Tuesday, August 03, 2010

"That’s odd"

Plenty of debate out there over whether we are in a deflationary growth period or a deflationary slowdown. Is the "I" word verboten these days? But there are some odd things out there and we are pondering the following:

- Bonds and equities both rallying.

- Copper and all things China related were trading up as if we had a stimulus package coming but by this afternoon Mrs Market felt very deprived of stimulus.

- Yen has not been weakening despite a 10%+ rally in equities in the past month.

- Platinum, palladium all up strongly but car sales pretty weak everywhere except for luxury vehicles.

- Why are the Chinese buying Japanese short term instruments? The Japanese fin min don’t even know. TMM discuss all sorts of "what if's", such as it being a precursor to stepping into Japanese equities?

- Northern Rock's 'Bad Bank' Makes a Profit, 'Good Bank' a Loss...

- JPM's open honesty over problems in their commodity unit. Huh? David Cameron advising them on PR?

We would like to think that this is still a summer squeeze and that the pendulum of expectation has swung too far to the deflationary side in this summer vacuum of liquidity. But we are wondering if the following equation works..

Positional squeeze + over-expectation of deflation + Equity/bond spread + a PCE catalyst + Voldemort's concerns - Fed's Bazooka = UST dumpage

14 comments:

Leftback said...

That is rather amusing, TMM. I bet Dealbreaker would love this one.

JPM's commodity unit no longer Masters of their Domain? She seems quite Blythe about an upturn in ROE. Anyone can have a bit of a coal streak, I suppose. Maybe the trader who made the mistake should lose his wheels? - after all it's only a Bhima.

Inquiring minds would love to hear more about Blythe Masters' Deep Diving skills, we assume that she can hold her breath for long periods in high level meetings with Jamie Dimon.

Doesn't anyone EVER get fired any more? Just askin'...

Leftback said...

Oh by the way, mate, you might need to get out more when on this side of the pond. Income and PCE in the States is only up among bankers, and the associated coke dealers and Ukrainian escorts.

Everyone else is getting kicked in the nuts.

Deniz said...

to add a funny fact to the equation; long bond yields rallied every August for the last 10 years ..

Leftback said...

10s30s is historically very wide here, so if there is some reversion to the mean then rates at the long end have room to decline even further....

Nemo Incognito said...

TMM at the moment is basically seeing two possible outcomes - US business spend leads to a 94 bond rout redux or...... we turn Japanese. As the equity/single name credit punter of the group this does not exactly make it easy to construct one's book because its hard to win both ways.

Leftback said...

Bond rout...! Ha ha ha ... bonk
(man laughing his head off).

LB would absolutely love to see a bond rout, as it would lead to an orgy of blood-letting among holders of high-priced homes and other leveraged and inflated assets. This in turn would lead to all kinds of financial Schadenfreude and armchair entertainment, a veritable Bonfire of the Vanities, Part Deux. But they cannot allow it to happen.

Now let's get real, think of the consequences of a bond rout - 2011 Option-ARMs. Ugly... residential real estate collapse... Ugly. Then think of all the interest rate swaps... Ugly... bank balance sheets.... Ugly. Corporate defaults.... Ugly. Commercial real estate.... Ugly. A surge of small business failures... Ugly. The only solution to try to uphold the status quo is a managed deflation.

"Turning Japanese
I think we're turning Japanese
I really think so...."

The next crafty monetizing move will therefore be..
BUYING MUNIS (as well as more MBS) as a way of getting around state and local insolvency. Moral Hazard will continue, Crony Capitalism writ large. Banks will borrow from the Fed and buy Treasuries and buy stock in banks, just as in Japan.

Now if you want to see a bond rout, Japan might just be your location...

FX said...

I feel the "sweet spot" developing.

mr potato said...

Hi Leftback, just a quick one

"Banks will borrow from the Fed and buy Treasuries and buy stock in banks, just as in Japan."

I thought old people's trillion dollar savings in Japan Post are still the bigger supporter of the JGB market, as saving regardless of interest earned is a national sport over there. I don't see the usual US treasury buyers being as disciplined and patient.

Charles said...
This comment has been removed by the author.
Charles said...

@ Mr Potato :
If saving rate in the US turns strongly positive, you may find some domestic buyers. In particular, with zero capital charge for credit, banks will be happy to employ the zero cost ressources of their frightened customers with Medium and Long Term treasuries.

mr potato said...

@ Charles

Even if savings rate would shoot right up... will US savers stay frightened for so long? My guess is they will take their money elsewhere in search for yield. Guessing the whole Japan comparison is a bit over-stretched.

Mike said...

Try "Japanese equities and property" if TMM wants to sing along with what apepars to be the current Beijing hymnsheet.

tas said...

It has occurred to me that some of the smart trading money may have developed methods of anticipating news announcements. e.g. they might develop a model that anticipates the ADP weekly payroll (or, more insidiously, have insider info on them.). This might explain why there was almost no reaction to bad news yesterday, and a bump up followed very shortly with a correction today. If you wish, the smart money bought the bad news and sold the good news.

Leftback said...

LB subscribes to the notion that the US consumer's reign as Last of the Big Spenders is coming to an end. The lack of foresight of Joe and Jane Sixpack is going to force the US to become a nation of savers just as the Japanese begin to withdraw their savings to support the Watanabes in their dotage.