Tuesday, September 15, 2009


While Francis Galton may have found that crowds are a surprisingly accurate forecaster of things like ox weights, when it comes to modern finance it doesn't appear as if the crowd of MM readers carry any more wisdom (or at least conviction) than he himself does.

Indeed, while the participation was gratifying and there was a, ahem, lively debate in the comments section between the deflation and inflation camps, the results of the polls were depressingly close to Macro Man's own, uninspired views. The results were as follows:

SPX: Readers are, on balance, bearish, with a sequential decline in votes for successively higher price buckets. That's probably an accurate reflection of the global macro consensus, which suggests that Macro Man isn't alone in his bemusement over the apparently bullet-proof rally in equities from the July lows.

Gold: The responses for gold were almost perfectly balanced, with the plurality of the vote looking for prices broadly around current levels. Indeed, the outcomes between 900 and 1125 are almost perfectly balanced. Somewhat surprisingly (to Macro Man, at least), tail risk looks moderately skewed towards lower, rather than higher, prices. Does this perhaps say something about the degree to which deflationists modestly outnumber inflationists?

USD/JPY: Macro Man has avoided the yen for the past several months as part of his general boycott of G10 FX. It's a decision that served him well, as he probably would have been tempted to buy the dip at some point. It looks like he would have had company, as the most popular choice called for a rebound between 92 and 98. Similarly, upside tail risk was given a much higher probability than downside tail risk. Macro Man isn't sure what to make of it, but it does seem tempting to buy some low delta yen calls....

Fed: Although 2011 won the plurality of the votes here, a slim majority of resp0ndents (54%) believe that the Fed will hike rates at some point next year. Macro Man was slightly surprised to see that nearly a fifth of readers don't expect a rate hike 'til 2012 or later...presumably they were among those who voted for lower equities and lower gold. At some point, Macro Man might get lured back into bearish trades in the reds or even the greens....

Finally, Macro Man would be your indulgence to answer one more question, a glaring omission from yesterday's series: where will US 10 year yields end 2009? Answers will be here.


Nemo Incognito said...

What I like:

- Gas contango flattening
- Short China steel and aluminum, long US steel and aluminum names. Restocking may be fleeting but its happening.
- Short nickel (but maybe not for much longer)
- Write put on AUD at .825 for dec future, short the future. Get short commods risk proxy and get paid while you wait.

Crisis Management said...

Ouch, sterling didn't seem to like those remarks from Mr. King. EUR/GBP looks to be breaking out on the daily charts.

Nemo Incognito said...

Crisis Management, about f&*king time. FX has been the Albatross around my book.

Anonymous said...

Wow! I totally missed those 72 comments in the inflation/deflation debate. Just goes to show, that is what makes a market!

GBP is trash....it has been weakening for a while against most other ccies.

If you look at the GBP index the BoE calculate it is quite clear that the currency has been consolidating all year.

Reasonable chance of another leg down. In my mind short cable could be more compelling than long EURGBP ...but the DisG(ing)DF at the moment.

Anonymous said...

the mighty IBEX on the way to 12000

can you believe it

Anonymous said...

MM. Do you think we will see the SNB intervene to sell franc's in the next few days/wks. CHF TWI is back to top of range and economic data continues to disappoint.

Anonymous said...

I am not sure if selling sterling is the right trade here, given the behaviour of other asset markets.(These of course may be wrongly interpreting the data, but that is a seperate question)

In general, although "sell QE currencies" makes sense in normal times, these aren't normal.

Equities are solid so to some extent the policy is "working"
However long-term rates are not rising so there is not yet a danger of too much acceleration being applied.

Together the bond & equity markets are happily saying that the policy has so far been the correct one.

The QE currencies should recover 1st with the benefits to the value of their currency that this implies

The bond market is really key here: if QE was excessive, then sell those currencies but the bond market is so far happy that it is not.

In particular, the UK was arguably the most exposed country to the old,leveraged world in that it had both a property bubble & is the major economy most dependant on world finance.

When that world shattered it made sense to sell pounds.

Again however,with equities now moving away from the armageddon scenario, it seems to me that GBP should do so too.

Both the S&P & GBP has been pretty correlated with the whole "sense of crisis" for the last 2 years.
This has broken down in the last few months where equities have done well.
I don't especially see a reason for this to have happened.

Of course, there is an entirely seperate argument that equities are over-stating recovery or bond markets ignoring the inflation danger.
However they can be directly traded.

Given the infomation they are giving out, it seems to me that sterling is presently under-valued

(Finally, on most long-run PPP measures, it is now cheap to its key trading area, the Euro-zone)

Tuppence said...

Gold: MM said, "Does this perhaps say something about the degree to which deflationists modestly outnumber inflationists?"

From my perspective gold is an anxiety trade. I voted on the low side because gold currently looks like a pretty crowded trade.

Anonymous said...

MM think its important to remember who reads your post--its a very atypical subset of the investment world which does not control much money (yea i know i like to think we are big but they don't call us real money do they) so even though macro men may be bearish the old equity and pension fund types are just getting around to be bullish and chasing their benchmarks once again--I hardly take a bearish macro vote on your site to indicate that the equitiy boys and girls are short (or even heavy cash)

Macro Monkey said...

Survey says......

S&P higher.

Monkeys rule. Thinkers drool.

Still too easy to get people to buy the bear story. And too much money needs to get put to work.

The liquidity that bears lament is NOT coming from central banks; base money has been flat since Jan and the money multiplier stinks. Rather, it is coming from the money on the sidelines. Higher prices have lit a fire under it and is dragging it in. Correction? Likely at some point, but not enough to offset these other forces when one extends one's horizon to year end. The biggest risk to this constructive scenario: a return to system risk, which for most of us, seems highly unlikely.

The bears will ultimately have their day, but I reckon it's going to be from meaningfully higher levels.

Macro Monkey said...

And, FWIW, agency REITs still a good trade.

Macro Man said...

Anon, note that I referred to the "global macro consensus", not the "market consensus" for that very reason. I personally believe the degree to which RM is underinvested has been overblown to a degree...but that and £1.70 will get you a grande black drip at Starbucks...

Steve said...

Another way to track folks like us is by watching the HFR macro index, on bbg HFRXM -index-. It shows NAVs with a two-day lag, so it's pretty easy to back out a real-time read on folks' positions, esp since there is only one trade on (infla/defla). It has been rangebound since mid-June.

Apathy reins. Long live converts.

Macro Man said...

Oh yes, I know!!!

Gary said...

MM - thanks for hosting (or at least tolerating) the Great Inflation Debate of 2009 yesterday. There is way to much group think / mindless parroting of the authorities IMHO -- but I was pleased to see there were also a number of people on both sides of the issue that appeared to think for themselves

For my two cents on the surveys:
1) Still amazed that anyone cites the bond market as "evidence" of anything. There is no free market price discovery happening (in most markets?) -- so current yields don't "say" anything IMHO

2) The real money players I work with are focusing more and more on non-securitized assets. Public markets are heavily manipulated, plus the usual complaint about private equity / LPs is lack of liquidity -- but in current markets, the public stuff is both illiquid and very opaque from an accounting view

If you get a margin call from your broker and tried to claim the market is underpricing the asset, so the margin call is unfair and should be ignored -- your broker would laugh and sell the position from under you.

And yet, the suspension of mark to market accounting by banks is essentially that.

Welcome to Mega Bank where our motto is "Do what I say, not what I do" How can I take advantage of you today?

Anonymous said...

Hey, let's invite Ted Butler on for some market manipulation comments as well.

Market manipulation = trade not working out excuse.

Gary said...

Personal attacks made under "anonymous" ... a bit cowardly?

I don't follow the gilt market, but over here in the colonies, Ben Bernanke openly states he is buying Treasuries to drive interest rates down. Manipulation is right out there in the open. Its in official government statements

Plenty of english majors wrote newspaper stories about the housing bubble -- but somehow the MBAs on Wall Street were completely surprised?

Its one thing when "greed is good" and you rip the face off some poor old widow -- what self respecting titan of Wall Street cares about her?

But when you drive your own bank into insolvency, a little mea culpa might be in order

Steve said...

Given that macro players are frustrated and need to rack up a game's worth of points in the 4th quarter (if I can do a little projecting here), I wonder if we will see some Hail Mary volatility for the next few months?

Deniz said...

To add to yesterday's polls, when do you think BoE will start hiking rates and how much by the end of 2010? It seems futures pricing in a 70 bps hike over the next year, less than Fed (91!) and ECB (81!).

I find it hard to believe this outcome. But it seems they have been successful at strong arming ppl who bet on early rate hikes.


Macro Man said...

Well, they're still talking about cutting the deposit rate on reserves, so that's driving some of thos expectations and market priing....

Anonymous said...

Sorry, I should have been clearer. Conspiracy theory manipulation is nonsense. As for public statements, that is not manipulation, it is another form of debasement of currency, along with keeping short rates artificially low. Big Deal.
I think it makes zero difference to the market price. If government bond yields want to rise, they will rise, the government be damned. They are in a 25/30 yr bull market, so I find it bizarre why the government feel the need to buy the long end....

Anonymous said...

Gary, current yields are »saying« lots of things, listen: thanks for monetizing us out of our MBSs gone astray bets to the tune of 1,25 T$ into (psst shorter) Treasuries. Also from another angle: we are still OTCing those IRSs while pretending to hedge our off BS book. And also from one other one: thanks Ben for that minor $300 bn of outright »bid« right after “bought”. Then there is: we will not turn vigilante until you continue to bail me out of every elsewhere.

That is a lot of things being said there; IMO.

Karen said...

Exactly, anon @ 4:21.

Anonymous said...


such inflationary pressures on the UK housing market....

the real cost of borrowing now is huge

Anonymous said...

bradley date today (and yesterday)

u can hear the tension in everyones comments for a reversal - and weather is changing

we go lower -bonds say it, crude says it


Gary said...

Anon 4:20 -- monetizing debts and past trades gone bad **is** manipulation.

In the "old" (pre Greenspan) markets, there was a meritocracy. In Liar's Poker (the book and the game), the saying was "no tears". Make whatever bet you want, but if it doesn't work, take your lumps like a man and move on to the next trade.

The whiny cry babies of today don't want that. Tears flow, Paulson gets on his knees before Pelosi -- and every half wit loser gets a bailout.

By "manipulation", I mean the politicians are choosing winners and losers over all -- taxing people who made good trades and propping up people who are failures.

Football teams that bench and penalize players who do well, and reward players who stink but they have the right political connections is bad mojo -- no matter how you try to spin it.

That is what I mean by manipulation, not any specific trade

I don't think you can derive any meaningful message out of Treasury yields here other than: the politically connected will be protected at all costs, and screw everybody else

Not a healthy market at all

Nemo Incognito said...

Given the importance of politics in this market, Bernanke's comments strike me as odd. In Australia (where I'm from) there's now a pretty punchy debate about whether to stop fiscal stimulus in order to keep rates in check, could it be that the US might find a similarly open debate starting soon? Ie, if things "feel" good for a bit and front end rates appear to be causing mad asset bubbles left right and center (and they certainly are) could the bearded one be tempted to raise rates given that Barry is unlikely to pass up an opportunity to hand out money just like every other elected official in history?

jbr said...

Nemo, about your AUD trade.

What do you think of Hugh Hendry's comments on it?


Nemo Incognito said...

I have no idea what structure / position has on but the risk/reward looks good to me on the short side for now. I've got stops as one should since timing is uncertain (and commods/RBA driven) but all is not well down there. Apparently we are going to see some 1-2bn distressed commercial RE and small biz portfolio soon out of one of the smaller lenders which makes me think that the guys who get all the real loan performance data on a day to day basis are not buying it.

leftback said...

Gary: About bonds. You need to think about it this way: Let's say I am a bank, LeftBack BancCorp. LBBC can borrow from the FED at 0.25% and buy 5-yr Treasuries with a 2.375% coupon. They can do nothing and make money. That's a much lower risk trade in this new era than lending money to a hairdresser who makes $20K/yr who wants to buy a $1M house. Similar arguments apply to Baa corporates.

Now think about the size of the debt market and all the junk paper that is still out there on balance sheets, and how tight spreads are right now. Think about this and you'll see why Treasuries are not going to blow up here. Any deterioration in credit will drive a flight to quality and Treasuries will benefit. It doesn't have to be an End of the World trade like last year - just a modest widening of spreads will do it.

Gary said...

Leftback -- I got the carry trade. You make 225bp (per year) **if** you are on the chosen list Geithner / Bernanke wants to win.

Two new firms I know started by ex-primary dealer traders are sticking to 100% agency trading (just handling customer flows, no prop positions) because they don't get the political insider borrowing rate.

Hedge funds are in the same boat -- they don't get the politically set rate.

Joe and Jane Q Public, also known as the fools paying for this mess, are lucky if they can borrow at 5% -- which is why they are (and will continue) to invest by paying down debt.

As for LeftyBank Inc... the BPV on a five year bond means you can lose your carry for the whole year with a roughly 85bp move -- something that happened this year even if you omit the January-March fiasco.

But the losers of Wall Street don't care about risk -- risk management is for suckers who have to earn their keep!

If the carry works out, Goldman traders will tell us how smart they are and how they worked so hard for their $10mm bonus.

If 5yr rates back up to 3.25% (where they were last fall), the losers will say they could never have anticipated that, and they will demand another taxpayer bailout.

And the really bad thing is, traders / risk managers with actual talent will get nothing either way.

Wall Street is being run like the old Iraqi football (soccer) program: Uday and Qusai (Saddam's sons) always had to win. Losses were blamed on everyone else. If some other teammate scored a goal, Saddam had him beaten or killed.

Goldman / Pimco / Blackrock are the new Uday and Qusai. They are feared, but not respected.

Not a good thing for the markets or the industry

leftback said...

A couple more flation bears for you here, Gazza, David Rosenberg and Ambrose E-P, on different measures of velocity, which many think is the critical determinant of which "flation" we are having:


No way of knowing which one of us is right, but just be aware of the other side of the crowded trade.

respectfully, LB