Friday, January 29, 2010

20 Things I Learned In January

Man, it's hard to believe that it's the end of the first month of the year (and indeed the decade) already. They say that time passes more swiftly as you get older; if January's anything to go by, that little aphorism is all too true. Still, you're never too old to learn, and keeping an active and inquisitive mind is one the keys to at least feeling youthful. Here are 20 things that Macro Man learned in January:

1) Chasing the initial stock market move out of the blocks is a bad idea.
2. Chasing the initial dollar move out of the blocks is also a bad idea.
3. Chasing the initial move out of the blocks in fixed income is, however, a GOOD idea.
4. Hell can freeze over.

5. So can the UK.

6. Barack Obama evidently doesn't like banks or rich people.

7. Neither does the Labour government.

8. Except when they do.

9. China might actually be serious about tightening policy.

10. Greece is in pretty serious trouble....
11. ...except on days when they have a bond offering. Or maybe that €20 billion worth of bids suggest that the investment wheat hasn't yet been completely separated from the chaff.

12. Europe, despite the rhetoric, is probably going to blink.

13. Ben Bernanke will repeat as Fed chairman.

14. The Steelers, alas, will not be repeating as Super Bowl champions.

15. The Human Fund lives.

16. Sometimes, following the consensus carry trade is a really, really bad idea.
17. A flask of mercury weighs 34.5 kg.

18. Kraft is buying Cadbury.

19. Haiti is, tragically, a bigger mess than anyone thought.

20. Fannie and Freddie have evidently ceased to exist (if they ever did), given how often they're mentioned when politicians look to dish out responsibility for the financial crisis.


Anonymous said...

Re: number 8:

"A new top rate of income tax due to come into force in April should be reduced as soon as the budget situation improves, Business Secretary Peter Mandelson told the Daily Telegraph in an interview published on Saturday."

"As soon as the budget situation improves" will probably require waiting for hell to freeze over a second time.

Macro Man said...

PSBR in 2009: £178 bio.

Forecast PSBR in 2010: £175 bio.

That's an improvement, baby!

Darth Trader said...

re. 7 & 8 - at least the opposition like rich people:

But What do I Know? said...

Re: Ben Bernancke. They got what they wanted--let's see if it comes back to bite them in the butt.

Anonymous said...

21. Argentina and Venezuela will go under before Greece.

jwalker46 said...

MM, looking ahead to February:

Since you trade debt instruments, please walk through the /middle/ part of a default on Greek (Spain, Portugal, etc) debt.

1. the gov't defaults on the debt, says "go to hell, we'll pay later."
2. DE quickly amends their accounting rules so the German banks are still solvent.
3. Then what... ?

In other words, everyone leaps from "they can't to that!" to "it would be a disaster for the Eurozone."

I don't see anyone spelling out the middle part, and AFAIK it is not clear why NL, DE, etc should give a damn.

Your turn. :-)

Anonymous said...

You missed that 109k votes in a country of 305 million can stop all US policy in its tracks. Yes a good old 0.035% of the Us population in the great state of MA can stop health care and reform, job and tax cut initiatives, and deficit reduction planning. Gridlock when everything is fine might be fine, but gridlock in times like these….well at what point do you think the petro countries say hummm I don’t want any more US debt (and I am selling what I got).

Macro Man said...

jawalker, the bit you've missed in the middle is where Ireland comes under pressure and defaults.....then Portugal....then Spain....then perhaps even Italy. Which then sort of raises the question of why there is a currency union anyway, if half the members are bankrupt.

zjin said...

Now just how much political risk is there for EU countries (especially Southern EU) to seriously cut deficit? I am not an expert and hope to hear from people who are familiar with the situation on the ground. Is a revoluation possible?

N N said...

Steelers BLOW. Why is that everywhere I go I run into steelers fans?? lol jk

Bankers said...

Excellent Post today! Especially the part about Freddie and Fannie not existing. From a U.S. Tax payer point of view, this is where we will NEVER see out money back from.


jwalker46 said...

MM, I didn't miss the middle, I just don't see what difference it makes /IF/ the accounting regs are changed (as AFAIK they have been in DE) so the banks remain solvent.

The Euro might drop? Who cares? (The exporters will be happy.)

In short, you are declaring that Greek default is a problem because there may be another default -- that doesn't answer my q: so what?

Will FR suffer? DE? (Not if they fudge the accounting regs for the banks.)

Please explain.

p.s. after the '87 market crash, the NYT, FT etc were full of dire prognostications about a US recession that "must" follow -- and it never happened. Folks just leapt from "all those losses" to a generic "recession to come!". Again: Greece, Spain, and Ireland are economically screwed. What on earth difference (aside from ego) does that make to DE, FR, ... or the EU as a whole?

Anonymous said...

Re jwalker46.
The impact of Greece default is perhaps more in sentiment than anything else. One never knows how the impact of market sentiment will manifest in politics and on main street.

In a similar vein to jwalkers question there is one I want to ask readers of this blog: For a long time now macro / finance experts say Japan has had two lost decades since the stockmarket crash of 1990. It sounds ominous. But what exactly has Japan suffered? How has it affected the average Japanese on the street? Anecdotal evidence suggests that the average Japanese is doing fine.

leftback said...

Beware of Greeks bearing gifts.
There's a lot of lipstick on those PIIGS.

jwalker46 said...


Japan's gdp per capital has declined, per the CIA annual Fact Book. In general, wealth is relative, and Japan's lack of growth drops its relative standard of living.

I agree that the impact of Greece (etc) is psychological - as was the '87 stock market crash - which is why I don't believe our host, MacroMan, has thought this through.

Macro Man said...

jwalker, I am really not sure what your point is re: German banks. If they hold Greek debt, and Greece defaults, they will have to bear the loss. Ditto the rest of the periphery.

Moreover, if Germany (and France) are forced to bear the fiscal cost of bailing out Greece (and Ireland, France, Spain, Italy), that will have a very real impact on their own ability to borrow. Given how many Bunds and OATs are owned by foreign central banks as a store of value, the outlook would not be particularly rosy should the euro's worth as a store of value come into question. YOu should remember that the euro is, at its heart, a political construct as much as it is an economic one. Policymaker reactions are likely to reflect that.

Closing one's eyes and saying "this isn't going to matter" has, in aggregate, been a dreadful investment strategy since most of the market closed their eyes in July 2007 and said, when Ralph Cioffi's Bear Stearns hedge funds went under, "this isn't going to matter."

If the ensuing two and a half years have taught anything, it is that the financial system is more complex than any of us realize, and that the unintended consequences of policy action/inaction can be extreme.

You can choose to ignore the potential fallout if you wish; that is your prerogative. But I suspect that if Greece were to default, and somehow Wells Fargo ended up taking a "surprise" huge writedown on its RMBS portfolio, I will not be the one accused of not thinking things through.

Aref said...
This comment has been removed by the author.
leftback said...

Bond bears and gold bugs have been quiet lately.... (grins inanely) but now that we are looking at a 4.50% on the 30y, this has me thinking about hedging.

The EUR:USD is trying to put in a bottom here. One imagines that some kind of ECB intervention will be forthcoming over the weekend, MM.

...I love the smell of intervention in the morning.

Nemo Incognito said...

LB as a gold bear and a bond bear its been a weird month. I'm reading Holy Grail of Macro right now so you never know, I may be converted yet to the treasuries go to the moon school of thought.

Glad to see some of the more outrageously overpriced base metals getting beaten up, ditto some turd-like SOEs.

Anonymous said...

"Yes a good old 0.035% of the Us population in the great state of MA can stop health care and reform, job and tax cut initiatives, and deficit reduction planning."

I am going to go out on a limb here, and state that Mr. Brown's presence in the Senate will not stop tax cut initiatives. In fact, I believe it will have the opposite effect.

"Gridlock when everything is fine might be fine, but gridlock in times like these..."

Gridlock at times like these is even MORE important (because governments have a tendency to do much stupider things - with the potential for far more damage - during a crisis).

Anonymous said...

I want to ask what happens when the (inevitable) bailout of Greece comes. Does the euro rally? Do bunds fall? Those seem like (too) obvious reactions. Will a bailout really surprise the market (yes, it will always surprise a few people not paying attention)?

Rossco said...

Jawalker, I have to concur with MM on this one that the ramifications of a Greek default may be much larger than people think. Firstly, the change to German accounting rules that you propose seems a triviality that only the least sophisticated investor could see through. A loss is a loss and the wholesale funding markets (as Bear/IKB/Lehman/HBOS in 07 & 08 found out) care not a whit for the type of ephemeral paper shuffling that equity investors do ...and it is them that call the shots on banks. But what about all the losses from other holders, pension funds for instance.... investors bear those losses...unequivocally.

However, the real issue IMO has to come from the fractional nature of the banking system. If you take the view that $1 of deposits can create $10 of loans (bonds) and those bonds default, then the call on equity becomes pronounced.....and covering that leveraged loss diverts funds from other asset classes to plug the hole. So, bond investors sell their "at the money" positions to fund their balance sheet shortfalls.

Maybe my analysis is overly simplistic but as I wtite this I find it inconceivable that a Greek default could not set off a highly unpredictable but nonetheless nasty chain of financial losses.

Anonymous said...

The one thing that doesnt seem to be reacting to Greece and risk off? LIE-BOR!.....why is that?