonymous said...
10:12 AM  

Sorry unclear, the GS est is for H2, not Q3. Still...
Now BoA is jumping on the bandwagon.

Anonymous said...
10:32 AM  

Anyone else looking at copper? Just a few datapoints:

- China still importing record volumes.
- HOWEVER.... seems every single producer's refining and treatment charges are down. Ie, Jiangxi Copper et al have a lot of copper in storage and seem to be short of end demand. John Hempton at Bronte Capital recently had a good piece on the potential for whiplash from restocking but I'm inclined to think that when this thing goes its gong to be huge.

I guess the Chinese monetary policy watch continues since more and more of the world's risk assets are riding on it.

Nemo Incognito said...
1:29 PM  

US GDP will probably bounce quite hard in Q3, due to the inventory rebound, but beyond that it will falter if consumption does not lift (and there isn't much sign of that yet). The household income figures earlier in the week were telling a 3.4% annual contraction in nominal income. That hasn't happened in at least the past 50 years. Nominal growth is also contracting. The US may already be in a Fisher-style debt deflation trap.

Skippy said...
1:51 PM  

NI, I thought the PBOC may tighten sooner rather than later, but perhaps they will let asset prices run for a while as an offset to contracting household income? Monetary Policy in China is probably more about maintaining social stability than any kind of US style taylor rule approach. Recent official comments about inflation have been interesting, however.

I completely agree that many risk assets, EM equities, commodities and commodity currencies will probably get hit for six when policy is tightened.

Note that the Baltic Freight Index has not participated very much in the latest commodity rally...

Skippy said...
2:05 PM  

Does anybody know, if there is a way to short the Iranian rial?

It's not tradeable on Currenex. But it seems to be a pretty safe bet right now.

Anonymous said...
2:06 PM  

I am not a trader, but I reckon that stories like a this are indicative of a market top (I recall a similarly strained argument last year about how the ECB refusing to ease was driving up oil prices).

RebelEconomist said...
6:04 PM  

No worries for the bulls. Abby Joseph Cohen has raised her EoY target for SPX.

leftback said...
7:40 PM  
This comment has been removed by the author.
Justin said...
1:48 AM  

Welcome to my fine state. Enjoy your stay. If you have any questions, shoot me an email. I have friends in HHI, MB & Charleston and visit regularly.

Justin said...
1:53 AM  

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