Bedtime Stories

Thursday, September 17, 2009

Macro trading is often a thankless and frustrating endeavour, not least because when things go wrong (as they often do), it is difficult to explain to a layman (or woman, or child.) Macro Man generally tries to leave his frustrations, as well as his victories, at the office; in a sense, he tries conduct his real life separately from his "Macro Man" alter ego.

Still, there are inevitable leakages. Take yesterday, when what was shaping up as a rare stellar day this month was derailed by a "paid advisory service" report suggesting that some Fed voters would already like to push for rate hikes, and that the committee generally senses that the output gap has narrowed quite dramatically. Although the report was evidently denied (perhaps after an angry phone call from the Eccles Building?), some of Macro Man's positions took a nasty dent, and his overall portfolio performance wasn't helped by a spot of execrable short term trading.

So last night, when it came time to tell the Macro Boys a bedtime story, Macro Man intended to tell them the story of The Boy Who Cried Wolf. Somehow, the nature of the story changed in the telling, however. Last night's story revolved around a paid advisory service that used to have good contacts in policy circles, oh, about fifteen years ago. Ever since then, however, this service has been consistently wrong. They issue a "ground-breaking report" which moves the market....only to be proven dead wrong. Eventually (though sadly not yet), they lose all their if and when they finally do get one right again, nobody listens and they go out of business.

Sadly, this wasn't the first time that Macro Man's day job has intruded on the evening ritual. Consider these other (macro) bedtime stories:

The Three Little Pigs: Three little piggies each built a house: one of straw, one of sticks, and one of stone. Unfortunately, each took out an ARM with a 1% teaser that reset after two years to LIBOR + 800. When this happened, they defaulted on their mortgages. This in turn bankrupted the big, bad, wolf, who received a hefty government bailout and a stern warning not to lend to little piggies ever again.

Jack and the Beanstalk: Jack was a young man who managed his mother's retirement finances. He put them all into structured credit vehicles which blew up, leaving Jack and his mother with nothing but three magic beans. Jack's mother was so irate that she kicked Jack out of the house and threw the beans out of the window. With nothing better to do, Jack pledged the beans as collateral to the government in their PPIP program. Eventually, the beans sprouted into mighty green shoots; Jack climbed up and paid himself a big fat bonus with the pot of gold he found at the top.

The Five Chinese Brothers: Once upon a time, there were five Chinese brothers. The first brother owned a toy factory in the Pearl River delta, but it went bankrupt when labour costs rose and Western consumers quit buying so many toys. The second brother applied for a loan to speculate on the price of copper. The third brother applied for a loan to speculate on equities. The fourth brother applied or a loan to set up a joint venture with a foreign electronics manufacturer, so that he could reverse engineer the products and eventually set up his own factory to make cheap replicas. The fifth brother was in charge of the local disbursement of central government stimulus funding; he fast-tracked all the loans, and the entire family became fabulously wealthy.

Dr. Strangelove, or how I learned to stop worrying and love the stock market: It's not really suitable for children, and in any case the story is still being told. Macro Man'll let you know how it ends....

Posted by Macro Man at 8:58 AM  


Suspect the call to MGA was from Pimpco since they'd been on the wires earlier talking about their big tsy position.

Anonymous said...
10:41 AM  

why not give up the global macro and write kiddie books? JK Rowling is worth a lot more than most macro managers, I bet. of course, that assumes money is the motivation. some people just enjoy punting global macro strategy.

Anonymous said...
10:53 AM  

In this case, though, Slim Pickens would be riding the bomb up. Whoo-woo, whoo-woo, whoo-woo.

But What do I Know? said...
11:51 AM  

hi.. just dropping by here... have a nice day!

tagskie said...
12:30 PM  

Classic post, hombre. Laughing out loud here in Osaka.


Anonymous said...
12:50 PM  

What's that I see flying sky high? Is is the S&P? Is it USTs? No its... (Drumroll and trumpets) "Macro Man", here to save us from drowning in a deluge of liquidity!
Or something.
Great post indeed.

Anonymous said...
1:13 PM  

Little Red Trading Hood has been lured into buying more shares by her beloved grandmother, but there is something slightly odd about Grandma these last few weeks... those teeth seem larger than she remembers, and then there is that strange drooling every time Nana is watching CNBC and the Spoos rocket skywards. LRTH can't understand why Granny keeps muttering about "one last bonus" and praying that DGDF...

leftback said...
1:55 PM  

enjoy while it lasts. The Fed will soon pull out the punch bowl. Give it a month or so until the October PPI and CPI numbers come out and the signals will become very clear. Until then, expect a lot of "rumors" and "speculations" to come out. But as soon as you start to see Fed members talking about inflation via speeches or interviews, than you know that the party is officially over. In addition, recent TIC inflow data allied to a plunging US Dollar is more evidence that the punch bowl has to come out. Did you happen to notice Ben saying that he thinks the recession is "very likely" over? Let the games begin...

Anonymous said...
1:58 PM  

MGA is so predictable in being wrong that I think their client base is growing.

Loved your post. Very funny. But was it omission or commission that you left out Goldilocks and the three bears?

Macro Monkey said...
2:05 PM  

Macro Monkey...well, Goldilocks would obviously be Goldman....but I couldn;t find 3 bears at Goldies to flesh out the story...

Macro Man said...
2:07 PM  

Haha. If you can't find three bears, I suggest you read the comments on your blog more carefully!!!

I still see a lot of bears (though admittedly their numbers are dwindling of late), and most of the putative bulls are buying more because they have to than because they want to.

IMO, it is still easier to convince people of the bear case.

Macro Monkey said...
2:15 PM  

Plenty of bears here, and in macro generally....not too many chez Goldies though

Macro Man said...
2:24 PM  

Agreed. The bears are still fighting this tape, and experience suggests that this ride won't stop until they stop. Besides, bears aren't as skilled in fighting as primates:

Macro Monkey said...
2:28 PM  

Good one leftback.

Come visit Andy's new home

Anonymous said...
2:30 PM  

I'd have thought the Pied Piper of Hamlin enticing all those children with cash on the sidelines to follow him to a Nirvana known as market heaven would have been appropriate.

Anonymous said...
3:29 PM  

Hah, I've been called Bernanke Dr Strangelove for months now.

Dr Strangelove and how I learned to stop worrying about inflation and love Gold.

Dr Strangelove and how I learned to stop worrying about deflation and love the long bond.

Ofcourse, this movie is only starting off so the plot is TBD.

jbr said...
3:59 PM  

Those were very inspired tales mate. Although its obvious you can not fight the trend, its quite hard to be complacent with such market(?) behavior. Anyawy thats quite exactly as you sad: not possible to make a layman understand that despite the bullish news, you are not making all the money he expected.

Skeptical said...
4:00 PM  

Good stories MM!!
If you run out you can do the "emperor who had no clothes" next.
I'm still a bear

Nic said...
4:13 PM  


I agree with you. But do you still think the 140bps of hikes priced into EDZ9EDZ0 is too low? I think in reality they dont go that much, but as soon as they intimate they may go AT ALL next year, the thing blows out to ridiculous levels right?

what you think?

Anonymous said...
4:30 PM  


Anonymous said...
4:47 PM  

Anon, I agree....spreads will blow out if they hint at tightening. Which is why I strongly suggest they won't til errr.....there's at least one (and likely a few more) positive GDP print officially in the bag! So I reckon dec/dec is too early....june/june, maybe, to get the real juice?

Macro Man (bbry) said...
5:22 PM  

As they said on Saturday Night Live many years ago: Da Bears!

Very frustrating, I know us bears predominate this blog. I know I have been "wrong." I know that sentiment is one of the better (counter)indicators.

But dammit this market is expensive! And hell hath no fury like a pulled punchbowl! And yes, deleveraging is a HUGE, painful, looooong drawn out process!! The consumer is tapped! Dead! Toast! So when is god going to cut me some slack and send this mutha down to 800 again?

Steve said...
5:38 PM  

As one of the (the only?) EM bull, though not for the usual reasons, I'm getting out and increasingly playing the short term game. I'm finding it harder and harder to find guys who are long anything illiquid or hard to sell who are not 1) Stupid 2) Constrained by a mandate or 3) Have such a long time horizon it hardly matters.

I'm going to the gym for at least 2 hrs tomorrow. Sometimes its just best to do nothing much at all.

Nemo Incognito said...
5:49 PM  

I'm one of those bears who thinks the punchbowl will never be pulled, not till 2012 or later, because the economy will never warrant it.

Government stimulus can produce a positive GDP print in Q3 & Q4, but the private sector will still be contracting or stagnant in all major countries, and the debt burden remains. Stimulus is unsustainable. Once it decreases, though short-term rates remain at zero, GDP will turn negative again.

When it does, the stress on the banks will be a different kettle of fish. Losses will be in cash, not accounting predictions and market values, as CRE busts and prime mortgages go under from unemployment and low housing prices. The 2010-11 banking crisis won't be concealable by words and accounting tricks, and governments will have to start making good on their bank guarantees and bailout promises. That will crimp any new stimulus plans.

No idea when this shows up in asset prices, but Q4 seems the traditional time.

PJ said...
7:06 PM  

MM, Agreed, absolutely no hikes or it is game over for the yield curve, housing market, banks, bondholders. But they can hint at less QE - in order to keep the low rates punch bowl in place, but take away some of the cheap vodka they left on the table lately, and arrest the DGDF trade and prevent further growth in the massive bubble in turds.

leftback said...
7:10 PM  

Well, I'm a bear who has been very lucky these last six months. For one, I live in Australia and AUDUSD has been most of my P/L. Secondly, I've played a few micro themes that have generated stupid returns. Luck again. My macro portfolio has been a incredibly difficult to run. Anyway, we kicked out just about all the equities yesterday - speccy nat gas plays, small niners, big miners, banks, biotechs. The whole "balanced" portfolio. As I mentioned, I have been very lucky - had I relied of level-headed thinking I would be in trouble. Until I get tomorrow's newspaper today like the big boys on Wall Street, I guess I'll have to keep scrapping in the alleyways.

Anonymous said...
12:02 AM  

Great post!

Reminds me a bit of the Monty Python's "The Crimson Permanent Assurance". A version of Sinbad the sailor. But set in an investment bank.

oaxiom said...
1:31 AM  

Great post! Dr Strangelove: Instead of Slim Pickens riding the bomb I'm somehow picturing T. Boone Pickens riding a windmill. Go figure. ;)

Tuzo said...
4:22 AM  

---anyone up---
whats the long dollar etf??? not dxy, the etf for dxy
hopefully one that has options.

something is up, and i want to be ready for a strong dollar squeeze when it happens


Anonymous said...
6:04 AM  

if your portfolio is denominated in non-usd then i suggest just buying one of the treasury ETFs.

Anonymous said...
8:02 AM  

One day, the bears will be right, but the low of that eventual sell-off will probably still be higher than when the bears first got bearish.
Both bulls and bears can then claim victory.
Strange world, investing...

Anonymous said...
12:34 PM  


Rydex's lineup of currency ETFs includes several funds with total assets in the range of $500 million, such as CurrencyShares Euro Trust (FXE), CurrencyShares Australian Dollar Trust (FXA), CurrencyShares Canadian Dollar Trust (FXC) and CurrencyShares Japanese Yen Trust (FXY).

ETF manager WisdomTree oversees several currency ETFs, including WisdomTree Dreyfus Chinese Yuan Fund (CYB), WisdomTree Dreyfus Brazilian Real Fund (BZF) and WisdomTree Dreyfus Emerging Currency Fund (CEW)

Invesco PowerShares manages a trio of currency products: PowerShares DB G10 Currency Harvest Fund (DBV), PowerShares DB US Dollar Bearish Fund (UDN) and PowerShares DB US Dollar Bullish Fund (UUP).

British banking giant Barclays issues several currency ETNs, including iPath EUR/USD Exchange Rate ETN (ERO) for the euro, iPath GBP/USD Exchange Rate ETN (GBB) for the British pound and iPath JPY/USD Exchange Rate ETN (JYN) for the Japanese yen.

Anonymous said...
1:28 PM  

...or just open a margin account and trade FX directly!!

Anonymous said...
1:47 PM  

ever considered a sideline as a standup comedy scriptwriter on retirement or you could do a new millenium update of those popular politically correct fairytale series - could be the jk rowling jr?

Judy said...
3:28 PM  

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