Withdrawal Symptoms

Tuesday, October 13, 2009

The problem with heroin, of either the literal or monetary type, is that once you're hooked it's a very tricky proposition to wean yourself of the addiction. Gordon Brown certainly seems to be having trouble even contemplating kicking the habit; his public calls cheering QE yesterday appeared to stand on the toes of Merve the Swerve and co.

The next few months will present an interesting test case as some of the healthier liquidity addicts start kicking the habit. Exhibit A is Australia. The country presents an interesting dichotomy; as a producer of precious and industrial commodities, it has been highly geared to the global liquidity cycle, and particularly that in China. At the same time, domestic demand has remained robust, at least partially fueled by relatively heavy debt burdens (which have obviously benefitted from ultra-low RBA rates.)

So while Australia's export sector is more about developments in Chinese monetary policy than what the RBA does, households and the service sector are more clearly vulnerable to a tightening of policy. So it was with great interest that Macro Man saw that the NAB business confidence survey dipped from 18 to 14 last night. Admittedly, it's come from a very robust peak, and some normalization would be conssitent with still solid growth. But perhaps it isn't a coincidence that business confidence fell as soon as the RBA tightened; it will be interesting to track the evolution of this relationship moving forwards, particularly if and as the RBA starts going in clips of 50.South Korea is another country where policy is widely expected to tighten; with 3m month KORIBOR at 2.78%, 2 year onshore swap yields are currently 4.02%, up some 75 bps over the last six months. Over the same time period, the KRW has been the second strongest Asian currency against the dollar, rising 13.75% (trailing only the Indonesian rupiah.)

Macro Man observed the other week that the Kospi had started lagging the performance of the KRW, and indeed the SPX. While the index is well off its recent lows, its broad underperformance has remained intact. Drilling down beneath the surface, it certainly looks like Korean stocks are under distribution (i.e., someone is selling.)

One thing that Macro Man has observed recently is that the Kospi tends to open on its highs and trade lower during the day...even on positive days. Perhaps unsurprisingly, trends in this phenomenon (defined as the 10 day moving average of the difference between the daily closing price and the open) have tracked index price action pretty well over the last few months.
Interestingly, the magnitude of the recent distribution phase appears to exceed that of the orgiastic accumulation at the height of the summer rally. Now, perhaps this simply represents a nice profit-take on the part of global equity managers, who are re-deployiong the funds in more lucrative markets. On the other hand, maybe Korea is a canary in the coal fine in terms of liquidity withdrawal and a sign that even apparently robust and balanced Asian economies are a bit more hooked on monetary heroin than some bullish commentators would like to admit.

Macro Man intends to keep a close eye on these two markets; the real-time laboratories in Australia and Korea may provide a useful guie to what we can expect when the seriously addicted patients start entering rehab.

Posted by Macro Man at 9:24 AM  


referenes to heroin and the Prime Minister really deserve you paraphrasing the Stranglers with a title such as "Never a frown, with Gordon Brown"

Richie Rich said...
11:13 AM  

you guys all need to buy some gold, silver, crude. Then chillax, and watch the money roll in for the rest of the year. Easy!

Anonymous said...
11:25 AM  

Apparently, the NAB survey was taken before the RBA's hike last week: "As for the Aussie market today, we have NAB’s September business confidence survey. Naturally enough this survey isn’t going to show the impact of the RBA’s rate hike – for that we’ll have to wait for consumer confidence tomorrow." See http://www.businessspectator.com.au/bs.nsf/Article/SP500-Dow-Nasdaq-USD-RBA-AUD-JPY-SPI-pd20091013-WRSHJ?OpenDocument

Anonymous said...
11:41 AM  

if the ten yr changes course. do you still want to hold your crude? just asking


Anonymous said...
11:42 AM  

Sorry, here's a better source: http://www.nab.com.au/wps/wcm/connect/818b39804feb2a24ac13af8460a45bb2/MBSSep09PR.pdf?MOD=AJPERES&CACHEID=818b39804feb2a24ac13af8460a45bb2

Anonymous said...
11:43 AM  

I'm all for the sentiment expressed in today's posts MM, but the issue with the NAB survey timing is that is was done before the October hike. And even before the RBA leaked the October move to Messrs Mitchell and Gittins.

After scoffing at OIS pricing a 5% OCR by end of 2010, I now struggle to form a decent argument on how it will be less than than that. I know it's all reliant on the China story, but the RBA's had as good a read on anyone on that, and they are bullish as ever.


Anonymous said...
11:45 AM  

mpm, my comment was somewhat throwaway. But my medium term thesis is for a risk asset love in for the rest of the year. That includes PMs and equities. In that scenario, treasuries are likely to be weak although not necessarily.

Since I probably trade on a bit more of a technical/ momentum basis than alot of the people on this board, my positions and my opinion are likely to change as the market direction either proves or disproves my view.

Anonymous said...
1:08 PM  

As someone noted earlier the Australian consumer confidence report will be important to gauge domestic sentiment on the rate hike - usually it is taken poorly (Australians are the most leveraged in the world, on average) - but rates are coming from a low level. If the RBA is expected to follow through there may be a meaningful dip in sentiment and possibly spending.

As for Korea, it is amazing to think that the BOK may be second rate hike candidate after the events of late last year - genuine currency crisis, large fall in dollar reserves, serious risk of bank nationalization.

Perhaps Korea may provide an early guide as the export sector is at the pointy end of the global cycle. The early cyclicals in the equity market (which have already priced a V recovery) may provide an early indication if new orders start to fall and global final demand is not recovering?

Korean households are also the honorary Anglos of Asia - leveraged.

Skippy said...
1:35 PM  

re Korea: honestly i think your looking for an academic explanation of a simple phenomenon that could be explained by a little on the ground knowledge. perhaps being a fixed income and fx guy, you don't get good onshore equity color. i would guess that there is some idiosyncratic dynamic relating to onshore accounts driving kospi rather than your overly complicated and convoluted "liquidity induced canary in coalmine" phenomenon".


Anonymous said...
2:09 PM  

Off-subject question: Does anyone know how to find NDF volume on RMB, or if such info is available?

Trying to track China flows...

Steve said...
3:47 PM  

Steve, no, but you can usually get a decent proxy simply by looking at teh premium/discount in the points.

Macro Man said...
3:53 PM  

Thanks MM, good point.

Steve said...
4:02 PM  

indeed QE is like a drug ... once you pop, ya just can't stop. Japan is doin it for how long? Repo operations to keep long end yields low and privide free funding to banks plus money supply ...

The day ECb says they are done, fixings will start creeping up and country sovereign spreads will start blowing out ... Will the PIGS sort out their financing positions in the next year or two ... nope.

And what happens to mortgage spreads in the US once they stop? Who wants to go out and buy some juicy mega rich mortgages sitting on a nice pile of collateral? Same with UK and its lending market.

No way the politicians will let QE come to an end ... market will have to find a way of showing central bank plonkers the way to rehab.

Anonymous said...
4:14 PM  

Market observers will have noted the non-collapse of US fixed income markets today... predictable - and profitable, I might add. If and when the apocalypse comes it is much more likely to visit the NYMEX and the NYSE first, don't you think?

QE is probably going to be an on-again off-again affair, more like: after you, Benjamin, no after you, Jean-Claude/Mervyn etc.

The US QE policy would seem to be key, since it drives the $ up or down and hence the commodity markets, with ECB second in importance.

Non-commodity equities seem more or less irrelevant from a macro-economic perspective and will just follow along. The tail is wagging the dog.

leftback said...
4:30 PM  

Often I will see a move, particularly in equities, and I have to remind myself that it could be a team of cokeheads on the other side of the screen.

A gentleman Seth Freedman has expounded on this theme in his recent tome Binge Trading. Guardian review: "The passages describing the lustful, grasping 19-year-old Freedman making his first coked-up moves as a trader are well handled."

Crisis Management said...
4:40 PM  

Crisis Management, if you have ever had to eject someone from a bar who was off their tits on blow/PCP or similar you would appreciate that there is no point fighting a crackhead.

I can't buy into a lot of these valuations and am valiantly fighting the good fight to stop my fund's PE/privates guys from taking insane illiquid risk in a flows driven market that could easily reverse. God help me.

Nemo Incognito said...
5:21 PM  

You might be right and indeed the pope might speak Latin,BUT ...

1.Earnings Season.

2.Oil and Gold looking bullish to me.

3.USD ($DXY) poised at .76 and flirting with a break below that range.

Now somebody's going to be wrong here and until the BOE cough in November regarding QE intentions is a long time to hold if the above lot go against the gilt play.

I'm glad though that you're happy about buying my bonds off me ;) .They might help you sleep more soundly ,but there again they might just give you a big case of reflux !

Anonymous said...
5:34 PM  


Yes, everything looks bullish at the top, what a lovely view. PMs looking especially like those peaks in the Alps, lately. Do be careful on that cliff, old chap - you can be sure that LB is nimble enough to spot the mother of all bond market breakdowns before it actually occurs.

While you're up the cliff, stop and take a look at the 30-yr history of JGB yields. Or think about the CPI, soaring to the dizzy heights of... zero. Don't you think you might be playing for the wrong decade?

leftback said...
5:50 PM  

Well Nemo just make sure you don't end up underwater.

Anonymous said...
6:02 PM  

Leftback ..old chap ;)

I said "somebody's got to be wrong here" ,I didn't say who. The jury's not yet in with a decision and I've never worked out how to prejudge that ,but calling a top is usually rather silly.

Anonymous said...
6:07 PM  

You don't have to be at the summit to notice that the air is a little rarefied and there might be a shortage of oxygen at Bovine Overnight Camp.

leftback said...
7:34 PM  

I think LB needs to recognize there are some structural issues that makes the Japanese episode different from today.

Anonymous said...
8:38 PM  

Of course, silly me, what a moron I am - the Japanese are fools who perpetuated a series of disastrous errors in managing their debt deflation. Other countries would never repeat those errors by stabilizing zombie banks and companies. Especially the USA, the bastion of free market capitalism.

Cut back US government spending and encourage increased private savings and you can recreate the Japanese scenario rather easily. Or go ahead - blow up the bond markets. Do you really think they'll actually do that? What about all those interest-rate bets on the books at US banks? Do you want to see another exciting episode of "counter-party risk"?

Anonymous said...
9:00 PM  


Anonymous said...
9:34 PM  

I don't disagree that Australia is highly geared to the global liquidity cycle. However it is a common myth that it is overtly geared to China.

Australia's exports to china make up only 3% of GDP. Sure this has grown fast from around 1% in 2005 and expectations are for it to continue to grow.
Australia as a global bet on commodities is misguided. Although, maybe self fulfilling like technical analysis.


Anonymous said...
2:43 AM  

2 days ago on the 12th. there was some serious foreign shorting of the Kospi Index Futures. almost 1 billion dollars worth. Some big foreign hedgies are taking some big bets that Kospi is going down hard.

Gomi said...
3:49 AM  

QE - Japanese experience and now

Sorry if this is a stupid question with an obvious answer to most of you here, but I can't understand one thing: If the Japanese QE and economic management has been so bad for over 15 years, while the US still has some time to change course, why is the Yen getting stronger vs the USD? Why hasn't it been getting weaker all these years while the Japanese economy is supposedly a mess?

Thanks if anyone can clarify this paradox.

Anonymous said...
7:25 AM  

That’s easy these days; “the more you destroy your country the stronger the currency”.

But back in the days, there was “the more you export the stronger the country”. Now couple that with a #destroyed country# already and in come the carry traders and an “economist” that offered help & preach to Mrs. Watanabe. Until unwind. The latter happens to have happened in the face of “quality flight” into another “currency” due to partial “destructions of its country” - these days.

Since then the US embarked on “destroying the currency (unless they need a bump of quality on this road) to make the country #stronger#”, LB happy and the carriers have now finally switched the base.

The economist in between became a Nobel laureate and gold just set the new nominal world record. Not in real terms. Those though will be coming soon to a theatre near you. Then the time for some more destroying of ones country kicks in and that basically is what we’re all waiting here for.

Anonymous said...
9:51 AM  

LB unhappy.

Anonymous said...
10:02 AM  

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