Not The Best Start

Tuesday, October 27, 2009

Macro Man's not had the best start to his day. Macro Boy the Elder, giddy that half term school holidays have arrived already, woke up at half past four this morning and decided that he wanted to watch television. He was swiftly dispatched back to bed, but the harmony of the night's sleep was shattered.

Then, when it came to catch the train this morning, the great British railway system performed its predictable collapse in standards whenever the clocks change by offering a half-length train. There's almost nothing worse than being crammed into a cattle-shed train at 6.30 am with some guy's butt three inches from your face. One of the few things that qualifies is being crammed into a cattle-shed train at 6.30 am with some guy's butt three inches from your face and spilling scalding hot coffee all over yourself.

Another, if you were limit short dollars, was yesterday's price action in foreign exchange. While USD/Asia has had a bid tone for a week and a half, as recently as yesterday morning EUR/USD was at its highs. Cue a correction, a break of a highly-visible uptrend line, and a lot of head-scratching.
The dollar's gotten further support from a Steve Beckner article suggesting that the Fed will say that they give a crap about the value of the buck. At the same time, things are starting to look a little wobbly. It's interesting to note that the star performers of the summer, turds such as FNM and FRE, are down nearly 50% from their recent highs. Meanwhile, European banks have been clubbed - ING is down 25% in the last 2 days- even as the macro data offers little comfort that it's all sunshine and sweetness in the pipeline. Today's M3 growth data in the Eurozone showed continued straight-line deceleration...not exactly good news.
It's not just European banks that are wobbly- the BKX also looks dreadful. Perhaps it's just a wobble...but maybe not. While it's certainly not out of character for markets to test the resolve of weak hands, there has clearly been a bit of a shift in the tone of the reflation trade over the past week or two: it's gone from fairly relaxing to rather bumpy.
In markets, as in sports, it's not about how you start but how you finish. Macro Man's month appears to be ending as his day today started, so he's gotta put his nose to the grindstone to manage risk and turn this sucker around.

Posted by Macro Man at 9:15 AM  

34 comments:

Look like its all on for the likes of LB.

Nemo Incognito said...
10:14 AM  

MM,

in terms of the M3 chart, what impact does (or should) that have on various markets ?

Anonymous said...
10:30 AM  

We've all been head-scratching and flamingo-passing for a while but meanwhile the markets have been roaring ahead, which they might continue (restart) to do. But consider this - we're looking for why, rules and relationships while the reality/market gap keeps growing. But you've actually said it but not quite used it as a new tool.
Two things could be the drivers: Risk On and Liquidity.
The world didn't end so it was safe to do stupid things again. And with ZIRP, TALK,QEsqurd plenty of free drinks to do it with.
Add in fantasies about what's going on in reality as opposed to what people really want to believe and voila'.
Betcha it explains many of the trends and trades we're seeing.

dblwyo said...
12:20 PM  

I think it's fairly simple. When governments were taking on $150-250 bn of risk assets per month, prices went up. Now that governments are taking on $50-150 bn per month, and prices are elevated, prices are being held in place. When government buying goes away, risk assets drop.

Where I differ from LB is that I think bonds drop too. No sector rotation will work ... you will have to short risk.

PJ said...
12:45 PM  

if ur selling risky asstes, betcha bond go bid. the only scenario scearios under which both consistently go down is an inflation scare (we are are still deflating) and a large soverign credit re-rating or default. that ain't happening either as taxes and money priting can still be increased. that and the credit rating agencies being useless and toothless.

Anonymous said...
1:41 PM  

Er have learnt that when the powers that be are in that mood, never think you've seen the worst - you don't want to be proven wrong - people might go on strike or you might see that same guy and this time he has his dinner with him, vinegary fish and chips - that when you know god is having a chuckle on your account.

As for the reality market gap - still believe it's cos no one wants to miss out on any gains - what else is there to do with all that cheap govt sponsored liquidity going around. There's only so much fun thumb wrestling!

Judy said...
2:05 PM  

LB thanks everyone for their comments and suggests that all bonds are not created equal. If we were to enter another phase of deleveraging, then an unwind of the dollar carry trade would likely ensue, and less risky assets such as Treasuries and IGs should then outperform more risky assets such as high-priced commodities (especially the shiny stuff) and the various forms of high-yield available.

The recent Lazarus-like rise of the USD from its death bed and the decline in the price of turds (FNM, FRE, BKX) highlighted by Macro Man suggests that such a move might indeed be in the offing.

leftback said...
2:51 PM  

The US consumer confidence report suggests that the reality of the economy is going to catch up now to the 'reality' of the high risk asset plays.

Anonymous said...
2:55 PM  

Actually should be the other way around shouldn't it.

Anonymous said...
2:56 PM  

have to concur with leftback..

if equities were to fall off a cliff in the next few weeks, the Fed's testing of the waters with the possiblity of beginning to withdraw some of their QE will quickly fade

the brokers who i trade treasury futs. with, tentatively agree that more professional players are short now than long

add to that a bullish seasonality for treasuries into nov-dec..

conclusion:
we could get a massive squeeze in treasuries and bunds, gilts.. but the equity market needs to have a few bad days for that in the next week or so

spagetti said...
3:23 PM  

Second that LB. I am still surprised how many bond bears there are out there. MM's chart on European M3 growth highlights the steady decline in money growth in the Eurozone and private sector credit is contracting in the US which is obviously disinflationary (if not deflationary). The final point to note is that primary trend on US Treasury yields is down, not up.

Skippy said...
3:24 PM  

And yet peculiarly, in all this risk-off actions some ags just won't get hit. Hogs come to mind. Could this be decoupling: bonds go bid and equities get sold in the west and inflation in the east? I certainly hope so.

Nemo Incognito said...
3:27 PM  

Ag inflation at the same time as aggregate demand led disinflation in the Anglo world might be very problematic for Asian central banks

Skippy said...
3:42 PM  

anon @ 2:55 consumer confidence - oct figures are in line once you take seasonality into account

re: risk off / unwinding... keep in mind that junk / corporates have outperformed equities, and that is where the flamingo should next visit if it wants to get the party started

Anonymous said...
3:46 PM  

consumer confidence = garbage data

$gaso is up, my neighbor lost his job, weather turned cold, had to buy heating oil, can't sell the McMansion.

leftback said...
4:36 PM  

consumer confidence = rate of change of stock market + level of gas prices

Anonymous said...
4:44 PM  

Even a broken clock is right twice a day...just not for very long

Anonymous said...
5:10 PM  

Is it just LB or was the recent selling of Treasuries leading into this week's auctions rather predictable? Looks like there was plenty of demand for the 2y.

If LB was right twice a day, LB would do rather well.

leftback said...
5:22 PM  

Who is going to buy all the US debt? The interesting answer is: we are. Domestic non-dealer buying is up, indirect bid at today's 2yr auction was about where it has been lately.
http://acrossthecurve.com/?p=9687

You can go back to calling LB a tool now.

leftback said...
5:37 PM  

Leftback: I hate to be the one wearing the tin-foil hat, but I have to seriously question the Trsy auction stats.

First, how is it that a nation that can't pay its mortgage bills, credit cards, etc that charge 5.5% or more interest for some reason has loads of money to invest in Treasuries that pay half that much in interest?

Second, the big sell off in advance of the auction is telling. Funds dump the previous auction on dealers, who finance the entire amount with Fed money (because the banks are insolvent on their own).

Next, the same Treasury "buyers" (renters?) snap up the new on the run issue (aka "most liquid in case / when I have to dump it" issue)

In other words, these are not buy and hold investors. This is hot money that could bolt for the door at any minute. Any buy and hold activity is done in the secondary market, with the Fed (ooops, "independent" banks) buying up the off the run issue with some combination of taxpayer money and Fed confetti.

Big banks, run by people who aren't very good at risk management, get recapitalized as Fed zombies. Right hand borrows from the left hand at 0% and lends it back at 3% -- and analysts call this "profit".

By the time the pay / profit czars in Washington are done "fixing" things, a lot of that taxpayer subsidy will need to be diverted to forced restructuring of underwater mortgages.

Hardly the sorts of things one sees in a healthy bond market

Gary said...
6:15 PM  

Gary - certainly an interesting point of view, and far be it from me to remove your tin foil hat, but having recently lived through a rather interesting period of RISK-OFF, I think we are all aware of the potential for Treasuries to function as a safe haven during periods of risk reduction. Remember that we currently have neither economic stability, healthy banking system nor organic growth, but merely the appearance of these things.

This fact will not have escaped many of the more conservative fund managers, for example, the gentleman from Newport Beach has mentioned this recently. Tin foil or not, I think you'd agree that the lower quality end of the credit market is going to go to hell in a hand basket long before govvies do.

leftback said...
6:43 PM  

LB -- didn't you get the memo?

ALL debt is public debt. If you can't pay your debts, Geithner will take them on for you and stick your kids with the bill.

The line between HY/MBS and Treasuries got really blury about two years back. OPEC and China aren't being very secretive that they have figured this out.

Flight to "safety" only works if people believe Treasuries are as safe as Iceland bonds. Ooops, well bad example. As safe as British Empire Bonds in the 1970s? Sorry, another bad example.

I agree that some short attention span people on Wall Street still see Treasuries as "safe" -- but the smart money knows Uncle Sam is not able to pay in real terms (after inflation). Someone is going to get short changed, and SAFE seems pretty sure Trsy bond holders will be on the execution list.

So the best plan is to stay in the most liquid stuff possible (on the runs). If the safety hoax holds, you are positioned. If investors decide to stop kidding themselves, on the run issues will be easier to unload than off the run.

Its not a vote of confidence when hot money is buying only the most liquid garbage. When you are chasing an obvious bubble, you have to be ready to unwind at a moment's notice.

Gary said...
7:06 PM  

LB is not holding Treasuries to his grave here, Gazza. Nimbleness is the name of the game, but there are some other cats who will need to liquidate and unwind at a moment's notice long before the sovereign bond markets blow up. Risk is everywhere, but there is a gradation of risk in the market that will be observed. You must also be aware of the seasonality in this market, right?

leftback said...
7:48 PM  

Some clue as to demand for Treasuries can be seen in the Fed's Z.1 tables on household balance sheets. HH's are still waaaay underweight USTs relative to equities and property. Even a slight change in asset allocation could create a big jump in demand.

Ian said...
10:40 PM  

Would have to agree here gents - my concern on the flows with treasuries more comes from what China does (and god forbid it becomes a net seller due to its own banking shenanigans). US households and those excess reserves have a ways to play out yet.

I'm just hitting it every time the long bond goes over 120 and getting out with a 1/2 pt trailing stop. Has worked out fine recently. I don't think any of us have religious views on securities here - at least I hope not.

Nemo Incognito said...
1:51 AM  

Ian -- I don't see any reason why US households must buy UST just because of some arbitrary asset allocation conjured up by a treasury sell side analyst.

The "over-allocation" in housing will right itself without any trade if home prices revert to historical means of income multiples. No trade is needed there.

And if US households want to save for their retirement (now that 401Ks are decimated), they sure as hell can't do it with bonds paying 3-4%.

Most pensions assume they are going to get 8%. However unrealistic that might be in Warren Buffet's view -- assuming a 6% return (Buffet's assumption) means MUCH higher contributions.

If consumers assume 3.5% return on UST, they would need a massive raise (fat chance).

Face it. The average US citizen is smarter than most sell side analysts. They may not be able to articulate why, but intrinsically they know that UST are not "risk free" when viewed against their expected liabilities (retirement, education, etc).

We are just waiting for the MBAs to figure this out too.

As Nemo says, bonds may still pop up for no apparent reason -- but claiming households are "underweight" UST???

You are really saying sell side analysts don't grasp asset-liability matching as well as the average consumer. That would explain why the big banks are insolvent

Gary said...
5:13 AM  

"The average US citizen is smarter than the average sell side analyst."

Yours, yours, yours. This is the same average citizen that has overconsumed and undersaved for decades, that thought equities would go up 15% p.a. in the 90's and that housing would do the same in the Noughties? The same average citizen that has made America the fattest nation on Earth (on average)because of his inability to say "no thanks, I'm full"?

The same average citizen that has become famous the world over for its willingness to buy a shiny trinket as soon as it's dangled in front of his face or advertised on the box?

You seem to have this belief system that everyone on Wall Street is either stupid, corrupt, or both. That's not been my experience.

And as for why households would buy more Treasuries...look no further than Japan, where a decimated post-bubble household sector has kept >50% of its assets in cash and fixed in come.

Macro Man said...
6:10 AM  

MM,
Correct on all counts.Moreover having managed virtually no real gains since the mid 90's i think you will find the average Joe public will be getting a touch more risk aversion to stock allocation taken on historic averages.They'll likely be willing to give up some hypothetical return for some lower perceived volatility.I say "perceived" because it won't necessarily play out that way at all.

Anonymous said...
6:57 AM  

Gary --- I think you miss one important point, namely that the govt can simply compel economic actors to buy Treasuries. That's what's happening in the UK, where banks are likely to be forced to hold more capital in Gilts.

MW said...
11:43 AM  

Yes MM, the average dumb @ss US consumer is unfortunately much smarter than most Wall St analysts.

Its a sad fact that those of us in the business will have to accept, and then correct, before we can move forward.

All the complaints you made about Joe Average apply to Joe Analyst ... when you make six or seven figures a year and can't make ends meet, you are doing something wrong. When its your business to watch the mortgage market and you are caught flat footed with 50-1 leverage (and more off balance sheet) -- you are doing something wrong.

Joe Average never claimed to be an "expert" in finance. Those of us in the financial industry did, and at least collectively, we made a serious mess of things

Gary said...
6:00 PM  

Gary, come off it. How many Treasury analysts, sales guys, etc. do you think had any control over the size and leverage of their firm's balance sheets?

You seem to have this bizarre notion that the intelligence/talent pool of the financial industry is normally distributed, and its mean is the outcome that we've observed over the past couple of years.

My experience is that quality/intelligence is decidedly non-normally distributed, and while I have no doubts that there are plenty of donuts who blew all their earnings of the past few years, I know plenty of chronic savers.

That there were some colossally stupid decisions made/risks taken by banks is beyond a doubt; to think that the average or median bog standard front office employee was party to those decisions is beyond silly.

And if we want to talk about idiots, why don't we have a look at the hedge fund industry, where all these assholes who clipped 2 and 20 for years turned out to be nothing but long-only highwaymen in a khaki-and-sport-coat disguise in 2008?

Moreover, you don't have to be an expert in physics to calculate that jumping out of an airplane sans parachute is likely to generate a terminal velocity (quite literally) for the jumper. Why do we need to presume a degree of financial expertise to realize that spending more than you earn and making up the difference in borrowing is a bad idea?

Macro Man said...
6:23 PM  

MM -- I think you are missing my point.

No one expects the average consumer to know as much as the skydiving instructor. No one expects the average tourist diver to be SCUBA certified. We all expect and demand that the experts be held to a higher standard than the unwashed masses.

Wall Street should have known better than the average over-levered home buyer. But at least collectively, the big banks are in the exact same shape as the condo flippers.

At the big bank where I used to work, I would actually have more confidence in the judgement of the back office people than front office. Exceptions to every rule in both areas, but as a generalization.

The bigger picture that I guess I am not explaining well: if the financial industry is to recover (for real, not just on paper), we have to re-differentiate ourselves from Joe Average.

We have to re-establish ourselves as the experts we claimed to have been all along

Instead, we are resorting to arguments like "some hedge fund managers were even worse than me" and "it was senior management's fault, I was just a big producer in the front office with no influence at all"

I have zero confidence in this industry crisis getting fixed by regulators or by senior management -- so its time for all the BSDs to speak up

Gary said...
7:07 PM  

Quality discussion there, gents. It is clearly just dawning on some retail investors today that equities can go down as well as up and that Return of Capital is as important as Return on Capital. The banks are already on board, of course.

Once the lesson has been firmly imprinted once again, 3% returns in less exciting fixed income instruments will begin to look surprisingly attractive. Do not underestimate the power of the Japanese parallel. LB was not fully persuaded of this until watching US savings take off last winter, but he has become a convert - if only because investing off this platform has worked so well. Now wait until Joe Public catches on to the idea.

leftback said...
9:40 PM  

LB -- there is no reason Joe Public has to buy UST. Some arbitrary (and ridiculous) asset allocation model by an insolvent bank is hardly compelling.

The fact remains: Joe Public has a very cheap and effective way to get AT LEAST 5.5%... probably more.

All he has to do is ignore his dim witted broker and pay off his mortgage, credit cards, home equity loan etc.

Joe Japan didn't have that obvious investment choice, since they started the game with a lot less debt.

Joe Average knows that 5.5% is much better than the return on a 10yr UST. Now we just have to get the MBA's on Wall Street to catch up

Gary said...
10:46 PM  

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