Wednesday, September 30, 2009

Behind the 8 ball

So here we are, at the end of another quarter already. This month in particular has flown by; Macro Man has
scuffled to find his feet from the word go.

He's feeling increasingly like the fat guy from Ohio at a poker table otherwise populated by Gucci-suited
Vegas regulars; whether it's the curious price action in equities or the BOE's apparently hawkish
comments yesterday in a private gathering, Macro Man gets the feeling sometimes that he's'stuck
behind a decidedly non-magic 8 ball.

Not being one of the illuninati, he"s'forced to live off his wits. (Readers can judge for themselves
ther this allows him to park in handicapped spaces.) Observing the market from afar, it doesn't
seem any easier than it does up close.

Perhaps next month will provide richer pickings; at this point, Macro Man is happy to bid adieu to September and welcome in Q4.

Tuesday, September 29, 2009

Cow Patties

Which are bigger? The cow patties littering the Cornish moors, or those served on a sesame-seed bun to risk asset shorts yesterday?

Having sampled the "delights" of both, Macro Man still isn't sure. Hopefully they'll both be behind him by the end of the week.

In any event, he's lightened up a bit as we careen into quarter end. No point swinging from his heels when he can't even see the pitch.

Speaking of which, Friday's'quiz was designed to illustrate the lack of coherence in the drivers of exchange rates this year. Country A was the US, with a 0% FX move.

Country B was Mexico, with a 5 % FX move.

Country C was New Zealand, with a 26% FX move.

Country D was South Africa, with a 27% FX move.

Try looking for coherence there....all you're likely to find is a big cow patty!

Monday, September 28, 2009

Communication Breakdown

Macro Man is suffering a communication breakdown-literally.

He's'spending a few days in the wildnerness of the Cornish countryside, the result of an rather generous bid at a long-ago charity auction.
The Internet connection is patchy at best, so his missives will have a rather haphazard quality.

Suffice to say that G20 seemed a bit of a snoozer and that the DPJ has discovered the story of Pandora's'Box. More later, including the results of Friday's'quiz.

Friday, September 25, 2009

A Milestone

Macro Man hopes that readers will pardon a brief diversion from your regularly-scheduled macro commentary as he notes a milestone in the history of this blog.

Today, at 1.04 pm London time, this space received its one millionth visitor (from Ponte-Claire, Quebec, if you're interested) since its inception on 13 September 2006. A lot has changed since then, both in the market and in this space.

Thanks to all readers for stopping by, and especially those who contribute to what is usually a high-quality discussion of the issues and markets of the day. Cheers!

And now, back to your regularly-scheduled commentary....

Ursus Minor

Is it time for the bears to come out from the woods? Apparently so, judging by the last 48 hours' price action and the general tone of comments in this space.

To be sure, yesterday's price action was pretty dreadful. Equities and other risk assets tried to rally, and had a modcium of an excuse to do so in the claims and house price data, but fell back to earth with a resounding thud.

What's interesting is that Macro Man's proprietary measure of risk appetite, while well below the highs reached earlier this year, remains at levels consistent with, dare we say, irrational exuberance by the standards of the pre-crisis era.

As for the whys and wherefores of the sell-off, there are two plausible explanations for yesterday's price action. The first, more prosaic, rationale was the disappointing existing home sales data, which fits the sort of brown-shoots scenario described yesterday. The alternative, sexier explanation was the Fed's announcement that it is reducing the size of the TALF/TAF programs, and the simulataneous releases from the ECB/BOE/SNB that they will be winding down some of their special USD repo facilities.

Now, all of these programs have been under-utilized in recent months, so their withdrawal should not have a particularly pernicious effect, especially as the authorities have retained flexibility to re-establish them. But one might reasonably posit that winding down unused facilities is a necessary (if not sufficient) precursor to implementing an exit strategy; while their elimination does not suggest an exodus is imminent, while they were in place one could reasonably discount the chances of a policy tightening for the tradeable future. Now, who knows, especially as the timing of the announcement in the run-up to G20 is probably not a coincidence.

That, at least, appears to have been the reaction of equity and currency markets. Today's WSJ op-ed from Kevin Warsh underscores that markets will need to contemplate the timeline of policy tightening before too long.

Interestingly, fixed income markets didn't take the same message....if anything, quite the opposite. The eurodollar curve flattened reasonably yesterday, continuing the trend of the past couple of months (proxied below by the March/Sep 2010 spread.) A eurodollar flattening implies "lower for longer"....not exactly what you'd expect from a market worried about having to contemplate tightening!
Alas, logical consistency appears to be too much to ask from this market, as currency punters know all too well. Consider the table below, which lists four countries and some relevant macro variables, and then four six-month currency moves. See if you can match which currency move goes with which country...and no cheating!
While Macro Man retains considerable sympathy for the bear case, and has enacted trades to that effect this week, he finds it difficult to fully commit to any thematic view when so many markets exhibit logical inconsistency.

So while it's tempting to have a real go from the short side and shoot for the stars, Macro Man will need to see more than two days of price action to convince him that this is the "big 'un." For now, therefore, he's happy to just aim for Ursus Minor.

Thursday, September 24, 2009

What Now?

So what now?

Last night's Fed statement was, to Macro Man's eye (and, he suspects, those of most macro guys) about as dovish as it could have been. And for the first hour of trade, the asset market reaction was predictable...short end screams higher, equities rally, and the dollar takes it on the chin.

But at some point, some time around 7.30 pm London time, it all sort of ran out of steam. First EUR/USD ran into corporate offers in the mid 1.48's, which then chased it lower, settting off stops. Then equities started trickling lower, which eventually morphed into a mini-torrent.

What happened? It's hard to suggest that the market had taken the adjustement to the MBS purchase schedule as a sign of imminent tightening when the short end a) flattened on the day, and b) closed pretty much on its highs.

Could it be- and Macro Man is ashamed to admit that this never occurred to him- that equity guys actually thought that there was a chance that the Fed would announce more QE? The very suggestion seems ludicrous to a macro observer, which is why your author never contemplated it. But it would certainly serve as the simplest explanation for the generally disappointing performance of stocks in the wake of seemed to be a very benign, reflationary statement.

Regardless, the stars may be aligning towards a somewhat less favourable environment for risk assets. Oil was a notable laggard in the entire orgy of reflation that's dominated the past few months, and in the wake of a huge composite inventory build crashed below the support level highlighted in this space the other day.

Sterling, meanwhile, has come under the cosh this morning after Merve the Swerve noted that a) it's a bit silly to get excited about a little growth after a huge recession, b) a year ago, a couple of UK banks were within hours of going bust, and c) that sterling weakness is welcome, in that it helps rebalance the UK economy.

The last comment in particular helped propel EUR/GBP to new highs for the move, putting the kibosh on a recent high-profile "buy sterling" call from a well-connected institution. Perhaps they need to get Merve on the payroll....
In any event, the issue of rebelancing is of particular relevance, particularly with the Pittsburgh G20 meeting rapidly approaching. One would like to think that global imbalances would be up for discussion; as Macro Man has said on numerous occasions, if China et. al. want a seat at the big boys' table, they need to bring something to the table, other than a set of demands. Y'know, like currency flexibility and/or convertibility, an issue which not only the US but also, increasingly, Europe are likely to highlight.

It's a particularly relevant time to address the global imbalances issue, as the beanstalk-like proliferation of green shoots may be about to slow. Economic surprise indices in both the G10 and Asia have quit going up and, if anything, look like rolling over. It's interesting to note that a number of leading indicator data points have disappointed consensus recently.
So if the second derivative/green shoot trend encounters a drought, 'twill be somewhat more challenging to avoid the siren song of protectionist, beggar-thy-neighbour policies that are already emerging in the dark corners of the global economy.

And if protectionism is allowed to flourish, green shoots-style, it won't just be Macro Man and other punters asking "what now?"

Wednesday, September 23, 2009


...that was as dovish as it feasibly could have been. Cue orgiastic rally in eurodollars, a nice pop in euro/dollar, and new yearly highs in the S&P. The boy who cried wolf indeed....


Well, the big day is finally here, and it's not begun terribly auspiciously. Macro Man is desperately trying to fend off a headache, as the brackets supporting his six computer screens have completely packed in this morning. The rather cubist array of monitor angles is eerily reminiscent of a Picasso painting; while that's fine for the Museu Picasso, Prado, or some other repository of the artist's work, it's not really what you want when you're attempting to track the progress of hundreds of small, flashing numbers.

The larger question, of course, is whether this evening's Fed announcement will generate headaches of an altogether more substantive sort. For choice, Macro Man suspects not; while there is some talk of the Fed starting to look at using reverse repos to drain liquidity from the system, this appears to be laying the groundwork for such a development next year rather than a sign of imminent draining. After all, there'd be little point in draining the SFB roll-off in the next couple of months when the MBS purchase program will be simultaneously increasing bank reserves.

That having been said, the FOMC will be looking at a headache of its own before too long. The deflationary impact of commodity prices, particularly energy, is already waning; by the end of the year, unchanged oil prices will generate a similar magnitude of yearly gains that a) lured the ECB into its ill-fated July 2008 policy tightening, and b) immediately preceded last autumn's global meltdown.
While it's certainly not axiomatic that a similar outcome will ensue, particularly in the absence of further marginal oil price rises, the impact of base effects on reported CPI and PPI inflation should be fairly substantial. Those Fed voters who interact with actual businesses who pay actual energy bills may eventually prove to be a headache for the more academically-inclined Fed governors who tend to rely on output gap models and measures of "core" inflation.

And that could prove to be a headache for those managers reliant on short-vol or coupon-clipping strategies. To be fair, "risk on" and carry trades have been the nonpareil money-spinners of the past few months. Anecdotally, Macro Man's sense is that just about every macro manager out there has some of the latter, even if they have disbelieved or attempted to fade the former.

For what it's worth, however, the HFR macro index has registered a pretty poor performance thus far this month. While Macro Man has certainly scuffled, there's been enough juice in the carry trades, some of his long-risk equity trades, and the dollar to avoid a shocker. He'd have thought others were in a similar boat, but on the evidence of the chart below, perhaps not.

Macro Man has long thought that the last few months of the year would prove volatile and topsy-turvy as the risk rally comes under the threat of its own success (via the implied policy tightening that it would produce.) Thus far, it's been fairly plain sailing. And while Macro Man is still positioned for the good times to continue, he's started to rein in his horns a little so as to avoid the mother of all migraines if the Fed does change its tune.

Tuesday, September 22, 2009

A Little Too Close

Sometimes you can get a little too close to the market. If someone (say, a friendly punter/blogger with a tasteful double initial) had told you that there was a potentially significant event on Wednesday, but little news of consequence scheduled for release before then, what would be your a priori expectation of price action for the first half of the week?

Chances are, you'd say something like "well, there'll probably be some profit-taking, and maybe the sharks will run some stops. I guess it'll be pretty noisy." Makes sense, right? And if you run a "directional medium-term macro strategy", you'd think it would be nothing to get worked up over.

And yet, if you're there watching the screens, it's incredibly easy to get sucked into doing something stupid when you see stops being run and/or a price correction. Such as yesterday's dip down to 1.4611 in EUR/USD....which you're kicking yourself if you sold, given that we've soared to new highs...and that's before Lauren Cooper Axel Weber said "I ain't bovvered" about the level of the euro exchange rate.
Not that FX is alone in its ability to suck in the unsuspecting punter, only to spit him out with a damaged P/L. Equities looked offered-only at this time yesterday.....and now they don't.
Treasuries caught a tasty bid.....until it went away.
Perhaps the most interesting price action was in the energy complex, where oil caught a proper bollocking...CLZ9 shed $3 at one point, and appeared on the verge of breaking a rather significant trendline. Needless to say, pre-emptive selling of the break was rewarded with a nice $1 bounce and a hole in one's P/L.
Sometimes, it's useful to take a step back and recognize that for the short-term, the noise to signal ratio is likely to be close to infinite. On yesterday's evidence, you can save yourself money by not watching things too closely. So while Macro Man is ostensibly taking Mrs. Macro out to lunch for her birthday (and our wedding anniversary!) today, he may well find that it's quite a profitable idea as well.

Monday, September 21, 2009

Big Week

It's a bit of an important week this week, and for a reason largely absent from the market calculus of the past few months. Wednesday sees the Federal Reserve announce its policy decision; while no one expects any change in actual policy, the statement will be parsed even more closely than usual for signs that the policy winds may be shifting.

That Big Ben essentially declared the recession to be over recently, in advance of the official data release, may simply have been an acknowledgement of the obvious- current quarter GDP will deliver a positive print when released towards the end of next month. Yet there may be some concerns that the Fed may start to guide the market's gaze towards its exit strategy; having been excoriated in some circles for its "free money giveaway", some Fed voters-particularly the regional presidents-may wish to signal that they do not intend to repeat Easy Al's mistake of taking forever and a day to withdraw stimulus.

The jitters caused by the "paid advisory report" last week suggest that the patient will not enjoy coming off the methadone. That equities have stumbled out of the gate so far this week does not suggest a willingness to look past a possible exit strategy, either.

That having been said, it does seem as if markets are pricing at least some degree of risk premium as to the development of an exit strategy. Using the front two eurodollar contracts, we can develop a "constant maturity" estimate of where 3 month LIBOR will be, say, three months into the future.

As the chart below indicates, markets have priced 3 month forward LIBOR higher than the spot fixing rate for the past several months after pricing it at or under the spot fixing for most of the first half of the year.
If we look at the gap, it's at the high end of the 2009 range; the peak just shy of 30 bps came on June 5, when "strong" payrolls were released and front ends went into free-fall.
What does it all mean? Frankly, Macro Man isn't positive. The rise in the forward-LIBOR risk premium suggests that the market is a touch nervous about what the Fed might come up with; as of Friday, this hadn't meaningfully impacted either equities or the dollar, though today they have reversed recent price action.

By the same token, the opening up of this little risk premium suggests that if the Fed delivers an unchanged message, a relief rally could ensue- particularly in the front eurdollar contract, where positioning is admittedly heavy but there's a bit more "juice" than in the EUR or GBP equivalents.

From Macro Man's perch, it's probably a bit early to be publicly discussing exit strategies- sure, markets have priced in a bit of reflation, but the SPX is still down 15% y/y and the dollar's largely unched over the same horizon. From the Fed's perspective, they are still at the point of adopting a "minimax" strategy- i.e., trying to minimize the losses in a worst-case scenario.

If, after a quarter or two, private demand looks resilient (and bear in mind, Macro Man is highly sceptical on this count), then the Fed will feel comfortable. But to Macro Man's mind, that's a 2010 story, not a 4Q09 one. Of course, he could be which case it could be a big week, but not in the way that he might like.

Friday, September 18, 2009


A short post today, as Macro Man is tied up with various errands this morning. Suffice to say that markets feel nervous in a way that's been largely absent during the past couple of weeks' rally.

Maybe it's the volatility that always lurks on triple-witching days. Maybe it's the late-session swoon taken by Shanghai- though contrary to Macro Man's expectations of a few weeks ago, developed markets seem to have shrugged off eyeing Chinese stocks for short-term guidance. Maybe it's negative headlines on Lloyd' seems like the first time in a while that we've seen negative news on banks get serious airplay. Or maybe it's next week's autumn equinox, which is getting some attention as a possible source of hocus-pocus to derail the risk asset rally. (Paging the sky dog....)

In any event, after such a sharp rally in recent days/weeks/months, the market feels overdue for another look at the downside...even such a look once again fails.

So really...Macro Man can't blame markets (or himself) for feeling just a little bit nervous...

Thursday, September 17, 2009

Bedtime Stories

Macro trading is often a thankless and frustrating endeavour, not least because when things go wrong (as they often do), it is difficult to explain to a layman (or woman, or child.) Macro Man generally tries to leave his frustrations, as well as his victories, at the office; in a sense, he tries conduct his real life separately from his "Macro Man" alter ego.

Still, there are inevitable leakages. Take yesterday, when what was shaping up as a rare stellar day this month was derailed by a "paid advisory service" report suggesting that some Fed voters would already like to push for rate hikes, and that the committee generally senses that the output gap has narrowed quite dramatically. Although the report was evidently denied (perhaps after an angry phone call from the Eccles Building?), some of Macro Man's positions took a nasty dent, and his overall portfolio performance wasn't helped by a spot of execrable short term trading.

So last night, when it came time to tell the Macro Boys a bedtime story, Macro Man intended to tell them the story of The Boy Who Cried Wolf. Somehow, the nature of the story changed in the telling, however. Last night's story revolved around a paid advisory service that used to have good contacts in policy circles, oh, about fifteen years ago. Ever since then, however, this service has been consistently wrong. They issue a "ground-breaking report" which moves the market....only to be proven dead wrong. Eventually (though sadly not yet), they lose all their if and when they finally do get one right again, nobody listens and they go out of business.

Sadly, this wasn't the first time that Macro Man's day job has intruded on the evening ritual. Consider these other (macro) bedtime stories:

The Three Little Pigs: Three little piggies each built a house: one of straw, one of sticks, and one of stone. Unfortunately, each took out an ARM with a 1% teaser that reset after two years to LIBOR + 800. When this happened, they defaulted on their mortgages. This in turn bankrupted the big, bad, wolf, who received a hefty government bailout and a stern warning not to lend to little piggies ever again.

Jack and the Beanstalk: Jack was a young man who managed his mother's retirement finances. He put them all into structured credit vehicles which blew up, leaving Jack and his mother with nothing but three magic beans. Jack's mother was so irate that she kicked Jack out of the house and threw the beans out of the window. With nothing better to do, Jack pledged the beans as collateral to the government in their PPIP program. Eventually, the beans sprouted into mighty green shoots; Jack climbed up and paid himself a big fat bonus with the pot of gold he found at the top.

The Five Chinese Brothers: Once upon a time, there were five Chinese brothers. The first brother owned a toy factory in the Pearl River delta, but it went bankrupt when labour costs rose and Western consumers quit buying so many toys. The second brother applied for a loan to speculate on the price of copper. The third brother applied for a loan to speculate on equities. The fourth brother applied or a loan to set up a joint venture with a foreign electronics manufacturer, so that he could reverse engineer the products and eventually set up his own factory to make cheap replicas. The fifth brother was in charge of the local disbursement of central government stimulus funding; he fast-tracked all the loans, and the entire family became fabulously wealthy.

Dr. Strangelove, or how I learned to stop worrying and love the stock market: It's not really suitable for children, and in any case the story is still being told. Macro Man'll let you know how it ends....

Wednesday, September 16, 2009


Is the dollar going down forever? Well, to paraphrase Benjamin Franklin, nothing is forever except death and taxes, but it certainly seems that the DGDF crowd is having their day (week? month? quarter?) in the sun.

The normative question of whether the dollar should go down "forever" is an emotive one; Macro Man is generally sceptical of such arguments, particularly in the current context when the US current acccount deficit (usual source of DGDF $ bearishness) is eminently reasonable by the standards of the past decade or so. Moreover, a number of the currencies that have performed best against the buck recently (here's lookin' at you, NZD and ZAR!) haven't exactly been paragons of balance of payment virtue themselves.

However, while market focus is usually (and justifiably) on the flow of currency movements (i.e., portfolio flow versus the US need to finance an ongoing c/a deficit), it seems as if the current bout of dollar weakness may have more to do with a stock adjustment...i.e., Asian and Middles East CBs reducing the share of dollars in the reserve bounties that they've accumulated over the past year or so.

Throw in a step-shift in the perceived equilibrium level of USD/JPY, thanks to DPJ laissez-faire, add a dash of flow recycling from Asian CBs standing in the way of overdue currency appreciation (so what else is new?) , and throw in a pinch of dollar-negative seasonality, and these are the things of which market trends are made.

EUR/USD has broken up to new highs for the year, courtesy of both public and private-sector flow. Near-term resistance lies at last December's high of 1.4719 and the Sep '08 high of 1.4866; above those levels, there's quite a bit of fresh air.
The breakout was confirmed, or indeed foreshadowed, by therally in precious metals a few weeks ago. Gold is not far below its nominal high of 1032 (though obviously well below its real high), but there appears to be more near-term upside in silver, which has broken and held the key $16 level.
There are still a few holes in the DGDF story, however, particularly if it's one predicated on a cyclical rebound. Base metals have been taken to the smelter recently (boom, boom), whereas one might reasonably expect the rising tide of a broad-based DGDF-deval to lift all boats...even those made of base metals. The chart of aluminum is indicative of the complex.
Similarly, oil (as measured by CLZ9) is off its recent lows, but doesn't exactly scream "breakout!!!" Now, this may be down to promised OPEC supply, or it may be down to spec limits. But in a world where the dollar truly is "going down forever" and inventories are sharply off their highs (though admittedly above long-run averages), one might reasonably posit that crude would have put in a better show.
So how are we left? Much as it pains Macro Man to say it, it looks like we may well be at the mercy of his old adversaries, the FX reserve managers. Should they continue their recent behaviour and consistently buy EUR/USD in the open market, the private sector will happily piggy-back and a trend will be born.

Should they pull the bid and start selling (because as you know, punting someone else's currency for a percent is a vital part of FX reserve management), well.....then we might find that the dollar going down isn't forever after all....

Tuesday, September 15, 2009


While Francis Galton may have found that crowds are a surprisingly accurate forecaster of things like ox weights, when it comes to modern finance it doesn't appear as if the crowd of MM readers carry any more wisdom (or at least conviction) than he himself does.

Indeed, while the participation was gratifying and there was a, ahem, lively debate in the comments section between the deflation and inflation camps, the results of the polls were depressingly close to Macro Man's own, uninspired views. The results were as follows:

SPX: Readers are, on balance, bearish, with a sequential decline in votes for successively higher price buckets. That's probably an accurate reflection of the global macro consensus, which suggests that Macro Man isn't alone in his bemusement over the apparently bullet-proof rally in equities from the July lows.

Gold: The responses for gold were almost perfectly balanced, with the plurality of the vote looking for prices broadly around current levels. Indeed, the outcomes between 900 and 1125 are almost perfectly balanced. Somewhat surprisingly (to Macro Man, at least), tail risk looks moderately skewed towards lower, rather than higher, prices. Does this perhaps say something about the degree to which deflationists modestly outnumber inflationists?

USD/JPY: Macro Man has avoided the yen for the past several months as part of his general boycott of G10 FX. It's a decision that served him well, as he probably would have been tempted to buy the dip at some point. It looks like he would have had company, as the most popular choice called for a rebound between 92 and 98. Similarly, upside tail risk was given a much higher probability than downside tail risk. Macro Man isn't sure what to make of it, but it does seem tempting to buy some low delta yen calls....

Fed: Although 2011 won the plurality of the votes here, a slim majority of resp0ndents (54%) believe that the Fed will hike rates at some point next year. Macro Man was slightly surprised to see that nearly a fifth of readers don't expect a rate hike 'til 2012 or later...presumably they were among those who voted for lower equities and lower gold. At some point, Macro Man might get lured back into bearish trades in the reds or even the greens....

Finally, Macro Man would be your indulgence to answer one more question, a glaring omission from yesterday's series: where will US 10 year yields end 2009? Answers will be here.

Monday, September 14, 2009

Your Turn

Well, well, well. The long-awaited protectionist chickens are coming home to roost. Amongst all the over-the-top furore over the president's birth certificate, Macro Man wonders if the conspiracists shouldn't actually be checking to see if his birth name wasn't "Steve Carlton"?

In any event, the brouhaha over tires (and chicken and cars) has predictably set risk assets onto the back foot today, after Friday's late session sag following the tariff announcement. How long it lasts remains to be seen.

Macro Man is trying something different today. After spinning his wheels for the last couple of weeks, he wants to take a step back and get a sense of where consensus lies in a few key markets. So it's your turn to write the post today, by answering the four poll questions below.


Results for the SPX, gold, and yen polls.

Friday, September 11, 2009

Market Dentistry

Macro Man has a dentist's appointment this morning. No, not the guy responsible for this (it still tickles Macro Man how many Brits didn't understand that the teeth were a joke.) When Macro Man first moved to Britain a dozen-plus years ago, his American dentist took him aside and told him to "find a dentist that the rich people go to" to ensure a basic standard of care. While Macro Man can't comment on his dentist's other clientele, he can at least confirm that the bills are startlingly high.

In any event, a spot of dentistry will make for a welcome break from trading these markets. We're more than a third of the way through September, and Macro Man can't seem to get any sort of trading rhythm...his P/L hasn't strayed more than a few bps from zero all month. It's been particularly frustrating, in that he's had a few pretty solid winners....but every day, the remainder of his portfolio has been dragged down by a bevy of small losses.

Intellectually, it's been pretty grating. AUD/NZD is as good a sign as any of what kind of market we're in. As noted in yesterday's post, the RBNZ had a bit of a moan about the level of the NZD, with Sleepin' Al Bollard highlighting the misalignment of AUD/NZD in particular. As you can see, since then it's been a one-way trip lower (i.e., for a stronger NZD), with a couple of particularly brutal trips down an elevator shaft along the way. You've gotta laugh....(if only so that you don't cry.) Randolph and Mortimer, where are you?!!?!?!

While Macro Man's had a small position in AUD/NZD, he's at least had the sense to leave other FX trades alone. The yen has been pretty interesting; for the past ten years or so the market has developed an almost Pavlovian response mechanism to sell yen (i.e., buy USD/JPY) when it's a "risk on", equity positive environment. As you can see, that strategy has performed execrably over the last five weeks or so, perhaps as a function of Japan's HIA and the new laissez-faire attitude of the DPJ.
And there's been other minefields as well. Macro Man bought silver a few days ago when it broke 16. Given his general scepticism of the "dollar going down forever" crowd and his uber-scepticism of precious metals cabal, this was purely a technical, "sell to some greater fool" play. Unfortunately, his metals scepticism is so great that he has tried to trade the position around, and somehow contried to not really make any money despite a current reading of 16.85 on the Dec futures contract.

Grrrrrrr. In many ways, Macro Man's looking forward to his trip to the dentist this morning. It's likely to be more intellectually satisfying and considerably less painful than his attempts to trade these markets this month, and despite the size of the bill it might well prove to be less costly to boot.

Thursday, September 10, 2009

Trading Places

Trading Places. In financial market circles, it's a cultural icon, and not a day goes by when some line from the film isn't quoted on a trading desk somewhere. When it is on Sky Movies (remarkably often), it's like slipping on an old, comfortable shirt...always good for soaking up a few minutes of viewing, and it never fails to raise a giggle or two.

Certainly it is a more realistic portrayal of finance than the utter dross served up in BBC2's "Last Days of Lehman" drama last night. Macro Man and Mrs. Macro could only stomach about ten minutes of it, and were forced to turn it off, gagging, as "Hank Paulson" launched into an impassioned soliloquy in the Friday night gathering of Wall Street chiefs. The dialogue was straight out of Eastenders, and Hank himself was portrayed by the same chap who was the crooked police captain in L.A. maybe the producers got that call right.

In any event, Macro Man has Trading Places on the mind. Last night saw the release of the altest monetary policy statement from the RBNZ, which kept rates on hold, acknowledged the uptick in the data, noted the excessive strength of the NZD, and stated that rates would be kept at current levels or lower through the end of next year. Alan Bollard subsequently offered some pretty explicit remarks that the NZD should be weaker.

Certainly the bounce in the TWI has been impressive, though it's failed to reach prior highs. The currency is pretty clearly a concern, given the ongoing size of New Zealand's current account deficit as a pecentage of GDP. Reading between the lines, Bollard would like to tighten rates, but feels constrained by the level of the kiwi dollar. While the RBNZ has done some half-hearted intervention in the past, they've made no real sustained efforts to systematically weaken the NZD.

Now compare that situation with, say, Korea, where the BOK offered some fairly hawkish commentary overnight, observing that the economy should maintain momentum and that inflation should begin to pick up. This was naturally taken as a signal that rates could begin moving higher, and 1y swap rates ticked up 16 bps. Yet the scuttlebutt on the ground is that even if and as BOK hikes rates, they will seek to prevent the KRW from rising too much through the same kind of intervention that has contributed so much to the well-being of humanity over the past 6-7 years.

That the RMB hasn't budged for well more than a year is a signal that BOK's view is hardly unique. Somewhat unbelievably, over the past year the NZD TWI has, in aggregate, fared somewhat better than the Asian currency index (ADXY), despite the fact that NZD isn't exactly a wonderful carry trade any more.
So on the one hand, we have a CB governor of a large c/a deficit country who'd like to tighten but won't because of strength in his currency, which he feels powerless to counter. On the other, we have Asian CB governors who, in aggregate, oversee large c/a surplus economies that may or may not tighten policy over the next few months, but are fighting pretty damned hard against domestic currency appreciation.

Winthorpe, meet Valentine. Valentine, meet Winthorpe.

If only we could play the role of the Dukes and put Dr. Bollard in charge of, say, the BOK, and have the BOK governor manage policy in New Zealand. Perhaps then we could avoid re-inflating the global imbalance bubble that was a contributory factor to the whole mess that we've found ourselves in.

And maybe, just maybe, those two would cross paths at some future APEC meeting. Macro Man can just imagine how the conversation might go:

"Looking good, Billy Ray!"

"Feeling good, Louis!"

Wednesday, September 09, 2009

A Rude Interruption

Theme d'anne ou theme du jour? The jury remains out. Yesterday's "everything goes up" strategy worked swimmingly until the London market marked its sheets, after which there was a rather rude interruption. First, gold interrupted its Buzz Lightyear-esque trajectory by correcting back below 1000, and then a piece of really quite fugly data was released.

Consumer credit fell by $21.6 billion in July, by far the worst reading on record. While the apogee of "cash for clunkers" stimulus will have occurred in August, it nevertheless underscore the belief, widely held in macro circles, that the consumer will continue to rebuild balance sheets for the foreseeable future.

And small wonder, too! Even as househeld spending has fallen modestly over the past couple of years, it has reached a new high as a percentage of GDP. Not good. So if and as stimulus income is saved rather than spent, and spending growth remains subpar by the standards of the past quarter-century, it will be mathematically very difficult for GDP growth to be anything but pretty blah over the next couple of years.
So while H2 might see a bounce in GDP growth (though in a period of price or debt deflation, as we are currently observing, nominal GDP growth trumps real growth), it remains difficult to get excited about the permanance of the rebound. Plus ca change, indeed.
What it means for equity prices, or indeed any other prices, is of course anyone's guess. But it provided a timely reminder to Macro Man that while it's OK to swim in the sea of "everything goes up", when the tide goes out it's best not to drink the Kool-Aid on the beach.

Tuesday, September 08, 2009

Theme d'Annee ou du Jour?

The late-summer holidays are finally over, and now it's time to get stuck into a theme. The early returns (which admittedly cannot necessarily be trusted beyond, er, lunchtime today) suggest that theme is one of "reflation."

On the face of it, today's trading might suggest "dollar going down forever", if not "dollar crisis." Yesterday the UN, acknowledged experts in financial mismangement and iniquity, issued a report trumpeting the need for a new global reserve currency, reviving an old chestnut guaranteed to set curreny traders' pulses racing.

Throw in the news of a long-overdue Hong Kong-listed sovereign debt issue from China, and the alternatives to the dollar look even more enticing. Sure enough, Macro Man's currency screen is a sea of red (for the dollar), as it's fallen against everything under the sun (other than the ILS, which has seen CB intervention.)

So is it another incipient dollar crisis, then? Not so fast, my friend! If there were a dollar crisis brewing, shouldn't Treasuries be selling off rather than remaining bid? In fact, the price of everything seems to be going up, at least measured in dollar terms.

The chart below plots the return on six different asset prices- S&P futures, 10y Treasury futures, EDZ0, gold, the EUR and the JPY- since the end of August. As you can see, they're all higher.
This trend has actually been persisiting for a bit longer than the last week...Macro Man plotted the rolling 20 change of these six prices since the start of the financial crisis, and totted up how many of the six were positive. Sure enough, as of this morning all six of 'em were up over 20 days ago.

Over the past two plus years, this has actually been a fairly rare phenomenon: we've registered a +6 on just 14 of 545 days, or 2.6%. And most of those were in the aftermath of the initial Fed rate cut in September, which as you may recall exceeded expectations at the time. Indeed, since the end of 2007 three have been less than half-a-dozen times when the all six of these asset prices have risen together on a 20 day horizon.
What should we take from this? That the theme du jour is likely to be exactly that, soon to be replaced by something else that will encourage asset market returns to go their separate ways? That monetary velocity has yet to show any signs of picking up would argue in favour of this proposition.

Then again, if economic actors are going to start using the huge pile of dollars (and other currencies) that central bankers have dropped from their respective helicopters, mightn't it show up in asset pricing before it hits the official economic data, even on money supply?

So this is the conundrum that Macro Man is wrestling with this morning. His eyes tell him that it's just a big reflation trade. Yet consensus, his own expectations, and the weight of the last 21 months' experience warn that recent price action is just a head fake. But the W-shaped macro consensus is so firmly entrenched that it might need a few weeks of contrary price action to shake things up before re-asserting itself when it's not expected.

Decisions, decisions, decisions. Macro Man is trying his best to hedge his bets, keeping his core view intact within his portfolio while still trying to participate in the speculative orgy of "everything goes up." It's easier said than done, especially when there's a change in cross-asset correlations and volatility.

It's all a bit tricky when you don't know if you're trading the theme du jour...or the theme d'annee....

Monday, September 07, 2009

We're All Communists Now

Question: Why is Kenneth Feinberg (and his like in other countries) referred to as a "pay czar"? Surely "pay kommisar" is more accurate, both literally and historically?

In any event, the G20 reiterated its desire to reshape the compensation structure of the banking industry over the weekend. And while Macro Man has no wish to dispute that banking pay practices have been suboptimal over the years, he is left to wonder whether or not the current vogue for the top-down allocation of resources isn't the first step on a very slippery slope.

Sure, some bankers get paid too much....but then again, so do some movie stars. And if we start to claw back, ex-post, contractual payouts rendered on a good-faith basis in real time, what does that say about the rule of law? If we do it with bankers, why not do it with sports "stars", particularly those playing in publicly-funded stadia? Hell, why constrain clawbacks to pay? Macro Man has little doubt that there have been a few occasions when the public would like to "claw back" its election of a particular candidate after a couple of years' performance in office.

While it's not exactly new news, the world is becoming frightenly Orwellian, seemingly by the week. Given the cronyism and fondness for dirigism in the corridors of power, it looks like we're all Communists now. Perhaps this explains the market's attraction to China this morning; after all, the Chinese have plenty of practice in the arbitrary abrogation of contracts and the central allocation of resources....and they're literal Communists to boot!

In any event, Macro Man's Bloomberg chat manager is alight with commentary on renewed interest in the CNY, which appears to be making impressive gains against the USD, as seen below.
It's impressive, of course, until you bother to look at the scale on the chart. Put into a slightly longer-term context, the recent breakdown literally doesn't register.
But hey, why let the facts get in the way of a good story? And if we're all Communists now, what other currency would we want to own but the most centrally-directed of all, the renminbi?

Just remember, folks: Poverty is prosperity. Insolvency is adequacy. Regulation is freedom. Plus ca change....

Friday, September 04, 2009

That Time Of The Month

It's that time of the month again already.....and with a full moon to boot! Bring out your crystal balls, ouija boards, tea leaves, and the collected works of Nostradamus, John Dee, and Hermes Trismegistus. Yes, ladies and gents, it's payroll day today.

The data comes at a curious time for markets, which seem uncertain about whether or not to lurch into the usual September downdraft, or whether to execute a trampoline-style bounce. Certainly the mandarins in Beijing are attempting to execute the latter, with yet another "regulatory enhancement" announced today- namely, increasing the maximum QFII quota per asset manager from $800 mio to $1 bio. In the context of the size of the A share market, this is like increasing the weight of foreign participation from a proton to a neutron.

(This hasn't stopped the usual suspects from trumpeting the impact of the move, however.)

In any event, we're at an interesting juncture in the US labour market. The straight-line deterioration in the data has evidently come to an end; while the unemployment rate dipped for the first time last month, ancillarly indicators like weekly claims and the jobs hard to get component of the Conference Board survey showed signs of stabilization/improvement earlier.
So really, we could get anything today, and that's outside of the usual statistical frailties of the data. Your guess is as good as the magic 8-ball's.

What's notable, however, is the fairly extreme change in market pricing since the last, reasonably "strong" employment figure. While US fixed income of every stripe was marked lower on August 7, the following Monday saw a strong bounce that has continued uninterrupted to this day. The rally in the eurodollar strip has been particularly impressive, with the reds and beyond all rallying 75 bps or more.
To be sure, that's partially a function of jittery equities, partially a reaction to dovish rhetoric from Jackson Hole (though that didn't stop Stan Fischer from jacking rates up), and partially a function of the continued decline in spot LIBOR.

But at the same time, it's also ignored the fact that the cyclical data has remained pretty decent over the last few weeks, as evidenced by the Citi economic surprise index.
Of course, as noted the other day, this divergence could simply represent a warning sign that so-called "smart money" is rotating out of the bullish trades and positioning for weakness, as we seem to be at the apex of enthusiasm for the inventory rebuild and cash for clunkers.

On the other hand, it could just be a naked carry trade; certainly we've seen that in other markets such as Euribor.

Either way, it looks like a lot of risk premium has been taken out of the eurodollar strip, and it doesn't look like a bad bet to take a punt on a correction of the last month's trend, whatever the NFP randomizer spits out this month.

Thursday, September 03, 2009


Grrrr. Macro Man hates days like these. Y'know, the days of reversal (however temporary), where the pimps, gimps, and chimps who have been on radio silence for the last 24% or so in the Shanghai Comp are suddenly all over the one day squeeze.

For squeeze it surely did, as it ramped up a rather tasty 4.8% on steady gains throughout the day. The catalyst appeared to be comments from one of the regulators on wanting a "stable and healthy" market. Alas, Macro Man can remember the days when a "healthy" market was one that didn't rely on administrative diktat for direction...
Anyhow, the tinfoil hat brigade was out in full force yesterday after a brutal spike higher in gold. Tempting as it is to derive some fundamental pearl of wisdom from the move, which was seen by all and explained by none, it may well be the case that the rip higher was merely caused buying some.
In any event, silly season is upon us; it's day 3 of the month, and we're already averaging one BS story per day. Such is the path of more volatile trading coniditons...while it's tempting to grind one's teeth in frustration, at this juncture (with today's ECM tender announcement and tomorrow's payroll figs on the horizon), it's surely far better to grin and bear it.

Wednesday, September 02, 2009


Game on? Game on indeed.

The party (for the bears, at least) started in Europe, where some very large (50,000 +), fairly high-delta bearish option strategies printed, sending futures tumbling as the market-maker hedges went through. The size and structure of the trades suggest institutional hedging rather than directional punting. Either way, however, they represented a concern about further upside in the market that has been largely absent over the past several months.

In the US, meanwhile, equity weakness was particularly telling in light of a pretty solid ISM report, which comfortably beat the published consensus (though fell short of the hotly-whispered 55 level.) Failure to rally on good news is clearly a change in tone, and there was a poetic symmetry to yesterday's price action. Futures volume was the highest since March 10, the day after the SPX printed its low close. 'Twill be interesting to see if the follow-through is as pronounced over the coming months....
In any event, the composition of the sell-off was gratifying, as (and there's really no other way to phrase this) the turds got flushed. Low-quality and impaired financials, which as noted yesterday had dominated exchange volume in recent weeks, got their comeuppance, falling very sharply in tandem. Chalk that up as a small victory for rationality.

While it's tempting to go all-in from the short side, the last six months of aborted reversals and repeated bear hunts have left Macro Man remaining cautious. Perhaps that very caution, if broadly shared, will provide the fuel for a deeper downmove. We'll see. At the very least, Macro Man prefers to wait until the August lows are breached before placing all of his chips on "red." As tautologically-inclined technical analysts will tell you, the SPX needs to break those lows around 980 before it can go even lower.

Weakness has carried over this morning, despite Asia not selling off as much as might be feared. While it's tertiary (at best) data, we saw the first dose of Roundup applied to the green shoots this morning as Norway's PMI turned sharply lower.
The NOK has been a darling amongst those punters not totally anesthetized to trading FX and now looks to be putting in a reversal against the EUR and USD. This reminds Macro Man of the rarely-cited Fifth Law of Thermodynamics: the amount of pain in AUD/NZD and the Scandi FX markets is always constant.

Given that the ostensibly positive Aussie GDP number put a bid under AUD/NZD, thereby gratifying a widely-held view, it was inevitable for the smooth functioning of the universe that the wheels come off of the Nokky trade.

Now, if you see them both get flushed at the same time, be afraid. Be very, very afraid.

Tuesday, September 01, 2009

Game On?

Farewell, summer, we hardly knew ye.

The commuter trains were noticably fuller this morning as the passage of the August bank holiday signals the onset of autumn and full staffing levels. With Labor Day on the horizon, there are likely to be another few days of liquidity impairment and potentially sluggish trade, but for all intents and purposes it is tempting to put one's hockey net in the street and yell "Game on!"

It was a year ago tomorrow that Macro Man scaled into equity shorts at elevated levels, and sure enough, 52 weeks on, major indices are once again at localized highs (but running out of steam.) We're now a month away from National Day in China, the trigger date that Macro Man had circled in his calendar for fireworks.

It seems as if the (pity) party has started early, however, as Shanghai has extended its early-August weakness to lapse back into a bear market. Recent confirmation that whenever you trade with China, you're actually selling them a free option is clearly not the best of news, and we surely must be close to the point where the man on the street starts selling with greater vigour.
And while it is oh-so-tempting to suggest that this spells doom and gloom for the SPX, SX5E, and the like, Macro Man has finally thrown up his hands in final, utter, complete disbelief and lack of understanding at what's going on in developed market equities.

In yesterday's fairly lackluster session, Lehman Brothers-Lehman Bloody Brothers!-stock traded 125 million shares, rising to 18c. In the last two sessions, that share price has more than tripled. Now, Macro Man gathers there is some stuff going on with respect to the vultures picking over the carcass of LEH, fighting for scraps. But he cannot think of any rational reason in the world why anyone would want to buy Lehman common stock....hell, until yesterday's move was pointed out to him, he didn't know that Lehman stock still existed! Gee, he wonders if he can get a quote on Enron or Penn Central...
Meanwhile, US equity volumes are being dominated by what can only be termed as a "cavalcade of turds." Macro Man recently highlighted the surge in volume in the Agency stocks....evidently the same thing is going on in Citi (though at least there, there's been a recent conversion of prefs to common.)

Trading volume in these three shares has, according to Brett Steenbarger, recently exceeded the total volume on the NYSE by a pretty comfortable margin. Macro Man has no idea what's going on there but finds it difficult to avoid contemplating something sinister.

So while he likes the short equity trade (what else is new?), at the moment his risk allocation is relatively modest. One of his investment maxims is that it's virtually impossible to forecast what you're going to see if you can't even explain what you're currently seeing. And while it's tempting to strap on a big short in stocks given the waning momentum and ancillary signals from bonds and EM, this bizarre activity in the low-grade financials is preventing him from saying "game on!"