The Haircut

Macro Man had a haircut yesterday.

Now normally, that's the sort of trivial everyday event that wouldn't come close to an airing in a financial blog, even one as ropy as this space. But this one is different. You see, Macro Man is a big believer in managing his psychology, putting in place a number of little buttresses to help him maintain an optimum mindset to to his job and live his life.

Part of that includes a fairly heavy emphasis on physical fitness: you know, healthy body generates a healthy mind, that sort of stuff. So it was quite jarring when your author injured his knee in February. Not only did it rob him of the ability to maintain his exercise regimen, but it also provided an unwelcome reminder of his own mortality and fallibility. Perhaps coincidentally, portfolio performance trajectory tailed off soon thereafter.

In any event, Macro Man decided to give himself a little psychological crutch to help him through the rehabilitation process after his ACL was reconstructed in April. The day that the surgeon gave him the thumbs up for the surgery and booked an appointment for five days later, he got a "#3 all over" haircut. He then vowed not to get another, not even a trim, until he was cleared by the surgeon to ski again.

Well, it's been seven and a half months of hard graft in the gym, during which time his barnet went from this to this. Well, he saw the surgeon yesterday, and the good doctor was very pleased indeed with his knee, and gave him clearance to hit both the slopes and the golf course come February. And that is the reason for the haircut, and why it was rather significant for your author.

Unfortunately, as noted above, there was a bizarre sort of Ricardian Equivalence at work. While noggin avoided a haircut for seven and a half months, his confidence and his investment performance did not avoid the barber's scissors. Macro Man noted his poor hit ratio this year in yesterday's post. During his time between haircuts, he managed to put together a Sharpe ratio just above 1...but in the context of struggling to generate any portfolio volatility, this generated a fairly negligible investment return. Meanwhile, the SPX rallied 30.3%. Ugh.
Now perhaps it is a coincidence that the SPX sold off a percent soon after Macro Man emerged, newly-shorn, from the barber's. Then again, perhaps not. Time will tell....

Today sees the release of payrolls in the US. While it's tempting to say "ooh, this is an important number", on the form of the last few weeks it will be a non-event. Macro Man has been wrong on a number of things recently, but perhaps chief among them has been his long-vol view for Q4. Simply put, it's been very wrong (Dubai notwithstanding) and very painful. Payrolls perhaps offer a last shot at redemption for the view....maybe it'll put "the haircut indicator" to the test?

Or perhaps Macro Man has already sounded the death knell. To offset some of his long-vol decay bill, your author recently increased in risk in what had previously been a pretty profitable space for him: namely, curve trades at the short end.

Now, yesterday's ECB announcement was perhaps slightly hawkish, insofar as the last LTRO will be indexed rather than fixed-rate. But Trichet went out of his way to emphasize that there was no signal intended and that the move has no implications for EONIA. That hasn't stopped the market from trying to pick the time that rates will normalize; thus far, Q3 on next year looks to be the "winner."

The chart below shows the changes in the contracts on the Euribor strip since Wednesday's close. While the absolute value of the changes in any individual contract are not particularly large, the change in the shape of the strip has been more substantial and, to Macro Man's eye, somewhat odd.
It's just one more item for the bulging drawer marked "Things I Don'T Understand." Anyhow, Macro Man can only hope that he is the "anti-Samson", and that his haircut provides him with increased strength of perception. In any event, Mrs. Macro was well chuffed with the new 'do, saying it makes Macro Man look ten years younger. It's just as well, actually....because managing his book since his previous haircut has made him feel ten years older.