Cats And Dogs

Monday, November 16, 2009

It's been raining cats and dogs for most of the last week (though sadly not during this turgid display, which might have excused the unappetizing fare on offer), so Macro Man has domestic pets on the mind.

After a brief respite last week, it feels like every man, woman, cat and and dog in the world has put in a bid for gold, taking the shiny metal/only "real" currency/barbarous relic (delete as appropriate) to fresh all time highs. Or at least, fresh nominal highs. While gold is starting to get a bit of that "Nasdaq 1999" feel about it, Macro Man is well aware of the quasi-religious fervour of some of its adherents. And if we want to devise a measuring target, looking at the "real" price of gold (or at least, the price of gold deflated by headline CPI) isn't a bad place to start. As the chart below suggests, the nominal price would nearly have to double to approach the early 80's "real" highs, though the metal's subsequent collapse suggests, post hoc, that such levels were, shall we say, bubblicious.

Meanwhile, in currency land, China and America are starting to fight like cats and dogs: a bit of barking and hissing with no real violence. The APEC meeting produced no substantive results, other than a cunningly-timed story in the FT in which China bemoans America's monetary policy settings. Leaving aside the fact that no one forces China to get to the dollar or to set deposit rates at farcically low levels; perhaps we should just revisit the chart of aggreagate money supply growth over the past year-and-a-bit?
Moving along from cats and dogs to flamingos, Japan has hosted the latest painful goolie-squeeze of popular trades. Shorting "Japan, Inc." has been a popular theme over the last couple of months on the deteriorating fiscal situation and underlying demographic challenges. At one point last week, Japan's soverignn CDS premium was wider than that of Spain. (As a reminder, only one of those countries has $1 trillion of FX reserves.)

Anyhow, the worm turned towards the end of last week, and even a well-above consensus print on Q3 GDP (1.2% q/q, non-annualized versus an expected 0.7%) derailed the squeeze in JGBs.
Four or five weeks to build a position and profit, a few days to lose it all. Such are the joys of portfolio management in a position-driven market. It almost makes arguing (or raining) like cats and dogs seem enjoyable by comparison...

Posted by Macro Man at 8:43 AM  


Why does Japan have so many reserves and at the same time so much public debt?

Anonymous said...
10:30 AM  

A small suggestion for next years top trade list:

Buy Icelandic goverment bonds in ISK!

Fully Inv. said...
10:53 AM  

Why does Japan have so many reserves and at the same time so much public debt?

reserves are consolidated in its overall budget position. In fact there could be an argument that it ought to take them out as there's no way Japan could ever ell them in hurry as it would send the Yen down to 40 and destroy the already destroyed.

Macro Man:

I don't understand the Chart as the heading is a little misleading

USDollar rise in various monetary ags....

However I take it the aggs are the relevant Ms for the individual countries, no?

jc said...
11:31 AM  

oops got it... their M's are expressed in US Dollars.

You think that gives a decent picture? It may for China as the currency is essentially fixed. How so for the others?

jc said...
11:33 AM  

jc, the point is that regardless of the sub-optimality of Fed policy, whatever it may be, it's a bit rich for the Chinese to have a of at anyone else for over-stimulatory policies when they've printed more money than the G4 combined. It also, I think, offers a warning signal that the fall out from a legitimate policy tightening out of Beijing could be considerable.

Macro Man said...
11:48 AM  

MM, jc has a point, all lines, except maybe the Chinese M2 line are misleading, especially for people not reading the small print. Who exactly cares about euro money rise, denominated in dollars (as opposed to % growth)?

Your point about the Chinese is still valid though.

Gregor Samsa said...
12:12 PM  


I don't get how the combined line could be higher (more stimulatory) than the rest...That is the green one.

jc said...
12:21 PM  

Listen, I think you guys are over-thinking this. The point was to find a way, in one chart, of doing an apples-for-apples comparison of total money growth (in cold hard cash) in various regions. Taking the local-currency amount of money growth, then converting it into USD, seemed an obvious way to do this. The green line represents that aggregate sum of the individual US, EMU, japan, and UK lines. There's no way it COULDN'T be higher than the rest (given that they're all positive.)

Macro Man said...
12:32 PM  

Yep You're right as it's absolute Dollars... sorry.. there was me thinking percentages again.

Thanks for explaining it.

However I still think its not great to look at when the buck has weakened.

jc said...
12:36 PM  

On Japan - JC has a point about the value of the FX reserves i.e. can they even be liquidated... Not only would an initial sale it destroy the USD (and kill the Japanese export industry) but in doing so it would substantially devalue the remaining holdings in terms of their ability to pay down debt because Japan's 1.1 Quadrillion JPY sovereign debt is all denominated in yen.

Besides total FX reserves at current valuations are only 19-ish % of GDP which means it would cover the next two years of deficits without even paying down principal...

Not too mention the signal that selling the family silver would send to the market about future fiscal credibility/sustainability of the Japanese goverment.

Mugpunter said...
2:43 PM  

Short the yen short the yen. Seriously, and besides all this does this country have any will to change anything? Unless the robots can do the work its all over red rover.

Viz China - yes on adverse effects. Commods would be a good start - copper just can't seem to break out from here.

Nemo Incognito said...
2:50 PM  

Nice break out for copper today: 6765 'as we speak' , on the 3M!

Anonymous said...
3:10 PM  

MM et al.,

Regarding the M2 graph, I think China's M2 growth is in part due to lack of alternatives to deposits for most folks over there. I think a graph at the M3 level would probably not show that steep a rise. In other words, maybe most of the stimulus enacted there ended up as banking deposits, then loans, and other things like stocks. The point being, maybe M2 is not the best metric for this intercontinental comparison... specifically due to the fact that investors in China have little alternatives to deposits. The problem is however, I'm having a hard time finding anything better to suggest... anyone care to help?

SD said...
3:14 PM  

but M2 does include loans..... and by and large it does not go into deposits, bill discounting made up most of the growth in Q1 but since then its been more and more term loans and facilities of a year or more....

Nemo Incognito said...
3:38 PM  

Nemo, I've invented a little machine that whacks me in the back of the head with a hammer every time I consider taking a position in the Yen pairs.

Professional Gringo said...
3:42 PM  

Well for starters we don’t have the US M3 ticks with us anymore as it was »cheaper« to disconnect the series back then, before QE started following certain »deflationary episode« that gave rise to a certain “quality flight”, followed by all those green shoots episode currently in progress. Regardless, I have to disagree on every man, woman, cat and dog in the world engaging in bids for the shiny metal… But, when they start (after the bugs, certain hedgies and now emerging CBs), then the real price could very well try and catch the “by the CPI adjusted one”. But we’ve changed the CPI so many times haven’t we? Now, let us contemplate (on things) in silence and pray...

...before engaging in chasing all those runaway yields again.

Anonymous said...
3:46 PM  

Professional Gringo, I felt the same way until it found this nice little range to trade around. AUD is not the pair though, EUR/USD makes sense. AUD is way too exposed to some kind of Copenhagen/currency pi$$ing contest in December happening.

China consumer anything is all bid again. Looks like this is the year end meltup.....

Nemo Incognito said...
3:55 PM  

Would Macro Man agree that China needs lots of forex reserves to insure against the possible capital flight of all that M2?

RebelEconomist said...
4:24 PM  

Of course not, because the capital account has not been fully liberalized and thus the vast majority of those funds can be forced to remain in China by administrative diktat!

Macro Man said...
4:35 PM  

Bernanke now talking about monitoring dollar developments. Just when the fun was getting started...

Crisis Management said...
5:18 PM  

Good point MM. China is expanding and changing so quickly that what seems like an excessive holding of reserves now may not look so large in future, by which time it may be less convenient for them to acquire more.

RebelEconomist said...
5:22 PM  

Apart froma 5min kneejerk the markets appear to be ignoring anything Bernanke or Geitner say re the dollar and who can say that is not the right response. At some point if these guys are at all serious they are going to have to stop simply talking and start doing something concrete ,but I don't see that happening until the market rams it down their throats which it may well be in the act of doing.

Anonymous said...
5:46 PM  

Another wonderful day of flamingo hunting and goolie squeezes... the family silver would bring a lot if you sold it today... speaking of goolies, all those brave chaps who were short the long end a few weeks ago must be singing falsetto by now... LB will probably put a steepener on now though after this massive move at the long end.

Frankly LB is shocked at Bernanke's seeming lack of interest in DGDF and his apparent willingness to see the return of $100 crude and all of the inevitable double-dip consequences associated with it. Perhaps it's all about inflating away his mortgage and Turbo Timmy's, and gunning Pelosi's AIG stock - maybe TPTB really don't give a fcuk about the rest of us. Shocking.

leftback said...
6:29 PM  

Obama needs to roll up his sleeves and get to work in Beijing ...

To work off $2 trillion, he is going to have to wash a heck of a lot of dishes

Bernanke's promises about the dollar are as important as his assurance that the subprime contagion was well contained; Bear Stearns was a one off event; green shoots; zero chance for a recession in 2010; etc

If the US was serious about protecting the value of the dollar, it would have to run balanced spending and have better balance between industry and finance, and it would need to raise interest rates such that "real" (after inflation) returns were positive. None of those are even on the discussion table.

If you can't pay your bills, you are going to be doing a lot of bowing in Japan and dish washing in Beijing. No amount of spin is going to change that

Anonymous said...
8:05 PM  

Random question for you non-equity folks out there: Why is everyone shorting JGBs?

I mean I understand the premise, but the 1 thing I know about the Japanese govt is that they issue a lot of 10-30yr bonds. So, why wouldn't someone just buy CDS on some highly levered Japanese corporate, which presumably has shorter duration bonds (since the govt crowded it out of the l-end) and thus roll-risk too. Or am I just being stereotypically equity-centric & making everything come back to companies (though even I can't get to equities this time)

Our Man in NYC said...
9:30 PM  

PS. Good day for Treasuries, Gold, and Equities today!

Our Man in NYC said...
9:32 PM  

Why is everyone shorting JGBs?

Issuance and debt levels. The idea is that USTs are going to become the new JGBs - US debt is lower than Japan's as a function of GDP and Japan's savings rate has declined - if this is true, then as money rotates from Japan to the US, JGB yields will have to rise.

We'll see whether this pans out, it didn't for the last 20 years or so. How much debt is too much?

leftback said...
9:43 PM  

LB -- I just meant, that as an equity/company-focused person, why not express that through CDS on (leveraged/poor interest coverage) Japanese companies who presumably have mroe roll-risk as well

Our Man in NYC said...
10:07 PM  

B/c all equities are going up forever....!!!

Seriously, if this comes to pass, then buying longer-dated puts on EWJ makes sense, no?

leftback said...
10:22 PM  

Our Man in NYC - read Hugh Hendry's Eclectica newsletter pg 7 this month - available at marketfolly blog - he reaches a similar conclusion to you (tokyo electric) although also seems to have some stuff on in govvie space as well.


Anonymous said...
10:48 AM  

About the real gold price: it is based on reported inflation figures. I am not a conspiracy theorist, but come on these figures are skewed at best. Better look at ratios with DJIA or oil.

12:46 PM  

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