Tuesday, November 03, 2009

Hunting Season

Yesterday was instructive, n'est-ce pas? The ISM was substantially stronger than exepected (OK, new orders dipped slightly, but employment rose sharply to exceed 50), equities popped sharply higher.....and then spent most the rest of the session melting away. Sometimes it's possible to over-intellectualize things: at the moment, stocks trade like they got 'em but they don't want 'em.

When Macro Man hears phrases like that, there's only one thing that pops into his head: hunting season. Flamingo hunting season. To be sure, flamingo-hunting has been in play for stuff like EUR/USD, ADXY, and broad indices for a couple of weeks. But now it looks like the hunters, having bagged their quota of big-game flamingos, have started poaching out-of-hours.

Macro Man wrote about Sunday night's ZAR/JPY carnage yesterday; last night saw the poachers go 2/2, as EUR/HUF was the victim of what is known in the trade as a "drive-by" stop loss run, which is an occupational hazard when you leave stops in illiquid pairs with NY spot desks.

More generally, taking a step back and observing the performance of the "naive" G10 carry basket (long the 3 high yielders, short the 3 low yielders), we can see that (unbelievably!), it has recouped nearly all of its "end of the world as we know it" losses. If you were fortunate enough to put this thing on close to the lows, you no doubt are feeling fine. But the very vehemence of the rebound would suggest that G10 carry is heavily posittioned. Add in the fact that AUD and NOK are especially beloved of reflationistas, and the potential downside for those currencies on a continued flamingo run would seem considerable.
And what of intra-equity market price action? Here, too, we observe an interesting dynamic. The chart below represents the relative performance of a basket of turds (some of whom don't currently exist [though their stocks are still listed], and the rest of whom wouldn't exist without government largesse) against the SPX. As you can see, there have been quite a few peaks and valleys over the year, with the relative outperformance in March and July/August looking like short-covering rallies in the turds.
Anecdotally, however, people have gone long these turds on the flimsiest of rationales, and now it appears to be going wrong. Indeed, the roll-over closely resembles that of June/early-July, a period which happened to coincide with quite a sharp downdraft in stocks.

It's hunting season, all right. How long the season lasts may depend on Chief Gamekeeper Bernanke tomorrow night- that is, assuming that the poachers follow the guidance laid down by the Fed. With so many flamingos turning into turkeys, however, there's probably no guarantees even after tomorrow night.


HoosierDaddy said...

DXY is getting kinda frisky this morning. Someone big "risk off"ing?

Anonymous said...

probably needs Helicopter Ben to subtly alter the Fed language tomorrow to really get any follow through, but it's certainly feeling like the risk is that way...SENSEX closed horribly today too...DXY breaking a well formed wedge on a "quiet" no data day...feels like something is brewing...just needs the cards to fall the right way over the rest of the week...

Saul Bollox-Innit

steveplace said...

If you're searching for a good proxy to MM's turd index, look no further than QGRI.

Judy said...

If even a non-specific magazine like newsweek warns of bubbles , the situation is looking desperate (for lack of a better word). The most interesting part of the fluffy article was the citation of an experiment where traders apparently only "got" the moral of the experiment after it went into round 3. Never fear, governments standing by with liquidity injections should the markets get a heart attack.

Anonymous said...

"DXY is getting kinda frisky this morning. Someone big "risk off"ing?"

I saw that, and thought I was getting bad quotes. I could have made my whole year on that mispricing. :(

Norwegian PMI awful today, and UK construction PMI reversed as well. You mean we are not going to have a "V" shaped recovery?

Nemo Incognito said...

Worth looking at the Canonbury group's latest - sounds like some truly crazy stuff is going to be coming out of congress.

Steve said...

Gold, silver...anyone...anyone?

Anonymous said...

yes indeed ,it's away again and why not.Is anyone other than the IMF wanting to sell their piece of gold ,I know I'm not.

Steve said...

Anon can I borrow it?

leftback said...

Hilarious post today, MM, the Turd Index is a classic. Certainly feels like the big risk arrow in the sky is pointing to OFF now, doesn't it? It will be interesting to watch the performance of the equivalent Turd Backed Securities also.

LB is engaged in the usual pre-Fed activity, which is to say nothing - other than a modest hedge against bond meltdown on hawkish language (not going to happen).
Play the reaction to the FED, don't game the FED...

Gregor Samsa said...

It seems gold is no longer perceived as a risk asset. Is it just me or are FX vols up, too?

leftback said...

DXY, gold, silver all up together. When long-standing correlations start to break down, it's usually a sign that something significant is around the corner, or that some people know something the rest of us are not yet privy to.

Anonymous said...

or that gold is entering its speculative blowoff stage and is about to go ballistic?

Steve said...

That was my feeling LB, we just have to wait and see what the hell is going on that only the particular insiders (and Goldie of course) are privy to.

Gary said...

I facetiously said I was taking risk off the books last week because I was suddenly agreeing with leftback on a lot of things... but beyond the cheap chuckle, I think political risk in the US (and any, ahem, dependent markets) is very high the next few months.

Obama has largely continued Bush policies on Iraq, Afghanistan and the financial mess. The name of the Secretary of the Treasury of Goldman Sachs might have changed, but nothing else.

A lot of people are saying state governor races (NJ and VA especially) are proxy votes for Obama -- and the predictions are not good.

Obama is going to have to throw Pelosi, Frank and Dodd under the bus in order to save his own Presidency -- the US can't have four presidents. Geithner will need to be fired, and replaced with someone less of a Goldman pawn, but not populist / anti Wall Street.

All that uncertainty creates enormous political risks. Not to mention the probability that the world doesn't have a spare $1.5 trillion to lend the US, meaning budget cuts and tax hikes are en route.

If Obama hikes taxes to bail out banks and auto companies, he might as well not bother printing any Obama 2012 posters. But if he gets protectionist and/or panders to populist anti-business factions, the economy will suffer.

The realization that Obama cannot walk on water is just starting to get priced into markets ... so its risk off until Obama actually becomes President (ie neutralizes Pelosi et al in Congress) and until he makes some decisions. The honeymoon is over.

Also, I am suddenly agreeing with leftback a lot...

leftback said...


I hate agreeing with you too, but more change is probably in the wind - LB has said from the first that Geithner would be sacrificed after the worst of the crisis was over and the dirty deeds had been done. Summers too, please. LB would prefer to see a brand new Stiglitz/Volcker team with clean hands come in to tackle the many-headed TBTF beast.

BTW, the steepener we put on that you didn't like is green, Gazza. Just a hedge against the unthinkable. Ain't no tightening from this Fed, not yet.

Crisis Management said...

LB, what do you make of the talk linking today's UST selling to the gold buying?

Gary said...

LB: "Ain't no tightening from this Fed, not yet."

The timing of "not yet" is the root of our disagreement. I think "yet" is sooner than the market is pricing; and I also think "yet" will be decided by exogenous factors... in other words, the opinion / judgement of Bernanke / [ insert new Trsy guy here] / Wall St is irrelevant.

History shows that large net debtors do not call the shots

Steve said...

LB I don't think Volcker is an heir apparent, he himself said that no one is listening to him, and that his idea to break up the banks into smaller pieces is falling on deaf ears.

Seems to me he's one of those kept-in-the-box hat tips to make peace with the right.

Steve said...

Gary history also shows us that in a debt deflation there is no need to raise rates, Japan tried it a few times and just had to lower them again. Some of the hawks may want to take a shot (but none are in any hurry) but Bernie won't go along.

Anonymous said...

Gary, LB agrees with Steve. Think about it, the FED doesn't really set rates anyway, the market just tells them when to do it and it trails along obediently in most cases. I am not a believer in EMH but the bond markets are more efficient than most. The language and the QE are the only variable that is in play here for the time being.

APtrader said...

Regarding DXY - ICE actually cancelled all the trades in DXY Dec futures that were above 77.50 ... And it went way over 80 today ...

Gary said...

Steve -- no matter how many failed investment banks talk about deflation, it simply is not happening.

Debt destruction is about as deflationary as debt creation is inflationary -- nobody was calling for 15% Fed Funds in 2000-2007.

Debt destruction / deflation is just a marketing gimmick. Its a better way to spin "the banks lost a lot of money".

Japan proves rather conclusively that fighting non-existent deflation with ZIRP benefits the banks and political elites -- at the expense of the economy as a whole.

It doesn't help the buy side. It doesn't help the consumer. It doesn't help small business. It doesn't help main street. It penalizes savers to reward the incompetent. Twenty years of "debt destruction" and ZIRP fixed nothing -- but eventually got the LDP kicked out of power.

And this time (in the US/UK/Europe) is not going to be different.

No one cares what "the market" thinks about interest rates. There is no market, unless you are confused enough to believe that Geithner is a market.

The banks aren't betting there own money on Treasuries (or anything else). And they have no one to lend to anyways.

Rates will go up because OPEC / China will decide to protect their own interests.

China can't cut off the US economy "yet", but only Wall Street has failed to notice they are cutting off the US as fast as possible.

China is diversifying out of USD. Saudi Arabia has announced it will no longer use WTI crude as a pricing benchmark. Many Arab countries are talking about pegging their currencies to a basket (not just USD).

If Japan is any guide, Wall Street/ the Fed's failed ZIRP policy will go on for decades and still not solve anything.

The rest of the world will develop alternatives long before then.

The UK ceased to be relevant in the years leading up to WW I. Chaos ruled for a few decades, until the USD emerged as a suitable new global currency at the end of WW II.

The USD's reign is over, if history is any guide. Several decades from now, some other currency will be the global currency.

But more immediately, the idiots in the BoE/Fed and Downing St/White House will whine endlessly about Germany/Iran ... but they won't act because they cannot.

Will the Fed and Wall Street make a lot of noise about ZIRP? I have no doubt. News flash: no one cares

The real economy is already paying much higher rates. Just waiting for the smartest guys in the room to catch up

Anonymous said...

The problem with Bernanke's rates is he has no way to pay for them.

Historically, Main Street subsidized China, who then recycled the money back into Treasuries. Without a huge (and growing) trade surplus, China has fewer and fewer USD to recycle.

ZIRP is going to end because Main Street cannot afford it anymore

leftback said...

Gary, so many things you write are so wrong in so many ways, LB barely knows where to begin... your misunderstanding of today's events is rivaled only by your lack of comprehension of prior deflationary episodes and macroeconomic issues.

Saying that the banks are not holding Treasuries, for example, is plain silly. This is exactly what they are doing, so they can earn risk-free returns rather than entering the market in turds. Japan didn't ALLOW true debt destruction and price discovery, hence the lost decade.

You really are quite a silly chap and really should pay more attention in class when Professor Macro Man is lecturing. BTW, my last three anti-Gary trades have been so successful that LB is thinking about installing you as the Ultimate Contrarian Indicator - the Gazzameter.

Macro Man said...

Come now LB, while I find Gary's screeds against the sell-side to be OTT (as is his belief in the merits of Joe Sixpack, en masse), it's good to have an inflationista or two knocking about. As I've noted before, I see merits in both inflation and deflation arguments, and suspect that they'll both play out...just on differing time scales.

Viz. Japan, I would take issue with your implication that the US is avoiding the mistakes of the Japanese. While monetary policy has been more aggressive, much earlier in the crisis, the US (and Brits, and Europeans) are committing the most egregious of Japan's errors: allowing fundamentally insolvent, huge banks to zombify in the name of "earning" their way out of the mire. It didn't work for the Japs, and I suspect it won't work for the west, either.

And please, by no means hold me up as some paragon of infallibility; indeed, for the past couple of weeks you'd find no finer candidate for your reverse indicator than me, much to my chagrin and annoyance.

Anonymous said...

About the gold, is it India? Just saw the article in ft

leftback said...

MM, LB agrees completely that we are in fact simply recapitulating most of the Japanese playbook. LB agrees that we can potentially have credit deflation and some commodity inflation, but the whole 70s raging inflation thing is totally out the do'. LB has had his own trading nightmares also, and can be a walking contrarian indicator some weeks, or indeed months...

Gary said...

LB -- thanks for making my tirades against the sell side more believable. My problem with sell side analysts (and you I guess?) is they read the headlines, but don't understand the story. Their analysis is sloppy. Yes, I know the sell side "used to be" good. Now they are at best a source for gossip (some true, some false).

Go back and read my tirade again. I said banks are not buying Treasuries WITH THEIR OWN MONEY. That is very different from your mis-read of what you wished I had said.

Insolvent banks betting on Treasuries with printed money from the Fed is hardly a barometer of the real economy.


I have no issue with you disagreeing with me -- I actually debate you (and others) because I learn a lot whether I agree or disagree. I think that is the big advantage blogs have over other news.

But if you are going to make personal attacks and ridicule *me*, not my ideas -- you are going to turn MM's little blog into the next Yahoo message boards

Gary said...

BTW -- I am sure the lawyers will make us do this at some point, so I might as well start.

At no time did I ever say I put on the trades I argue for (against LB or others). Sometimes I believe the stuff I write, a lot of times (most?) I am playing devils advocate.

If I subscribed to sell side analyst's recommendations 100% of the time, I would be broke. But if I went against them 100% of the time, I would also be broke.

I just assumed (maybe wrong?) that other people used this blog as a learning tool, not as gospel truth.

But before the lawyers make me say so: I may have trades on at any time that differ from, or even contradict, my "silly" rants coming from my pea sized brain. I assumed everyone else here did too.

Knowing *why* someone put on whatever trade is often more informative that knowing what trade(s) he put on.

leftback said...

Gary, first LB does really and truly very sincerely beg your pardon, he had no wish to belittle your intellect, macro chops or undoubted trading acumen. But we do see things a bit differently. We'll simply agree to disagree, old chap. You say "to-may-toe" I say "to-mah-to" kind of thing.

It's all jolly stimulating, this flation debate. BTW, Gazza, it's possible to be TWO kinds of bear right now, a deflationary bear or a stagflationary bear. LB is clearly NOT bullish on the present scenario and expects we will see a year-end flight to quality.

In addition, LB is unable to reveal his field of employ, but he can assure you that he is FAR from being on the sell-side, and finds that a rather amusing idea. LB is more of an analytical buy-side type, who likes to hedge his bets. One point of interest is that LB called and traded the bottom on March 6, 2009. Luck, mainly, with a large slice of contrarianism. He has had less luck with the top.

Gary said...

Fine -- toe may toe, toe mah toe

But you still haven't explained why you think we are having a deflation bear economy. Most of the deflation arguments given boil down to banks having massive losses, which is not the same thing as deflation.

Even saying we are having a massive credit contraction (if true) isn't the same thing as deflation (an increase in the currency's purchasing power).

Thousands of articles have been written about the disintermediation of banks -- especially by their best customers (big companies, both public and private). I know quite a few S&P500 companies that have a formal policy not to use investment banks whenever possible (which turns out to be 99% of the time). Private placements / 144a issues, private lending / vendor finance, etc have replaced banks. This has been happening for many years.

So banks were forced down the food chain to, um, less capable borrowers -- but they generally were not allowed to charge a rate to compensate for that risk. The banks used a variety of securitization vehicles to poorly conceal that their historical customer base had been replaced with a much less credit worthy clientele. Suddenly that restaurant in downtown Detroit with the fancy wine cellar realized the local clientele could not afford $500 bottles -- but via securitization, they could pretend like the $500 bottles were flying off the shelves. In reality, the $500 wine drinkers left town 15-20 years ago, the bankers just didn't want to admit it.

This is where all the bogus "credit" creation happened in 1992-2007, and this is where the "credit" contraction is occurring.

Well, I argue that a loan to someone whom you know in advance cannot pay it back is better known as a gift.

Arguing that credit is not available to people who have zero chance of paying it back is rather absurd. Saying that this represents a credit crisis is just dumb.

The sorts of people who USED TO borrow from banks stopped borrowing years ago. They can still get credit via the shadow banking system. They were "cut off" for only a brief period (days, maybe weeks in some cases) in the fall of 2007.

The "customers" whom banks have "lent" to more recently were never ever going to pay their loans back in aggregate, and the credit spread was never enough to compensate.

This isn't debt destruction -- its the belated acceptance that your deadbeat cousin is never going to pay you back that money he borrowed in college.

There is no credit system to restart. Now that the genie is out of the bottle, no one is going to believe these are "loans" anymore. Hence, they are not happening except via government welfare programs (or whatever you want to call the GSEs)

Like Detroit, banks failed to understand their changing customer base, and REFUSED to adapt their products.

So like Detroit, they are screwed. Detroit's best customers buy Hondas now, and the banks best customers use 144a placements and debt issuance direct to the buy side (no unnecessary middleman / bank involved).

Since banks don't understand their business anymore, propping them up with a super steep yield curve is about as useful as lending money to GM.

Its not deflation -- its welfare. Welfare is ultimately inflationary.

leftback said...

Gary, you have a lot of good arguments but they all sound like deflation arguments to me! Without the QE we would be in profound deflation now, and bear in mind that stimulus will become more and more unpopular and less politically feasible.