Friday, October 23, 2009
When market punters chat to each other, which they often do, the conversation almost inevitably opens with some variant of "So how you getting on?"
The typical response bears a striking resemblance to that of high-level amateur athletes. When you ask somebody, for example, how well they ski, it seems that the best skiers almost always reply with "oh, I'm OK." In Macro Man's experience, people who reply "yeah, I'm pretty good" generally are not. (By way of disclaimer, Macro Man was a "yeah I'm OK" guy before he came a-cropper.)
In any event, Macro Man's standard answer to market punters these days likens his mentality to that of a runner on a treadmill: he feels like he has to run as fast as he can just to stay still. Ever since the SPX market bottom on March 9, the year has been something of a grind. Given his largely incorrect big-picture view, Macro Man adopted a sort of macro RV strategy after he returned from his knee surgery.
It has done OK, but as we approach year end and assets appear to be trading largely off of the available liquidity, his strategy has ground to a halt. So at the beginning of this month, he decided to pump up the vol a little bit and become a bit more directional. The problem with that, despite the SPX and EUR/USD trading at their highs of the year, is that it's been pretty damned noisy. The last 72 hours in US equities are a prime example of how easy it is to get sucked into doing something stupid:
The noise surrounding Fed policy and possible exit strategies doesn't make it any easier. For if and when the Fed does withdraw accommodation, it seems likely that today's stellar performers will be tomorrow's home-run shorts. As such, today's trial balloon in the FT on the Fed's semiotics has sparked substantial interest (though curiously, only fixed income markets seem to have reacted.)
While this will certainly be a key theme for 2010, it looks to be a premature consideratoin this side of new year. Macro Man likes to look at a simple Taylor rule proxy, which is the y/y change in nominal GDP. As the chart below illustrates, it has pegged levels and changes in the Fed funds rate pretty well over the past forty years. What's cool is that the chart highlights two periods of overly-lax Fed policy error: the 1970's, which produced high levels of inflation (and was followed by the Volcker Fed bringing down the hammer in the early 80's) and Easy Al's free-money giveaway in the early part of the Noughties.
While y/y nominal GDP is likely to turn up when it is released next week, it seems unlikely to print levels that would be consisent with a need for higher rates until the middle of next year. Still, this game is not so much about predicting what will happen in 6-9 months as predicting what the market believes will happen. Obviously, there are exceptions to that rule, and the longer your time horizon, the more you can focus on your forecast. But in a world of ten-minute macro, market belief matters.
Ultimately, of course, you can't buck the data, as recent purchasers of sterling found to their detriment this morning. Q3 GDP shocked the consensus by printing -0.4% q/q, prolonging the recession, re-opening the case for QE and giving the queen's head a proper slap on the cheek.
Alas, Macro Man's bearish GBP options look set to expire worthless next week. Such is the joy of directional trading, where you have to get your direction and your timing right. Is it any wonder that Macro Man feels like these guys?