Thursday, January 28, 2010

A New Broom At Treasury?

While the entire market (at least in London) appeared to be on Greece death watch yesterday, those pesky Hellenes have thus far lived to fight (or at least to trade) another day. That March 2010 CDS got paid up yesterday is hardly a good sign, though whether the purchaser possesses inside information or simply a desire to push Greece towards the brink is thus far uncertain.

Omitted from yesterday's post on DC fireworks was, of course, mention of the AIG hearings, for the simple reason that Macro Man could not see much chance of market moving developments. So it turned out, though the entire sordid spectacle does little to cast the American policy-making mechanism in anything but the harshest of lights. Not that the organs of government are any better elsewhere, mind, and perhaps it is a check mark in America's favour that there is at least the platform to attempt to discover the truth.

While Macro Man is tempted to put Holmes on the case, he fears that even that worthy might taste the bitter sting of defeat; when confronted with an adversary possessing the malice of a Moriarty with the elusiveness of an Irene Adler, victory is far from certain. Suffice to say, however, that Tim Geithner is the man to have if you are participating in an Obama Cabinet dead pool.

As for the Fed, there were some modest changes to the statement which summed to "something for everyone." While the outlook seemed to be upgraded modestly (the statement forecast a higher level of resource utilization, which is presumably a prerequisite for policy tightening) and Tom Hoenig prefered to eject "the extended period " language ASAP, the removal of the warm 'n' fuzzy vibe on housing suggests that the committee is aware that downside risks still remain. All in, to Macro Man's reading it meant that we're a bit closer to the time of the first policy adjustment, and he finds it hard to take issue with the modest uptick in yields observed since 7.15 pm London time- particularly given how strong fixed income had traded over the past week or two.

While equities eventually shrugged off the move in yields to put in a strong close for the first time in a week, Macro Man was interested to observe that his proprietary measure of risk appetite has recently moved to its most negative level since last March. What is curious is that the aggregate level of risk appetite has been positive since the beginning of 2008, with an average daily reading of 0.19 on the scale of the chart below. It's quite extraordinary, really, given the 7.3 standard deviation event observed in late '08, and it would not appear to be an unreasonable proposition that we are now overdue for at least a modest bound of risk aversion.

As for the State of the Union address, Macro Man has a couple of thoughts. While Obama, true to form, tried to strike a broadly encompassing tone in his remarks ("Democrats and Republicans. Democrats and Republicans."), the little jabs towards financiers were neither surprising nor particularly potent, and more or less confirmed that the Bush tax cuts would not be renewed. This is an easy win for him; he'll be able to tighten fiscal policy through inaction, rather than action and be able to claim that he hasn't actually raised taxes.

While his frequent references to individual success stories of his policies were clearly intended to personalize his appeal, Macro Man couldn't shake the (admittedly cynical) thought that it instead confirmed that his efficacy was so limited that the few positive results could be identified by name.

In any event, while improving the labour market is of course a worthy goal, Macro Man is let to wonder what increasing employment at all costs will do to productivity, unit labour costs, and, ultimately, competitiveness. While it's easy to say "we want manufacturing jobs to return to the US", the fact remains that blue collar workers are facing literally unprecedented competition from much lower-cost alternatives in EM economies. It's hard to see how that dilemma is resolved without subsidies, tariff barriers, or other forms of protectionism. Yeah, it makes for a nice sound bite to mumble about "green jobs" and the like, but they aren't going to save the day automatically.

Perhaps the most interesting part of the president's speech was his stated desire to double exports in the next five years. By this, Macro Man presumes that he means the gross level of exports, rather than net exports (which are currently negative, and the deficit could easily double in 5 years with no help from him.) Talk about "competitiveness" and "fair trade" also set the protectionist alarm bells ringing, particularly when taken in conjunction with his comments on employment.

A 100% rise in exports over a five year period is a challenging but not impossible goal; both Bush I (goods and services) and Bush II (goods) accomplished the feat in the past thirty years. Of course, both of these periods had something in common: an extremely weak dollar. Indeed, since 1980 the correlation of the trailing 5 year growth rate in exports and the level of the trade-weighted dollar has been -0.56, which is quite a strong (if unsurprising) relationship between two such simple factors.

What does it mean? Perhaps nothing in the near term. But Macro Man does wonder about the fate of the strong dollar policy, in both its literal and figurative forms. Hmmmm. Competitiveness....bring manufacturing jobs to America....double exports. It all smells like a harder line on China specifically and trade generally from Obama, which shouldn't come as a total surprise; why should trade be exempted from the increasingly dirigiste policy stance of the Administration? (Unless, of course, Obama expects US manufacturing to conquer the world with this catalogue of useful products.)

So if Macro Man's Cabinet dead pool tip is correct and Geithner falls on his sword, 'twill be very interesting indeed to see who his replacement might be. A new broom at Treasury may well bring new ideas....bashing mercantilists and weakening the dollar might very well be among them. Stay tuned.


Anonymous said...

Its hardly dirigiste is it?

Anonymous said...

State of Union: November factory orders rose by 0.6%(not 1.1% as seen with yer eyes on jan5th) while durable goods orders fell 0.7(instead of +0,2%). Processing error.

Not that it matters.

Nemo Incognito said...

It does look like TimG is toast - or that he is going to have to extricate him from the banking borg sooner rather than later.

Anonymous said...

'...bashing mercantilists and weakening the dollar might very well be among them'
If they bash the mercantilists wouldnt that hurt EM an lead to a stronger dollar in the short run?

Anonymous said...

sobering stuff

Anonymous said...

Anonymous said...

"BASHING DOLLAR" ..and exactly what good would that do whilst so many markets that have growth prospects to absorb US exports either peg to the dollar ,or intervene in the market to achieve a dollar competitiveness level. Exclude those and are you really left with enough market capacity to double exports.Yes, the Euroland are really going to love being staked out for bait for such a policy aren't they.
The above is a non starter without major agreement on currencies and if they can't get that (and I really don't see it likely) then tarrifs look the better bet.

Anonymous said...

The irony is the catalogue of "American goods" are all made in China.

Anonymous said...

Obama's a wimp. His speech was limp wristed. Exports double? Codswollop.

Anonymous said...

Ford report $2.7 million dollar profit.Given the cash for clunkers bail out will we now see Obama bashing the car makers for profit making ,or does that only happen where profits are shared out to management in banking which we are told 'makes' nothing of value ?!

Not so much double standards ,as no standards at all when it comes to goverment policy.

Anonymous said...

MM - how long before Timmy G, gets thrown under the bus by Obama and Co. and he ends up working at GS or JPM 3-6 mnths?

Anonymous said...

In the words of 50 cent : "I get, I get, I get money...I run New York"

Anonymous said...

or maybe "I print, I print, I print money..."

Donlast said...

According to Roubini, Greek government advisers are suggesting a call might be made to China to come to the aid of the Greeks. It is argued that it gives them a chance to diversify into Euro assets out of the Dollar - like out of the frying pan into the fire.

Anonymous said...

From the SOTU: "We cannot afford another so-called economic expansion...where prosperity was built on a housing bubble".

From Barney Frank (Oct09): “I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”

So we can't have prosperity based on a housing bubble, but policy is to artifically inflate prices. Got it.

Anonymous said...

Surprisingly, durable goods orders beat expectations. Huray.

Hit hit.

Anonymous said...

Now for some improved Sate of the union (2.0): Senate Democrats will vote to increase the nation’s debt limit to $14.3 trillion one day after President Barack Obama emphasizes fiscal responsibility. Without the hike, the government could hit its borrowing limit by mid-February.

We hear you, O!

Now back to out regular Greek – and Spanish too - sovereign CDS competition.

leftback said...

Geithner was always going to be the sacrificial lamb because he is essentially a hold-over from Bush and was appointed specifically to facilitate and complete Paulson's transfer of wealth to the banks. He completed his dastardly mission with no little skill, and will no doubt be amply rewarded. Which might give him the chance to unload his house...

Now, Bernanke's reappointment will lead to a relief rally, but that will probably be the exit rally. The clouds are gathering and next Friday's jobs number is not going to be pretty for the "recovery-ists".

MM, I share your concerns about the dollar, long-term, but another round of deleveraging is now long overdue and that will be dollar positive and provide support for US debt at the expense of corporate debt and equities. There will be plenty of warning before Ben's QE2 is launched.

Anonymous said...


why do you think nfp numbers will be bad? i understand lot of things will come into play -annual revisions, question whether seasonal adjustment factor will catch up, and census hiring. the number itself and thus market reaction does not seem very predictable to me ..


Anonymous said...

Copper hit the buffers: coming down hard and fast from its recent 7700 high and now < 7000. Same story in most other metals.
CLo1 looking vulnerable here , closing in on its 200d MA.

leftback said...

riise = leftback = jon arne riise's trusty left peg?

NFP? Why bad?

The January number, we understand, is usually the one where all the alchemy involved with the B/D adjustments to the NFP number is finally removed/corrected, so this number can often be quite startling to the downside.

The other obvious reason is that a lot of large businesses in the US are still laying people off and now the states are starting to reduce hours etc.. as budget concerns start to bite. There is not a whole lot of job creation going on in small business in the US, which is cautiously waiting for another shoe to drop.

The curious thing is that we may have reached a singular point in the capital markets - where either a good or bad jobs number can sink the equity markets.

k1 said...

A while back Gary commented on the performance bogey faced by pension funds. Today Mish points out that Wisconsin is levering up to attempt to close their gap, using the notion that levered FI is less risky than equities.

Assuming this is the kind of thing that works fine until it doesn't, might we see other pension funds follow suit? Generating a final levered rush into bonds, followed by something akin to the LTCM debacle?

Interested in thoughts from the gallery. Just trying to figure out which currency to hide in which mattress.

Anonymous said...

thanks leftback. something you probably know - jan b/d revisions have been always negative even during expansions b/w 2003 - 2007. Himmm, a model that always overestimates the job formations regardless of the cycle?


Leftback said...

"jan b/d revisions have been always negative even during expansions b/w 2003 - 2007"

Precisely. Add in the layoffs that were delayed during the pre-holiday period and you have something about as promising as Liverpool FC's trophy prospects.

Nemo Incognito said...

This copper and gold breakdown is, well, f&*king gold. All we need is a few strikes to be settled in Chile and we're back to 2.80 in no time.

leftback said...

MM, this may just appeal to your highly mature sense of humour. Did you know there is a firm in NYC called John Thomas?

I am pretty sure they have no idea of the connotations of the name, but it must be amusing when they work with clients in London. "I'm just going to consult my John Thomas before making this investment..."