Thursday, October 28, 2010

You know QE expectations are getting a bit out of hand when...

So the ECB's 3m LTRO ended up with a larger take up than expected, causing short-dated EONIAs to collapse (see chart below, white), and so, of course, the Schatz yield (orange) decided it was in fact not going to follow. This is a common frustration for TMM - it's difficult enough getting the Macro right let alone making any money off it. Nevertheless, TMM firmly believe that as the money markets in the Eurozone thaw, along with Club Med worries once again surfacing that the front end will gradually rally.

In other news, TMM would like to pay their respects to the passing of Argentina's Nestor Kirchner, for the reaction in Argentine assets was simply astounding, with the stock market up 10%. Now TMM don't bear any ill feeling to President Kirchner, but it just goes to show what can happen when economic policy is run essentially by printing money to fund deficit spending and ignoring inflation by claiming that it has only gone up due to "one-off" factors. Kirchner, of course, decided to alter the inflation statistics such that these large "one-offs" were stripped out, something that reminds TMM very much of that other guy that loves printing money and ignoring inflation by claiming it is due to "one-offs"... their arch-nemesis, Mervyn King. Of course, he isn't quite so explicit as to alter the actual statistics, he uses another approach: rubbish one index, and focus on "inflation ex-energy, ex-food, ex-VAT, after currency moves, ex-..etc etc". TMM's blood pressure is rising so they won't comment on Adam Posen's claims that "if the UK recovery was going to be inflationary, it would have been evident by now" aside from pointing said Posen to RPI running at 4.6% y/y.

But back to printing money. With markets in "QE-on/QE-off" mode rather than just "risk-on/risk-off" TMM thought that it was worth considering whether QE expectations were getting a bit out of hand over the past week and would like to invite readers to post their own metrics:

You know QE expectations are getting a bit out of hand when...

  1. Goldman calls for $2trn.
  2. Rumours fly around that the Fed may eventually do $4trn.
  3. China starts complaining that the Fed is about to purchase $1trn of USTs despite buying a similar amount themselves.
  4. Xerox is up 36% since Jackson Hole.
  5. Your Mom calls you asking what QE is.
  6. The BoJ buys a promissory note from TMM for $1bn whose principal is equal to their combined yearend bonuses price in Gold today.
  7. IBM issues a super long bond.
  8. Mexico issues a really super duper long bond.
  9. You find out that both of these organisations have a guy who had Bernanke as a thesis advisor in their Economics PhD program before joining their respective Treasury departments.
  10. Greek tourist-tat shops sell QE wallets three times the size of normal ones.
  11. The guy that trades European Telecoms on the Equity floor explains to you how QE works.
  12. The TDI (Taxi Driver Index) flashes Red when your taxi driver starts using QE to justify the Gold he bought in May.
  13. A word score of 36 in Scrabble is nicknamed "scoring a QE" in old folks homes.
  14. Your FX sales shag starts giving you minute by minute updates about 10s30s, but doesn't know what "10s30s" is.
  15. Handing out an extra 200,000 quid to all players when any one goes bankrupt is now mandatory and in the official rules of Monopoly.
  16. The DPI (Dinner Party Index) flashes Red when you are in Islington and the Guardianistas around the table start debating just how much more QE is needed.
  17. Your Mom calls you back and asks if she should put her 401k in Gold to hedge against inflation.
  18. Bill Gross, an otherwise nice guy, goes on a rampage, and while not naming names is clearly not happy with the FOMC right now.
  19. The UK decides to privatise the Royal Mint.
  20. Your Mom calls you again and explains to you how QE works.


Nic said...

This post is absolutely priceless :)
And then there is the GS 50yr bond.

What do TMM make of the chatter of a Yuan revaluation this weekend?

cpmppi said...

Glad you liked it. Vampire Squid 50s, comical.

As far as a Yuan reval goes, TMM's bitter experience over the years has been that it is pretty much impossible to make money playing for a China reval! As far as timing goes, we really have no idea, their historic behaviour suggests it ain't likely

ed said...

Great post. Can you elaborate on the Bernanke PHD thesis students please?

Leftback said...

LOL, this one had me choking on my coffee this morning...

My brother is a Guardianista and he works in Islington ! But he is an economist so he probably knew what QE was already...

Bob_in_MA said...

Bill Gross's comments seem to be getting a little distorted. He essentially endorses QE as being a necessary evil. But then points out that it will likely speed the inevitable end of a 30-year bull market in bonds.

The biggest problem for the Fed is that QE will probably have little effect, outside of supporting higher gasoline prices. And if the economy turns to the worse, they are as likely as not to be blamed for causing it.

The Fed is insulated from the need to cater to public opinion, but it would have behooved them to have spent a lot more time making a case before a wider audience than those in attendance at some function of functionaries in NY.

scharfy said...

Funny post.

Just wondering who would win in a theoretical fistfight between QE2 and Chuck Norris ?

karen said...

LOL! Fantastic.. Laughter IS the best medicine. #8 was my personal fav as I live in so cal.. tho, 1-4 had me lit up.. The phone calls from Mother were endearingly understandable, but irrelevant to me as my mother lamented after the bust.. "we probably never should have gone off the gold standard."

abee crombie said...

most retail ppl I talk to still live under a rock and have no idea what QE is

Leftback said...

many retail ppl hiding out in bond funds where they may remain ostrich-like until yields bleed upwards and stocks eventually peak, at which time they will flee safety like lemmings just in time for the next big cliff dive....

FX said...

That was funny,Number 14 = Worries there, indeed, the stealth contrarian indicator no doubt.

Sung said...

I'm a student. What's a 10s30s and 5s10s30s butterfly? I understand the structure of this but when do traders use it?

Thank guys.

Leftback said...

10s30s is 149 bps today, mate. Now see if you can figure out what it is. LB prefers the breast stroke to the butterfly, to be honest.

The QE post really was the dog's bollocks.

housing_mess said...

In recent years, many things that were worrying people with a common sens approach (rise in consumer debt, large current account, China buying ever more treasuries) were dismissed by sophisticated economists (Fed and others often linked to banks in some way) with some fancy theoretical arguments. The Joe six-pack in me, tells me that printing money leads to disaster.

Great remarks on QE... I loved the European Telco Equity trader getting involved in the QE2 discussion! Everyone in financial markets (and beyond!?) has an opinion on this thing, and believes he understands it.

Nemo said...

Looks like some ass from BNP Paribas reads this blog and is happy to plagiarize from it:

Nic said...

Im sending them a msg now

Polemic said...

Well Nemo ,

If we are nicking ideas perhaps we can nick David Guetta's trade mark and say "Fk me I'm Famous ".

No wonder he dropped our "TMM bonus bond" one. I don't think BNPP press office would have liked mention of BNPP 1 bil bonio numbers to be inserted instead.

BNP Paribas . I think your FX strategists in London are great but shame on you you NY scoundrels.