Theme d'Annee ou du Jour?

Tuesday, September 08, 2009

The late-summer holidays are finally over, and now it's time to get stuck into a theme. The early returns (which admittedly cannot necessarily be trusted beyond, er, lunchtime today) suggest that theme is one of "reflation."

On the face of it, today's trading might suggest "dollar going down forever", if not "dollar crisis." Yesterday the UN, acknowledged experts in financial mismangement and iniquity, issued a report trumpeting the need for a new global reserve currency, reviving an old chestnut guaranteed to set curreny traders' pulses racing.

Throw in the news of a long-overdue Hong Kong-listed sovereign debt issue from China, and the alternatives to the dollar look even more enticing. Sure enough, Macro Man's currency screen is a sea of red (for the dollar), as it's fallen against everything under the sun (other than the ILS, which has seen CB intervention.)

So is it another incipient dollar crisis, then? Not so fast, my friend! If there were a dollar crisis brewing, shouldn't Treasuries be selling off rather than remaining bid? In fact, the price of everything seems to be going up, at least measured in dollar terms.

The chart below plots the return on six different asset prices- S&P futures, 10y Treasury futures, EDZ0, gold, the EUR and the JPY- since the end of August. As you can see, they're all higher.
This trend has actually been persisiting for a bit longer than the last week...Macro Man plotted the rolling 20 change of these six prices since the start of the financial crisis, and totted up how many of the six were positive. Sure enough, as of this morning all six of 'em were up over 20 days ago.

Over the past two plus years, this has actually been a fairly rare phenomenon: we've registered a +6 on just 14 of 545 days, or 2.6%. And most of those were in the aftermath of the initial Fed rate cut in September, which as you may recall exceeded expectations at the time. Indeed, since the end of 2007 three have been less than half-a-dozen times when the all six of these asset prices have risen together on a 20 day horizon.
What should we take from this? That the theme du jour is likely to be exactly that, soon to be replaced by something else that will encourage asset market returns to go their separate ways? That monetary velocity has yet to show any signs of picking up would argue in favour of this proposition.

Then again, if economic actors are going to start using the huge pile of dollars (and other currencies) that central bankers have dropped from their respective helicopters, mightn't it show up in asset pricing before it hits the official economic data, even on money supply?

So this is the conundrum that Macro Man is wrestling with this morning. His eyes tell him that it's just a big reflation trade. Yet consensus, his own expectations, and the weight of the last 21 months' experience warn that recent price action is just a head fake. But the W-shaped macro consensus is so firmly entrenched that it might need a few weeks of contrary price action to shake things up before re-asserting itself when it's not expected.

Decisions, decisions, decisions. Macro Man is trying his best to hedge his bets, keeping his core view intact within his portfolio while still trying to participate in the speculative orgy of "everything goes up." It's easier said than done, especially when there's a change in cross-asset correlations and volatility.

It's all a bit tricky when you don't know if you're trading the theme du jour...or the theme d'annee....

Posted by Macro Man at 9:28 AM  

45 comments:

You've got to wonder how long CBs will allow this to run before getting a grip. Even Greenspan is warning about inflation and that codger would know.

Nemo Incognito said...
10:23 AM  

Confusing price action. With every asset class off to the races, surely cross/yen was the play. But its seems like it is sell the dollar across the board.

Interesting to see whether USD/JPY will bounce if US bonds go offered later in the day? Yield differentials have been the biggest driver of late.

Anonymous said...
10:31 AM  

Guess it's time to come to grips with DGDF.

Gregor Samsa said...
10:55 AM  

Certainly seems like China is trying to tell the markets something...

The former Vice-Chairman of the Communist Party's Standing Committee told the Telegraph's Ambrose Evans Pritchard on the record:

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market.”

Crisis Management said...
10:57 AM  

Does anybody here know of any proprietary trading houses which operate in a similar manner to the way Commodities Corporation used to? That is, they stake you a certain amount of money, let you trade it in any manner you wish to and take a percentage of the profits? As well as being able to trade your own account?

Anonymous said...
11:04 AM  

Crisis Management, if you look back these guys tend to talk their own book. I am patiently waiting for the long bond to crack.

Nemo Incognito said...
11:09 AM  

I've been trading spot forex with Interactive Brokers for several years now and still have a question. I know there isn't a central market for forex trades. I pay a small commission and the spread is only 1 pip wide. Is IB taking the other side of the trade? How do they hedge so quickly and efficiently when the spread is only 1 pip?

kihei said...
11:19 AM  

Nemo, nice technical gold trade BTW.

Not sure China has much of a book vis-a-vis gold. Some stock in New York owns more than they do. That's the problem.

They try to buy a relatively small amount and they move the market too much.

Crisis Management said...
11:22 AM  

Crisis Management, sounds like copper, zinc, anything really. They could move this another $250 before they get the joke, just like they did with copper. No point on stepping in front of the world's worse investing minds when attached to the world's biggest cheque book.

Nemo Incognito said...
11:28 AM  

Nemo, From AEP: "He [the Communist official] played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth."

Shouldn't forget this was the last country on earth to get off the silver standard.

Crisis Management said...
11:38 AM  

Probably because the witch hunt is on in China to work out who blew up the Rio deal and the government is starting to realize that it might be the same guys who moved copper from $1.5 to $2.9 thus pulling every mining equity along with it. He's a buyer 10% down from here if the YPF and other deals don't go through.

Nemo Incognito said...
11:41 AM  

Add US residential prices to the list of dollar assets getting a bid. The ground level anecdotes suggest the smaller houses have a solid bid under them from cash flow investors.

Anonymous said...
12:28 PM  

kihei 11:19, the FX market is huge, with massive liquidity. Although there's not 1 official clearing house there is a defacto one - EBS or Reuters depending on the ccy pair, but what generally happens is:
1) you submit an order
2) your broker tries to cross it internally with another client, internal trader or whatever
3) if they can't the spot desk may warehouse a little and try to work out of it wherever there's liquidity (typically EBS/Reuters or possibly hotspot or currenex).

I should also say that, although you can deal at 1 pip wide, top clients can (at liquid times of day) deal small amounts in less than 1 pip, so even if they just paid the market to get out of your trade they could still profit.

Anonymous said...
1:10 PM  

as an outsider (not even pa)...
what if this is the top for Gold ?

i only hear abt the upside from everywhere.. disregarding the China talk, the charts look like gold topping, and the dollar bottoming. although DXY could be breaking down here.. but my feeling is that it will bottom in 1-2-3 days

spagetti said...
1:38 PM  

"the charts look like gold topping" Since when did a commodity hitting a new high out of an extended consolidation period look like topping, on a technical basis?

Come on guys, whether you like it or not and whether it makes "fundamental" sense or not - Gold is probably going up, possibly substantially from here. And I wouldn't bet on the dollar holding up too well either.

But if you want a real tip for something to trade over the next few months the dark horse here is Silver. You will get a larger bang for your buck there than Gold, imho.

Anonymous said...
2:03 PM  

or just any high dollar value per ton metal. that and a lot oxidation rate make for easy storage.

Gold
Silver
Platinum
Palladium
Rhodium (dark horse, my favorite)

Nemo Incognito said...
2:10 PM  

Nemo, is rhodium traded on any exchanges?

belektron said...
2:36 PM  

When traders start talking about rhodium, technetium and einsteinium as dollar hedges, it's a crowded trade. Gold traders love to whip up a hysteria and then drop it like a stone. We will see many such episodes.

leftback said...
3:06 PM  

Anon 2:03

it just feels sooo consensus to see dollar shoot higher and the dollar lower. last year we had the same story with oil. then it was supposed to go to 200.

spagetti said...
3:22 PM  

11:04, most of the big macro funds operate like that. Tudor, BH, SAC. But the bar to entry is incredibly high. Also, it seems like GS (who bot CC) gives its prop macro traders a great deal of leeway. Again, you can't just show up and ask for a desk though.

CC sounds like it was a pretty amazing place back in the day. I'm not sure if any of the current "prop firms" are an apt true comparable. I think most of them are only intraday-trading operations.

Anonymous said...
3:23 PM  

With respect to rhodium, at least its a cheap call option on car sales though its worth pointing out that platinum group metals will suffer if this electric car thing catches on - less fuel = less emissions needing to be catalyzed.

Nemo Incognito said...
3:34 PM  

Similarly, all this stuff about lanthanum being important is not going to stick if the NiMH battery gets superceded by Lithium ion batteries (and I think it will).

Nemo Incognito said...
3:36 PM  

I do wonder who is chasing the broad indices up...what do they feel they are getting from it?

Anonymous said...
3:41 PM  

re:lithium, August's national geographic has a multipage spread on it and bolivia

that is a crowded trade!

Anonymous said...
3:44 PM  

Yup. Though the market is likely to be tight unless Evo gets his act together in which case it will crack and crack hard. I'm long Evo being an idiot and not getting the Salar de Uyuni developed anytime soon. Ultimately it has no effect on demand though, the lithium content of a battery is not a whole lot of the cost.

Nemo Incognito said...
3:48 PM  

if you want a hot exotic commodity story check rare metals. AVL on TSE is a good example. These metals are supposed to be in very limited and geographicaly concentrated supply. Used predominantly in electric cars. Closed my AVL longs yesterday, just to parabolic for me.

belektron said...
3:49 PM  

belektron, lanthanum is a rare earth metal and its toast. its more the dysprosium, neodymium and praseodymium that are of interest. Do your research. Yes they are strategic and that's why the Lynas deal in Australia has not been decided upon yet.

Nemo Incognito said...
4:00 PM  

from the chatter here, and the action out there it seems like the long commodities/short USD trade is very much back on. So you have to think - what could disrupt it? I'm not sure there's much that could. But it is getting a tad crowded. Perhaps a useful hedge would be long USDJPY and short treasuries at least while the market is in an expansionary phase - but watch for oil above $80 and yields above 4% - a 'blowing off' signal? As for gold, well it all seems way to speculative for me. Would prefer to be in a useful metal like platinum or palladium.

Anonymous said...
4:16 PM  

Thanks anon at 3.23pm. CC did look a like a great place back then. And it spawned some excellent traders, some of whom are still around today.

Anonymous said...
4:19 PM  

Nemo, I appreciate your thoughts, but did my research. When these juniors (like Avalon or Lynas)rise 5-10 fold, and their market cap crosses a couple of hundreds of millions without an ounce beeing mined, it is wise to get out IMHO. And so I did and took my profits. Although could be a really interesting long term story and a whole new industry could be born. But for anything else than short term investment I prefer miners that actually mine or undiscovered juniors. Do you maybe have any interesting names in rare metals universe?

belektron said...
4:24 PM  

Not particularly especially at these levels. My problem with the space is that everyone thinks lanthanum is the philosopher's stone of electric cars whereas its actually going to be done within 5 years. Most of the other applications are so niche and specialized (fighter jet orders anyone?) and specialized laser components. It also depends on the component mix of the actual mine.

When something gets this hot and most people don't even do the research on the end demand I'm inclined to focus on something else.

Nemo Incognito said...
4:29 PM  

I wouldn't buy gold here, no way. There is a very large reverse head and shoulders forming, and depending on which gold instrument you use (spot, lead contract, etc) it has not yet broken up convincingly. If it were to get up to $1030 or so it would be more bullish but there have been so many false breaks lately that it would be a dicey proposition.

And if gold is so bullish, why are bonds firm, and stocks consolidative rather than at new highs as well? Shouldn't crude be over $75?

Steve said...
5:54 PM  

Is the USD tanking today out of concern for / uncertainty of Obama's health care speech tomorrow?

Regardless of one's opinion of government run health care vs private insurers -- the cold hard fact of the situation is the U.S. can't afford the spending already on its books.

If forex traders (and China) are worried about the US's ability to service its debts (in real terms) before -- a new multi-trillion spending proposal (regardless of merits) will only make things worse

US states like California and Florida have experienced net emigration (people leaving the states) for the first time in their history -- and departing residents blame high taxes.

New Jersey Governor Jon Corzine (democrat) trails his opponent by 10% in opinion polls as residents fear even higher property and transportation taxes.

California has a long history of leaning liberal / democrat -- but even the tree huggers feel they can't afford to pay higher taxes.

The saying in the US has been "California leads the country" ... (see FL and NJ at least)

So raising taxes to pay for new government spending is highly unlikely -- meaning the spending would be paid for with inflation / USD depreciation.

The "Theme du decienne" is "Uncle Sam would gladly pay you Tuesday for a hamburger today"

Gary said...
6:20 PM  

I must say everything feels a bit strange now...the breakdown in the USD smells like a rat now.

Anonymous said...
6:37 PM  

I agree with Steve on gold now. if it closes here I would not want to be long tomorrow.

Also, it can't clear EUR 700 either.

Anonymous said...
6:41 PM  

This micro guy thinks the USD short trade is over-subscribed both intellectually and practically. I think being short the USD at 1.45 EUR / 1.65 GBP is like being short SPX in late February of this year. You might make money in the near-term but the big move is already over and you'll probably overstay (and I did, ouch!).

L/S Equity Guy said...
6:54 PM  

I've been doing currencies for fifteen and a half years...exclusively, for much of that time. I've got one small FX position (nothing in dollars) and haven't been able to see a decent opportunity in g10 versus the dollar in months. After today, I still don't, really. I know a number of very smart guys at great shops who ain't seeing it any better than I am.

Pass.

Macro Man said...
7:02 PM  

maybe i am going nuts. anyway there is a recent Marc Faber interview on some Asian channel where he says his view is the dollar going higher and equities going lower very soon...and David Rosenberg's piece today showed accelerating and ongoing shrinkage of various money supply measures out of the St Louis Fed. That is what probably spooked my mind into thinking the USD was looking strange..

Anonymous said...
7:42 PM  

We all know what's going to happen.

This market is less convincing than the cardboard scenery for a 9 year old's school play. Pretty soon, it is all going to fall down. The questions are: WHEN? and WHAT CRASHES FIRST? Stocks or commodities?

leftback said...
7:56 PM  

I'll drink to that

Anonymous said...
8:57 PM  

Boys,
write this down. The next short squeeze leg in equities is just around the corner. US indices showing typical setup of slightly lower open in tomorrow's session and promptly followed by a black box ramp up.

Anonymous said...
11:46 PM  

Question: Why would anyone want to purchase Chinese Debt after China have just threatened renege on commodity derivative contracts?

byronical said...
5:30 AM  

Good question.

1) Because you want to speculate on the Yuan and don't want to pay NDF levels.
2) Its China, its going up, blah blah.
3) HK retail will be the big buyers, if they default HK will have a massive democracy march just to get their money back.

On the negative side:
1) Its a bunch of HK people and any self-respecting Beijinger knows that they a) stand for nothing and b) have never been known for military or partisan prowess. Nothing a tank down Queens Rd can't solve.

Nemo Incognito said...
5:34 AM  

As Liquidity Drains, So Does Inflation Risk and the Dollar shall rise - well that's how it used to play out.

Anonymous said...
6:47 AM  

Byronical - the bigger question is:

Why would anyone want to buy the debt of a country that runs perennial deficits, has massive public debt outstanding already, has huge unfunded retirement spending debts "off the books", and has stated intentions to continue running deficits as far as the eye can see?

What if that same country wanted to tax successful businesses and use the money to prop up failed businesses of political cronies?

What if the debt of this country paid essentially zero percent interest?

And yet, "investors" keep buying US Treasuries as fast as the treasury can print them.

In the land of the blind, the one eyed man is king. In a world of deadbeats, the country that can pay its debts is less risky than those who can not

Bob said...
3:48 PM  

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