Friday, February 27, 2009

Bury My Heart At Wounded Knee

"I shall not rest quiet in Montparnasse.
I shall not lie easy at Winchelsea.
You may bury my body in Sussex grass,
You may bury my tongue at Champmedy.
I shall not be there. I shall rise and pass.
Bury my heart at Wounded Knee."

Stephen Vincent Benet, "American Names"

And so the time has come to lay another month to rest. Two down, ten to go. As observed yesterday, it looks set to be another wild and wooly month-end today. Indeed, it has already been so; month-end flows have finally given the yen a bit of support, while the rest of Asia has been smacked badly. The euro has been hit by stops and (reportedly) reserve manager selling, while equities aren't really sure what to make of the Citigroup news or the proposed World Bank bail-out for Eastern Europe.

For Macro Man, it will be a particularly eventful day. Not only must he navigate the usual month end fixing cacophany, but as soon as the sheets are marked and the month is in the books, he will race off to the hospital for surgery on his knee. Naturally, he hopes to bury considerably less than his heart with today's procedure on his wounded knee.

"Bury My Heart at Wounded Knee" is also, of course, the title of a history of the US government's gutting of the Native American heartland. The modern-day economic equivalent, fortunately occurring without loss of life, is perhaps taking place before our very eyes.

For how else to characterize a recession that is, more than a year in, still gaining potentcy? Yesterday's figures were just the latest in a skein of horrible data, a trend which now seems as long as the national breadline. (thanks, BR). Yesterday's jobless claims numbers shattered both expectations and the previous highs, and confirmed that this downturn is being felt in the heartland much, more more than either of the previous two recessions. The all-time high of 695k in October '82 is now within sight.
Meanwhile, the orders and activity data just keeps getting worse and worse. The early-noughties recession was famously all about corporate excess and the IT/dot-com investment bubble. When it popped, it was ugly. This recession famously started with housing and the consumer; the manufacturing sector was generally thought to be in pretty decent shape, because excesses were not allowed to build up after the early years of this decade.

Think again. The rate of change of manufacturing shipments is now considerably worse than anything observed during the last (business-driven) recession, though core shipments (nondefense capital goods excluding aircraft and parts) have not yet reached the early-00's nadir. You may observe a more than passing resemblance to the shape of this chart with that of the earnings momentum chart posted yesterday; while these are two completely different series, they are clearly capturing the same horrible dynamic.

So what is a citizen or an investor to do? Somewhat frighteningly, the answer appears to have a Wild West flavour to it. For as the Bloomberg chart of the day points out (as flagged by SP), it seems as if Americans are spending their pennies on those two staples of raw survivalism, guns and tinned goods. How else to explain the relative outperformance Sturm Ruger and Hormel, maker of firearms and Spam, respectively?
On second thought, maybe that Sussex (or shall I say Surrey) grass doesn't look too bad, after all.....

Thursday, February 26, 2009

The Back Of My Mind

So suddenly, here we are closing in on the end of the month again. And yes, here we are contemplating the passive rebalancing flows that are likely to occur on the heels of yet another month of execrable equity market performance. Early readings would suggest buying USD (again) to adjust MSCI EAFE passive hedges, and to buy equities/sell bonds from the pension crowd.

Macro Man just cannot shake the nagging feeling that equities want to rally here. Not only should month-end flows provide some sort of support, but the newsflow can be construed as at least marginally positive. Here in the UK, RBS earnings were slightly less awful than expected, and the asset insurance program from the government more generous than the martket had thought.

Meanwhile, some tiny details are emerging of the US Treasury plans, mainly around bank stress-testing. (Macro Man can only imagine the thousands of people thinking to themselves "Stress test? You wanna stress test? Try having 90% of your net worth in a stock now worth $2! That's a stress test.) Hell, even UBS has appointed a credible chief executive!

In any event, markets never move in a straight line forever, and having plummeted (in the case of Eurostoxx futures below, nearly 20%) in the last couple of weeks, and least some sort of correction seems likely to be on the cards. Not that Macro Man can really bring himself to be long....he's more comfortable taking positions in longer-term dividend flows than in short term technical bounces. And in the back of his mind, he feels compelled to remind himself just how awful the fundamentals are. (Not that he needs too much reminding- the macro data flow is just TERRIBLE. Q4 GDP was revised down in Singpore to -16/4% q/q saar, and January exports in Hong Kong posted their lowest y/y reading since 1958.)

Macro Man uses a proprietary indicator of earnings momentum to help him model forward equity returns. The chart below shows his indicator (on the left hand axis) along with the subsequent 12 month price change in the S&P 500. As you can see, it's not a perfect fit, but it ain't bad for a one-factor model (Macro Man naturally uses other factors as well!) As you can see, through the onset of the crisis in July 2007, the indicator suggested earnigns were likely to remain resilient.
The chart below updates the indicator with the latest available data. The scales are left consistent to provide an apples-to-apples sense of magnitude. As if you didn't know, the earnings headwinds faced by companies are unlike anything that they or their chief exeuctives have likely faced before.
Literally off the charts! So while we may indeed get a bounce, perhaps even a "tradeable" one, it should only prove to be a temporary respite. To paraphrase Winston Churchill, this crisis cum depression may be at the end of the beginning, but it ain't close to the beginning of the end. This is a bear market, and the burden of proof will remain on the fundamentals to improve to change that fact. And that's something that's never far from the front of Macro Man's mind.

Wednesday, February 25, 2009


Welcome to Macro Man's new digs! The site redesign was rather hastily forced upon him yesterday by what seems to have been an issue with servers of the company that had designed the old template. He cannot really complain, given that the template was free; evidently the design firm offers the same guarantee as your scribe.

Yesterday saw speeches from two of the most important people in the world, Ben Bernanke and Barack Obama. People seem to have given BB a modestly positive reception on his performance, though to Macro Man's eye the headlines seemed underwhelming.

In fact, Macro Man has a confession to make: he is getting policy announcement fatigue. For more than a year and a half, we've never been more than a few days away from yet another "important announcement" or "key speech" or "vital press conference." And sure, Macro Man has had fun tossing verbal (if not literal) darts at the likes of Trichet, et al....but it's getting to the point where he is really struggling to see the utility in parsing every passage of key announcements for fresh developments. It would take several pages of 10-point printing to list everything that the Federales have done since August 1, 2007....and in the grand scheme of things, this panoply of programs, proposals, and procedures has accomplished.....peanuts.

Small wonder, then, that when Bernanke...or Geithner....or any of these guys open their mouths....Macro Man is starting to hear nothing but Charlie Brown's teacher.

As for Obama, Macro Man hasn't really seen any market-based critique of the speech, but c'mon! What can the guy say? The State of the Union is: Buggered!

Such, at least, was the message from yesterday's Conference Board consumer confidence data, which printed an all-time low yesterday (going back to 1967.)

The "good" news is that at least the employment components were not at all time extremes- the chart below shows the "jobs hard to get" indicator. The bad news is that it still jumped a lot, is consistent with an unemployment rate at 8%, and shows no signs of slowing down. So if you wanted to draw conclusions from the isolated datapoint of yesterday's trading (warning: may be hazardous to your investment health), you might say that bear fatigue has set in and the market is set up for a bounce. Certainly a few notable bears (Prechter, for example) are suggesting a good chance of a technical squeeze.

Speaking of squeezes, the rally in all yen crosses remains rampant and in force. A number of crosses broke through the upper barrier of "ichimoky clouds" yesterday, fueling more buying from locals. Also not helping the yen were Japan's January trade figures; although the level of the deficit was moderately better than expected, the collapse in volumes was stunning: exports are now down 46% y/y. That's comfortably the worst reading since 1970.
So given the stunning reversal in the yen, and what he wrote yesterday, Macro Man is now on the hunt for other good risk/reward bets on a reversal. "Equities higher" seems an obvious one, though from a fundamental perspective some of the dividend swap products discussed periodically in the comments section look like better value. Gold lower is another one that Macro Man has played with, but frankly he has struggled to construct a trade that offers a solid risk/reward profile. Ditto with "dollar lower against all but the yen" trades.....the cost of transacting options in the marketplace seems very, very high to him; small wonder many banks are reporting record trading volumes so far this year!

Perhaps Macro Man will have to trawl the Second Market website, which appears to be a sort of financial E-Bay for doubt there is plenty of stuff on sale there cheap cheap! Then again, if you're only willing to pay peanuts......

Tuesday, February 24, 2009


Another day, another dump in equities. Hard as it is to believe, the sense that the (financial) world is coming to an end is becoming almost commonplace. While such resignation is perhaps the stuff of which bottoms may eventually be born, Macro Man isn't willing to countenance much more than a small short-covering bounce at this juncture.

As February comes to an end, more interesting to him is the comfortable fabric of the investment landscape may be fraying somewhat. It's that time of year; Macro Man literally cannot remember the last March that did not bring (at least temporary) reversals and breakdowns of usual relationships. In his experience, January and February are for making money, and March is for playing defense. (Not that it should work that way, per just seems to happen every year.)

In that vein, it's perhaps worth touching on a couple of points that suggest some fractures in the thematic monolith that is Financial Armageddon. Macro Man has already highlighted one issue in recent days, but it's worth touching on again. Given that equities are near or at new lows, and that the economic newsflow remains execrable (Taiwan's exports and IP both dropped more than 41% y/y in January!), one would normally expect USD/JPY to be on its knees. Yet here it is, up nearly 10% from last month's lows, showing a clear correlation break with its supposed anchor, the SPX.
Similarly, one might rationally expect that an equity meltdown would prompt a safe haven bid for government bonds. Yet Treasuries have barely budged with the last 10% in the SPX, and have yet to put much, if any, dent in the step-jump rise in yields at the beginning of the year. While it's true that German govvys have performed quite well, this probably has more to do with intra-European spreads than it does with outright longs.

Now, Macro Man isn't sure what all of this means, other than that he has to be very, very wary of other correlation breakdowns, which could potentially submarine a previously smoothly-running portfolio mix. Correlation breakdowns are among the most difficult and frustrating things to trade from an established book of positions, so Macro Man is trying to keep an especially close eye on his assumptions...which will hopefully save him another frustrating March.

One notable development last night was JP Morgan slashing its dividend from 38c to 5c. Now, this would appear to be common sense, particularly for a bank, but it nevertheless highlights the frailty of one of the major arguments in favour of equities- namely, attractive dividend yields. A quick survey of his Bloomberg shows the SPX with a divvy yield of 3.8%; the FTSE has a yield of 6.4%; the Nikkei has a yield of 3.0%, and the Eurostoxx has a yield of 8.2%. Yowsah! Who needs bonds when you can buy equities and, if not wear diamonds, clip divvys?

JP Morgan highlights your answer. Dividends represent a claim on an earnings stream that a)
may be lower, or at least more uncertain, in the future, and b) need not be paid out to rhe same degree at all times. While it is true that earnings recessions generally see payout ratios rise, it is also a case that there is a limit to everything. Macro Man would humbly submit that an S&P 500 paying out 113% of earnings in dividends is ripe for the type of divvy cut that JPM delivered last night.

More broadly, there is no gurantee that dividends yields will fall. It could be the case that stock get "cheap" and stay "cheap" for a long, long time. Indeed, time was that divvy payments represented a substantial portion of an equity's total return, and Macro Man has maintained for some time that there is a risk that we return to that regime. It is perhaps worth re-posting a chart that Macro Man showed last autumn; there is a long and glorious history in the US (which ended in roughly 1957) of dividend yields trading above government bond yields. This party could just be getting started.
This little wander down memory lane stoked Macro Man's imagination. The first month of the Obama administration has come and gone, and the results from both a policy and market perpective have been underwhelming. (This is an observation, and is not intended to spur unrewarding political debate.) This got Macro Man does the equity market's performance in the first month of this administration compare with that of previous Presidents? With the aid of Bob Shiller's excellent online database, he took a look.

The chart below sets out the equity market price change during the first month of a President's tenure. Grover Cleveland, with two separate terms, is counted twice. The short answer is that while equities have performed poorly during Obama's first month, he has plenty of company; indeed, during Macro Man's lifetime, only Bush I and Clinton have seen the stock market go up during their first month of office.
More broadly, since Rutherford B. Hayes, the first month of a president's tenure has seen stocks go down. Some of this may reflect a "shock value" deriving from presidents who die in office, but that doesn't appear to be the case; Truman and Johnson saw sparkling returns during their first months in the White House. A more cynical theory might be that when new presidents fail to walk on water, markets express their disappointment...and then recover as expectations are set to a more realstic level (and, one might add, a new president's policy platform has time to gain traction.)

Macro Man leaves it to the reader to judge for himself which of these has been in play for the past forty years or so......

Monday, February 23, 2009

Good News and Bad News

"The bad news," said the surgeon on Friday, "is that you have indeed torn your anterior cruciate ligament." OK. This was no more or no less than macro Man had expected. "The good news, however, is that it is a very clean tear with no damage to other parts of the knee. All things considered, the joint is pretty stable." An arthroscopic procedure to clean the knee out was recommended, followed by a course of intense rehab. All being well (a big if, mind you), a stronger leg and a brace will hopefully take the place of a full reconstruction.

Evereywhere he looks, Macro man sees good news and bad news. Staying on the "leg" theme, there was good news yesterday as Macro Man managed to hobble about on a 20 minute walk wearing a brace but no crutches. The bad news was that it was startlingly tiring, and the muscles on his leg have withered to shocking degree. (He was told to expect a rapid atrophying of his quads, but could it all vanish so fast?)

Moving to his professional life, the good news for Macro Man is that his portfolio has rallied handsomely in the couple of hours that he's been logged in. The bad news is that he is still well underwater on the day, having been frankly blindsided by the driveby in the dollar that started about 4.40 last Friday afternoon London time.

Macro Man has a funny feeling about this one. While his Bloomberg chats were full of head scratching and "we're not seeing its" and "oh, it's stops" and even a "someone's sold a billion dollar-Swiss", the rally (which carried over into Asian trading" has a bit of a sinister feel to it. It reminds him quite a bit of the dollar's tumble in December, which started out of nothing but was only ex-post attributed to a massive flow from the nice folks at Voldemort, Inc.

Regardless.....after Macro Man was salivating over a potential key technical break higher in the dollar (against the Sing-a-ling), it's not hard to see why a chartist might think the buck is about to break down. Ugh.
Still, once cannot ignore the news in Europe, either. The good news is that Macro Man's chum Jean-Claude Trichet has managed to pull his gaze away from the mirror long enough to see that credit flows are falling as a result of deleveraging, thereby threatening both the Eurozone economy and the financial system. The bad news is that a ten year-old with a Magic 8-ball and a Tony the Tiger Decoder Ring from a box of Frosties could have figured that out two or three quarters ago.

In the US, meanwhile, the good news seems to be that the Federales are going to take a stake as high as 40% in Citigroup copmmon stock. The bad news, of course, is that there remains a further 60% (as well as BofA!) to be wiped out.

Regardless, the market seems to be in the mood to mambo today, with Spoos up nearly 2% in early trade. (Mind you, it's only 15 points, which doesn't actually seem like that much- and indeed, it wasn'y much longer than a year ago that that would have been less that a percent.) In any event, one dollar cross that has remained relatively resilient despite the (ahem) sound and the fury of recent dollar action is USD/JPY, which this morning has traded back up towards its highs of the year.

If the euro continues to trade well, this could mean a breakout from high-octane crosses like AUD/JPY, which have gone nowhere over the past few months (kinda like the S&P).

All of this probably presupposes a sea change in the trend of equities and the DXY; while Macro Man can certainly see the chance of a further correction, he remains relatively confident in the view that both equities and the euro go lower. The bad news is that it might get a bit tricky for a few weeks.

Friday, February 20, 2009

The Sound and the Fury

Perhaps it makes him a philistine, but Macro Man could never stand Faulkner. Over the course of his (liberal-arts) educational career, your scribe had occasion to pay the odd visit or two to Yoknapatawpha County, but he can't say that he ever enjoyed the experience too much. Still he has to give Faulkner his due; his book titles make excellent plagiaristic fodder for that 21st century literary form, the blog post.

For Macro Man finds himself confronting a veritable tempest of market news, data, storylines and price action, and it's taking all his effort to stay on top of the sound and the fury of the day. Consider:

1) The SGD breaks out. Regular readers will know that Macro Man has followed Singapore for quite some time, viewing the SGD as a good way of implementing his "collapse in global trade" theme. Although it's a bit dangerous to look at the SGD exclusively versus the dollar, Macro Man nevertheless finds it instructive that USD/SGD is breaking both last year's high and a longer term downtrend line. A weekly close above 1.5350 would look pretty darned bullish.

2) The "coffee rule" in action? Time was, if the stock price of a financial went below $10, it was a sign of imminent death- viz. the Agencies, AIG, Lehman, et al. These days, $10 is the new $100- a sign of rude financial health. Macro Man would therefore like to propose a new test of financial solvency: the coffee rule. If your share prices falls below the price of a cup of coffee, you are (pardon the pun) toast. In that vein, two (erstwhile) giants of American banking, Citi and BofA, both look doomed. And indeed, rumours are swirling that both will be nationalized over the weekend. Macro Man doesn't believe the hype...but then again, maybe that's because the "coffee rule" is a more robusta (sorry!) plan than anything coming from Washington.
3) Caveat Dip Emptor. There seems to be a broad feeling across market participants that things must eventually improve and recover, if only by default. Macro Man himself has started to build a "bottom of the drawer" long term recovery portfolio of beaten-down stuff with a limited loss profile. But insofar as we are all turning Japanese, it is perhaps worth taking a longer term look at the original; the Topix made a fresh 25 year low last night. Ouch!
4) What recovery? Earlier in the week, the German ZEW survey printer higher (on the expectations component, at least), prompting at least a few observers to cue up a little D:ream on the iPods. Sadly, this voyage down memory lane may have been a bit premature, as the composite Eurozone PMI lurched lower, with both components making fresh lows.
5) Policy paralysis. Meanwhile, the policymaking in Europe is swiftly becoming even more disappointing than the US. Yesterday's speeches from Merkel and Barosso failed to deliver a concrete lifeline to troubled European nations...indeed, a cynic might suggest that the only thing on offer was a pair of cement shoes. Little more clarity has emerged this morning, as a host of talking heads have offered a lot of bark but zero bite. One proposal doing the rounds would be a series of joint bond offerings, wherein core European countries would lend their AAA rating to their less fiscally fortunate brethren. And to top it all off, it is bond option expiry day today in Europe! Oh the joys (or otherwise) of short gamma....
6) Cuckoo clocks and Crunch bars only get you so far in life. Switzerland has come under the microscope again this week. UBS avoided being charged by the Justice Department but is being pressured to divulge thousands of names of potential fraudsters. Meanwhile, Gordon Brown is calling for world action on tax havens, which are depriving politicos like Gordo of their rightful appropriations. This is the same Gordon Brown that is prime minister of a country whose affiliated territories include the Isle of Man, Jersey, Guernsey, and the BVI...noted tax havens, all of them. In any event, the renewed focus of tax avoidance has helped put a bit of pressure on the CHF over the past 24 hours. It's remarkable how despite fresh lows in stocks, neither classic safe haven currency (yen or CHF) has recently outperformed the euro, let along the dollar.And there you have it: a complete market weather system. Macro Man has his hands full today, managing his book, some options expiries, and a visit to the orthopaedic surgeon to get the official diagnosis. Oh well, things could be worse.

At least he won't have any time to read Faulkner.

Thursday, February 19, 2009

Turning Japanese

Working from home, as Macro Man is doing in the aftermath of his injury, presents a unique set of challenges. While he remains in contact with his colleagues, counterparties, and contacts on a real-time basis (thanks to the miracle of modern technology), it is still all-too-easy to feel out of the loop, especially when it come to the give-and-take of the quotidian on-the-desk banter.

Still, there are some benefits to working in relative isolation. It certainly allows for introspection and a contemplative mien that is difficult to achieve on a trading desk. For example, Macro Man has discovered which song he has listened to more than any other on iTunes (Bohemian Like You, 105 times). That's information that he just couldn't get in the office, no matter how hard he tried. (As you can probably tell, Macro Man is attempting to accentuate the positives of his injury.)

Macro Man has also found his thoughts straying to Japan in recent days. It's been a while since he has written about Nippon, largely because the country has sunk swiftly into irrelevance, a mere side show when compared to the financial crisis Big Top. The yen has rallied sharply over the past year, not because of any particular merit of Japan, but largely because the rest of the world is turning Japanese (no growth, rising savings, and zero interest rates.)

And yet....Japan is managing to to re-insert itself into the global market debate through sheer force of economic decrepitude. Much like the Asian nations profiled yesterday, Japan's economic trajectory stinks. As noted in the comments section yesterday, Q4 real GDP in Japan shrunk by a resounding 12.7% q/q annualized. That's the stuff of depressions. Indeed, y/y nominal GDP in Japan (Macro Man tends to focus on nominal GDP given the distortions caused by Japan's GDP deflator) has sunk below the depths plumbed during the Lost Decade, the nadir which effected the rise of the reforming Junichiro Koizumi.
Morgan Stanley's Stephen Jen articulated an interesting concept a few years ago with respect to the JPY, citing the "economic equilibrium" level and the "capital account equilibrium" level. For most of Macro Man's career, the former has been well below the latter, as Japan has run a tasty current account surplus while exporting zillions of yen worth of capital. On the rare occasions where the two equilibria have aligned, as in 94-95, the moves in the yen have been explosive.

Perversely, however, as the rest of the world has turned Japanese, the directional bias of the two equilibira has flipped-flopped. Even as Mrs. Watanabe and her institutional brethren have brought money home in droves, thereby lowering the USD/JPY capital account equilibrium exchange rate, Japan itself has "turned American", if you will, and its once-impervious external surplus has withered into deficit.

As a result, the economic equilibrium USD/JPY has drifted well north of current levels. How far north is open for debate, but the chart below shows a simple overlay of the leading relationship between Japan's trade balance and the yen. On this basis, the economic equilibrium level for USD/JPY would appear to be literally off the charts- to the topside.

Now, Macro Man isn't suggesting that USD/JPY is going to 150 in short order, if at all. Yet the trend in Japan's external surplus is a legitimate one, and Macro Man has heard some rumblings that Japanese exporters are over-hedged. If that's the case, then we could probably expect them to become net buyers of USD (and other currencies) and sellers of yen into fiscal year end.

At the same time, Mrs. Watanabe now finds herself long multi-year trade-weighted highs, naturally. While Macro Man doesn't expect a return to the care-free carry-trading days of yesteryear, it wouldn 't come as much of a shock for Japanese retail to swing back to shorting the yen, especially if some interesting chart points are broken.
Source: Barcap

So despite the ongoing travails of equities generally and the financials in particular, Macro Man is sensing a growing desire amongst Japanese and gaijin punters alike to have a go at selling the yen. Critically, positioning is skewed the other way, with market positioning embedded long yen.

Perhaps the last word on the subject should come from Japan's (former) finance minister, Shoichi Nakagawa. Say what you will about Paulson, Geithner, Steinbrueck, and Darling (and Macro Man has said plenty!) least none of them were driven to the bottle:

Wednesday, February 18, 2009

Fun With Acronyms

Macro Man is having fun with acronyms today. It started with a visit to the hospital this morning, where he got an MRI scan on his injured knee.

Upon his return, he saw his email inbox full of comments on currency weakness in Russia, India, Brazil, and even China; it seems as if the Big Bad Wolf has managed to huff and puff and blow down even the House of BRICS.

And what of the four little PIGS? German finance minister Peer "there's no crisis in Europe" Steinbrueck admitted this morning that Germany and France may have to bail out entire countries, rather than just dodgy banks.

If the periphery of Europe is looking like a vegetable, it should come as no surprise. One analyst that clearly has too much time on his hands recently suggested grouping Russia, Hungary, Ukraine, the BAltics , Romania, and Bulgaria together into one big RHUBARB pie. Needless to say, the pie is looking badly burned at the moment.

All of this got Macro Man thinking. Regular readers will know that one of his favourite themes of the past several months has been the collapse in global trade, and particularly its impact upon Asia. It would be nice to come up with a snappy, apt acronym for vulnerable Asian nations, wouldn't it?

Just look at Singapore, where all manner of statistics, including y/y GDP growth (pictured below) have fallen off a cliff.
And what of Hong Kong, which has benefited from liquidity, property, and China bubbles over the past few years? Prime real estate on the Peak has already fallen some 20% from, but could easily drop another 30% if not more. Ouch!

Indonesia is rarely too far from any regional tempest, and this time is no exception. Overall economic activity has started to tail off badly, local currency asset markets look vulnerable, and Indonesian trade has collapsed. Exports (pictured below) have fallen 50%, but the trade balance has actually improved, because imports are falling close to 60% y/y. Observe how the export figures are worse than anything observed during the last recession, or even the Asian crisis.
And finally, special mention should be made of Taiwan, which this morning released Q4 GDP figures showing an 8.36% y/y decline. Not only is that the world's worst (non-Zimbabwe division), it's also the worst that Taiwan has seen since at least 1962, the first year of Bloomberg data. (In fairness, there's only another baker's dozen of possible years in any event!) It's amazing to think that it was only three quarters ago that market punters, including Macro Man, were bullish on Taiwan's growth prospects as economic ties to Beijing strengthened. It seems like half a lifetime ago....
So there you are: Singapore, Hong Kong, Indonesia, and Taiwan. Four Asian economies in a world of hurt. But for the life of him, Macro Man cannot think of any sort of acronym that could possibly highlight the state of the economy in SE Asia. Gee, maybe some things just aren't meant to have an acronym. Then again......

Tuesday, February 17, 2009

All the King's Horses

Now that Macro Man has gotten his sob story out of the way (thanks to all for your kind comments and advice), it's time to get back to focusing on the market. After all, Macro Man may be housebound, but market opportunity doesn't accept sick-notes.

When he left the office on February 6, markets appeared to be starting a romance with recovery. Hopes were high for the Geithner plan and the Obama stimulus, the bounce in the BDIY and Shanghai were fingered as auguring an improvement, and the world generally seemed content to play "Shiny Happy People", perhaps the worst song in the entire R.E.M. ouevre, in a continuous loop.

What a difference a few days makes. The administration announcements were predictably short on detail while the ancillary newsflow has been less than rosy, particularly with regard to the credit quality of peripheral European sovereigns, both inside and outside of the Eurozone.

Indeed, a week and a half after the market wanted to look on the bright side of life, Humpty Dumpty appears to have taken a Macro Man-style tumble, and is struggling to get back together despite the best efforts of all the King's horses and all the King's men.

And with that, a number of financial market prices have reached very interesting junctures indeed. The euro, for example, has borne some of the burden of the unraveling of the European periphery, no doubt helped by the "shocking" admission of the ECB that the situation now merits further serious policy attention. The impulsive sell-off in the dollar last December seems like a long, long time ago, and EUR/USD has now broken decisively back below the 1.27 support level. From here, a re-test of the lows would appear to beckon. Spoos, meanwhile, look perched on the brink of a precipice. Now, we have seen this set-up before, and it hasn't necessarily amounted to anything but a painful squeeze higher. But still, you have to be suspicious that futures keep testing this 800 level; the more visits are made, the more likely it is that the next one will resolve into a (potentially cathartic?) downdraft in stock prices. Like many punters, Macro Man is watching this one closely.
When Macro Man left a week and a half ago, the market was piling back into China. To be sure, the Shanghai composite has put in a decent show, though Macro Man still believes that it is dangerous to draw macroeconomic conclusions from onshore Chinese price action. Perhaps more tellingly, a Chinese offical was quoted as suggesting that USD/RMB could trade back to 7.00 after flatlining around 6.83 for the past seven months. Unsurprisingly, punters have scrambled to get out of the 1y NDFs that they put on a couple of weeks ago; Macro Man wouldn't be surprised to see it squeeze quite a bit more.
Meanwhile, bonds have recovered their sheet, most particularly in Europe. To a degree, this reflects the dovish language from the ECB, singalling further rate cuts ahead. In addition, the rally in German bonds may also reflect intra-European spread trades (Irish CDS now trade above Morgan Stanley!) But surely there must be an element of recognition that the real-economy newsflow is dreadful. Japan's Q4 GDP printed a Depression-style contraction, and data on global trade continues to sink into the abyss.
And with the whiff of financial crisis still floating all around us (you can now by a share of UniCreidito for less than the cost of an espresso in Milan), small wonder that the "return of capital" trades are starting to find favour again.

Eventually, of coourse, things will recover, if perhaps not in the guise with which we are are familiar. But it will take a heck of a lot more than all the King's horses, all the King's men, and all the King's stimulus and rescue packages to effect that recovery. More than anything, it will take time; and that is a commodity that currently seems to be in short supply.

Monday, February 16, 2009


When the sordid history of our times is finally written, many years from now, the catalogue of explanations for our current plight will be manifold.

* Avarice on the part of lenders, borrowers, banks, brokers, investors, and ratings agencies? Check. It seems as if just about everyone out there thought that they could get something for nothing, whether it be a million-dollar house with no money down, or LIBOR + 100 with no credit risk. What just about everyone seems to have forgotten, however, is one of the oldest rules in the book: if something seems too good to be true, then it probably is.

* Stupidity from many of the same people. As excuses go, "I didn't understand the risks" is a pretty lousy one, particularly combined with a venal attempt to get something for nothing. You may not have understood all the risks in their full mathematical glory, but surely some kind of bullshit detector should have gone off when someone offered you a $999,999 mortgage without either knowing or caring that you made $18,750 per year? And for anyone running a complex financial model, as the ratings agencies did, to say that the model won't work if the price of the primary input starts to fall, as the ratings agencies did...well....Macro Man is left to wonder if the agencies' subprime pricing models were written by Cap'n Crunch.

*...and of course, no tale of financial or economic woe would be complete without a healthy dose of hubris. From Ralph Cioffi to Dick Fuld, Peloton Partners to Fannie Mae, CBR to Peer Steinbrueck, the list of people and instiutions who thought that "that can't happen to me" is legion. Special mention should probably go to Fred "the Shred" Goodwin, who led the charge to consummate what may have been the stupidest, most ineptly-timed takeover in corporate history. What does it say when less than a year after the consortium gained approval to take over ABN, two of its three members were getting bailed out by their governments?

Of all the faults in any financial crisis, hubris is usually the most difficult to forgive. Greed is, to some extent, hard-wired into the human psyche, an inheritance from our ancestors' days as hunter-gatherers. As for stupidity, well, P. T. Barnum supposedly (though apparently, apocryphally) said it best. But hubris, ah hubris! The most popular drama in finance is the morality play in which the ruthless, unscrupulous, and very possibly immoral high-flier finds that bad things can, in fact, happen to him, usually in spectacular fashion.

And yet this morning Macro Man finds himself with a touch more sympathy for those hubristic authors of Icarus-like descents. For on Friday, Macro Man found himself tearing up meter-deep fresh powder off of the black Combe de Caron run in Val Thorens (pictured below, in considerably less snowy conditions.) A few hundred meters above the end of the run, Macro Man's friend suggested that they ski back onto the piste, where turning down the steep slope would now seem easier than ever.

"Why would I want to ski on that," said Macro Man, pointing at the piste with his pole, "when we have this," indicating the deep bank of largely-untouched powder.

Why, indeed. And so they took off, and Macro Man really attacked the powder, going as fast as he ever had off piste, in deeper snow than he can ever recall skiing in. Until his left ski got caught in the snow, Macro Man face planted, and he felt the tell-tale pop in his left knee. Hubris, indeed.

He'd love to share more of his thoughts on hubris with you, but he has to go to the doctor now to get the ball rolling to confirm and treat the initial diagnosis of a torn anterior cruciate ligament. Let's just say, however, that he's learned his lesson...and at €400 for mountainside rescue, €150 for the hospital treatment, and another €300 for crutches, braces, and far it's been a damn sight cheaper than the lessons learned in the financial marketplace.

Saturday, February 07, 2009

This 'n' That

Macro Man is taking a short trip from this...... this
As always, punters should feel free to use this space as a forum to exchange market views, concerns, et al. While Macro Man's winter ski trips don't have the explosive predictive power of his summer holidays , given the potential newsflow over the next few days there should be plenty to discuss. He'll be keeping an eye on things from (literally) on high.

Bonne chance to all.

Macro Man returns February 16.

Friday, February 06, 2009

Let's Call the Whole Thing Off!

To quote Hannibal from the A-Team: "I love it when a plan comes together."

Although the outcome from yesterday's European policy announcements was not particularly surprising- 50 bps from the BOE, nowt from the ECB with a heads-up on 50 next month- the market outcome was gratifying.

Sterling roared against the euro and particularly the CHF; if this keeps up, he'll only have to re-mortgage his house (as opposed to his soul) to afford the odd piste-side vin chaud next week.

Similarly, the front end of the sterling curve got bushwacked (though in fairness, no part fo the curve did particulary well); there would appear to be further downside in store, given the rather tepid reaction of 3 month LIBOR to the rate cut.

Today, of course, sees the release of US payroll data. What is there to say? It will be crap, though exactly just how crap is frankly ungameable. Porbably more itneresting than the headline print will be the revisions from April '07 through March '08; these are typically revised lower during economic downdrafts.

Elsewhere, Macro Man feels caught in a global sentiment cross-current; punters seem desparate to play a reflation/recovery rally in certain markets and sectors. Meanwhile, while the various moving parts in his diversified book seem to oscillate on a daily basis but, in aggregate, end the day somewhere close to zero.

It's as if markets can't seem to decide whether the reflation trade is real or not. And it brings to mind the old Gershwin tune, "Let's Call the Whole Thing Off."

You say either and I say eyether,
You say neither and I say nyther,
Either, eyether, neither, nyther
Let's call the whole thing off!

You say China and I say zloty,
I say peso and you say Aussie,
China, zloty, peso, Aussie
Let's call the whole thing off!

I say Korea and you say Baltic*
You say rally and I say uptick
Korea, Baltic, rally, uptick
Let's call the whole thing off!

* Baltic Dry Freight Index

No doubt there are plenty more couplets that illustrate the dichotomy of views at the moment; under ordinary circumstances , he would be happy to delve into them.

But he's been tied up this morning and has quite a few things to do beore payrolls, so he'll leave it to readers to furnish their own. Good luck to all for the payrolls and the market aftermath; as for Macro Man, he can only hope that in looking at his book a few hours from now, he doesn't want to call the whole thing off.

Thursday, February 05, 2009

On Brittania

It's central bank day in Europe today- can you feel the excitement? While Macro Man's bon ami Jean-Claude Trichet has told him not to expect anything from the ECB today, the announcement from the Bank of England could prove interesting.

Today's decision will be taken with the benefit of the Bank's quarterly inflation report, which common sense would suggest will contain significant forecast revisions from the previous November effort. To be sure, the growth outlook seems to have deteriorated, but will the inflation trajectory be adjusted upward after the sharp weakness in sterling?

The UK press has been trying to search for "green shoots" of recovery amidst the doom and gloom, along the lines of the recent modest uptick in global PMIs. This morning provided a somewhat startlign example of the green shoot phenomenon, as the Halifax house price index somehow printed a monthly uptick of 1.9% in January, the best result in two years.
Rumours that Alistair Darling now calculates the index himself remain unconfirmed.

In any event, the UK markets appeared to be poised for a bit of motion. Finxed income markets are pricing 50 bps of easing today; while that's a pretty good base case, there should be considerable uncertainty around the decision. If the terminal rate is going to be, say, 0.50% (there seems to be some resistance to take rates to zero), there's an argument to be made that you might as well get there as soon as possible and cut 1% today.

On the other hand, you might say that the Bank is operationally far from being able to purse QE, so they need to drag out cuts for as long as possible...which could argue for a 25-er.

If they were to cut by less than expected, might that provide a boost for sterling, which is perched on the edge of a technical breakout against the euro? (And just in time for Macro Man's annual ski holiday, too- how thoughtful!)
The real action, however, could be at the front end of the short sterling curve. Although it has sold off over the past few days, March sterling is pricing in a 43 bp decline in LIBOR over the next six weeks or so. While anything is of course possible, Macro Man reckons LIBOR would struggle to get there in the event of a half-point cut, let alone if the Bank does less than that.
Moreover, the sterling curve is only pricing in a modest reduction in LIBOR over the six months after March. Any suuggestion from the Bank today that there may be rate cuts in Q2 should provide a handsome opportunity to benefit from trades that are short front March and long other 2009 contracts.

Finally, Macro Man finds himself constiutionally unable to discuss the UK without pointing out some cack-handed government policy initiative, or at the very least evidence that the country is going to hell in a handbasket.

Today's nugget is the story that Ed Balls' solution to ensuring that Britain educates its children in the best way possible enroll 16 years as assistant teachers. And here was Macro Man, thinking that 16-year olds might still have something to learn! Good luck with that, Ed....

Wednesday, February 04, 2009

Signs of the Apocalyspe?

Macro Man is back in the saddle this morning and somewhat bemused to see that the world has gone China-recovery mad. Both the comment section of yesterday's post and his email inbox this morning are crammed full of observations about the bottoming of Chinese equities and the manufacturing PMI.

While it factually true that both have bounced, Macro Man is withholding judgement. After all, the Shanghai composite is closer to its recent lows than the US homebuilders index, and he doesn't see anyone falling overthemselves to call a recovery in that industry. More importantly, we should all remember that things don't move in a straight line forever, and China has cranked up a large inrastructure stimulus. Indeed, there will be a period of improved growth in the US this year...just as there was last year.

Looking elsewhere, Macro Man sees little else but doom and gloom. Indeed, if he were the religious type, he might be worried about the impending approach of the Apocalypse.

Yet another emerging market currency has been splattered today, as the Kazakh tenge has finally been devalued by 20% after months of pressure. The KZT was in vogue a couple of years ago as a sexy long....but another one of Macro Man's rules of thumb is never to trade a currency named after a movie character (the KZT is known as the 'Borat'.) The pressure on the KZT has been mirrored in "real" markets, where the CEE currencies such as HUF and PLN have been obliterated in the past few days, with market liquidity collapsing. So the Great Unwind has further to go.

Indeed, somewhat ominously, LIBOR rates have started to tick up, with three month dollar cash fixing some 14 bps higher over the past couple of weeks. Perhaps this is an inoccuous development...but treating previous upticks as such has been a very dangerous (and costly) proposition.
At the same time, US sovereign 5 year CDS surged 15 bps yesterday to 86 bps. To put that in's where Citigroup CDS was trading exactly one year ago. Remarkably, Macro Man could only find two other countries with double-digit CDS ratings: Japan (58), Germany (59), and France (69). Was it really only a decade or so ago that Japan's loss of a AAA rating amidst massive borrowing made waves? Now markets are essentially saying that the Japanese government (facing a massive demographic challenge) is the best creditor in the world.
Rumours that the devil is shopping for a mink winter parka are as yet uncofirmed.

More troubling is the prospect of a populist political backlash to the crsis. Populism is generally the enemy of sensible policymaking; in that vein, developments in Switzerland are troubling. We've had suggestions from the SNB that they might contemplate FX intervention as a tool in their policy arsenal; as currencies are a zero-sum game, that merely shifts pressure from the Swiss economy to someone else. But this weekend, the Swiss are voting on a proposed "economic freedom of movement" treaty with the EU. A certain cohort in Switzerland opposes allowing workers from some new "undesirable" EU countries into Der Schwiez. The imagery used in their campaign is truly scary, as to Macro Man's eye it is not dissimilar to that used in early 30's Germany.

Finally, there is a literally Biblical sign of the Apocalypse in Australia, as Queensland has been beset by floods of such magnitude that crocodiles are swimming in the streets. In typically Aussie fashion, however, afflicted citizens have homed in on the really apocalyptic aspect of the flooding: they're running out of beer.

Tuesday, February 03, 2009

A Brief Update

Macro Man is still snowed in today, though at least this morning's snowfall lasted for 20 minutes rather than 20 cm. While he has very few hard and fast rules in life, one of them happens to be "when the UK transport authorities advise you to avoid travelling, you'd best follow their advice."

And so he finds himself at home once again today, watching a webcast of a conference he was supposed to attend this morning. So you'll have to pardon him if his attention is once again diverted...though not so much that he hasn't noticed a couple of new datapoints confirming that his favoured themes remain very much in play.

Over the weekend, South Korea released preliminary data for January external trade. The results were grim. Exports tumbled by a great-than-expected 32.8% y/y. While that is a terrible figure, looking at the actual total decline in exports is perhaps even more shocking- exports are down 47% since the middle of last year. So the theme of collapsing global trade looks to be alive and well.

Of course, the decline in Asian exports isn't happening in isolation. Sure, the dislocations in trade finance explain some of the decline in trade. But ultimately, the world's consumer of last resort has quit consuming, a development that should prove more enduring than the inability to finance shipping. The latest data on the US savings rate show an uptick to 3.6%; this is the highest non-distorted (via stimulus packages or Microsoft dividends) rate in more than a decade.

Macro Man would submit that regardless of the size and nature of any stimulus, household savings are on an inexorable upwards trend for another few years. And that spells trouble for those countries and companies whose growth model is based on selling stuff to Americans.

Perhaps China will fill the gap? After all, the Chinese have stepped on the fiscal stimulus gas, and domestic equities have put in a decent show so far this year. Perhaps the Chinese will take over the role of "big spender of last resort"?

Good luck with that. Beneath the surface, there is reason to for considerable worry with respect to Chinese growth. Anecdotals suggest a large and rising unemployment problem...which obviously explains some of the rationale for the stimulus. From Macro Man's perch, the actual story 9rather than the reported newsflow) from China looks set to get worse before it gets better. And given that Chinese policy is made based on the real story rather than reported statistics, it looks like we'll be waiting a while before a) Asian exports to China pick up, and b) USD/CNY goes lower (indeed, there's a non-zero chance that it drifts up from here.)

Monday, February 02, 2009

Snowed Under

Macro Man is at a bit of a loss today. It was always going to be a slow one, given that he stayed up last night til 4 am to watch his favourite NFL team in the Super Bowl. But when he awoke this morning to find the UK transport system paralyzed once again due to weather- and this time with good reason.
Much as Macro Man would like to wax lyrical about the lack of weekend developments on the bad bank front, or muse about Barron's catching a bad case of Europhobia, he somehow can't muster the energy today. In any event, in his current "Micro Man" guise, his attention has been taken by shorter-term issues. And with a five- and a six-year old baying for another session outside, today's entry will have to be brief.

Macro Man would like to write more, but he's just completely snowed under today.