Friday, November 12, 2010
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.