Monday Musings

Monday, March 22, 2010

Well, whether it was technical exhaustion, triple witching, or the passage of the [REDACTED] bill, equities have sagged since Friday's post. While it's tempting to get excited about the prospect of a(n overdue) meaningful correction, bitter experience has demonstrated the utility of waiting before layering meaningful shorts.

Still, if it's "all about liquidity", then it is probably worth noting another instance where the opening salvo of a tightening campaign has been fired. India's RBI tightened rates on Friday, between regularly-scheduled meetings. While the exact timing of the hike was a surprise, that they have chosen to start hiking should not be so: Indian wholesale price inflation is nearly back to the summer '08 highs, while CPI is rumbling along at mid-double digit levels.

While India is of course a very different economy from the US, that inflationary pressure has re-emerged so easily does bear watching. While US measures will of course be heavily impacted by rents, there would appear to be little standing in the way of a decent bout of supply-side manufactured goods price inflation.

And hey...when even American outsources decide that lobbying on China's behalf is pointless, the prospects of a protectionist cage match look better than ever.

Meanwhile in Europe, the Germans have once again said "nein!" to the prospect of a Greek bailout over the weekend. Though it's not exactly new news, the contrast between Germany's fiscal rectitude and the American willingness (under both Bush and Obama) to throw money at any old turd-maker in need of a spare $20 billion or so is striking.

The Treasuryt-Bund spread has moved sharply wider in recent months, taking US yields well above their German counterparts. However, there is ample historical precedent for wider spreads; indeed, in the second half of the 90's Treasuries routinely traded well over 100 bps over Bunds.
Add in a dash of short Gilts (though be wary of this week's Budget), and you have the recipe for one of Macro Man's favourite trades of the year thus far.

Posted by Macro Man at 8:02 AM  

9 comments:

You should check out some of the CLSA strategist's stuff on inflation. Long story short is that equities have no problems going up until inflation hits 4%, at which point the wheels start to come off. It will be interesting to see if some of the ibanks start pushing some trades in equities based upon who has better exposure to inflation.

Nemo Incognito said...
9:28 AM  

and I mean Russel Napier....

Nemo Incognito said...
9:29 AM  

"...there would appear to be little standing in the way of a decent bout of supply-side manufactured goods price inflation."

How about over-capacity? A few years ago, when China was appreciating the RMB 20% and was experiencing %+5 inflation, WalMart did not cut them any slack. They had to make it up with efficiencies and lower margins.

Now demand in the West is falling and China is building more capacity.

The savings rate in the U.S. has barely started to tick up, this has years to go.

Bob_in_MA said...
1:49 PM  

Supply-side price inflation requires at least a modest demand increase... looking at the US retail environment the best way to move goods (even food) seems to be to keep prices low. Don't see anything sustainable at this point, and $100 crude would be self-limiting for sure. I agree that inflation is easier to see in the UK.

The geniuses predicting the death of the Treasury market seem to have struck out again. You can make a very good argument that the h**lth c*r* reform bill may actually be deflationary, as more efficient delivery cuts costs and unnecessary procedures and prescriptions (trust me on this, the present US system is bloated and loaded with fraud). This will actually be great for small business, even those who have railed against it.

Leftback said...
2:07 PM  

Of course, in the US there have been pockets of inflation, i.e., college tuition, medical costs, medical insurance etc. Inflation in the things you need, deflation in the things you want.

dss said...
4:27 PM  

Agreed, but there is such a profound pressure to downsize and deleverage that even education and health care are going to have to yield to the pulverizer. Here are some charts of interest on this point. It's really easy to reduce your grocery bill by 50% right now if you are willing to spend a little extra time (and leave midtown Manhattan).

US Inflation? Charts from Rosenberg

Leftback said...
4:48 PM  

Also, anyone seen this piece from Dong Tao at CS on these UDICs? Scary stuff - I remember there was an old GS piece in April-May last year making the case for commods based on infrastructure spending economics. It might not be the silliest thing to assume that particular rug gets pulled out from under aluminum, copper etc.

Nemo Incognito said...
5:06 PM  

What is the main rationale for the short Gilt trade, MM?

I am curious since I'd prefer the other side of that trade if I had to choose.

MH said...
6:49 PM  

MM -- what to make of the fact that many companies (Bloomberg today mentioned Berkshire, P&G, Johnson and Johnson, etc) now have bonds yielding LESS than US Treasuries

Kind of like how VALE has traditionally yielded less than Brazil government bonds

Gary said...
8:48 PM  

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