Step Off

Friday, November 13, 2009

Sometimes, you just need to step off the desk and get away for a bit to clear your head. For Macro Man, this is one of those times. He runs a book that can, at times, be quite sensitive to changes in the correlation and/or volatility structure across different assets. When it works (which, knock on wood, is more often than not), it's a beautiful thing. When it doesn't, it's hair-pullingly frustrating.

Take yesterday. Sometime just before 3pm London time, a Reuters headline flashed that "German government fund may be forced to inject more capital into WestLB." Given that the banking system is the sort of seedy cousin of the Eurozone that no one likes to talk about much, it wasn't much of a surprise to see the euro (which your author is long on expected CB reserve flows) take a hit and never recover.
A-ha! Good thing your scribe is clever, and has embedded some Eurpopean banking index puts in his portfolio to guard against just such an event! Except that the European banking index fell a little, then recovered to make new highs on the day, and only afterwords drifted off to close "only" a bit up on the day (at roughly the same time as the euro was making its then-lows of the week.)
Adding to the "fun" was the fact that this very story had apparently been the lead article on the front page of the Handelsblatt, which is available for purchase well before 3 pm London time!

So much for efficient market theory, and so much for efficient portfolio construction. At this point it literally feels like Macro Man has a little trading vampire on his shoulder, picking off his trades one-by-one and sucking the life out of them.

So in an effort to clear his head and get a fresh perspective, Macro Man's taking care of some other business today of a more mundane nature. The market is stelling him to step off.....and he's obliging.

Posted by Macro Man at 10:02 AM  


Seriously, equities are smoking crack rocks right now compared to what FX, rates and even credit (which hasn't done much on this side of the planet) are saying.

I'm going by the 2007 playbook and think equities are the dumbest money in the room.

Nemo Incognito said...
10:21 AM  

I recall a comment from an old timer in 2004 saying that equities are just a creature of credit. He was right! and he is right again...

Anonymous said...
10:30 AM  

I think that junk might actually be the dumbest money in the room at this time.The level of complacency theirin is very high.
Barely a ripple of concern to be seen.Obviously there must be little default risk out there ,right ? It's all been priced in right ?

Anonymous said...
10:39 AM  

"efficient market theory"? I`d
stick with "turd on the run" instead...

Anonymous said...
11:02 AM  

sometimes it'a spectator sport MM.

Cheer up:-)

Anonymous said...
11:17 AM  

it's a rather

juggling coffee is never a good idea

Anonymous said...
11:19 AM  

Hi MM..take a look at this, and provide views if any..

....From India

Anonymous said...
11:20 AM  


What exactly would you be putting your money in at the moment if not equities?

Gold? I don't understand that trade as an inflation hedge. If it's such a great inflation hedge as the CB's are printing money why isn't it $5,000 an ounce right now instead of $1100.

Gold was $870 in 1979 so the idea that it's an inflation hedge despite all the money printing over the past 30 odd years makes buying this crap a joke.

There are two things that have kept up with inflation over the longer term. Land in a decent area and good stocks with good management. Both asset classes have to be managed though.

Stocks are going up and will continue to go up for as long as we have the money spigot going and the Chinese remain with the fix.

In other words we'll see the $100 tomato and a 20,000 Dow.

Anonymous said...
11:43 AM  

One other thing... Gold should be up against all currencies as every CB is printing oodles of money. It's not up much against he Aussie dollar though and the Aussie dollar is basically global liquidity play.

the earlier comment was me.

jc said...
11:46 AM  

I'm not a buyer of land "in a decent area" - that's a population / scarcity & zoning premium / real incomes / credit growth bet. So if you want to get long that you have to be in the right countries like Brazil or Indonesia. Then, you have to not get your assets expropriated.

Its more a tactical view, equities are overvalued in most places given growth prospects so I'd rather lighten up. I don't like gold either on a long term hold, but then again I think the long term is an invention of people who won't cut losing positions quickly.

Nemo Incognito said...
12:45 PM  

You don't have to be a buyer of land. I'm just telling you what's worked as an inflation hedge for the past 30 years.

Anonymous said...
12:58 PM  

Not sure how you can say equities outperform in inflation. Maybe in disinflation, such as the last 30 yrs.

Silver should be an outperformer in episodes of high to hyper inflation. Gold's unit cost would be too high to be the medium of exchange for most economic transactions.

Land with productive value, ideally farmland sitting on top of a large silver reserve ;-p

Anonymous said...
1:14 PM  

MM - I understand your frustration, but are these hedges you put in place such as index puts supposed to protect u from intra-day price movement or from the big moves?

Also, do you employ any kind of statistical analysis before initiating a hedge like this? just curious.

FYI - the ft short view talks about the very topic of European equities versus euro today.

Anonymous said...
1:17 PM  

Why not long USD/CHF as a hedge MM, on a FX theme?

Just curious.


Anonymous said...
2:02 PM  

I think land has worked because populations have increased - it doesn't look so hot in a credit bust with bad demographics even if you've got scarcity (Japan).

Nemo Incognito said...
2:20 PM  

Nemo- I think the dumb money might be in credit these days. Just look at US mutual fund flows so far this year. Not much retail equity buying, but an ungodly amount of retail fixed income buying. HY is on pace for on the best years ever by any asset class, but surely some of the can kicking will result in higher defaults in 2011, no? And I say that having a fairly benign macro view.

Ian said...
2:39 PM  

Too much money chasing too few assets, and much more volatility than before, with buy & hold effectively dead.
We are living in interesting times.

Gregor Samsa said...
2:50 PM  

It's feeling like flamingo time. Crude seems to be stepping up to the plate.

Steve said...
3:00 PM  

Yes, as the gentleman @ 2:02 suggests. why not long usd/chf? The braniacs at SNB intervened last time at what was it 1.06 or 1.065.. was it? And screwed us all... exactly where will they draw the line in the sand now?

And that vampire that you sense MM is the Giant Vampire Squid doing god's work.

Professional Gringo said...
3:05 PM  

I think the market is unshortable.

Anonymous said...
3:06 PM  

crude is not going to hell (yet)although I heard of 10k lots of 70puts traded yday (F10).
Lots of buyers once we get under 70 again.

Anonymous said...
3:14 PM  

Gregor - More like, too much money chasing too few assets for 6-12 months, then too much money fleeing too many toxic assets for 6-12 months, then too much money looking at demands for at least an 8% annual return and rushing to get back into the toxic assets for 6-12 months.

I think we're reversing. Short equities, long mid-curve Treasuries is the trade of the next 6 months.

PJ said...
3:36 PM  

The market is unshortable - until the credit markets reach the point where bondholders realize that they can once again take a loss and that the US Govt will not backstop everything under the sun, including turds.

leftback said...
3:56 PM  

more bad news is good news for equities. fantastic.

Anonymous said...
4:39 PM  

The fact that people think the market is unshortable is a technical indicator that this uptrend is late in the day.

No one wants to fight the Fed, but they've spent most of their ammunition and the lagged costs of stimulus are starting to catch up to the current benefits.

There is manipulation going on - the US Treasury has a $200+ bn TARP slush fund and seems to have placed the money with Goldman Sachs - but it goes only in to liquid assets like the S&P500 index at politically sensitive periods like before health care bill votes. Today SPX is up, but banks are down, small caps neutral. This is what I expect to see for the next few trading days.

Once the Christmas season is a clear failure, with many small business closures to come after it, and a spike in commercial and residential loan delinquencies, we'll see a downdraft in the market.

PJ said...
4:52 PM  

Looks like people have already checked out for the weekend. There are probably some Michigan shorts that need to come off before 4:00 so we could see our traditional meaningless afternoon squeeze, which as a short I always enjoy.

So I got that going for me. Which is nice.

Steve said...
5:04 PM  

Make a stand, bears!
For he to-day that sheds his money with me shall be my brother
(Henry V).

Gregor Samsa said...
6:03 PM  

Ignoring all the crack smoking in equities and HY and thinking only about carry trades for a second... Macro Man, the Eurozone GDP was a really rather miserable 0.5% compared with the "Supercharged" helicopter drop US GDP of 3.5%. How long before JCT is under political pressure from the sick men of Europe (PIGS etc..) to "do something" should the European economy be seen to be deteriorating?

All it would take would be a small 1/4 point move or some jawboning about QE from the ECB and this synthetic dollar/yen carry trade would fall flat on its face. What would be the trigger? Another big problem in a European bank? E. Europe issues? Unemployment in Spain hitting 25-30%?

leftback said...
6:16 PM  

Obama is visiting the US's bankers this week. And in not to subtle terms that only Goldman's PR department could possibly miss, Asia (China?) is saying they aren't going to dump Treasuries, but they won't be buying lots more either.

Never one to miss a stunningly obvious opinion trend, Obama has assured our bankers that he will do something about containing the out of control deficit. Its not obvious how he would do that (if he was serious) -- but the message is clear: there is no more free money falling from the sky to p!ss away on stupid bailouts of failed companies.

While Europe's 0.5% growth may appear anemic, it is less of an accounting fraud than the US's number. After backing out Goldman accounting tricks, Europe is probably less bad than the US (at least before demographics kick in in a year or so). JCT doesn't need to worry.

Geithner is out of ammo, out of ideas, and worst of all out of credibility.

And the health care spending boondoggle hasn't even failed yet.

Anonymous said...
6:56 PM  

Agreed in general terms with the above, and hope you're correct about Obama cutting back on the free money and bailouts.

The inequalities across the economies of the EuroZone are going to become a really hairy political problem of substance before this is all over. How much long-term unemployment will be tolerated before the social unrest becomes significant? The Euro is going to face challenges that it has never confronted before.

leftback said...
7:14 PM  

"President Barack Obama plans to announce in next year's State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 – and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning."

Ian said...
7:23 PM  

"The Euro is going to face challenges that it has never confronted before."

Indeed and when the GBP rises to the summit there's a Maison D'maitre down there in the Charente Maritime with my name on it ..all I want is £2/Euro to make that jump into the sun ..that stuff I was just smoking was really strong ;)

The problem is there are so many good arguments to suggest that none of the major currencies deserve space in my wallet really is a case of which are real dogs as opposed to the one's that merely stink.

Anonymous said...
8:21 PM  

FWIW -- over the last 2-3 weeks, some of the political press have been mentioning that Rahm-bo/the OMB has asked the various cabinet agencies (bar defense/va) to have 2 budgets for fiscal 11 (starts Oct-10) with spending freezes/one with 5% budget cuts.

The timing is suspect (just before Asia trip) but politically smart (get to talk about it in the Spring, roll it out in the Fall just before election day).

Our Man in NYC said...
8:25 PM  

Not that I would want to endorse Lyndon "W Bush" Johnson's bloated government, but Obama needs to make 20-25% cuts just to get back down to Bush-era deficit levels

No one has a spare $1.5 trillion lying around, and that kind of tax increase would put the economy out for the count. The man needs to grow up, and make spending cuts like all his constituents are already doing.

Talking about additional health care spending is exactly like two homeless guys discussing what options they want in their new Maybach.

Anonymous said...
9:04 PM  

Don't worry, Pelosi will whisper sweet nothings into Obamas ear about new gulags and entitlement programs and he'll fold like a cheap suit and sign whatever she wants.

Anonymous said...
9:16 PM  

For those of you who appreciate the quirky style of Hugh Hendry, some classic lines in this piece, where he discusses the non-imminent collapse of the US treasury market and a possible meltdown in Japan, all issues which MM and his readers have chimed in on recently. Gary probably will not enjoy this - especially the part about the inflation protection many people are busy wrapping themselves in... enjoy !

Hendry on bonds and Japan

leftback said...
11:02 PM  

Thanks for the link LB, Hugh is entertaining and thought provoking as always

Skippy said...
1:54 AM  

"Hugh is entertaining" and well paid but curiously underperforming..a great byline for most fund managers..all opinion and little performance.

Anonymous said...
10:44 AM  

The guy clearly has a lot of time on his hands.... I can't get that many cultural references into my posts and I'm on gardening leave.

As usual I think this all comes down to the binary variable: Trade War [1|0]. There are gradations but that's the core of this, whether we go the RMB reval route or whether Obama takes away access to US consumers via tariffs (and thereby gets some more tax income to pay down the deficit while reducing the rate at which it increases).

Nemo Incognito said...
11:14 AM  

If you are saying the global trade imbalance and the associated surpluses/deficits can't simply continue then I agree.The only question is how they are going to be resolved. Currency revaluation and or trade protectionism.I'm not optimistic the Chinese will do anything significant enough to revalue because it is clearly not in their growth interests to do so.
There will be lot's of noise ,bit like Iran allowing inspection rights etc for about 5 years without actually giving up anything at all.Chinese will stall for time ,but the outcome will be zilch action of any note.

Anonymous said...
12:28 PM  

I guess trade wars have gradations - Hendry is right to point out steel and ali in particular as being black holes of excess capacity but that could be readily resolved with some kind of carbon tax for emissions intensive industries. Tariffs are not fighter planes, but maybe in this messed up a world they could be.

Nemo Incognito said...
12:39 PM  

I don't have any faith in Hendry's predictive powers at all.

He got this year completely wrong and seems more prepared to rely on his market ideology than what the market is actually telling him.

Anonymous said...
1:08 PM  

I like Hendry but with his style/strategy he's not going to outperform the market every year. You have to count his good 2008 against his weak 2009, they're flip sides of the same strategy. The people who have done the best in 2009 are the ones who did the worst in 2008.

PJ said...
11:13 PM  

Its high time people start thinking/looking at this rally from a different perspective...


Anonymous said...
2:29 AM  

Hendry's market view is highly problematic. He seems to think that low nominal yields will prevail moving forward largely because... its the least painful option?

I address the topic of low Japanese yields on my blog for those who have interest-

bleichroeder said...
3:00 PM  

The barbaric relic is on fire again today...hmmm

Skippy said...
6:31 AM  

Still long Skippy. Its a bubble, but its liquid and easy to get out of. Small cap gold miners - yours. Its the equity guys who will be holding the bag when this party is over.

Nemo Incognito said...
8:06 AM  

Post a Comment


This commentary is written for entertainment purposes only. Nothing you read on this site is advice or an inducement to buy, sell, or hold any real or hypothetical investment, nor should you construe it as such.