Friday, November 12, 2010

In Case of Global Consensus Break Glass

TMM were somewhat cynical about the G20 but some of the headlines hitting the news today have given us pause for, ooh, a few seconds before we started tipping out our gold. Much of the wealth generated over the past few years has been based upon the thesis of “more of the same” – more trade imbalances, more carry trades (now supercharged with QE2), more monetary debasement and therefore higher commodity prices. So, at this time TMM have broken the glass on their macro playbook for a global consensus apocalypse. Needless to say it’s a little different to the other one we have which is reserved for a zombie apocalypse, the other tail risk event TMM worries about.

EM FX Carry Trades: Higher FX rates generally mean lower inflation which means that what you make on your FX upside you are likely to lose on rates. TMM mentioned this a while ago but really long duration trades in Southeast Asia and India look a lot less appealing than they did in the middle of the Euro Crisis. The front end and cash do look interesting though since some hikes are priced in there for some of SE Asia.

Equities: All things good for the USD are generally negativeve equities but in the medium term the picture is not uniformly clear. People in the low margin exporter business will get smoked (Li & Fung comes to mind at TMM), not to mention any other number of lower end clothing brands and outsourcing driven businesses in China. A lot depends on how these countries respond to the challenge of higher currencies: responsible policy would suggest fiscal stimulus but monetary easing is entirely possible too despite the fact it would exacerbate investment bubbles in much of Asia. To that end, its hard to argue for shorting property names, incredibly overcooked as they are, until you see what the domestic policy play is. The only braindead move may be Japan exporters which will now face a vaguely competitive position on the macro front, something they haven’t seen in a long time.

Rates: Let’s be honest – one way ticket, up. Less demand from the FX bodily fluids taking community means demand goes down just as improved competitiveness would wreck the case for QE. Rates are one of the more overcooked trades out there in TMM’s view and have the capacity to move hard and fast. Similarly, more carry driven FX pairs (USDJPY) would move quickly too and JGBs might be ground zero for the mess. Shorting these would get leverage to some very heavily over owned bonds in a ridiculously misaligned currency.

Commodities: If the world realigns, the case for an alternative currency doesn’t really check out and Gold will get brutally, horribly beaten down. TMM finds it hard to see it any other way but is open to suggestions. Industrial complex and the like will be hit hard too, though there is light at the end of the tunnel: while China fixed asset investment would take a backseat those countries with serious infrastructure and housing shortages that would now be buying iron ore, coal and the like with more valuable currencies could pick up the slack once the dust has settled.

Eurozone: TMM would normally exclude the EU from any discussion on consensus thinking, but even they seem to be coming to the realisation that something needs to be done about Ireland.


Anonymous said...

Ah, the macroman clarion call, "gold will fall". I recall last year at 950 buck gold, the same thing was said.

I guess, like a broken clock, you'll be right one day.

me said...

They are talking about "in the case of global consensus", which is clearly not what is happening here.

Polemic said...

Hi. Anon 1 . U are completly correct, we have been wrong wrong wrong. But thats the fun of markets. If u scratch off every asset class you ever call wrong from the bingo card, you would fast run out of assets to trade. But you have to play on... Any good ideas from here? Would welcome all thoughts u have..

Anonymous said...

"I guess, like a broken clock, you'll be right one day."

if all you have going for you is being right I would suggest you'll struggle to make money long term.
We are frequently wrong ,but in being so smaller thane when we are right we make money. I have yet to meet anyone making money simply on the basis that they have made right calls.

rene-korda said...

I think you should stick to preparing for zombie apocalypse. The tail's fatter there.

Anonymous said...

in this case, even gold is not fat tailed enough...

worth investigating

FX said...

TMM, Our form race of the year is over.

Now that they've crossed the line and return to their stall, the first noticable sign shown is that there all sweating profusely,not one seems have taken it in its stride, except our ref no doubt, though his only the clerk of the course these days.

Don't know which one put in the top for the year, but inclined to run along with our NFP week/week after system if I was to go long, pretty lame I know , I'll be giving it only a couple strides to show any improvement.....I always remember, when it comes to form races the most important variable is how they pullup in their honest lead up race.....this is a plungers market.

housing_mess said...

Hey MMT,

As usual very interesting comments.

I will refer to your comments on rates, as to be more specific ("one
way ticket up").

Are you assuming Asia revalues and all of a sudden the C/A surpluses
(and portfolio inflows) disappear, and thus reserve recycling (into treasuries) stops?

It can happen, but looks rather unlikely, as Chine does not want to
move in a big way and Asia still favors a mercantilist approach to
trade (maybe India is the exception).

Also you seem to be assuming that the offsetting boost in US exports
will lower unemployment to the point that Ben will stop intervening in treasuries.

If all that were to happen, then I agree that we would be facing much
higher real yields and much lower gold. But how likely is this
scenario? It's a perfect scenario from the US economy and Global
rebalancing perspective, but looks extremely unlikely.

Asia (and China) will only really move in FX when inflation and
overheating become a problem. In the meanwhile the US will be
inflating them with QE.


Anonymous said...

Good ideas? At the moment, I feel quite light on them.

I still think that the trend in being short EUR has further to go. I guess Australia is starting to look interesting, with money getting tighter over there. The increasing disquiet with the Federal Reserve in the US, and the probable zero fiscal stimulus for the next two years is another interesting point that could keep the dollar in the 75-90 range for a while yet....