Thursday, February 04, 2010


Readers will be happy to hear that after a lengthy, tedious ordeal, Macro Man managed to secure the requisite stamp in his passport yesterday. How bad was it? The level of bureaucracy was stunning: Macro Man had to pass twelve different interaction points before he was admitted to consult with the officer considering his case. And after that meeting, he was convinced that they had granted him de facto indefinite leave to virtue of forcing him to remain in the waiting area indefinitely. He could have sworn that he saw Godot walk by at least half a dozen times.

In many ways, it was like being in Vegas: there were no windows and no clocks, and time lost all meaning while Macro Man was there. There are important differences, of course; instead of piping in pure oxygen, the Lunar House ventilation system appears to emit methane. And at £1020 for the pleasure, it was certainly a costlier endeavour than your author's solitary visit to a Sin City casino.

Still, mustn't grumble, as the Brits say; the appalling bureaucratic waste at least has the benefit (viewed from the perspective of Whitehall) of keeping scores of people off the unemployment rolls. Despite this chilling example of "Soviet Britain" in action, however, Macro Man's labour market indicator for BOE policy still suggests an optimal nominal base rate that is negative- even with the recent improvement in the data.
It is partially for this reason that today's BOE meeting carrries some interest. Normally, one might posit that a central bank confronted with a return to real growth (however tenuous) and an inflation rate nearly high enough to merit an apologetic letter would be considering its exit strategy. Not so the for the Bank, however, as tepid M4 growth and the labour market slack could tempt Merv to take out a final piece of "recovery insurance" before he eventually swerves. If the BOE does anything (either expanding QE or cutting the deposit rate), this will be the month, as the quarterly inflation report will be released next week.

A further easing of policy would of course be a gamble for the Bank, given the likely trajectory of reported nominal GDP growth. If Merv does decide to roll the dice and ease policy, 'twould be a gamble worthy of a high rollers' table in Vegas or Mente Carlo. Hmmmm...perhaps Mr. King is angling to lead a renewed push to roll out supercasinos in the UK? Vegas-by-Thames, anyone?


Nemo Incognito said...

Assuming the house prices are going to deflate anyway a la Richard Koo wouldn't pushing rates even lower just be pointless? Certain parts of the CPI basket (housing) are going to go down anyway and other things with more obvious bottlenecks are going to run hard anyway. Unless you want to micromanage supply and demand in different asset markets rather than the aggregate supply of credit/money it seems pretty pointless one way or another.

Cornelius said...

Model = MM forward-looking Taylor?

But What do I Know? said...

Silly me--I wondered why I had to stand in line for two hours to clear Immigration at Heathrow last fall. Apparently it has to do with a jobs program!!! :>)

Thanks for the insight, MM.

Macro Man said...

Nemo- house prices are actually going up in a numbr of places. But the point of cutting the deposit rate would be to increase the opportunity cost of holding reserves for the banking sector, rather than lending it out. That M4 lending is what merv is really worried about...

Cornelius, it's a simple one factor (ie labour market) model that I devised about 5 years ago. Does a pretty good job of explaining BOE reaction function both in and out of sample.

BWDIK, doing the iris scan is the only way to go these days when you're travelling to the Uk on a non-EU passport.

Anonymous said...

Lunar house must seem like Disneyland compared to Swansea DVLA...

With this level of debt and deficit and government sector crowding out the private sector, perhaps only a matter of time before British citizens are clinging on to the Eurostar to go to Eastern Europe once the state removes unemployment benefit (flying pig scenario of course).

At some point, inflation has got to wear away at the fixed benefit payments to spur the labour market.

Cornelius said...

Ah ok - like an idiot, I didn't even read the title.

Have you tried fitting some version of the Taylor on it? Have had pretty good results with creating a custom Taylor index on the US market, just have to be careful not to over optimize (especially depending on how you cut your out-sample).

Nemo Incognito said...

Is this the sweet sound of deflation returning to Europe?

Low Conviction said...

What struck me about Lunar House when I was lucky enough to visit it last year was the barriers presumably designed so people form an "orderly queue". Almost identical to what you see at a dairy farm.

Anonymous said...

Go long Thailand!!

Leftback said...

LB has enjoyed many visits to a variety of American Embassies, Consulates and so on during his journey to permanent resdiency. It's a universal feature, MM, when you are in Bureaucristan you could be almost anywhere.

LB wonders whether today's market action is selling of tomorrow's number. The upcoming revision of the entire prior year's NFP numbers seems to be the world's worst kept secret. Conducted some successful hedging this week, back to a net long position in Treasuries now. The dollar can do no wrong in the short term - rallies on strong economic news, or on risk aversion.

Anonymous said...

Nasiim Taleb believes every single person on earth should short US Bonds - I think it will take everyone actually - how many Chinese are there now?

Leftback said...

Taleb has identified a good trade, but he may be a bit early - maybe a decade early. He should be looking at JGBs first. No doubt in my minde that we can see a crisis in sovereign debt at some point, but there are a lot of steps before that happens - the weakest segments of the debt market are going to go first.

Ian said...

Kudos to those copper shorts. Question is whether we stop in the 2.60 area as the Chinese go for growth post New Year or retest the lows.

Gary said...

While everyone has become obsessed with whether central bank rates will stay at de facto zero, or will be "tightened" to something still well below 1% -- the big picture is being ignored

We have G7 economies that cannot function with "normal" levels of interest rates. In particular, the banks apparently cannot make a profit without a 400bp (yield curve steepness, give or take) subsidy. Very General Motors.

We have G7 debt levers that are taking running long jumps over the 90% of GDP "threshold" where debt service starts to seriously impede future growth (and by extension future tax revenue). A few countries are well above a sustainable debt level.

In the so called "free market" economies, total government spending is already above 50% of the economy. "Free markets" go into conniptions over what central economic planners (Bubbles Bernanke, Swervin Merv, whomever) have to say. We know most of their analysis has been proven wrong, and yet "free markets" rise and fall on whether these central economic planning committees are in a good mood or not.

Leftback is now in a twitch over what NFP is going to print -- even after saying the last year's worth of lies is rumored to be up for revision.

No matter how clueless and delusional the financial world gets -- voters are so angry they cannot see straight. If the Volcker proposal doesn't pass, it will likely be something far more onerous (for banks) instead.

Now even the FT is pointing out that sovereign debt is in deep trouble. When a problem is so obvious that it makes the general circulation papers, it means the problem is soon to come to a head...

Gary said...

P.S. ... MM good call on the Euro a week or two ago

leftback said...


The employment picture tomorrow is not going to be pretty. But it's not a bad idea to have some protection against an unexpectedly good number, just in case.

LB is not twitching, by the way. Rather relaxed in fact.

Gary said...

Leftback -- I just finished a "tour" of the country (annual performance meetings are not as fun as they might sound). Storefront windows are covered, parking lots are empty, streets are quiet.

I seriously doubt Obama will allow any more creative accounting at the BLS ... Sell side banks might buy a "good" number, but voters will punish Obama if he tries to claim a recovery is in the works

The sell side is still focused on fighting last year's battles (betting other people's money), but voters don't put any credibility to CPI or NFP.

NFP is irrelevant. CPI is structured to report a low number all the time. Both numbers are viewed as a bad joke. That some market practitioners are still watching these fictions is just more evidence that bankers are out of touch with reality.

Employment is a huge problem, regardless of what NFP prints. Government has been most (all?) of the recent job growth, and other than temporary census workers, existing debt levels are going to require a government downsizing.

Neither the US nor the UK can afford to keep their governments at current sizes.

Lack of real (not debt induced) growth is the big problem. The economy gets no lift from government subsidized entities (auto or banks); it is artificial "demand", and everyone knows it.

The sugar high of the last two years is peaking, and the insulin crash is going to be devastating to overpriced equity and bond markets

leftback said...

Gary, I would second your ground level observations on the US economy. Outside of the NYC and Washington DC boomtowns things look a lot like PIMCO's New Normal. Not the end of the world, except in places like Detroit, but much slower activity than before the crash.

No real disagreement with your thoughts, except to offer that the next stage likely sees the most overpriced markets correct first (EM equities and fixed income, commodities and commodity currencies, high yield US corporates).

The rallies are getting weaker on low volume. Once we see some major support levels break, things are going to get interesting.

James said...

Taleb is right to point out that Bernanke and Summers are absolutely clueless and basically dangerous. Do they not understand that alot of risk comes from leverage?

It was the credit/debt that brought us down in the first place and they seem to think that credit is going to drive us out?
Idiot savants and retards

Gary said...

LB-- I wonder if **some** (definitely not all) emerging markets deserve a higher PE multiple than the dinosaur markets.

It is not so much that these countries have dominant economies; and many are not big enough to make a difference to global GDP. The issue is more about the decline of European empires (since the US is acting like "old Europe", I am grouping the US in)

Massive debt, bloated (and often corrupt) governments, central economic planning by theorists -- these are the attributes we used to associate with banana republics. Now these describe the G7 better than the emerging economies.

I wouldn't rule out a pullback in EM as insolvent banks are forced to delever and stop speculating ... but over the medium term, growth prospects in EM are much better than in the G7

The biggest danger right now is the blind faith in G7 sovereign debt. Other than historical reserve currency status, there isn't much difference between Greece and Iceland -- and the US/UK.

There are no pro-growth policies being considered, meaning the future tax bases of the G7 are eroding. In case this isn't obvious -- that means the cashflows backing the debt is eroding.

At this stage, companies like Exxon, IBM, Bristol Meyers, Alcoa, Intl Paper, etc, are much better credit risks than the US government.

I am hard pressed to think of any decent UK companies -- BP has been managed about as well as RBS. Like RBS, BP is obsessed with size for the sake of size.

The UK government is hugely levered to both RBS and BP -- the first one blew up in their face, while the second is no longer able to keep the North Sea fields paying royalties to the UK treasury.

Looking at cashflows and fundamentals (not historical status), many emerging economies look less risky than the developed ones.

PS -- China is not an emerging economy. It is a very levered bet on the US economy. We have all seen "big growth" companies that eventually blew up when their vendor financing couldn't shove any more product onto customers that could not pay. SAFE is just a vendor financing division in drag.

Gary said...

BTW -- read a piece from Marc Chandler where he said (I am paraphrasing) Greece is to Europe what Thailand was to Asia in the 1990s.

I would add that California is to the US ...

leftback said...

Why Gary, your bearishness is quite profound these last few weeks... welcome to the Cave.

SPX 1066 level being tested here. can't remember when but I seem to remember that having had some significance in the past.

MM, the risk aversion trade is - most definitely - ON.

James said...

Things are going to get much worse before they get better. We had a chance last March to take the medicine and hand out losses, but the idiot political system and the morons at the Fed armed with all there worthless theories couldnt take it.

Gary said...

James -- I don't see the United States getting better in the medium term. Obama sending aid to Haiti sounds like all those once monied families bidding at charity auctions to maintain appearances. The US cannot afford to bail out Haiti -- the US needs a bailout itself.

Obama's plan to run trillion dollar deficits as far as the eye can see is just terrifying. And that doesn't even include all the off balance sheet Enron frauds like FNMA, FHLMC and AIG. These entities are now US government owned -- their debts (and future losses) belong on the US government balance sheet.

And against this financial crisis, the so called leaders of the country propose: a new entitlement program, million dollar bonuses to failures, and deficit spending on pork. Calling pork "stimulus" does not make it so -- ask the LDP in Japan.

There will be no recovery unless debt is paid down, and failed entities are shut down. Not only is this not happening, the clueless wonders in Washington seem determined to incur ever more debt and prop up more zombie companies.

If Obama doesn't radically cut actual spending (the budget is just a head fake) -- the economy will crash. If he does cut spending, he will have to admit this "stimulus" nonsense was just a lie, and the economy will be forced to make the painful ajustments we should have started in 2008, PLUS it will have to pay down trillions in debt for wasteful spending.

Obama has pretty much guaranteed we will have a republican president in 2013 -- not to say the republicans have any brilliant ideas, only that Obama is a fool.

While Japan's LDP had essentially no real alternative, the US is a country of mal-contents who will present endless alternatives (not necessarily better)

James said...

The only thing the G7 has discovered is socialism. Everyone keeps making these promises and gurantees that have zero basis in reality.
The government keeps trying to force people to look away from the mirror because if you do you will realize that the US is governed by the people and the people are completely broke.
The west is going to through hell.

Nic said...

So restrained LeftBack ...
Not even a hint about the shiny thing which you're not allowed to mention :)

Nemo Incognito said...

Was that the plunge protection team? Looks like it.....

Either way all in all a fun week.