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.