Tuesday, March 31, 2009
Well, Macro Man thought that Bill the Banker might stir the pot, and he was right.
Bill is, as readers immediately twigged, a fictional banker. He is not, however, a figment of Macro Man's imagination. Rather, Bill is amalgam of people that he knows in the market, the "silent majority" of anonymous finance workers who have seen both their reputations and their net worth obliterated over the last eighteen months.
While they garner no sympathy from the populace at large, the anger that Bill and his ilk feel is real. Virtually every element of Bill's rant is a quasi-verbatim quote from one of Macro Man's acquaintances from some time over the last three months. To be characterized en masse as "leeches" or compared to Nazi prison guards devoid of morality, as was the case in the comments, is unpleasant enough. To confront the prospect of physical violence on the basis of one's profession is another thing altogether.
While Macro Man may not agree with every sentiment in Bill's article, he wholeheartedly endorses the right to free expression...as long as it does not damage the person or property of someone else. But freedom of expression goes both ways; while the public has the right to (peaceful) protest, so, too, do the unpopular City workers have the right to have their persons unmolested and their concerns heard.
In the absence of any other forum, Macro Man stepped in to fill the breach, articulating the frustrations he has heard, as they were expressed, to the best of his ability. While it may have been provocative, surely it was no more so than some of the slogans and tactics emanating from the protest camp. In any event, while Macro Man is hardly an impartial observer, he thought he had established some credibility for critical assessment of the finance industry.
He deliberately abstained from commenting to let the chips fall where they may. Suffice to say that the results were.....interesting.
In any event, he trusts that readers of all persuasions will join him in hoping for a peaceful series of demonstrations this week. But if it all kicks off tomorrow, perhaps Bill the Banker will give you an insight to why some in the City choose to fight back.
Regardless, normal service will be resumed tomorrow. Roll on Q2!
The next couple of days are expected to see mass demonstrations in London. Protesters are planning to descend upon the City (tomorrow) and the G20 meetings (Thursday), marching against everything from bank bailouts to globalization to climate change. There is an undercurrent of tension, however, as some groups are threatening violence, a development which would be unfortunate but hardly unprecedented. Today features a riposte-in-advance from "Bill the Banker", presenting his side of the argument. Readers jonesing for a dose of Macro Man's own particular brand of literary styling should check out the newly-minted FAQs. Take it away, Bill....
First of all, let me say that I understand that people are angry, and that I understand why people are angry. The idea that the finance industry reaps virtually all the rewards during the good times but socializes the risks in the downturns is not one that sits well with the public, for obvious reasons. I also support the democratic right to freedom of assembly, which was used to such effect by leaders such as Gandhi and King.
However, what people need to understand is that most of us in the City are angry, too. Contrary to the caricature of "greedy bankers" who play roulette with the public's wealth and pensions, most of us are honest, hard-working, and do the best job that we can. And probably to a greater degree than the public, many of us have seen our life savings evaporate during this crisis, through no specific fault of our own. Does anyone think that we're happy about that? Does anyone think that we regard Fred Goodwin, Dick Fuld, and the like as anything but villains?
Most of us had no control over the decisions that led to this debacle. And yet here we are, with bills to pay and an evaporated nest egg. Oh, and a salary that hasn't changed in a dozen years. I reckon that I made around £35 per hour last year, working 70 hour weeks. That's little better than a skilled tradesman's wage...except I pay more tax, get less sleep, and have no tea breaks.
So you'll have to excuse me if I get angry when some unwashed layabout who's never seen the sun rise starts moaning about the government bailing out the banks with "our" money and threatening to "bash" or "burn" a banker. "Our" money? Oh really? How much tax have these protesters paid over the years, and how much will they pay in the coming years? A damn sight less than the City, is my guess. What's the tax rate on the dole again?
OK, OK, I know that a lot of protesters will actually be people who hold jobs and pay taxes. But you don't have to be Sherlock Holmes to see that there is a cadre of professional moaners and rabble-rousers who are looking to stir up trouble. You know, the "property is theft" crowd who figure that since they can't be arsed to do any work, anyone who does must have something wrong with them.
And then there's the eco-nazis who blame all of the world's ills on climate change. Well, here's a little newsflash for them. The financial crisis has nothing to do with climate change. And here's another: the climate has been changing for hundreds of millions of years. To expect the earth's climate to remain forever constant is an act of breath-taking stupidity.
Has modern industrial society had an impact on the earth's temperature? Almost certainly. But during that period, human health and life expectancy have risen dramatically, thanks to the advances brought about by modern industrial society and globalization. Where are the protests against that? Why, too, do the eco-freaks campaign against genetically-modified foods, which can enhance crop yields and reduce starvation?
Perhaps they just like a good moan, regardless of the rationale. Whatever. That's their prerogative. As I said above, the freedom to take to the streets for a moan is a democratic right. But the destruction of property and pogroms against a specific sector of the economy cross the line of what is acceptable. I hope that the marches are peaceful and that the protesters enjoy themselves. But the soap-dodgers should be warned: if they're looking for trouble, they just might find it.
Monday, March 30, 2009
Over the weekend Macro Man christened a recently-acquired Blu-Ray player (his home entertainment Luddism is slowly receding) by watching an episode of Planet Earth with the Macro Boys. As they marvelled at the ferocity of the Great White Shark, the eldest asked, in a slightly timorous voice, whether Great Whites attacked humans as they did the seals on the televison screen.
"No," was Macro Man's confident reply, not wishing to scare the boys out of swimming at the beach. "But there was a movie about Great Whites that came out when I was about your age."
So it was with no small sense of surprise that Macro Man logged onto his Bloomberg this morning and almost literally heard the "nuh-NUH, nuh-NUH, nuh-NUH" theme music to Jaws. Just when you thought it was safe to get back into the water, the world's looking like a mess again.
Where to start? The Spanish bank bailout? Geithner suggesting a similar outcome in the US? Obama getting stuck into 2/3 of the Big Three? A limp G20 leak? Take your pick.
But a market that went home fat and happy on Friday is now looking at a rather nasty reversal in a number of asset classes. Take the Nikkei, which shed 4.5%, breaking its post- March 10 uptrend.
Perhaps the economic data had the temerity to intrude upon investors' consciousness? Japan's industrial production fell a gut-wrenching 38.4% y/y in February. While this was only slightly worse than expected, it is still indicative of an unprecedented level of economic stress, at lest during the careers of 99.99% of the investors out there.
Coupled with tomorrow's fiscal year end, the overn ight news has prompted a rather sharp sell-off in all yen crosses. It perhaps shouldn't come as a total surprise; after all, a cross like NZD/JPY had rallied 29% since early February. Yowsah!
Of that, the kiwi leg had done most of the heavy lifting, with NZD/USD up nearly 18% since March 10. Now, on a fundamental basis the kiwi has absolutely no business putting in a rally of that magnitude. So a lot of that upside looks to have been short covering. However, as reality starts to bite again, one wonders if the market won't break out the shotguns and start taking aim at this most defenseless of prey.
Similar reversals have been evident in everything from oil to USD/KRW. Perhaps the market is starting to realize that reality still bites. If Geithner's comments are preparing the market for one or more institutions failing the stress tests next month, Macro Man cannot help but think that the recent love-in of all things risky will be largely unwound.
And while the data has certainly become more balanced, hopes for a US-based re-stocking bounce look misplaced. While Japan's data activity data was execrable, at least it was accompanied by a sharp de-stocking. In the US, there are only the most tenative signs that inventory liquidation has even begun, with the retail inventory to sales ratio starting to turn down slightly. Manufacturers and wholesalers, on the other hand, still have inventory relative to sales at ten year highs. Oof.
So Macro Man is treading gingerly this morning. The next 30 hours or so are likely to be dominated by month- and quarter-end considerations, but it does look this morning like some signal is emerging through the noise. And hey...even the noise is starting to sound a bit ominous.
Friday, March 27, 2009
What a rubbish week.
Markets have been dominated more by positioning than so-called fundamentals, Macro Man's carefully-constructed has seen its correlation structure go awry, and he's bled away the accumulated work of the previous three weeks.
So he's understandably lacking in inspiration.
Look at Treasuries, for example. As Macro Man observed a couple of days ago, if you bought after the FOMC announcement, you lost money. Going into yesterday's seven year auction, the "ten year" future (which is really a seven year future) fell enough to take out most of the longs...including your frustrated scribe.
So naturally, the auction went much better than the earlier five year auction, futures rallied smartly, and now markets are looking at several buyback sessions before the next bout of supply.
Should Macro Man have expected this? Yeah, maybe. But when everything else is going awry, it's pretty natural to excise the most obvious losers. That's the way you keep a small drawdown from turning into a hemorrhage.
Perhaps the difficulty that Macro Man is having is that markets have, in a sense, caught up to his bearish worldview. While it is true that some pieces of data have turned around in an absolute sense, albeit in very modest form (and well within the boundaries of statistical noise), the real issue is that the outturns are no longer disappointing expectations.
Citigroup is one of a number of institutions that calculates an "economic surprise index", which measures data outcomes relative to consensus expectations. The real economy aftershock of the Lehman collapse generated a steady skein of worse-than-expected data. More recently, however, analysts seem to have "caught up", and so far this year the data has, in aggregate, come out in line with expectations.
While this more balanced data outturn may have contributed to the recent bounce in stocks, Macro Man has been unable to extract a consistent forecasting relationship between the surprise index and future equity returns.
So it's back to the drawing board. Perhaps the best thing for Macro Man to do is to keep his head down, write off the next two days' price action as month end paper-shuffling, and get ready for an April that will hopefully offer a bit more signal and a bit less noise.
Thursday, March 26, 2009
QE promised so much, yet has delivered so little (even less than yesterday after the poor auctions in the UK and US.)
And so perhaps March is what we thought it was: a month of erratic price action in which positioning trumps all else. It was looking that way anyhow until the SNB dropped their bombshell; and hey, it's hardly the first time we've been in the pain cave.
It's usually not a good sign when Macro Man's morning inbox is littered with New Zealand fixed income commentaries, and so it proved again this morning. New Zealand rates inexplicably started rising late yesterday in London, continued through the New York afternoon, and then surged into a full-blown panic in early Wellington trade. Stop-losses and rumoured mortgage paying were behind the rise....which abruptly ended as suddenly as it began, taking 2 year rates down nearly 40 bp from where they'd been a few hours earlier.Yesterday, the Norges Bank cut rates to 2%, as expected, but also hinted that rates would likely trough at 100 bps, lower than the market had priced. They also observed that a somewhat lower krone was naturaly in the context of the global financial crisis. Given that long NOK had been one of the market's sacred cows, it naturally took a swift trip to the abattoir.
Yet even that wasn't the FX pain trade of the day, pride of place must go to the farce surrounding some comments from Tiny Tim yesterday. Speaking at the CFR, Geithner said that although he hadn't read PBOC governor Zhou's recent proposal, he was certainly open to expanding the pool of IMF SDRs. This was an innocuous enough comment, as the IMF is likely set to see its funding levels increase dramatically.
Yet somehow the Reuters newswire managed to run this comment into a headline suggesting that Geithner was open to using the SDR as an anchor in a new multilateral reserve currency, i.e. ending the dollar's current dominance. Unsurprisingly, the dollar got swiftly smacked (leaving dealers shouting "WTF!?!" until the offending headline was spotted), retracing part of the losses after a hasty clarification was made.Remember, policymakers: stay on message, keep it clear, and keep it simple. Although one thought did occur to Macro Man yesterday. Given the yawning size of the US budget deficit, perhaps the Federales have decided to generate a little revenue on the side, a la Voldemort and friends? Perhaps the US Treasury has decided to buy overnight options in EUR/USD, and then let Geithner step up to the mike. Hedge your gamma, and boom! You've paid for half an hour of bank bailouts. Yippee!
Finally, a video clip that both gladdens and saddens Macro Man. While he is pleased to see the government inquiring into the shadowy cabal at the heart of the banana republic, can we really not do any better than Maxine Waters? Really, she shouldn't be running a lemonade stand, let alone part of the US government. The look on Geithner's face when she misunderstands the difference between a chief of staff and CEO is priceless. It's a small ray of light in an otherwise dark and chilly pain cave...
Wednesday, March 25, 2009
Was it only a week ago that Macro Man was writing about the "shock and awe" of the Fed's dramatic embarkation into the world of QE and credit easing? The world seemed alive with possibilities, with the triple barrels of the Fed, the BOE, and the SNB aimed at stemming the impact of collapsing global monetary velocity.
A week on, and "shock and awe" is looking more like "shock and awful." Ten year note futures are nearly a full point below the first price printed after the FOMC announcement, and a point and a half below the closing level on the day. If you bought and held bonds on the Fed's announcement, you have lost money. Put another way, the only way to make money out of the Fed's QE was to be on the distribution list-and make no mistake, it exists in the banana republic market that the US has become-and get the tip-off in advance. As an additional kick in the teeth, the Fed, after having initially announced that the vast majority of UST purchases would be in the 2-10 year sector, announced last night that it would buy back some long bonds as well. While the two statements weren't technically contradictory, in hindsight the first one now appears to have been misleading. The 10-30 steepener has now gone wrong as well. Awful indeed.
Meanwhile, in the UK, the impact of QE was dulled yesterday by a higher-than-expected inflation print (the joys of a weak currency!) and comments from Merv the Swerve. Less than three weeks into QE, and Merv was already talking about the possible need to hike rates aggressively at some point. He also suggested that the BOE might not deploy its fully allotted £150 billion of buybacks should the program prove effective. While there was nothing technically wrong with these comments, they were the wrong thing to say to a teetering Gilt market, and were received with all the pleasure of a swift kick to the groin from an iron-tipped boot. Like Treasuries, Gilts are now below the closing on the day of the QE announcement.
Finally, EUR/CHF. The manner in which the SNB prosecuted its intervention on March 12 was awesome indeed, and hearkened back to earlier comments from SNB member Phillipp Hildebrand suggesting "unlimited" intervention to weaken the franc. So naturally, the market took this as a strong statement of intent from the Swiss. Since then, the SNB has been AWOL from the market, and EUR/CHF has-you guessed it!-now fallen below the closing level of the day of the policy announcement.
Now, regular readers may justifiably ask why Macro Man advocates weaker currencies in Switzerland and Singapore, while repeatedly chastising China for pursuing a similar policy. The difference is one of size. Singapore and Switzerland are both small open economies where there is a strong pass-through from currency moves into the domestic price level- similar to what we have observed in the UK.
China, despite its large trade surplus, is a fairly closed economy. Yet the sheer size of its intervention activities carries all sorts of negative externalities, from generating excess domestic liquidity (via non-sterilization of the intervention) to creating an undesired easing of monetary conditions in the West (the bond "conundrum") to, of course, mucking about in other countries' currencies-including day trading-in the name of "reserve management."
Now, is Macro Man bitter because he's dropped some money on QE-coat-tailing trades? Yup. Does he wish that he were on the secret distribution list of the BRA* (Banana Republic of America)? Undoubtedly.
Yet there is a larger, slightly less selfish issue to what he is writing about today. In its most basic form, monetary policy is meant to influence the behaviour of economic actors. Virtually nobody outside of a few banks transact at central bank policy rates. But central banks change those rates in an attempt to influence other, market-based rates which do have a meaningful economic impact-bond yields, mortgage rates, etc. In a very real sense, while central banks adjust the sign posts, financial markets do the real work in changing monetary policy by moving market rates.
And yet when it comes to QE, Macro Man is hearing things like "the SNB wants to shake out a few longs before intervening again." What possible purpose does it serve to "punish" the very people who are supposed to make the policy work? While the SNB may be throwing a bone to the ECB by declaring that they don't actually want a weaker currency, it seems pretty clear that they do. Yet by submarining the market's positions, the SNB is creating a situation wherein any further intervention could be met with selling from relieved longs, rather than the sort of coat-tailing that would put EUR/CHF back to where it was a few months ago. Similarly, one wonders why the Fed would introduce unnecessary volatility in the back end of the yield curve by misleading the market with its statement a week ago.
To be clear, Macro Man is not asking for a handout or a tip-off, nor does he require one to make money these days a la Bill Gross. But by the same token, central banks should realize that the market is their ally in QE, not their enemy. Clear, unswerving policy and a total public committment to maintain it (even if you don't actually mean it) will render maximum effectiveness unto QE. Ambiguity and flip-flopping will put the relevant asset prices right back where they started, with the market further out of pocket, and the "nuclear option" exhausted and ineffective. Granted, that's been the inevtiable outcome of all previous policy initiatives since the crisis started. But it would be a pity to see a shock and awful outcome for the last policy bullet in the gun.
*The central purpose of which seems to be supporting a bunch of tits
Tuesday, March 24, 2009
Macro Man was sceptical of the PPIP yesterday and sceptical of the early-doors knee-jerk rally in stocks. He was short. He was wrong. His stop having been executed above 800, he can now sit back and survey the damage to his portfolio. Fortunately, his equity short was appropriately-sized, so the pain has been more intellectual than monetary. He is suffering through one of those irritating periods of correlation breakdown that are the cost of managing money the way that he does. It's frustrating, but hopefully it'll be short-lived.
Macro Man was admonished last night not to repeat his mantra about 6% rallies. Coming so soon after the last 6% rally, there would appear to be little utility in doing so, so he won't. Instead, he'll cue up the Smiths' "Stop Me If You've Hear This One Before". The 23% rally off the recent lows has been impressive, but let's remember that it's the fourth such rally of similar magnitude of the last six months.....many of which have been centered around policy developments. So while he's retreated to the equity market sidelines, nursing his wounds, Macro Man retains a less-than-enthusiastic outlook moving forwards.
The question he has re: the PPIF is not why an asset manager would participate, but rather why a bank would sell assets at a level that would be economically viable for the buyer. While it is true that fund managers will be putting up a small sliver of equity relative to the assets that they can buy, what this means is that if the managers overpay it will take only a small decline in the value of the assets to completely wipe out that equity. If these investments are placed in specially-crafted vehicles, this will encourage them to drive the hardest bargain possible. Would you invest in a fund that has an equal chance of doubling its money or losing all of its equity/ Neither would Macro Man. It will be worth following ABX to see if markets start getting legitimately excited. So far, it's been met with a yawn.
Elsewhere, the debate about the dollar's reserve currency status rages on. A UN panel has suggested a move to a multilateral framework, though why the UN is opining on the matter is open for debate. Most likely because it's the only organization that will give a platform to some of the "experts" quoted in the story, who have made a career out of not udnerstanding the functioning of currency markets.
Still, you can't deny that many of the largest holders of FX reserves, including some of the worst of the serial piss-takers, are getting restless. China appears to be a Huey Lewis fan, as they've recently started playing "I Want A New Drug"* to fuel their FX reserve-buying habit. Now, Macro Man would argue that the current arrangement is useful, insofar as when the limits of economic rationality are pushed to extremes (like having $2 trillion of FX reserves), it provides a built-in disincentive to continue mercantilist behaviour.
Another consideration is that if a new FX reserve currency is going to be managed/arranged through the IMF, there should be some sort of quid pro quo. You know, like oversight of misaligned exchange rates. Such as when a country runs, oh, the largest trade surplus in the world, and offsets more than 100% of it with FX reserve accumulation, as China did in 2008.
When faced with an oversight condition, something tells Macro Man that PBOC will be serendaing the dollar with another Huey Lewis tune....."Stuck With You."
*Thanks to Bobby D for passing this one on.
Monday, March 23, 2009
Here we go again. (Sigh)
Another weekend, and another attempt by the authorities to bolster sentiment, restore confidence, and support equities. This time, it's the US bad bank plan. The authorities are so excited about this one that they made a special announcement over the weekend to tell us that...err...they are making an announcement today. Hurrah!
You can hardly blame the Federales, though. The market still bites at the holographic carrots offered up by the Fed and the Treasury; S&P futures have traded up more than 3% at one point this morning. But if this program is going to make a important contribution towards solving the crisis, it will have to be a bit better than the hints that Geithner drops in today's WSJ. Heavy on platitudes and light on details, Macro Man can see nothing there to suggest that the PPIP will be any more successful than the TALF (after a 2.35% take-up, the latter has changed its name to "That's Another Laughable Failure")
One of the problems with Congress' excise tax solution to the AIG bonus scandal is that it renders the private sector a little, ahem, nervous about going in to partnership with the government. After all, what would stop the Feds from going after the profits that firms made in the PPIP (PIMCO, Blackrock, and GS excepted, natch)?
Perhaps Geithner may wish to ask Londoners how well their version of a Public-Private Partnership has worked, both financially and service wise. (Hint: it rhymes with "not very.")
So there you have it. The US Treasury has come up with a plan similar in spirit (or at least name) to one foisted upon London by the wretched "Red Ken" Livingstone. Why does Macro Man have the feeling that after this plan is launched, equities will tank and we'll all be saying "here we go again..."?
Finally, thanks to all for the radio station recommendations. The early returns have been promising.
Friday, March 20, 2009
So now it gets interesting.
After a sharp rally (bear market or bottom, depending on the coolur of your spectacles), and a "kitchen sink" policy response from the Fed, we now get to test the resolve of the bulls. The uptrend line of the bounce has been breached, and it will now be down to the true believers to show an appetite to buy stocks "on sale."
Or was the rally just a bit of short-covering? Certainly Macro Man knows a few punters who are/were short, and the chart of the HFR macro hedge fund index would appear to suggest that the industry was damaged by the rally. As is always the case, stocks rallied just enough to encourage any chart-reader to get out, particularly in the context of such a shock and awe responsde from the Fed.
Sod's law would suggest that the decks are now clear for a renewed downdraft. Macro Man has sold a derisory amount of Spoos, just to have his little toenail in the water, but is fully prepared to engage more fully if the dip-buyers go AWOL.
The dollar trade, however, still appears to have some steam in it, with system funds in particular showing a solid appetite to kick George Washington in the groin. Hell, even USD/CNY forwards have come in, trading at the year's low. Of course, they still price in a tiny CNY depreciation from current levels. The joys of beggar-thy-neighbour....
Finally, a query to Macro Man's American readers: what the hell has happened to the radio industry? Macro Man has recently acquired a rather neat piece of kit that allows him to listen to radio stations from all over the world through the stereo system in his living room. This was great last weekend, as he listened to a bit of the ACC tournament while reading a book.
But he then went searching for his favourite radio station from his college days, one that was voted as America's best in Rolling Stone in the early 90's. Imagine his chagrin, therefore, when he tuned into the station, and found it had turned into somethign called "The Rooster."
Any readers who can suggest a good alternative/indie rock station with a minimum of ads or talking DJs should feel welcome to do so. His current favourite is an Irish station which plays great music, but sadly has regressed from it's early-Noughties days as a pirate radio outfit.
Thursday, March 19, 2009
For basketball fans, the sweetest two weeks of the year-the NCAA tournament, aka March Madness-begins today.
Those of us in financial markets, of course, have been living with March Madness for a bit longer, ever since the Bank of England kicked off an orgy of quantitative easing just two weeks ago. Macro Man can now report, on an exclusive basis, on some of the deliberations that took place amongst central bankers at last weekend's G20 meeting:
QE or not QE? That is the question.
Whether tis nobler in the mind to suffer
The slings and arrows of a vanished fortune,
Or to buy bonds against a sea of troubles,
And by inflating end them?
At this juncture a PM has to make a couple of decisions. What does he think the world will look like in, say, three to six months? And what does he think the market will think the world will look like, which is another way of saying what trades will the market do?
Contrary to some, Macro Man doesn't think last night's shock and awe necessarily spells a catastrophic descent into the abyss for the US dollar. On the contrary, last night's actions will merely go some ways to filling an abyss that represents a lack of dollars in the shadow banking system.
However, it seems quit clear that tactically, the market will wish to push the greenback lower. A brief stroll down memory lane to see what happened to sterling after the BOE decision may prove instructive. After an initial 48 hours of uncertainty, the market has pummeled the pound, and EUR/GBP is now up more than 5% in two weeks.
A similar short-term spanking of the dollar seems eminently possible, if for no other reason than there seems likely to be a disproportionate supply of dollars from people who like to make bets on currencies: hedge funds, real money managers, etc.
And while Macro Man is no fan of the euro-quite the contrary!- the fact that intra-European tensions are easing somewhat (BTP/Bunds spreads have narrowed some 25 bps this month) have restored some of the, ahem, "allure" of the single currency.
One view that seems to be overwhelmingly consensus is the bullish case for gold. Having sustained a Satan's finger-style reversal yesterday, the yellow metal is left near its highs of the last couple of weeks with positioning a fair bit cleaner.
Macro Man accepts this, and acknowledges that the bull case looks solid. But consider the uber-bull case. In a world where gold trades at $2000, where is the oil price? Last year's oil rally was largely a demand phenomenon, some of which was real and some of which was speculative.
But gold at $2k will pretty clearly be a monetary phenomenon, one which should impact all hard assets fairly similarly. When you throw in the multipliers that work in the oil market, via the monetary impact on the factors of production, Macro Man would submit that you should see a disporportionately large rise in energy prices. If you throw in the market pricing in an eventual recovery in demand volumes, the price impact could be explosive.
Gold may well be the superior trade for a 20% move. But Macro Man reckons that mid-curve oil is a far, far better trade for a 200% move.
And in a world of March Madness, that's the way he's thinking right now.
Wednesday, March 18, 2009
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.
The trades would appear to be:
1) buy equities
2) buy bonds (though the issue for a futures monkey like Macro Man is whether you buy TYM9 or USM9)
3) sell the USD (on the basis that everyone else is going to)
4) buy oil (on the basis of 3, and the inevitable projection uber-inflation moving forwards.)
Big day today.
Contrary to Macro Man's expectations, equities put in a very good day yesterday, with the SPX breaking and closing above the 767 level. Perhaps the feel-good was stoked by the unexpected rise in housing starts; if so, Macro Man remains sceptical, as that data is a rather flimsy foundation for a recovery.
Perhaps, also, the rally was stoked by a belief that the Fed will do something at tonight's meeting. Certainly, the Fed has lost its leadership in the global easing league table. While Bernanke has long been touted as an expert on the Great Depression, and the Fed was the first CB to publicly contemplate quantitative easing in this cycle, they've basically done nothing for several months. (OK, they've been preparing for the TALF, but hey- what have you done for me lately?)
As a consequence, the growth of the Fed's balance sheet has stalled. In the meantime, the BOE, SNB, Bank of Israel, and BOJ have all embraced some form of QE. So is the Fed going to bring shock and awe tonight, or is Bernanke going to do nothing, sit there like a deer caught in the headlights, and pray like hell that the TALF works where every other Fed program has failed? If the latter, equities may face their sternest test of the "recovery".
Nevertheless, markets clearly seem to "want" to trade this recovery. The few equity longs of Macro Man's acquaintance are crowing, dollar bears are emerging, yawning, from their winter hibernation, and thousands of virtual trees have been killed with all the e-ink spilled about China's incipient rebound.
And indeed, there are a few interesting-looking charts. Oil is trying its damnedest to break out; June WTI, pictured below, has driven through both trendline resistance and the 55-day moving average CTA trigger level. Frankly, Macro Man has more sympathy for this move than the equity bounce, as the long-term supply/demand dynamics of the energy market are considerably more bullish than those for equities.
Elsewhere, some of Macro Man's sacred cows appear to be en route to the abattoir. He has long favoured playing SGD weakness, and it appears that he has quite a bit of company. There's been quite a squeeze at the very short end of the SGD yield curve, with overnight rates trading as high as 55% yesterday. Ouch! The chart below, showing tom-next forward points, illustrates how unusual this is. Ultimately, this squeeze should prove cathartic ahead of next month's MAS meeting. In the meantime, it's just another indication that the pain trade takes no prisoners.
Finally, AIG. Macro Man has been alternately amused and bemused by the reaction to the AIG bonus disclosure. On the one hand, you have popular uproar, complete with buffoonish Congressmen grandstanding in front of the TV cameras. When a Senator starts advising people to commit suicide, that's usually a pretty good sign that popular hysteria has taken hold.
On the other hand, you have community of financial market professionals, aghast that Congress could contemplate breaking the sanctity of an employment contract and comparing the AIG hearings to the McCarthy HUAC hearings. It's surprising how many people seem unfamiliar with a concept that is part of daily life for members of small investment partnerships, namely netting risk.
Simply put, no matter how well an individual trader does, if the firm performs poorly and does not earn sufficient revenues to cover its expenses, you don't get paid, regardless of whatever agreements you might have. It's not pleasant and it might not be fair, but that's life. (Disclaimer: Macro Man lived through three years of this early in the Noughties.)
Now under ordinary circumstances, employees of large firms don't have to worry about netting risk. But it seems quite clear that these are not ordinary circumstances. One argument put forward by finance pros to justify the payouts is that AIG needs to retain key staff to maximize shareholder (e.g., taxpayer) value moving forwards.
Two thoughts come to mind on this one. The first is that cash bonuses are no guarantee that staff will stay; Macro Man knows that if it were him, he'd be looking to get the hell out of Dodge the moment the bonus hit the bank account.
The second is a quote from legendary baseball GM Branch Rickey, informing the star player (Ralph Kiner) of a woeful Pittsburgh Pirates team that he was on the trading block: "We finished last with you, we can finish last without you." Well, AIG lost $66 billion last quarter with these invaluable staff members; it seems reasonable to expect that they could achieve a similar result without them.
All of this makes Macro Man appear to occupy a place of the political spectrum further to the left than his usual ideological residence. So to put things right, he has a compromise, market-based solution. Don't seize the bonuses via a one-off excise tax. Instead, pay them in the amounts contractually-mandated, and use normal tax treatment. But pay them in stock, and allocate shares on the basis of the average AIG share price in 2008: $27.57.
So someone receiving a million-dollar bonus will receive 36,269 shares of AIG. Current market value: $34,818. This should appease the baying masses and also introduce an incentive to these valuable employees to right the ship as quickly and successfully as possible. Oh, and at the same time, introduce these guys to another concept well-known to hedge fund types: the high water mark.
If and when AIG were ever to surpass the high water mark of the stock allocation price, that would be a very big day indeed, for both the employees and the taxpayer.
Tuesday, March 17, 2009
Well, after a 16% trough-to-peak rally in just a week and a half, things might be about to get very interesting indeed for the S&P 500. The index touched and briefly breached the support-turned resistance at 767, the old reaction low from 2002, but failed to close above it. With the Fed announcement on Wednesday, the TALF on Thursday, and triple witching on Friday, Macro Man frankly wouldn't be surprised by any weekly close between 700 and 800.Spoors aren't the only asset price at a critical juncture. EUR/USD, which has attracted a reasonably bullish following over the past week or so, managed to breach an old high of 1.2992 yesterday, registering the first "higher high" since the Great Chinese Screwjob (or whatever it was) last December.
Still....price action since it breached 1.30 has been less than impressive. The market got excited by yesterday's January TIC data showing huge net sales of US assets, but Macro Man finds this data to be so misleading as to be worse than useless. The only month out of the last four reported that the TIC showed a net inflow into the US was December. This was, coincidentally or not, the only month of four when the DXY actually fell. So perhaps what the TIC is caputring is fire-sales of USD assets for foreign banks, etc. in desperate need of dollars. Inquiring minds want to know....
Elsewhere, an interesting recent release that has garnered a modest amoutn of attnetion is the credit card deliqeuncy data, recently released for January. Bloomberg carries figures for fifteen issuers in the USA, UK, and Canada. All fifteen saw delinquency rates rise in January from December. Who knew that "stop paying my credit card bill" was such a popular New Year's resolution?
Particularly notable was the sharp rise in delinquencies at Citi. While comfortably large spreads have no doubt propelled Citi's markets division to decent profits so far this year, per recent comments from The Bandit, the deterioration in its bread-and-butter consumer credit business must be eye-watering.
Macro Man doesn't do single name stocks, and frankly has no idea (or at least one that's he's prepared to make public) whether C is a buy, sale, or hold. But the underlying dynamic, one of rising non-performing loans (and concomitant non-performance of structured credit products that bundle them together) is far from bullish. Stories are beginning to ciruclate that the Fed is struggling to find many interested parties to participate in the TALF. If that goes down like a lead zeppelin, the risk must be that equities swiftly follow.
Monday, March 16, 2009
Macro Man's a bit pressed for time this morning, as he has an appointment with his physiotherapist at a time when he's usually pushing the "publish" button to send another edition of his witterings into the cyber-sphere.
It occurred to him this morning that, at the risk of boring readers with another self-indulgent foray into his physical condition, that the global economy and financial system are really quite like a knee with a torn ACL. Consider:
Knee: When Macro Man took his tumble last month, he fell and couldn't get back up. Actually, he did manage to get his skis back on at one point, but when he tried to ski off he knee collapsed and he fell over again.
Economy: When the credit market took a tumble in 2007, the global economy took a long tumble and has yet to get back up. Actually, people did believe the de-coupling Kool-Aid at one point, but then Lehman Brothers collapsed and it all fell over again.
If only the global economy had had Life Call....
The Current State of Play:
Knee: Macro Man is undergoing a battery of exercises in a rehabilitation program, the goal of which is to allow the joint to regain maximum flexibility and to straighten itself out.
Economy: The global economy is undergoing a battery of programs and stimuli in a rehabilitation program, the goal of which is to give lenders and borrowers maximum flexibility, thereby allowing the economy to straighten itself out.
Knee: Macro Man can continue with the rehab program and hope for the best, or opt for a full reconstruction, which will entail a more thorough rehab program and a modest lifestyle adjustment.
Economy: The global economy can continue with the current rehab program and hope for the best, or opt for a fuller, coordinated reconstruction (IMF, WB, bank regulation, etc.) which will likely entail some lifestyle adjustment for all concerned.
Knee: A long, hard slog that will require a lot of effort and, most importantly, time.
Economy: A long, hard slog that will require a lot of effort and, most importantly, time.
To continue the analogy, the weekend G20 meeting was a lot like Macro Man's last consultation with the ortho: it resulted in a vague action plan for the future, but no immediate solutions.
So for now, focus shifts to the Fed announcement on Wednesday. Despite being the first central bank to ease policy in September 2007, the Fed has now fallen behind the BOE and the SNB in terms of its prosecution of policy. So the million-dollar question will once again be, as it was in January: Will the Fed announce any specific measures, or merely continue offering vague assertions of intent at some point in the future:
"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability...the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
Delaying the beginnign of the TALF by two days, so that it falls after, rather than before, the FOMC announcement has raised a few eyebrows: are we in for some shock and awe after all?
The June 10 year contract has been caught in an ever-narrowing wedge for the last couple of months; perhaps we'll get some resolution one way or the other, depending on the outcome of Wednesday's announcement.
Regardless of what the Fed does or does not do, it's important to remember that neither the economy nor the stock market can be fixed with one wave of a magic wand. From Macro Man's perch, both he and the market still have a long way to go yet before we're back to our best.
Friday, March 13, 2009
So for the second month in a row, we are confronted by the prospect of a Friday the 13th. It was exactly four weeks ago today that Macro Man took his tumble on the ski slope, so he can testify that bad things do happen on the famously inauspicious date.
Today, of course, the world somehow feels a bit warmer than last month. True, the SPX is 10% lower than it was a month ago, buy hey! It's more than 10% higher than it was a week ago!
Meanwhile, this weekend sees the G20 meeting here in the UK, where the world's major finance ministers and central bankers will join Gordon Brown in saving the world economy. Or perhaps not. There seems to be little consensus on a unified approach to fiscal stimulus or the financial system, and while the grandees might agree to increase the IMF's war chest, there's always going to be the uncomfortable question of who, exactly, is going to sign the cheques.
Meanwhile, the FT is full of nonsense about "currency wars" following the SNB's action to intervene in EUR/CHF yesterday. Switzerland intervening to weaken its currency is one thing; Japan or another large, closed economy (China?) doign so is something else. After all, Switzerland doesn't face much competition for its cuckoo clock exports. Moreover, given the huge stock of CHF liabilities in Eastern Europe, one could argue that the SNB has now done more for Mrs. Gabor and Mr. Bukowski than the European Union ever has. CHF/HUF is now down 10% from its recent highs, which should take a bit of the sting out6 of the next mortgage payment.Focus is now shifting to who the next currency-weakeneing candidates may be. Obviously everyone cannot do it....but the small, open Asian export machines (Taiwan and Singapore) are coming into focus, re-kindling a theme that Macro Man's been preaching for some time.
Elsewhere, the Fed released the quarterly flow-of-funds report yesterday, and it made for grimmer viewing than a hacker movie like...err...Friday the 13th.
Part 1: Jason suffers a record decline in his household equity last quarter
Part 2: That, combineed with equity market weakness, sent the y/y change in his net worth down to off-the-chart lows.
Part 3: Jason sees his net worth as a multiple of consumption collapse to early 90's levels, despite being considerably older. He resolves to cut back on spending.
Not pretty viewing, is it? Let's hope we have to wait longer than 29 years before they decide to do a re-make of this movie.
Thursday, March 12, 2009
Macro Man can feel the knee starting to straighten out already. He's been running long a bit of EUR/CHF as a hedge against his other (non-performing) positions, and for the first time his career, a central banks has intervened at exactly the right time and place for him.
Welcome to the wonderful world of QE, SNB-style:
For at least this afternoon, happy days are here again!
(Though whether Switzerland's trading partners agree is a different question.)
Such was the ortho's description of Macro Man's knee this morning, much to his chagrin. He still cannot fully straighten his left leg, nor can he walk normally; both are preconditions for an ACL reconstruction from Macro Man's surgeon.
"Not happy" might also be an apt description of some macro punters out there. Macro Man has noted the possibilities of a March position squeeze, and thought that fixed income was a likely source of the pain. It seems as if he has missed his guess.
Foreign exchange is one market that has suddenly become bloody difficult, as it seems that it has been the locus of a lot of position squeezing this month. EUR/JPY is the latest cross to suffer a correction this week, following on the heels of EUR/USD (back and forth and back again!), USD/Asia, and EUR/CEE4. Not pleasant.Gold longs have been feeling the "joy" of position liquidation for a couple of weeks; a chart of the past thirty trading days resembles one of the Alpine peaks near Switzerland's many gold vaults.
And of course, the recent equity bounce has brought a steep correction (in percentage terms, at least) to the financials; the SKF double-short ETF has had a 40% peak-to-trough decline in just 4 days. Double-ouch!
Obviously, thre are some markets and strategies where the shake-out has been non-existent; Gilts, for example, are close to their highs and didn't move much after yesterday's reverse BOE auction.
Just about everyone goes through these periods where you have one thing go moderately wrong and a bunch of things go slightly wrong. It's frustrating and unpleasant, but it's part of doing business. Eventually, this too shall pass, as the saying goes; in the meantime, Macro Man's got his nose to the grindstone, trying to ensure that happy days come again......the sooner, the better.
Wednesday, March 11, 2009
Repeat after me: six percent rallies don't happen in bull markets, six percent rallies don't happen in bull markets....
A six percent rally did happen yesterday, however, which tells you everything you need to know about what kind of market we're in. It was possibly (probably?) overdue, and now that it's come, it's time to survey the landscape and say "what now?"
Macro Man is struggling to get too excited, he must confess. 750 on the SPX, which more or less marked daily lows for a solid week before giving way, should provide some decent resistance on the way back up. That's only 30 points from yesterday's close; given that spoos have already rallied 50 points from the lows, the implication could be that the correction is already more than half done. Ouch. March is often a month when crowded positions get shaken out. If the equity rally were to get more legs, one possible casulaty would be the front end of Europe. German two years yield just 30 bps more than their US counterparts, despite the obviously larger spread in policy rates. True, the US has a bit of a supply issue, but still; given the scope of the rally in Schatz, euribor, et al, would a 30 bp backup in yields really be that surprising?
Speaking of yields, today sees the onset of QE in the UK. While the Treasury is auctioning Gilts as fast as they can print 'em up, the Bank will start reverse auctioning them out of the public domain. Somewhere in Westminister, Gordon and Alistair will share a quite high five, no doubt.
Finally, back to China. First, the good news. Fixed-asset investment rose 26.5% y-t-d in February, better than the expected 21%. Hurrah, the stimulus package is working! Looking at the details, however, Macro Man was less enthused. Despite dealing with a real estate bubble of tis own, Chinese property investment has yet to decline y/y, and in the first two months of the year represented more than 23% of all fixed investment. That's a higher percentage than was recorded for all of 2008. Not exactly what Dr. Keynes ordered when there's already a 14 year excess of office space in Beijing, is it?
Meanwhile, the trade figures were a literal shocker, as the surplus collapsed to just $4.8 mio, much less than both the January surplus of $39 bio and the expected $28 bio. Interestingly, the narrowing was all on the export side; imports actually rose in February (while still collapsing y/y on Macro Man's preferred 3 month moving average measure, of course.)
It will be interesting to see the breakdown by region when that data is released next month. China has recently swung into surplus with Asia, might today's figures suggest a reversal into deep deficit, which could buoy growth in the rest of the region?
Perhaps, but the anecdotes aren't supportive. The price of Australian thermal coal, used to provide electricity in manufacturing powerhouses like Japan, Korea, and Taiwan, is falling sharply due to collapsing demand.
Repeat after me: we're not out of this yet.....
Tuesday, March 10, 2009
Macro Man is back in the saddle after being bed-ridden with the flu yesterday. He's not really sure what to make of the fact that he had the most site hits in more than a month on a day on which he wrote nothing. Perhaps word got round that the site was more insightful than usual yesterday...
Regardless, he's back, and it seems as if little has changed over the past few days. Equities still trade dreadfully, bonds are still unimpressive given equities and the economic data, and EUR/USD is still 1.27 +- two and a half cents. This is market that's tailor-made for topping and tailing one's self. so Macro Man is trying very hard to avoid falling into that trap.
The first snippets of February economic data are beginning to emerge from Asia, and for a China sceptic like Macro Man, the figures are decidedly unimpressive. In Taiwan, exports fell 28.6% y/y, worse than the expected 26.2% decline. "But wait!" he can hear you exclaim. "They were down 44% last month! Surely that's an improvement!"
Welcome to the wonderful world of seasonally adjusting Asian data early in the year. In most years, including 2008, the Lunar New Year (when many Asian countries have a full week's holiday) falls in February. This year, however, it was the last week of January. So this "improvement" in the February export data came in comparing February 2009, with 20 working days, against February 2008, which had but 16, despite being a leap year. And exports were still down by more than a quarter. You can clearly see the "New Year bounce" on the chart of export data below, including in 2004, the last year that the New Year week fell solely in January. However, the bounce is conspicuous by its absence this year, even though February had 5 more working days than January.
Also telling was China's CPI data, which crashed to its lowest level (-1.6%) since the inflationary aftermath of the Asian crisis. Some of this is of course down to base effects; nevertheless, those effects are set to last for another 5 months, so risks are heavily skewed to more negative prints.
And so, might China accelerate its deflation-fighting policies? One obvious thing would be to weaken the currency; however, letting USD/CNY drift higher is fraught with political peril, given America's sensitivity to the rate. (And not without cause, mind you; near-record trade surpluses are hardly suggesting the RMB is anythign but weak.)
Then again, the RMB has appreciated most against the euro over the last couple of quarters. Given that a) Europe is just as important to Chinese trade as the US, and b) for whatever reason, the Europeans like to moan more about the EUR/USD rate than what China does, might it make sense for China to try and weaken the RMB against the euro?
Perhaps that's why Voldemort was once again fingered as the euro buyer in Asian time overnight. At the very least, it's probably why 1.25 has been such a tough nut to crack. Not that the level might not fall eventually; de-leveraging flows could and probably will overwhelm the Voldemort bid eventually.
In the meantime, however, market price action is likely to remain as noisy as one of the rockets they shoot off to celebrate that Chinese New Year.
Friday, March 06, 2009
One down, one to go.
Yesterday proved to be eventful, to say the least, as the Bank of England formally adopted QE, announcing that they could purchase up to £100 billion Gilts and £50 billion private-sector bonds as a new way of prosecuting monetary policy. It's hard to believe that it was only three months ago that the Bank "saw the light" about the state of the UK economy and the global financial system? You can't say that they haven't made up for lost time!
Amusingly, readers of the FT can find commentary that the Bank has either done too much (Martin Wolf) or not enough (Willem Buiter.) When everyone disagrees with you, that's usually a sign that you've done the right thing. Certainly the Gilt market likes it; 10 year yields have plummeted 50 bps since the announcement.
In Europe, meanwhile, the ECB also seems to have had a Damascene moment. How else to explain the revision to the staff forecasts, which now expect EMU GDP to fall 2.7% this year and for CPI to go negative by mid-year. Not that that is "deflation", however....more of an "extreme disinflation", peut-etre? Either way, rates look like going to 1% or below by June.
Today, of course, sees the release of employment data in the US. Yesterday's throw-away line about seven-digit office pool entries seems to have morphed into the hot rumour du jour, as Asia was rife with stories that the NFP would ring up the dreaded "million."
Frankly, Macro Man has no idea if it will or not (though he suspects not.) As always, the difficulty with the payroll number is discerning the signal (the shift in trend) from the noise (the 100k plus standard error around that trend.) That's why he prefers to focus on the unemployment rate; it might lag a bit, but the serial correlation is high and the magnitude of monthly changes provides information about trend strength.
Regardless of what the payroll report shows, today's U-rate should be a shocker; Macro Man's model based on the jobs hard to get component of the consumer survey suggests a 0.8% rise in the unemployment rate. Ouch!
"Ouch" is also a pretty apt descriptor of the foreign exchange market these days. recently volatility in EUR/USD has been fairly extreme, with virtually no signal to show for it. Yesterday the interbank electronic broking system went offline for most of the afternoon; given that virtually all spot guys who used to trade by voice alone have either retired or (ugh!) become salesmen, the market had little idea of how to trade. Carnage ensued. And then this morning, Macro Man was awakened by the dulcet tones of a text message telling him that Voldemort was up to his old tricks again. And Mrs. Macro wonders where the gray hair comes from....
One market where there definitely does appear to be a singal is Turkey, where the lira is getting roasted (sorry!) against all comers. A tax amnesty has expired, thereby eliminating a key source of TRY demand, while Turkish banks are facing a reasonably significant amount of debt roll-overs over the next month or so. Both USD/TRY and EUR/TRY have made new all-time highs over the past 24 hours, so technically it might be time to cue up a little Sinatra and play "Fly Me to the Moon."
Actually, finding out what spring is like on Jupiter and Mars doesn't sound like such a bad idea. I wonder how their banks are doing?
Thursday, March 05, 2009
Like Colt .45, it works every time! Macro Man points out that the market's gone down pretty consistently and that there seems to be remarkably little panic, and whammo! Here's a nice 2.4% rally to stick in your pocket.
But that was yesterday and this is today, which kicks off a pretty darned important 48 hours for financial markets. Chinese Premier Wen failed to deliver a hoped-for stimulus package in his keynote address to the NPC (more on this below), and tomorrow of course sees the release of US non-farm payrolls; Macro Man suspects that more than a few entries in office pools will be looking for seven-figure job losses.
But the real focus for the remainder of the day is the central bank announcements here in Europe. The ECB is widely expected to cut 0.50%, so focus will probably shift to the press conference, where JCT's comments will be parsed for hints of further easing. Certainly it's difficult to see the likely staff forecast downgrades standing in the way of taking rates down to 1%. That, at least, is what the bond market is saying; Schatz (German 2 year) yields appear to be in the grip of a Death Star-type tractor beam at 1%.
Even more interesting, perhaps, will be the Bank of England's announcement, which could prove historic. Why? Because for all the talk of quantitative easing, and all the ink that's been spilled over it, and indeed for all the central bank balance sheet expansion seen all over the world, no CB has actually formally adopted QE since the BOJ unwound it a few years ago. But perhaps the BOE will formally adopt it, in the sense of actually, you know, targeting some sort of quanitity. Whether they actually cut rates or not is largely academic; the market is expecting a 50 bps easing, but if policy is shifting to a quantitative asset-buying target, the level of base rates is largely irrelevant. Not that Macro Man wouldn't welcome another half a percent off of his mortgage rate, however!
And now, China. Ever since the stimulus package was announced last November, there have been elements in the market that seem to have pinned their hopes of global recovery on a quick bounce in Chinese growth. The January rally in A shares is greeted with a fanfare, while the February sell-off is met with radio silence. The BDIY edges off the bottom of the chart, and this is seen as proof that things are picking up. The PMI bounces, and suspicions are "confirmed"; China is on the way back up.
Macro Man finds himself in a difficult position here. One of his relative investment advantages is being on top of the data, seeing second-derivative changes in important trends, and anticipating market sentiment shifts. This would appear to be a perfect set-up for him to go long oil and copper on the back of a Chinese recovery.
Yet he is best by nagging doubts...which are largely a function of the poor quality of Chinese data. How much can it really be believed? It is certainly true that the government has announced a program to increase domestic infrastructure spend, but it is not the case that this Y4 trillion will be completely accretive to growth; some, if not most, of it will be deployed away from other areas. Nevertheless, it is not a surprise to see some measures bounce.
But still, Macro Man has reservations. Bank lending surged last month...but we know that bank credit in China is administered via diktat, larging without consideration of the merits of the borrower. Anecdotal evidence from China (Michael Pettis is an excellent man-on-the-street source) suggests that a significant portion of this new lending was ploughed into....the stock market. While that may be swell if you're invested in A shares, Macro Man isn't quite clever enough to figure out how it benefits world growth in any meaningful way. Anecdotal evidence also suggests that Chinese firms badly overestimated deamnd for basic goods, and that domestic steel prices are falling as a result. What does that suggest about future commodity demand?
More generally, there seems to be a virtually unquestioning faith in certain quarters about the government's ability to spend its way to its 8% growth target. Yet a simple analysis of what fiscal data is available suggests that this is nonsense. As mentioned above, the stimulus announced last November totalled Y4 trillion over the next couple of years. There was some suggestion that a new package of similar magnitude would be annoucned this morning. (It wasn't.)
But on Macro Man's readings of the data, there is just no way in hell that this is possible. Total central government revenues in 2007 were, accroding to Bloomberg Y5.1 trillion. The 2009 budget is forecast to run a deficit of roughly Y750 - 900 billion. That's 3% of GDP. And while it is certainly possible to run a much bigger deficit than that (hey, just ask the West!), the Chinese government might be able to do just that without allocating a single new yuan towards stimulus. That's because central government revenues are falling sharply, according to the monthly data available on Bloomberg.
So if revenues are falling and a big net spend is about to ensue....why, then the government must be about to adopt the Western model and increase borrowing very sharply. Given that the major buyers of government debt, the banks, have been increasing loan issuance instead...well, then surely Chinese yields must be ripping higher?
Uh.....no. While yields did rise in January, that appears to have been largely in synpathy with a global phenomenon (the "Barron's bounce" for yields.) Since then, yields have been trickling lower, as the chart of the 5 year rate below demonstrates.
So if revenues are falling and local bond markets aren't pricing in a big rise in borrowing, where's the massive net stimulus going to come from?
Macro Man can only conclude that the answer is from the daydreams of the China bulls.