Monday, January 11, 2010


Perhaps it was always going to happen. After the hawkish drum beat of evidence for the prosecution going into Friday's payroll data, the employment figures were skewed well to the weak side of expectations. And while eurodollars gapped up and stayed up, the impact on other asset markets lasted, oh, at least forty-five minutes before "risk on, baby" re-asserted itself.

And if that wasn't enough, Macro Man's email box was peppered with sell-side missives over the weekend trumpeting China's excellent export data. Even his equity-manager chum was talking about Chinese exports on the train this morning. To be sure, the figures were impressive. Macro Man is always somewhat bemused by the focus on Chinese exports, given that these are a) at least partially driven by the country's mercantilist policies, and b) as such, at least partially represent the vulturing of market share away from other producers.

Far more interesting to Macro Man is China's import data, which was truly stunning; up 55% y/y, taking the nominal dollar amount to new highs.
Unsurprisingly, this has been taken well by other markets, with developed-markets equity indices (and futures) reaching post-2008 highs. In many ways, it feels as if there is no market advantage to weighting risks and considering expected values on sundry investments. CHINA RULZ, BEARS ARE FOOLZ is looking like a manifestly superior investment methodology for the time being.

In any event, whether it's "China rulz" or simply the ongoing abundance of liquidty available for certain types of investment, whatever is driving markets has spread its tentacles far and wide. Commodities have ripped higher; while oil could perhaps be explained by the cold weather gripping the entire Northern Hemisphere, gold has also made a Lazarus-like comeback after the $150/oz smackdown observed last December.

While Macro Man is sceptical that oil can extend another 30% or so and hang onto those gains, there would appear to be little to stand in the way of further upside in the nearer term. CL2 has sustained a break above its Q4 trendline, and aggregate open interest (shown in the lower half of the chart below) is at post-Lehman highs. New OI highs could be an obvious trigger to a further melt-up.
So what's a bear to do? Those of an ursine persuasion have morphed from terrifying creatures that can crush a bank skull with one blow to cartoon caricatures who may think that they are "smarter than the average bear" but are undone by their own "cleverness."

One of the lessons that Macro Man has taken from last year is that trying to call the top in risk assets when the market is "in the mood" is little short of a fool's errand. Sure, it's fine to have doubts about the sustainability of "China Rulz" in light of the abject consumer credit data from Friday night (which is what the US economy ultimately needs, but is not necessarily bullish for the "we're in a sustained recovery" view), but there's no point hopping off the Risk Train until it starts peforming like Macro Man's 6.33 to London Bridge.
Perhaps earnings season (which kicks off tonight with Alcoa) will give stocks pause for thought. Then again, maybe not. Either way, as long as the market wants to play CHINA RULZ, it's a bit foolish to stand in the way.


Donlast said...

China imports in December...Iron ore up 80% vs same month last year - price rise of 20% anticipated in new year; aluminium +150%; copper +50%. Now maybe this does represent surging domestic demand - like pig farmers now storing aluminium as well as copper - but all round this looks like more asset purchases by China using its hefty stock of depreciating dollars. The re-stocking may go on, but all told this seems a dubious measure of "buoyant domestic demand" .

See FT this morning:
"Chinese imports surged by 55.9 per cent in December, the latest indication of buoyant domestic demand in China, although the figures are also likely to increase concerns about potential inflationary pressures." A nice non sequitur.

Anonymous said...

For my 2cents worth, I think the above-trend loan growth is a flurry of deals that are pushed through before year-end (chinese new year) as markets are shut for 2weeks. The Reuters headline of "China lending jumps, feeding heating economy" might be over-done.
Anecdotal evidence from bankers is that lots of clients are exerting pressure to complete deals before Chinese New Year.

spagetti said...

risk off

charts look like breaking out, but my guess is that its all false.

newsflow can only turn negative from here - i think.
only good news could be the IRanian regime throwing in the towel somehow. any other segment of the news, be it geo-pol, economic, policy..etc i can only see risk for bad headlines

also im off for a long weekend from Thu to Mon, and when a bear is out of the office its usually at least a failed bank or a 3-sigma-bad econ. figure

Anonymous said...

So what if news turns negative. It's been hideous all year long (green shoots, indeed) and the market has ignored it all along. Why can't the irrationality continue?

Donlast said...

Of course, Chinese New Year. Anonymous is dead right. Lots of house cleaning in China before the Lunar New Year festival: pay off debts, clear deals, take a final gamble in the stock markets... But watch out after February 14 Chinese New Year day, the year of the Tiger.
The Tiger is reputedly the most dynamic in the Chinese zodiac. Rebellious, short-tempered, a risk taker, make of it what you will, many Chinese investors take it seriously. But then how different is that from the motivations of many investors in the West. Hope and change anyone?

Gary said...

If I was in China, and someone asked me what was a better store of value: US Treasuries or commodities? You really don't have to think about it long

I have to agree with Pimco's El-Erian who described the current economy as a "sugar high". Much of what we are seeing is the result of absolutely gluttonous government "stimulus"

We can all argue when this stimulus nonsense will stop: 1 week, 1 month, 3 months, 6 months?

But there is now *another* study (this latest one from some guy at Harvard) showing that countries with 90% debt-to GDP ratios have much slower growth rates. Most of the G-7 is pretty close to that limit already, and most have stated intentions to run 10% of GDP deficits as far as the eye can see.

Either these governments will drastically cut spending, or they will have to meet spending with printed money.

Which ever end game you predict, it won't happen this week, but it absolutely positively will happen during the life of a 5yr note -- to say nothing of the longer maturity garbage.

Its fine to say that those managing a small portfolio will be able to sell out of their bonds at the exact peak (although history suggest most will not) -- those managing larger portfolios can not be as nimble... everyone can't run through the fire exit door at the same time.

The guy who runs through the door first escapes the fire unharmed. The guy that waits doesn't make it.

Without a credible exit strategy, the Fed / ECB / BoJ, etc are creating another crisis -- essentially forcing PM's to exit first or risk being trampled.

The folks in London are busy packing their desks for May. Geithner is too busy lining up a job at Goldman. In Japan, the guy barely got the seat warmed up before he had "health issues" caused by politicians wanting to spend madly.

Trichet opted not to bail out Greece, making him the one eyed man in the village of the blind.

The "crisis" of 2010 will be in sovereign debt -- they need a credible exit strategy for all this QE / ZIRP nonsense. Sovereign debt is a sell until that happens

In the land of the blind sovereign debts, the one eyed commodity looks like a king

leftback said...

Let's stay calm and look at earnings. My guess is that the earlier earnings (industrials, financials) will be BTE and the retail earning that come later, not so much.

DGDF roolz for the time being, but pretty soon they'll sell the nooz.

Gary said...

LB: which earnings are we talking about? Non GAAP, pro forma numbers or reality? Better than who's "expectations"?

Long term, I need my *investments* (not speculative positions) to throw off actual cash -- I can't spend accounting entries.

I am also not sure what to make of "improving" earnings -- financial's are simply reporting that they are no longer marking declining assets to market. FASB changed the rules at Barney Frank's gunpoint. That is an accounting irregularity, not the same thing as earnings.

Agree that *some* industrials may show earnings that really are improving. But GE is not an industrial no matter how much Imelt protests -- its still a bank, and its still on govt life support.

True industrials actually do interest me.

But I note that both FedEx and UPS are reporting stable / declining shipping traffic yoy. I notice that newsletters that track sales tax receipts at state governments are reporting rather dismal numbers. Consumers continue to prove they have more business sense than Geithner & Bernanke by paying down consumer debt.

Analysts and CEOs can lie about pro forma earnings (gasp!) -- but actual products shipped and sales taxes paid are much more difficult to fudge. People who are unemployed and/or paying down debt do not buy as much as they did last year.

A little bit of common sense here tells us the sky is not falling -- but the economy is not about to re-enter a boom phase either

Gary said...

LB: one other point I forgot to mention... a lot of the earnings "improvement" comes not from increased revenue, but from lower costs.

There is a limit to how much a company can "grow" by laying off staff (which is where much of the cost savings comes from).

And Henry Ford pointed out decades ago that employees needed to be paid enough that they could be customers -- "cost savings" in 2009 will not have the money to consume in 2010... meaning a lot of the earnings "growth" is temporary at best.

I want to emphasize that the sky isn't falling -- just saying P/E multiples appear rather generous and a lot of the earnings (the denominator) reflect a sugar high and accounting irregularities.

Not the stuff of a long term bull market

Ian said...

Gary - I think the Rogoff study is a bit dubious because not many countries have been consistently above the 90% debt to GDP threshold besides Japan. In other words small sample size skews the data towards the Japanese experience. Not saying they are wrong, just something to bear in mind. We don't really know what the consequences of such a high debt to GDP ratio across the developed world are going to be for growth.

PPM said...

How about some potential scenarios re. how this all comes to a head? How the Fed handles the decision of whether to stop or continue MBS purchases has to mark a significant turning point. What are their options, and the implications of each?

Gary said...

Ian - the Rogoff paper I read (which I should qualify by saying it was a draft copy, not the final one that was published) looked at 44 countries over a period of 200 years

Japan is the notable *surviving* country that has had debt levels above 90%/GDP. There are lots more examples when you include governments / countries that collapsed

You are also forgetting the UK, which nearly collapsed in the 1970s. An IMF bailout (technically a guarantee) and the discovery of oil in the North Sea delayed England's day of reckoning.

This is not the first time Greece's economy has collapsed since WW2. I forget how many iterations of drachmas, Italian Liras, Turkish Liras and so forth we have had in the last 50 years.

France went through 4 or 5 versions of francs, new francs, new new francs -- before finally adopting that silly fortress franc policy that existed pre-Euro.

Dozens of books have been written about France and the financial shenanigans about the Mississippi Scheme (South Sea Company) to how Versailles was financed to the various revolutions between 1799 and WW1.

You also need to remember the various empires (Europe and Asia) that existed pre-WW2 and no longer appear on maps today.

Africa and Latin America have enough former currencies and former governments to fill whole books.

There are many many many examples of countries that spent more than their revenue allowed, and most of them started having troubles when their debt climbed above 90% of GDP.

leftback said...

Gary - I am with you 100% on all points here.

LB's thinking is that earnings will be good for the Alcoas and 3Ms of the world, will be all but uninterpretable for the financials, and weaker than expected for retail. As ever, the tricky part is going to be figuring out the market's reaction to earnings reports. LB is simply observing the DXY and the usual carry trades for the time being.

Anonymous said...

Speaking of failing sovereigns: we all heard the creaking under Venezeula lately (the black market suggests further devaluations are likely)

The country with the biggest exposure to Venezeula (according to the BIS) is Spain.

Which banks in Spain? Anyone know? Santander is the biggest in Latin America generally, but are they exposed to Venezeula?

leftback said...

I wonder if China will eventually admit to using steroids on their economic reports, now that Mark McGwire has finally told us what we already knew?

Anonymous said...

Well, well, well, Alcoa Q4 NOT Better Than Expected, after all, wonder if this is going to be an isolated case? How many earnings disappointments will it take for Risk to be recognized once again?

carbonsink said...

FYI: Macro Man's commodity imports charts were reproduced on the main business page of The Australian yesterday (Monday):

Commodity shipments to China fall as speculative stock build-up eases

As the charts, which are drawn from the well-regarded economics blog Macro Man, show, the growth in China's copper imports was even more remarkable.

No charts visible in the online version, but they're in the printed paper, Australia's only national broadsheet.

Anonymous said...

Congrats, MM. The CNBC green room beckons.