Wednesday, November 25, 2009


It feels like an either/or kind of market doesn't it? With a number of key asset prices (SPX, EUR/USD) approaching their extremes of the year in liquidity-impaired holiday markets, it feels like we're either on the edge of a breakout/melt-up or witnessing perhaps the last chance to sell vol at decent levels before the end of the year.

The dollar has taken a bit of a bashing today against both the euro and the yen, no doubt helped by the Fed's relatively sanguine view in last night's minutes on recent dollar weakness. EUR/USD has traded on a 1.48 or 1.49 handle every day since October 9, so at this juncture it is probably still premature to get too excited about today's move. As you can see, one month realized euro vol is (unsurprisingly) now at its lowest since Lehman went bust.
Still, there's plenty of precedent for big currency moves in thin markets; Macro Man has the feeling that if the previous high of 1.5064 were to give today, then tomorrow may well break the streak of consecutive "1.48 or 1.49" days.

Macro Man's scepticism over yesterday's Shanghai "collapse" proved to be well-founded, as the Comp rallied 2% today. While that scepticism didn't make him any dough, it at least prevented him from doing something stupid, which is at least a start when you're on a cold streak.

Lest we all think that everything is hunky-dory, however, there are a couple of reasons to doubt that the future will be wobbble-free. The FDIC confirmed that its insurance pot is now negative, which is strangely apt insofar as the taxpayers' net return on providing insurance to the banking sector has also been negative!

Meanwhile, in Asia, the State Bank of Vietnam officially devalued its currency over night. Asia watchers may recall that it also did so in May 2008, just a few months before the rest of the world went "kaboom." So far, the rest of Asia andd EM has happily shrugged off the Vietnam news, and Macro Man can be glad that he hasn't been positioned in a Vietnam/metals relative value trade.

As you can see, long dong/silver has not been a winner this year....


Nemo Incognito said...

Hanoi real estate not really coming back as it should which probably means that defending that peg didn't really make much sense.

Anonymous said...

The currency moves of its own. The Bunake reserve belched something about asset bubbles in its scribbles yesterday.

Anonymous said...

Additionally the unshaven moron should not be inviting an attack on his own currency.

Skippy said...

For those that don't follow Vietnam, interest rates were also hiked by 1% to 8%. It was not a huge surprise, but nonetheless a large move in the context of what other countries in the region are doing. The CPI has increased to 4.4% year-on-year, from 3% and well above the 2% low in August. Housing inflation was 8.4% up from 2.4%.

Vietnam may be instructive for some other emerging markets.

Anonymous said...

It's not instructive for Russia which just joined the walk down to zirp. A week after Brazil and Taiwan throw out currency controls. The unshaven goon is going to crash everything with his printing press ejections.

Nemo Incognito said...

rIce rice baby (x2)
All right stop collaborate and listen
rice is back with my brand new correction
Something grabs a hold of EM tightly
Flow like a harpoon bumping CPI sharply
Will it ever stop yo I don't know
Turn off the lights and I won't grow
To the extreme I rock food prices like a vandal
Light up cars on streets with molotov cocktails
Dance on the police car 'til the riot baton looms
I'm killing em political stability like a poisonous mushroom

OK I can't get much further than this. Who normally does the lyrics, Gary?

Key words are EM inflation, rice, political risk, etc.

Anonymous said...

On the otherhand until that unknown point in the future where he does crash assets why not enjoy what there is to grab.You don't have to fall in love with it.I've seen and heard nothing yet that makes me feel this is the moment to stop.
The weak dollar is the best bet the US have to trade back so they're really not going to jump on it unless the bond market goes the wrong way in fright and we have MR LB right here to ensure that does not happen at this point.

Anonymous said...

And here I was thinking that any extention of yesterdays banter would focus on "Dong" puns.

Anonymous said...

"it feels like we're either on the edge of a breakout/melt-up or witnessing perhaps the last chance to sell vol at decent levels before the end of the year."
I could not agree more, we are now on a half way inflection point, where markets either goes all for a "liquidity melt-up" as you call it, or crumble under the weight of economic "reality". Judging from the current dollar action, I believe it will be the former.

Owe Jessen said...

How long have you waited to use the pun long dong/silver ? *lol*

Anonymous said...

Interesting piece which gets to the crux of the original LB v Gary Debate.


Skippy said...

DC, thanks for the link

I think the issue is time-frame. Many of the bulls on Treasuries (such as myself) are probably not planning to hold the position for 10 years.

You may also find a different conclusion if the study was on JGBs over the past 20 years.

Macro Man said...

Re: Dong: really, the only reason I cited it today was to use that gag, which I've been using amongst market colleagues for longer than I can remember.

Re: bonds; I think the buttonwood study is too narrow. I have seen other studeis suggesting that buying the back end of steep yield curve markets and selling the back end of flat yield curve markets tensd to be a winning strategy, no doubt in part because of relative rolldown considerations...

Anonymous said...

I laughed out loud when I saw that.

You're on a slippery slope MM.

Anonymous said...


completely agree its all a matter of mandate timeframe and whilst for smallish pools of capital (<5bn) the HF model is superior it is v. difficult to scale to the size of pension assets hence my sympathy for their conundrum.

I haven't seen any of the other studies MM alluded to but it has at least piqued my interest to go and do some digging.

Bonne Chance,


Anonymous said...


If you recall where you saw those other studies on bond returns based on shape of yield curve it would be most helpful.



Macro Man said...

It was actually at a former employer...they performed the study and then ran a model based on the conclusions. 'Twas profitable when I was there, not sure how it's done since.

leftback said...

"buying the back end of steep yield curve markets and selling the back end of flat yield curve markets"

Agreed. Seems logical, no? Like buy low, sell high.....?
LB likes to keep it simple. Morning, Gazza !!

If the economy stays weak, they can sell the front end if they want and pile into the rear end... of course they would have to pull out in time as things firm up.

Richie Rich said...

I can verify that MM has indeed been using that pun for most of his working life. A huge relief to see it surface in context on here at last. I can finally tick it off my "MM Bingo" card. Still plenty to go though.. :-)

getyourselfconnected said...

Long Dong/Silver, classic!

leftback said...

MM, do you think Tokyo would be happy with USD-JPY in the low 80s? Who is going to blink first? Which rotten-to-the-core banking system will be first to collapse? Answers on a postcard....

Shorting silver*, a bit, mainly for something to do, while waiting for the 7y auction. Lately it seems like the equity markets are strong in the morning and then sell off just before the Treasury auctions.

*Really. Baht not Long the Dong.

Gary said...

I have already argued far more than I wish I had about the yield curve / inflation / etc. So much as this may disappoint LB et al, I have said my peace.

On the steep yield curve issue -- the problem with many of these studies is that they assume price = value. That is, they assume the market is correctly pricing assets, and hence the curve steepness (or lack thereof) is a valid signal.

Hopefully, the last two years have proven beyond any doubt that price = value ON AVERAGE, which means that it is too high half the time, and too low the other half.

The US bond market was mispricing inflation for most of the 1970s - so a relatively flat yield curve signaled nothing.

Today's yield curve reflects blatant manipulation by the Fed and Treasury... even if you believe their actions are necessary, it doesn't change the fact they are openly manipulating bond prices.

So you can't infer any sort of a signal from what is obviously a non-market price

leftback said...

"I have already argued far more than I wish I had about the yield curve / inflation / etc. "

True, and yet you are asking for another informed debate here at Macro Man. In fairness to LB, one most point out that thus far your forecasts of a bond market crash have been proved quite wrong, Gazza. For now, and since midsummer. You are in good company, as it turns out.

MM made the point recently we that we are all investing on politics as much as economics now. Figuring out what is politically expedient or unacceptable has been a useful investing tool.

"So you can't infer any sort of a signal from what is obviously a non-market price"

Perhaps so. LB would suggest that this may well be true of US and EM equities and many commodities. The entire capital market structure is distorted by hot money. The question is, surely: which are most distorted and by how much, and for how much longer? As we discussed earlier, such metastable structures can persist, but not for ever.

According to the Gazza model of stagflation, when it all goes pear-shaped again, what do you buy? Or in Gary's case what can you sell? LB wouldn't trade seats with the G-Man for all the copper in China.

Our Man in NYC said...

Continues to feel like a twerp & must be missing something for being Long 20Yr+ Treasuries...also continues to feel it's his 'best' position.

Anonymous said...

Bond markets have been crashing in silence into oblivion for the last 9 years in a row… but no one, not one has seen that, right?

What crash?

Gary said...

Since no one is going to publish their portfolios on a public blog, lets look at widely traded ETFs for asset class performance:

IWV (Russel 3000) +33.1% ytd
SPY (S&P500 eqty) +31.0%
TLT (20+ yr US Trsy) -15.2% ytd
LQD (Corporate bonds) +17.8%
MBB (MBS bonds) +4.3%
GLD (poor proxy for gold) +14%

Deflation camp down 15%, most other asset classes (even MBS!) up on the year. USD still in DGDF mode... 'nuf said

Happy Thanksgiving to everyone in here in the colonies; and we will see the rest of the world again on Monday

Anonymous said...

fantastic, now since you are a long term investor perhaps you can tell me what all of the above have done over the past 3 years or 10 ears for that matter.

i small a turkey called gary. goble goble.

72bat said...

"price = value ON AVERAGE, which means that it is too high half the time, and too low the other half"
confusing median with average?
could well spend more than half the time on either side, but not affect the average?

Our Man in NYC said...

Wasn't aware we should base our ptfs on what's done well so far this year.

Happy Thanksgiving everyone...though I'd still trade it for having Boxing Day off!

Nemo Incognito said...

I agree with Gary, on the other hand, as a man in bike shorts once said "nothing lasts forever in the cold november rain". Agree with MM - this Yen bounce is looking suspciously like a bottom, or the BOJ is just stepping in front of the bus (again).

Skippy said...

An amusing comment on Dubai I recieved from a sales guy this morning.

"Dubai is in a financial pickle after building the world's tallest tower and biggest man-made islands. After noting that the beaches weren't very interesting, Dubai installed giant wave machines. After noting that beachgoers were sweltering in the still desert conditions, Dubai installed giant fans to create pleasant zephyrs. When beachgoers complained about hot feet, Dubai fitted pipes under the beaches to refrigerate the sand. Dubai's courageous developers didn't seem to notice that Queensland is still much nicer and only a $400 flight away and concept - which seemed so exciting in 2007 - is now starting to look a little silly. Dubai's efforts to create a Financial Hub when others were better placed is is now going the same way."

Nemo Incognito said...

Skippy, I received one sage bit of advice from an older trader and that is that anyone who builds an indoor ski slope is a short. Japan, Dubai, I know they're talking about it in Shanghai now.

Macro Man said...

We've got 'em in the UK as well....

Anonymous said...

Belgium, Germany and New Zealand as well. 1st one opens in the US next year....