Following on from yesterday's post marking his 2009 views to market, Macro Man is pleased to unveil the first half of his non-predictions for 2010. Regular readers will by now be familiar with the annual ritual, wherein he differs from the crowd by offering a set of "non-predicitions", identifying ten things that he feels won't happen. And so, with no further ado, on with the show:
1) Oil (defined as second WTI future) will NOT rise as much as it did in 2009. CL2 rallied $31.42 last year, the second-biggest dollar rise ever, and the second-largest percentage gain of at least the past two decades. This reflected a couple of factors that are unlikely to be repeated: an artificially low starting price last year, courtesy of the late-2008 liquidity-driven puke fest, and a massive shift in the delta of economic expectations over the course of the year (from staring into the abyss in January to celebrating the BRICs and contemplating positive payrolls by December.) Put another way, oil prices closed 2009 $31.42 higher than in 2008...despite the fact that Cushing inventories were actually slightly higher. A repeat performance in 2010 therefore seems highly unlikely.
2) G10 FX carry will NOT repeat 2009's stellar performance. The simple "up three, down three" FX carry basket (wherein you go long the three highest yielders in the G10 and go short the three lowest yielders) rallied nearly 28% last year, exceeding the returns on the SPX and retracing virtually all of 2008's losses. This was partially a function of similar drivers to those cited above for the oil rally (particularly the delta of economic expectation), but also of dollar weakness, courtesy of QE and the Fed's promise to not rock the boat in '09. Now, we're left with a situation where the delta of expectation and of monetary policy are more uncertain, and some of the high-yielders look pretty expensive (we're lookin' at you, NZD.) While a passive carry basket may well generate a positive P/L in 2010, returns pushing 30% and a 1.65 ain't gonna happen.
3) The Democrats will NOT lose control of either house of Congress. It's become quite trendy to postulate on the mid-term elections and a potential 1994-style collapse of the Democratic majority. Macro Man sees three problems with that thesis. First, the Republican revolution of 1994 occurred after a lengthy period of Democratic Congressional rule. By 1994, it had been a decade since the GOP controlled the Senate and 48 years since they'd enjoyed a majority in the House. This time around, it's been a scant 4 years since the GOP ceded control. Second, it's the economy, stupid. The first half of the year should see a return to job growth and further impact from last year's stimulus package. At least superficially, therefore, the economic news should get a lot better. Finally, it's not like the Republicans are offering a lot, either. The fact that Sarah Palin is still knocking about is evidence of the dearth of quality in the GOP "brain" trust, and it doesn't seem unreasonable to expect the electorate to recall why they voted the Republicans out of Congress in the first place.
4) True S&P 500 earnings will NOT reach the published consensus forecast level. According to Macro Man's i/B/E/S spreadsheet, the consensus earnings forecast for 2010 is $77 a share. While 2009 isn't in the bag yet (after all, we've got earnings season around the corner), a total of $55-$60 is likely for the headline earnings figure. The problem, of course, is that the headline figure is a work of fantasy worthy of Tolkien. The chart below shows trailing 12m earnings data on a headline basis, as well as the true earnings figures once all the "one off" turds are added back in. While Macro Man is happy to believe that the amount of turds will be lower in 2010 that it has been over the past 18 months, he wasn't born yesterday- comapanies will still massage their figures lie to pimp and pump their share prices. Sorry, Macro Man isn't buying it. While he's currently small long equities, he believes that at some point, the small print will matter once again.
5) China will NOT meaningfully adjust its exchange rate mechanism in H1. By this, Macro Man means that there will be no step reval, and that the peg at or around 6.8250 will remain intact. He was tempted to indulge in a spot of reverse psychology and forecast no move at all this year (there's a decent chance of that), but he's settled for just non-predicting the first half. What will spur a Chinese exchange rate move? Macro Man is looking at domestic inflation conditions, but also at two external factors. The argument could be made that the authorities will do nothing on the RMB until exports exceed their 2008 peak (they're currently more than $20 billion below, on a monthly basis). Given the exorbitant Chinese whingeing about the US policy mix, Macro Man can also construct a scenario wherein PBOC doesn't let the RMB move until the US starts tightening policy.
Of course, common sense would dicatate that the appropriate response to "why should we tighten until you do?" is "grow a pair! Your nominal GDP growth is 12% higher than ours!" Sadly, however, common sense has little role to play in discussing the likely policy response of the world's great mercantilist power.
So there you have it: the first half of this year's non-predicitions. Tune in tomorrow for the second five.
1) Oil (defined as second WTI future) will NOT rise as much as it did in 2009. CL2 rallied $31.42 last year, the second-biggest dollar rise ever, and the second-largest percentage gain of at least the past two decades. This reflected a couple of factors that are unlikely to be repeated: an artificially low starting price last year, courtesy of the late-2008 liquidity-driven puke fest, and a massive shift in the delta of economic expectations over the course of the year (from staring into the abyss in January to celebrating the BRICs and contemplating positive payrolls by December.) Put another way, oil prices closed 2009 $31.42 higher than in 2008...despite the fact that Cushing inventories were actually slightly higher. A repeat performance in 2010 therefore seems highly unlikely.
2) G10 FX carry will NOT repeat 2009's stellar performance. The simple "up three, down three" FX carry basket (wherein you go long the three highest yielders in the G10 and go short the three lowest yielders) rallied nearly 28% last year, exceeding the returns on the SPX and retracing virtually all of 2008's losses. This was partially a function of similar drivers to those cited above for the oil rally (particularly the delta of economic expectation), but also of dollar weakness, courtesy of QE and the Fed's promise to not rock the boat in '09. Now, we're left with a situation where the delta of expectation and of monetary policy are more uncertain, and some of the high-yielders look pretty expensive (we're lookin' at you, NZD.) While a passive carry basket may well generate a positive P/L in 2010, returns pushing 30% and a 1.65 ain't gonna happen.
3) The Democrats will NOT lose control of either house of Congress. It's become quite trendy to postulate on the mid-term elections and a potential 1994-style collapse of the Democratic majority. Macro Man sees three problems with that thesis. First, the Republican revolution of 1994 occurred after a lengthy period of Democratic Congressional rule. By 1994, it had been a decade since the GOP controlled the Senate and 48 years since they'd enjoyed a majority in the House. This time around, it's been a scant 4 years since the GOP ceded control. Second, it's the economy, stupid. The first half of the year should see a return to job growth and further impact from last year's stimulus package. At least superficially, therefore, the economic news should get a lot better. Finally, it's not like the Republicans are offering a lot, either. The fact that Sarah Palin is still knocking about is evidence of the dearth of quality in the GOP "brain" trust, and it doesn't seem unreasonable to expect the electorate to recall why they voted the Republicans out of Congress in the first place.4) True S&P 500 earnings will NOT reach the published consensus forecast level. According to Macro Man's i/B/E/S spreadsheet, the consensus earnings forecast for 2010 is $77 a share. While 2009 isn't in the bag yet (after all, we've got earnings season around the corner), a total of $55-$60 is likely for the headline earnings figure. The problem, of course, is that the headline figure is a work of fantasy worthy of Tolkien. The chart below shows trailing 12m earnings data on a headline basis, as well as the true earnings figures once all the "one off" turds are added back in. While Macro Man is happy to believe that the amount of turds will be lower in 2010 that it has been over the past 18 months, he wasn't born yesterday- comapanies will still
5) China will NOT meaningfully adjust its exchange rate mechanism in H1. By this, Macro Man means that there will be no step reval, and that the peg at or around 6.8250 will remain intact. He was tempted to indulge in a spot of reverse psychology and forecast no move at all this year (there's a decent chance of that), but he's settled for just non-predicting the first half. What will spur a Chinese exchange rate move? Macro Man is looking at domestic inflation conditions, but also at two external factors. The argument could be made that the authorities will do nothing on the RMB until exports exceed their 2008 peak (they're currently more than $20 billion below, on a monthly basis). Given the exorbitant Chinese whingeing about the US policy mix, Macro Man can also construct a scenario wherein PBOC doesn't let the RMB move until the US starts tightening policy.
Of course, common sense would dicatate that the appropriate response to "why should we tighten until you do?" is "grow a pair! Your nominal GDP growth is 12% higher than ours!" Sadly, however, common sense has little role to play in discussing the likely policy response of the world's great mercantilist power.So there you have it: the first half of this year's non-predicitions. Tune in tomorrow for the second five.
32 comments
Click here for commentsVery entertaining and interesting altgough not the gutsiest of calls tail seller!
ReplyGood predictions, MM, but I think - being based in the marmite capital of the world - you have underestimated the anger folks here have with democrats. You may miss that one rather boldly.
ReplyCheers, mate.
-Ivanovich
MM - nicely done. My heart wants to agree with you on the Dims but my head tells me the lizardbrains are running amok (in the old Philippino meaning). And where did you get that lovely...lovely earnings data?
ReplyMeanwhile let me return the favor if I might by sharing my own outlook and review: http://tinyurl.com/ykvsgwq
The blog post provides some wrapping but also three paths for downloading it in presentation form, instead of the old written form. And (so far :) ) it's still free and probably worth every penny.
Needless to say, entirely independently, we seem to converge on similar answers.
Always good value MM. Your predictions really have a common thread, that last year’s performance in many asset classes was a big bouncy ball, that kept bouncing simply because the news did not get worse. Of course that is not the same thing as saying that what caused the crisis in the first place has been resolved. Now we are settling down to the long haul and the fizz is subsiding to a damp puddle.
ReplyThey say that the first requirement is making a profit is to assess the possible loss. Last year you could do that. S&P at 6600? Why not buy. Can’t be bad in the long run. Entirely different now we are into 2010. You can make very big losses now in many asset classes if you don’t pitch it right. Who is to say with surety that the S&P will not test the old lows at some point? Equities have run all one way for nearly a year and the money and value is in there like water building up behind a big dam. One little crack and away she goes.
Who would dispute your China prediction? There is a unholy alliance here: if China doesn’t keep buying the Dollar whither that currency and US Treasuries and funding the trillion deficits? But there is little to stop protectionism and with unemployed Americans, Brits and Frenchmen wandering the streets, the economsists’ paen to free trade will sound very thin. Along with bankers, economists are not the citizens favourite people, especially those with the highest and best intellectual credentials.
Which brings me to Ms Palin. I have learnt through life that there is no necessary correlation between intellectual capacity and wisdom, and above all, common sense. Indeed, most often there is a complete disconnect. There is no need to name names because this is too obvious at the present time especially in America. So I think your forecast on the US political scene will prove profoundly wrong. Rasmussen isn’t showing a 15-18 point negative gap between those who strongly approve and disapprove of Obama’s performance as a result of interviewing a general sample of American adults but of those who really care what happens and will act on it. Oppositions don’t win elections: governments lose them. Whatever Republican electoral themes emerge will be in response to Obama and Democrat perceived failures. That is the only way they will resonate with voters. The past is the past and will be cast aside. And because Ms Palin is not intellectually pretentious she will be up there garnering the votes. Betcha.
That earnings chart is staggering!!! It never made sense to me why the equity markets fell as far as they did, but after looking at that chart, it all comes clearer. . . I know that sounds naive, but I guess I was stuck in the forest looking at the conifers.
ReplyRe: Palin. While she is obviously not the "intellectual heartbeat" of the GOP, the fact that she hasn't been consigned to the dustbin of history along with Los Del Rio, the New Radicals, and Lou Bega is, frankly, disheartening. I understand that there's a difference between a razior sharp-intellect and folksy wisdom. Palin has neither. She denies evolution: the woman's a moron.
ReplyAnd you can bet your ass that if she looked like Madeline Albright, none of us would have ever heard of her. She's a particularly egregious example of the Simon Cowell-ization of modern Anglon-Saxon culture. To quote my 14 year old niece: Epic Fail.
Passing through the airport over the holidays I was dismayed I could not purchase the Christmas No 1. It seems it beat Cowell's pantomine via downloads at £0.29 undercutting the latest rags-to-riches karaoke singer.
ReplyI assume that the juicier stuff is coming in part two, MM, like the range and eventual destination of the 10y yield. Are you going to outline the rationale for the long EUR:short SPX trade for us as well?
ReplyLB is writing from flight 33 to LAX, with one eye on the markets while the other is obviously open for any young persons with potentially flaming underpants.
BTW, I also think MM may be underestimating the potential for large sections of the US electorate to "Go Rogue" on us in the next few years.
Re Palin, we'll see. Her critics, including you, MacroMan, may be jumping to conclusions. She seems a thoughtful sort who reads, but in a busy life with a large family has not had time to season her ideas. She'll have that now. We'll see what she is in 10 or 20 years. You could have made similar observations about a young Ronald Reagan - a lifeguard, actor, etc. - but his years of thinking about politics and reading deeply made him a highly successful politician later in life. Palin is actually precocious compared to Reagan, but generally similar in background and talent. Of course, celebritydom could ruin her. Time will tell.
ReplyAgree in general on the GOP lacking talent though. Not that the Dems have much either.
While I certainly won't try to defend Palin's utter lack of intellect, your partisan rant on Palin devalues the rest of your opinions
ReplyThe Democrats gave us Al Gore -- who thinks he invented the internet. And John Kerry, who is either a war criminal or a war hero depending on what mood he is in.
The sad truth is this: the #1 reason George Bush got elected was that the alternatives were even worse.
Palin and McCain were just place holders and we all know it. After 8yrs of Bush, the Democrats could have run a rubber band and it would have won.
And then we have probably the most stupid person ever to hold office in Washington DC: Nancy Pelosi.
How anyone can complain about Palin (a glorified book author) while not mentioning the speaker of the house is a total mystery.
Obama (and his supporters) needs to stop campaigning -- and start acting like a President
Only 40% of Amercians want government health care (meaning the majority 60% do not). England's NHS is a disaster that no sane group would ever emulate... and before you whine MM, rich people like yourself do not see the same doctors as the rank and file
"England's NHS is a disaster that no sane group would ever emulate..."
ReplyNo no no! Look, this comment is typical of the utter ignorance displayd by many towards the health systems enjoyed by most of the developed world. There are many examples of solid reliable and inexpensive (or free) systems with options to use private medicine available side by side.
The reason health care is so expensive in the US is because the industry has been ruthlessly skimmed by a greedy corporate elite, aided and abetted by the lobbyists for health care providers who don't object one bit to the overdiagnosis, overprescription and overintervention that are characteristics of the US system. (If you are rich or insured.....)
Palin has neither. She denies evolution: the woman's a moron.
ReplyRiiiiiiiight, well fortunately political opinions/news isn't why I read this blog.
Not saying the Republicans will pick up the House, but given the number of Democrats quitting/not running and especially if the Dems add amnesty for illegals to their stew of everything 70% of the country loathes, it's quite a possibility.
Bob,
ReplyAt least UK's "rank and file" get healthcare provision
If you're rich or insured....
ReplyYou realize that's essentially everyone right? The number of uninsured citizens who do not choose to be uninsured when they could be is around 3-4% of the population. Too high yes, though many are covered by charities and rules that hosipitals set aside revenue for patients who can't pay.
As for expense of US health care, well when you don't ration something with has essentially unlimited demand with the income availible to meet much of it, yes its price goes up. The insurance system as we have set up also encourages overconsumption. None of which is slated tro be fixed anytime some (except for maybe rationing).
Professor Hamilton has an interesting post on Chinese inflation:
Reply"So why hasn't domestic inflation in China undone the stimulus from the exchange rate? I've been forming the opinion that U.S. inflationary dynamics may be more governed by relative price changes than was historically the case, and raise the possibility that China could be ground zero for this phenomenon. Specifically, I'm wondering if the pent-up inflationary pressure takes the form of inducing consumers and businesses in China to try to acquire any hard assets they can, with the result that rather than overall inflation we see remarkable increases in the relative prices of such items."
http://www.econbrowser.com/archives/2010/01/inflation_in_ch.html
I'm not sure the improving economy dynamic will work for the Democrats. If the recovery is even reasonably strong, the Republicans will do well playing up the deficits. The worse thing for the Democrats would be strong growth in the first half combined with increasing deficits, and then a turn for the worse in late summer/fall.
The Democrats will almost certainly keep the House, but they will suffer a big loss. Some Democrats in contestable seats have already announced they're retiring. A slimmer majority makes a real difference.
In the Senate, I wouldn't be surprised if Lieberman drops all pretense and just changes parties. CQ shows one loss so far:
http://innovation.cq.com/senate2010_map
LB: There are many examples of solid reliable and inexpensive (or free) systems with options to use private medicine available side by side.
ReplyOnly an idiot believes in a "free" lunch.
Whether other governments can do things in an inexpensive way is subject to debate -- however the US government (under both parties) has proven beyond any doubt that it cannot.
Europe has very reliable train service -- the US has Amtrak.
European secondary schools cost far less per pupil than US schools, but the students regularly test much much higher
Despite the US government spending billions on "the arts", art students all go to Paris or Rome.
Maybe other governments can run effective social programs, but the US government has proven again and again that it cannot
It needs to be mentioned that the #1 priority of the US government the past 9 years has been terrorism -- yet the Nigerian idiot slipped through and was stopped by passengers (a Dutch guy to be precise), not by the police state.
The TSA is focused on strip searching my grandmother, not on finding terrorists. Hundreds of billions of dollars wasted on not fighting terrorists but fighting citizens instead
The NHS is by no means perfect, but I'm pretty grateful to benefit from a system that will treat anything from a busted knee to a brain tumour with no notice, where ever you are in the country and with no regard to your social or financial status.
ReplyD
One comment about Palin. She appeals to a group--mostly blue-collar, mostly not university educated--who are suffering disproportionately and who would traditionally form part of the base for the Democrats.
ReplyShe's not a moron, and probably was a good mayor. The same could be said for Calvin Coolidge. He was mayor of our little burg 100 years ago and ended up as president through a series of unlikely events. Of course, he made sure not to sabotage his good fortune by saying as little as possible.
For the record, my disdain for Palin has nothing to do with partisan politics. When last I voted (nearly 20 years ago!), it was Republican, and as a non-resident American the only issue that affect me personally are minimizing my tax liability and not making it too miserable to travel.
ReplyWhile it may be true that Palin reads a lot and thinks about politics, the same could be said for my mother...and I wouldn't vote for her, either. My real objection to Palin is that she represents the triumph of faith over reason and the theocratization of the GOP, which is one of the reasons that it lost my vote.
As for Pelosi, the woman's a shrew, I believe I've said so before in this space; sorry, but I am not going to repeat my views on every politico out there every time I refer to one in particular.
As for healthcare, the US system is woefully substandard when the aggregate cost is taken into account. You get some of the best and worst health care in the world there, but the bill just doesn't make sense. The crux of reform should focus on cost reduction and broadening the the basic level of care for those who haven't got a fat checkbook handy.
Bob in MA, I agree with Hamilton, and I think that explains some of the behaviours like pig farmers hoarding copper.
MM: As for healthcare, the US system is woefully substandard when the aggregate cost is taken into account. You get some of the best and worst health care in the world there, but the bill just doesn't make sense. The crux of reform should focus on cost reduction and broadening the the basic level of care for those who haven't got a fat checkbook handy.
ReplyIn the US, health care COST is the issue, but nothing in the democrat's proposals does much (if anything) to contain costs.
All the proposals are focused on expanding coverage -- which is why the plan is projected (by the Dems themselves) to COST $900 billion more over the next 10yrs (and even more after that)
And as we speak, CSPAN is trying to get access to the health care negotiations that are going on BEHIND CLOSED DOORS. The US is supposed to be a democracy, but one political party is deciding behind closed doors what horrible Amtrak system they are going to force on the majority who have clearly stated that we don't want government health care
But MM's big worry is some moose lady up in Alaska? Talk about being out of the loop
Hey Bob, do I need to tell you every single goddam thing I think about everything each time I venture to express an opinion? Should I start a Twitter account so you can be notified every time I take a crap?
ReplyYou have admirably demonstrated in these comments why I generally refrain from political comments altogether; the quality of political discourse in the US seems to be regrettably low, as the ideologues on both sides of the aisle elbowing level-headed discourse to the sidelines.
MM - you made a particularly ignorant political comment, and you got called on it.
ReplyNancy Pelosi is in the news, forcing a horrible and expensive health care fiasco on a majority that doesn't want it -- but you chose to mention someone who isn't even in office instead.
As for political discourse in the US ... when the going got tough, you ran off to England instead of making a better discourse
In spite of that, you still have no issue with passing judgement from afar on the system you ran away from.
When your adopted country becomes solvent again -- maybe then you can start telling the rest of the world what to do
Hey Bob,
ReplyGet your own blog. You're degrading this one.
Best,
-I-Man
Bob, with all due respect (i.e., the amount that you have shown me, i.e., zero), kindly piss off and swim in a bilious sewer with members of your own species.
ReplyMM how did you re-turd the earnings, if you don't mind?
ReplyYou can download the data straight from Bloomberg into excel...I think there are two different measures available under 'index fundamentals'...weighted 12m trailing EPS, and trailing eps adjusted for extraordinary items (aka, turds)
ReplyWhere's the OGDF crowd with CLo1 at 80?
ReplyI know it's early days in 2010 but oil doesn't look going down the toilet in a hurry.
WTI seems to have lost a lot of its correlation with the $ and equity an now runs more on fundamentals.
Same story for base metals. Seen copper lately?
MM: interesting to see how yr prediction #1 pans out.
Anon, copper at 3.40 is not based on fundamentals. I have never seen a mine with cash costs above 2.30 and we're headed back to 3.50. I thought it wasn't cheap at 3.00 but shows what I know.
ReplyIf China real estate starts to blow up its going to be time to push this very hard, ditto if those industrial disputes in Chile get sorted out.
any views on silver?
Replyalso, does anyone else think rate hike schedules are aggressive in some of the smaller economies?
Nemo,
Replyagree that based on supply/demand picture Cu + Wti should not be where they are. However,prices decoupled from s/d picture for most of '09 in both Cu +Ti.The barrel counters had it wrong all of '09. The back of the curve is pulling up the front. It's the market's expectation that soon the stuff in the ground runs out, so buy now and hold.The other dimension in Cu + Ti is this: who is willing to sell cheap? who shorts oil at 60? who shorts Cu at 5000? Not many are willing to mega short these ,what in the prompt month, are becoming 'physical' contracts.
Tks, nice discovery.
Reply"grow a pair! Your nominal GDP growth is 12% higher than ours!" -- Macroman, take a look at economic history. *Every* developed economy got to where it is through cheating. Either through the importing of gunpowder and various technologies Europe (which led to the exploitation of the New World and then the agricultural and finally industrial revolution in England) and more recently Japan's mercantilist control of the JPY during it's development in the 20th century. China's just examining history and drawing the appropriate conclusions on what it must do to catch up to the West's including learning from its duplicitous ways.
Reply