Wednesday, December 22, 2010

TMM solves the UK structural deficit

Well, it's that time of year again, when the media and political classes all get in a tizz about bank bonuses, and while Team Macro Man often cannot believe their eyes at how bankers keep shooting themselves in the foot as far as political sensitivities go, TMM reckon that there are a fair few other areas of society that ought to pay their dues. So in this regard, TMM will attempt to try and plug the UK's fiscal hole by proposing a set of windfall taxes along the lines of the Bank Bonus Tax. But this time, with the *real* culprits.

Banker Tax. As mentioned above, we are often incredulous at how retarded bank PR has been over the past few years, with a seeming inability to accept wrongs or indeed even give an inch to policymakers. In particular, the way banks behaved in 2009 despite unprecedented public support, forced politicians to act. But it didn't have to be that way... UK banks, in particular, blew up as a result of the structured finance books and exceptionally poor decisions by senior management at a few of them (Fred Goodwin, we're looking at you).

Given all those bankers and traders who were in the employ of foreign un-rescued banks who have nothing to do with UK lending, and in jobs like operations or IT had very little to do with the losses that materialised, it seems somewhat unfair that they are made to pay the windfall. Whilst banks may soon try to redefine their activities ("Hello Barclay's Butchers, can I help you?"), it's the other non-bank banks we feel real sorry for, e.g. Blood Banks, Bottle Banks and err. where they keep "man-deposits"?.

Anyhow, the Bank levy is supposed to raise around £2bn, so let's distribute that a little more fairly. HMRC data show that Income Tax and NIC contributions from Financial Intermediation for 2009-10 were £23.2bn. As a ballpark guess, the average tax rate (including NICs) on that is probably about 40%, implying ~£58bn of pay. Again, taking a guess that around 5% of the payroll was responsible for the losses, or ~2.9bn, that implies a tax rate of 69% for those guys to raise the Banker Tax's £2bn.

Accountant Tax. Barry Ritholtz popped this post up as we were writing this. Enough said. They've got to be good for another £2bn.

Ratings Agency Tax. As TMM have oft pointed out, this little lot are directly responsible for the start of all this in the first place with their split ratings on turds. They are currently playing havoc with Europe. We suggest adding a tax of 1 penny on every bond issued that carries one of their ratings. This would either raise a sum of 0.01 x 1 trillion = £10bio, or alternatively drive people to do their own risk assesments. Both being positive outcomes.

Lawyer Tax. So lawyers were never involved in okaying all those structures that brought the financial world down? Guilty! Lawyers to be nationalised and pay to be capped at 100 pounds per hour and bonuses to be payed 1% cash and 99% in legal aid vouchers. Given the UK boasts 151,000 lawyers, probably earning an average salary of £50k, that would raise about £7.5bn.

Labour Party Tax. In running an expansionary fiscal policy, Gordon Brown pushed up the UK's Real Exchange Rate in line with the Mundell-Flemming framework. However, in doing this, the private sector economy became uncompetitive and vulnerable, resulting in large swathes of UK Plc. being sold to the French, Germans and Americans along with their future tax revenues in order to finance the UK's current account deficit. By doing this they were part and parcel of the fundamental imbalance in the UK's economy. Brown's meddling with the regulatory framework also prevented a sensible and coordinated appreciation of the risks prior to the crisis and also an appropriate response during it. While it's hard to put a concrete number on this, the Labour Party membership stands at around 92,000. Guessing that they earn the UK's average salary of £26k, a 69% Labour Party Tax would raise around £1.65bn.

Bank of England Tax. TMM's nemesis, Mervyn King, and the other ivory tower economists that have inhabited the BoE since its independence also clearly contributed to the crisis in keeping monetary policy far too easy to begin with, then far too tight as the crisis evolved and then to outright lunacy as banks started to collapse around them. Not to mention the money market reforms of 2003 and 2006 that sent leverage ratios on HBOS & Northern Rock's balance sheets northwards (we'll do a post on this at some point in the New Year...). Unfortunately, the Bank of England's profits already accrue to the Treasury, so there isn't room for a tax here.

Estate Agent Tax. The cheerleaders of the past 10years of ever-rising property prices. In the UK, House Price to Earnings ratios jumped from around 2.6 in 2005 to around 4.9 at the peak and TMM reckon that the difference between the 2007 peak ratio and the 1989 peak ratio is probably a fair assessment of their contribution, or around 40% of the valuation move. The HMRC data show Real Estate, Renting & Business Activities as paying £43.3bn in Income Tax/NICs in 2009-10, so guessing an average tax rate of about 30%, that makes about £144bn of taxes. Guessing that about half of this payroll (conservatively) was involved in residential & commercial property sales, and applying the 69% tax rate above gives an Estate Agent Tax of £49.7bn.

Buy-To-Let Tax. The next group are those that priced first time buyers out of the market and amassed large property portfolios (anyone remember the stories of people on £26k a year, but owning 10 buy to lets?!). TMM cannot find much data on this, but taking a conservative assumption that there are ~200k buy-to-let landlords each owning a single second property, worth the average house price of £165k and yielding an average 4.5% results in a Buy-To-Let tax take of £1.02bn.

Media Tax. Kirsty Allsop, Property Ladder and all those other "buy! buy! buy!" property programs who provided tips to would be buy-to-letters and property developers (the polite name for "speculative flippers"). In this group, we'll add The Press and the BBC, who get a special mention for Robert Peston fueling the run on Northern Rock, which cost the taxpayer £40bn. It's pretty difficult to find data about earnings here, but as a proxy, the BBC's budget is £4.8bn, so at 69%, the BBC Tax would raise £3.3bn.

The Simon Cowell Tax. To be introduced for reducing half of the population of the world to dribbling morons every Saturday evening and reducing workers efficiency on Monday mornings as the previous Saturdays are discussed. With yearly earnings of $54m, that's another £37m.

UK Consumption Tax (VAT). TMM learned a long time ago never to underestimate the stupidity of the UK consumer - he/she will just go on spending no matter what the consequences. As we all know, overconsumption is unsustainable and represents an imbalance, so hiking VAT pushes up the relative cost of imports to exports in tradable goods. The hike to 20% is expected to raise around £18bn, so why not hike it to 30%? Substitution and a collapse in consumption is likely, so it probably wouldn't raise a huge amount more, but if it's only 50% as effective, that would raise about £36bn.

Overseas Private Infrastucture Company Tax. How did they raise all that money to buy our monopolies? This should be hugely popular given recent experiences at Heathrow and on the trains. An alternative is to go the whole hog where the UK instead sells ALL national interests to overseas purchasers, only to renationalise the lot six month later (the Putin trade). Estimated revenue £10bn.

Footballers Tax. You know the bubble isn't over until these guys go back to being paid thrupence a week for the honour of bladder kicking for their local factory town. Half of the rhetoric offered for taxing anyone with the name "bank" in their company title is that "everyone must do their bit". Except, apparently, footballers, whose money when spent lavishly in nightclubs on imported booze and mock "insert era here" houses is deemed to be helping the economy and anyway they provide a great role model to the youth of today. Ahem. Tax them too. Estimated revenue £500m.

Psycho-delusional Politician Tax. Taxing Vince Cable is about as indiscriminate as the taxes he is suggesting, so let's go for that too. Given all the freebies and expenses putting his earnings at around £280k, at 69% that should raise £190k.

TMM Tax. We realise that there is little chance of getting that lot invoked without the chance of someone trying to get their own back. So we are going to pre-empt it and tax ourselves. Revenue estimate - £ 38.57.

Totting that all up raises an annual £123.7bn which is about 8.6% of GDP and pretty much bang on the OBR's estimate of the UK's structural deficit. Job done. Mr Osborne, we expect your call.

Merry Christmas. TMM will be back in the New Year.

Friday, December 17, 2010

Order of Service

Welcoming Address

We would like to welcome you all here today to celebrate a very special year in the world of finance.

Reading from the Gospel According to Mangler Merkel

Trichet sent an angel to a girl named Merkel. "Mangler, you have nothing to fear.", the Angel told her, "Trichet has a surprise for you: you will give birth to a son and call him Eurobond, and he will save the Euro from all its sins". Merkel asked how this could happen, and the Angel explained that the Berletchsconi would come upon her, by Trichet's power, and that the baby would be called Eurobond, Son of Delors. Merkel was ready to obey. Then the angel left her.

Hark The FX angels sing,
"Glory to devaluing!"
What on earth? These movements wild,
Get those trades all reconciled.

Vengeful, all the nations rise,
Join to sell down from the highs,
With the CB host proclaim:
"Devaluation is our aim".
Hark! The FX angels sing,
"Glory to devaluing!"

Reading from the Gospel According to Darth Weber

And so it came to pass in those days Europe issued a decree that a census should be taken of the all the banks. And everyone went to their own regulator to register. So five Spanish banks and two Germans also went up to the town of Frankfurt in Germany, the town of Weber, because he belonged to the house and line of the Buba . They went to register with CEBS who also, was a descendent of the ECB and of the tribe of Hawks. At that time Greece was expecting a bailout. While there, the time came for the Crisis to be Born.


We Mervyn Kings of BoE are,
Printing money, so you can buy cars,
Gilts and Sterling, both are curling,
Inflating our debt away.

Ooohh... STIR of wonder, STIR of might,
STIR when money is not tight,
Inflation leading, not proceeding,
Guide us to the perfect Rate.

Reading from the Gospel According to Jim Rogers

There were miners camping in the outback. Suddenly, an Angel stood among them and Gold's glory blazed around them. They were very scared. The Angel told them, "Don't be afraid. I bring you good news". Today a saviour has been born for you. You are to look for a bid wrapped in rhetoric and lying through its teeth.". The Angel was joined by a huge host singing "Glory to Gold in the Heavenly Heights, Pieces for everyone on Earth". The miners ran to Asia and found China and Korea, and the bid lying with the reserve managers.

The Lord's Prayer

Our Ben,
Who art in heaven,
Hallowed Be-nanke,
Thy auctions come,
Thy Bill's be done,
In Twos as they are in Sevens,
Give us this day our daily FED,
And forgive us our Treasuries,
As we forgive those that default against us,
And lead us not into recession,
And deliver us from deflation,
For thine is the borrowing, the easing, and the printing,
For ever and ever.

Closing Address

This Christmas may we have the joy of the FX Angels, the wonder of commodities and the giving hearts of the central bankers; and may the Blessing of Gold, Equities, Fixed Income and FX rest on each one of us. Amen.

Wednesday, December 15, 2010

More on Ratings Agencies and Consultants - What a bunch of quants!

More on one of our pet themes. After Moody's fun with the US yesterday they have turned their attention to Spain now. If the ratings agencies don’t state anything new but only officially "time stamp" what we know already on the risk curve, why do markets insist on step change moves in response to their announcements? Are there really investors so comatose that they don’t react until a ratings agency announcement tasers them out of their torpor? Yes, apparently there are and people even pay fees to these people to manage their money. How do they justify these fees? Well, dear investor, it's called Benchmarks and, to paraphrase the Sex Pistols (and to nick a chapter heading from from a friends book), "Never mind the benchmarks". Because benchmarks are indeed bollox.

It's all part of the cycle of unintended consequences. The investor tries to protect himself from risk by insisting that his money only be put in "safe" investments, but who decides whether they are safe or not? Enter the ratings agencies who then carve up a normal curve of risk into thick histogram buckets with Hoover Dam-like edges. The difference in real risk between a top BBB+ rated bond and a single A- may be non-existent in reality. But to the benchmark-driven, ratings agency-dependent passive bond fund, investment dicta handed down from a board of fund trustees made up of laymen advised by "consultants", it can make a difference on the order of 1000bp of performance (just look at where the crossover indices got to in 2008). Does that reflect TRUE risk? No, it reflects a self-inflicted market distortion, which just adds risk to the very portfolios that introduce these rules to try and reduce it.

What is more, as the rest of the investor community can see the ratings agency changes coming a mile off, it means that any portfolio changes based on their actions hit a market that has already discounted them, undermining performance even further. But the really magic trick is that it doesn’t matter because performance is measured against a benchmark of similar passive funds that have to follow the same rules! And as a benchmark reflects the average, then on average, they are average. Collect the fees and shrug.

That is the case for passive managers. But there are examples of active investors doing their proper bottom up research on assets, discovering that they are hugely undervalued despite the risk of downgrade, but can't take the risk of buying them, because in the event of a downgrade the contract they have with the client (usually advised by a top consultant) makes them a forced seller into the "mark-to-market" price freefall. To make things worse this is the moment the supposed risk-taking "Market Maker" suddenly backs off, becoming an "agency broker" on commission! Or in the case of a bank, the regulator forces them to increase the amount of "risk-weighted capital" held against the asset following the downgrade, making the original investment case untenable. What is more, the derivatives of ratings agency-dependent products have their margins and haircuts set against the same ratings, creating a horrible negative feedback loop in response once a downgrade occurs.

This is exactly what happened with the ABS/MBS market and in particular the genuinely high-quality end of the US MBS market, where ratings agencies changed their methodology on rating bonds for the potential of default. Despite the fact that an MBS might only suffer a projected default over its life of 1 dollar, the security was rated sub investment grade, destroying the investment thesis of even a good researcher and closing a massive investment opportunity to bond fund managers and the back books of banks alike.

The fundamental problem is there is a total disconnect between the "risk taker" and the "risk controller". In this case the "risk taker", the real name for whom in the modern market is "investment manager" and the risk controller, i.e. the legal rules and compliance depts set up to control the dangerous risk taker (because as we all know taking any kind of risk is far too dangerous for the masses) and "protect" the capital of the end investor. The good investment manager does the research, finds the asset, works out the fair value, compares this to the market price and, if the market price is cheap to fair value, should be able to buy as much as possible within his level of prudence and conviction. But then in steps the risk controller who has no more information than an arbitrary set of rules thereby emasculating the investment manager and guaranteeing that the investor's capital is put at higher risk than it needs be.

This is all the more pertinent because we are only a gnat's crotch away from some regulating do-gooder kicking the plug from the comatose UK public sector pension's life support system. It has been noted that the deficit has doubled in the last 3 years to £100bln and we know what happens next by looking back at what Myners did to the UK Pension funds in 2001/2. Scream outrage at the losses occurring, look at where the funds were invested and regulate that they are no longer allowed to invest there at the absolute bottom of that market. So with the "consultant" on the radio today complaining that 70% of these UK local funds' money is in equities, you can be pretty sure the next move will be to tell them they have to go into bonds. RIP.

Tuesday, December 14, 2010

Of Squeezes, Ratings Agencies, Lawyers and Haircuts

Well the Mervynflation report came out again and managed to show remarkable stability as inflation ex-everything is encouragingly low. Well done, Mervyn. Great application again of the Gaucho Grill.

Elsewhere December is going just swimmingly as far as the general "stuff you" moves go. We are still intrigued at the almost desperate recycling of Eurowoe headlines in an effort to get Eur/usd down again. But the price is not responding. The path of pain beckons beyond the oft quoted 1.3450 JSTFR point. The latest excuse for this further squeeze on Euro shorts came via the mood swing on USD. Or rather the Moody's swing on US. Once again the ratings agencies come out and screw a country with their views observed through their rear-view blindingly obvious binoculars. Are the ratings agencies as dangerous and uncontrollable as Wiki-leaks? No. Probably not, as what they say has normally been out in the public domain for years (though a lot of folks would like to see them go down for abuse crimes). We have bankers' taxes, how about ratings agency taxes, where we refuse to allow ratings agency employees to receive bonuses if their agency causes financial upset?

Whilst we are on the subject of taxing professions. How come the lawyers get off so lightly? Talk about a tax on efficiency, a tax on lawyers, if it decreased their activities and intervention, would actually be a tax that INCREASED efficiency. And if you thought Winston Churchill was talking about the RAF when he said "Never in the field of human conflict was so much owed by so many to so few", it's more likely he had just received a lawyer's bill.

Another profession that appears to shun efficiency as much as the lawyers is, surprisingly, hairdressing. How many of you are as bemused as TMM by the questions even one's regular hairdresser asks. "What is it to be then?" Errr... Shorter? "Would You like it layered?"... Wassat? "Scissors or clippers?" Err.. "Tapered or straight across the back?".. I dunno I never look at the back! "Wet or dry cut?" Why the hell do I care? Basically we don’t speak "hairdresser language", so much as we'd love to be able to trot out "scissor-over-comb-1/2inch-over-ear-layered-1-inch-top-thinned-tapered-back-dry-cut-shaken-not-stirred", we can't. We are normal people and don’t watch reality hairdresser programs. So here are some TMM top tips to all our hairdresser readership. Please do one of the following.

On completing a haircut, jot down exactly what you have just done in hairdresser language on a small card that we punters can present to the next hairdresser to get the same results. Or set up "HAIRNET", an internet based service that you log the above data in, preferably with photo, so that it can be accessed at salons globally, then make it into an "app". Or don’t act surprised when the client, as this one did, hands over a phone and asks to have a photo taken of the result for use at the next visit.

Finally a tip for us customers. You know that bit at the end where they get out a mirror and show you the back (as quaintly traditional as offering that stupid oversized pepper pot in Italian restaurants) and you mumble the expected "yes lovely thanks" ?
Well, instead scream: "WHAT THE HELL HAVE YOU DONE TO IT!! ". It doesn’t half freak them out.

Now we know we should be saying something intelligent about the markets, especially after the very generous responses a few of you have made to the TMM "last request" Christmas appeal, but we really haven't anything intelligent to add. But, to those of you who have responded - A really Big Thank You. It is a lonely place doing this for the love of it, so seeing your appreciation and support being channeled to something worthy is heart-warming. Thanks again. To those of you that haven't responded, we are sure that you have good reason, but there is a candle lit in the window of the "JustGiving" site for you just in case.


Friday, December 10, 2010

Christmas - Time for Giving?

The Christmas lunch season is fast descending upon us, which will play havoc with our posts from now on, so we apologize in advance if they become more sketchy.

But this is much more important -

With Christmas nearly upon us we thought it worthy to revisit Macro Man's Last Request (tagged in the sidebar). Back in May when MM moved on, leaving TMM nursing his baby, he launched a little charity request for any appreciative reader over the years to help the children at Great Ormond Street Hospital. Your immediate response raised about £1500. Now, 7 months on, fresh help has slowed to a trickle but we would love to be able to have one last push over the Christmas period to help us get to at least £2,000 by year end or, hopefully, blow that target away.

So, calling all of our readers who haven't helped already, you referral blogs, you mirror sites, you syndicating sites, you press readers and as the radio phone in folks say "Every one else who knows us", please can you spread the TMM Christmas Message and help us to help them at -

Macro Man JustGiving

Team Macro Man

Thursday, December 09, 2010

Competition Time

We are back in the badlands of admin-o-tastic bullshit. It feels like career regression is kicking in big time, with one member of TMM feeling he has actually just crossed below his original entry level into the world of finance. Didn't they invent machines powered by steam 200 years ago that can do the job better than the current ones we are given, powered by electrons?

Out there in the real world it looks as though the falling bonds have been saved by the twanging of the safety rope and we are generally on hold. Pause day. Or COMPETITION DAY!!

Now TMM recently received an offer to invite our readership to participate in an essay competition run by a body of investment managers. The competition involves writing a paper that critically looks at how investors "might better manage portfolios during market downturns yet still capitalize on periods of superior performance". The winner would receive a sum of money and the chance to tell others all about it.

Which leads us to consider all the oxymorons, tautologies and downright "D-UH"'s involved in this. But instead of raising little points like "Well, if it works so well, why am I telling you about it" or "You mean you haven't heard of short positions or options?", we would just like to launch our own TMM Award.

Entrants are asked to submit papers on their designs for a "free money" machine, accompanied by $20,000 of the free money it has made as proof of its success. The winner will receive a sum of $10,000, the chance to talk to a field full of sheep in North Wales, a MUG and will then be told to bugger off.

Runner up certificates will be awarded to anyone sending in over $1,000 of free money to TMM. We look forward to your entries and sailing off into the sunset at your expense.

Most Faithfully Yours,
Dr T, Dr M and Dr 'Bleedin' M, PhD, MBA, CFA (and random qualifications from the Univeristy of Cowboywebsite, Witchy-bloody-taw)
Joint Chairs, Dining Table and Tea Tray
BigImpressive-Sounding Fund Management, Inc, LLC
Bowlacks, USA

Wednesday, December 08, 2010

Bad day for Goldfinger, but worse for Mr Bond

Well, TMM were happy with yesterday's Gold move, but they are sure they are not alone in cringing at the car crash that has occurred in the Treasury & FX markets overnight as Tens smashed through 3% and then proceeded to trade as low as 3.25% on the London open. Cue a barrage of excitable emails, Bloomberg messages and IBs from all corners of the market, intellectualising about how the Treasury move shows that the market is now worried about the sustainability of the US debt load, or that equities cannot rally with yields moving higher, or that QE2 has failed, or that mortgage convexity selling is about to send yields to 3.5% etc etc... Usually, TMM's "signal" for when things have gotten a bit overdone is when emails on rather complex subjects start to come from single stock equity guys or the FX market... we'll merely refer you to our Armchair Generals piece.

But in seriousness, TMM have a hard time buying a lot of these arguments and we will attempt to explain why. In terms of debt sustainability, in our view, looking at US sovereign CDS is not particularly useful, given that US banks cannot trade it and given that most hedge funds have US banks as their prime brokers, there is little point in them trading such instruments, and as such, it is rather illiquid. However, the Treasury market and Overnight Indexed Swap (OIS) markets are very liquid. Now TMM is totally open to the idea that the US is the next "obvious" candidate for the bond market vigilantes to target, it is pretty hard to do so when Voldemort & his Deatheaters and the Fed are on the bid. And the former doesn't have any other obvious candidates given the Eurozone train wreck and the latter will buy until growth and inflation are back to "normal" levels. But back to the UST/OIS markets. A much better way of observing (and trading) the pressure on the US fiscal position is to look at the 10yr UST-OIS Swap Spread, as the latter is a much better proxy for the "real" risk free rate (usual caveats apply, but it's pretty close) - see chart below. It's pretty clear that the rates sell-off is not related to fiscal concerns.

And as far as TMM can tell, at around 12bps, there is no particular concern evident here, and we are well-off the wides of ~30bps earlier in the year. Clearly the financial crisis has taken its toll, with the measure no longer trading negative due to the premium they have had as a result of the USD being the reserve currency, but we are nowhere near the kind of levels that the equivalent Eurozone spread is trading at. The below chart shows the GDP-weighted EMU yield vs EONIA, and even though this measure includes the King of fiscal prudence, Germany, at 118bps the debt sustainability concerns are very clear:

But what about growth prospects? Obviously, payrolls excepted, the US economic data has generally surprised to the upside over the past month or so and the Vampire Squid (amongst others) have revised up their 2011 growth forecasts significantly. TMM like to look at the 5y5y forward real rate as a market proxy for future growth, and the below chart (white line - 5y5y forward real rate, orange line - consensus economist 2011 GDP forecast, lagged two months) seems to indicate that the bond market has revised up its view of GDP to close to 2.7%. With 5yr real rates still negative, and both economist and market growth expectations higher, TMM struggle with the idea that equities cannot push higher.

We also note that next week sees the FOMC meet, and in the context of the bond sell-off, TMM would be very surprised if their statement were not overtly dovish. And while QE2 was marketed as trying to keep real bond yields low, it was also intended to force investors higher up the risk curve and out of Treasuries into riskier assets. On that basis, given the UST sell-off and equity rally, you could easily argue that QE2 has been as successful as QE1, which met a similar reaction, culminating in a capitulatory sell-off in June 2009. Given the ferocity of the sell-off and the fact that on the 7yr Note (a proxy for the 10yr Note future CTD) has touched the 50% retracement of the April-November move, with a fierce 36bp two day sell-off that smacks of a combination of convexity paying and long capitulation, TMM wonders if the end of this move is near. The million dollar question is whether Fannie 4s breaking below par will trigger a new round of convexity paying or not. Now the Fed's MBS purchases have removed a lot of this risk from the market, so it's unlikely that mortgage accounts will be dramatically caught offside, but in December, anything can happen.... So while TMM are biased to put on their "catch a falling knife" gloves, they're putting on the Kevlar-strength ones, and only buying a small amount for the time being.

Tuesday, December 07, 2010

Swimming with the Sharks

Bounce-time Baby. We are happy with yesterday's thoughts as today the scramble to de-leverage the stress trades grabbed hold with the world looking just like an old fashioned "risk on"/"bash the Dollar"-fest. Usually at this time of year, TMM are cursing Voldemort and his Death Eater chums for coming in with a massive Euro "buy" programme. The past few weeks they have been somewhat absent from the market, but TMM knows that Voldemort loves to screw speculators, so to come in right now when the market is trying to be bearish Euros would be "very FX".

Commodities are all screaming higher too and though oil took a bashing in the back end yesterday and the soothsayer signals suggest a sell, there appears to be a rampant background chat of $100 around the corner which no doubt will suck in another round of spivs short term traders. So rather than "Red Adair" it we' d rather let it burn itself out.

But there really hasn’t been much Macro change - it feels more like the positional Micro (though we are sure that the world will be allocating retrospective Macro news headlines to explain it all). Now with everything going just so swimmingly with our bounce view and us being the stupid bored adrenaline junkies that we are, we thought it fun to do the equivalent of going for a swim at Sharm el Sheik and raise the matter of our nemesis. Duck! Incoming Spam Tins!

So TMM have dusted off their trusty Gold-Real Rate charts and found to their surprise that since the QE2 set sail sank, Gold has diverged significantly from real rates. Indeed, while during the May Eurozone turbulence, both Gold and Real Rates moved in unison, excepting a brief QE2-fade trade, Gold has pushed to new highs, while real rates have crept back up to where they sat in late-September. To date, TMM's view has been that Gold is only a bubble if US Treasuries are, because the moves in Gold have been fully consistent with those in the Treasury market. But this is something different, with the Gold vs Real Rates relationship suggesting a 14.5% valuation gap (the largest we have noticed since 2008 - see chart below: white line - Gold, orange line - 10yr World real rates) and increased chatter about Gold being "the true" reserve currency. While we generally try to stay clear of these quasi-religious debates, it's looking increasingly like Gold is getting a bit "frothy" again. Of course, this divergence could just be year-end balance sheet-related as dealers (and leveraged money in general) have been caught long USTs at the wrong levels. TMM are just as wary of putting on large RV trades just before year-end, but it might make sense to begin scaling into long Treasuries vs short Gold betting that this relationship snaps back. The one worry we have, however, is that now that Europe has had its fiscal crisis, the next fiscal domino to fall (Uncle Sam) could play havoc with this trade. But that is probably next year's story.

The Sharm el-Shiekh toe-dipping trade is the GOLD/UST one, but the full immersion, Steve O, Jackass trade is Short XAU/EUR (see chart below). We are going for the latter. Yeee haaaaw!

Monday, December 06, 2010

Eurobear Squeezes and Footy Swaps

Well the beginning of last week saw Europe tanking, US data doing ok and China continuing on its tightening theme. But now we have bad US labour data, China increasing money supply and the short Euro play being bazooka'd by the ECB.

The mood has been resolutely bearish in Europe since the US QE announcement, but we feel that, without some enormous Tape Bomb (huge news event), the imminent risks are fading as are the chances of another successful attack on Europe before the end of the year. So despite a good attempt this morning to get the Euro down (involving the cut and pasting of any and every Euro negative headline) we think another Euro bear-squeeze may be on the cards. As for trying to sell Euro on a large US fund man's view on Ireland? Not only do we think said organisation's views get FAR too much airtime, we also remember his Gilts calls. This cartoon in today's London Daily Telegraph sums up the Europeriphery perfectly.

As for equities, the JBTFD ("just by the dip") policy is working well. It doesn’t feel as though many people caught that 4% US rally last week and a year-end melt UP certainly feels like the pain trade, once again, tape bombs forgiving. And with that we guess we would see the usual carry asset suspects go back into "creep up" mode.

And that, folks, is probably that. Mince pies and Xmas parties to dominate global markets from now on, but before we sign off, TMM have been wondering how the ECB is going to be funding their bazooka. Whilst others consider the idea of the E-Bond, we actually think there is another cunning plan being instigated in the background, the first glimpses of such were surely seen last week with the outcome of the World Cup venue decisions. Europe is obviously entering into "Footy swaps", in which FIFA votes are nominally exchanged for funding using some sort of long-dated off-balance sheet product. If we consider the amounts needed, we calculate that duration must be out to 600 years. Football's never coming home.

Friday, December 03, 2010

Groundhog 28 Months

It's US payroll day today, but TMM can honestly not remember an NFP release that holds less interest for markets. Given that just about all asset correlations are at 1, markets are (correctly) trying to focus on the ultimate driver, which is the condition of the Eurozone Sovereign credit market.

The only was that TMM can see NFP being relevent is if the number is materially lower than 100k, which could perhaps dampen the recent enthusiasm on US growth. On the other hand, it might put a stop the slow pnl drip out of UST longs' trading books. But certainly anything close the the 150k consensus forecast will represent a continuation of the recent trend.

In fact, rather than write a post, we'll just refer you here to a post Macro Man put up 28 months ago:

It's US payroll day today, but Macro Man can honestly not remember an NFP release that holds less interest for markets. Given that just about all asset correlations are at 1, markets are (correctly) trying to focus on the ultimate driver, which is the condition of the credit market.

The only way that Macro Man can see NFP being relevant is if the number is negative or near-negative, which could perhaps encourage the Fed to relax its language next Tuesday. Failing that, Macro Man would expect the FOMC statement to retain its relatively tough stance, which could prove to be an ideal catalyst for the start of the next downleg in risky asset prices. Certainly anything close to the consensus 125-130 forecast will represent a continuation of the recent trend.

As for views on all the other stuff going on, it will have to wait. Behind the scenes TMM are still not out of their "bright lights big city" meets "trains, plains and automobiles" real life experiences...

Thursday, December 02, 2010

Lifestyles of the rich and … us.

As we wait for the Eurobollox to unravel in a new load of Eurevelations, the UK is under a coating of Eurosnow. This is a special type of snow that is denied by officials right up to the moment of its unplanned arrival and then turns the infrastructure of developed countries into that of Third World states. So today instead we will step back from Europe themes, take a break and offer a little glimpse into the heady lifestyles we lead (hoho).

Well, it's all glamour in the life of a macro man. Yesterday started with a leisurely awakening on the country estate, followed by being driven to the office for a pleasant day profitably saying "yours/mine", a long lunch and an early departure for a night spent mixing with the rich and famous at a private art show hosted by a famous actress (and close friend, of course) at her palatial house. Of course, wit and repartee positively dripped from the tongue and all present were wowed and dazzled by the stream of intellect and insight offered on any subject they wished to raise; the evening ending with a very famous billionaire whisking said macro man off for a night of very classy debauchery... No names, of course.

Well that would have been a great day, but here is the REAL day in the life of...

5am - Awaken to read that the Eurosnow has resulted in no trains from the countryside running into the City. Start to ring colleagues in similar situations to coordinate actions (you can't be seen to be pub-lunching it at home when your treacherous colleagues have managed to struggle in). Drive to local station to find, indeed, "no trains". Drive to mainline station to find the same. 7.30am - give up, go home and start to ring office/log on to Bloomberg, which then intermittently dies on the home PC, making work impossible, as all the local broadband electrons must have been canceled due to the snow. Get a bit gung-ho and decide to break out the ancient Landrover, reserved for just such occasions and drive in to work. Spend an hour prepping the car with de-icer, water, oil, tow ropes, shovel, overnight bag, arctic clothes, drink and food supplies to the point that it's fit for a trans-Siberian expedition. Meanwhile wifey suggesting that, if it needs all that, then the trip probably isn't worth it. But it's become one of those man-missions and MUST be achieved. Set off finally at 11.30am. 200 yards down the road, wonder why the wheels don’t do what they are told. Not the ice and snow, there is something seriously wrong. Limp home and face wifely "told you so's". Not to be beaten ring the local friendly mechanic for an over the phone diagnosis. Nope, bring it round. Frustration now becoming palpable as the mission is losing direction, the vehicle is limped to said mechanic who does one of those air-intake-through-clenched-teeth and shrugs "Oooo, I wouldn't t be driving that. Leave it with me for a week". Ring wifey who kindly turns up to do the lift home. Decant all the survival kit, and then find that the Landy's rear door catch is now frozen and will not engage. Door now flopping around open in a public car park... Arrgghh... Lash said door closed internally with the stashed tow-rope (see? TOLD you it would come in useful), return keys to mechanic and go home. Can't find house/other-car/everything keys. Work out they must be in Landrover... Drive back to mechanic, break into rope lashed car and don't find keys. Ring wifey, who says she's found them in her handbag... HER HANDBAG?? Well I didn’t friggin' put them there. Oh, they were being untidy, were they? So you must have just tidied them up? Get home, apologise for unfair rant and now, adamant not to be beaten, turn down pub-lunch invitations from other strandees and load stripped down version of survival gear into small VW, whilst placated wifey fusses over the bad "man-packing" of the overnight kit and insists on repacking the lot in a "nice" way. FINALLY leave. Now, can someone please sue those people that sell 5 liter containers of blue piss that you put in your windscreen washers? I can assure you it is just blue dye with absolutely NO anti-freeze properties, as the squirties froze up soon into the trip resulting in staring through a screen worthy of a "Help get me out of here" Swamp Trial. But the good news is that after a journey worthy of an episode of "Ice-Road Truckers", mission was accomplished arriving at work at, trumpet fanfare..., 4pm. Just in time to leave at 5pm.

Book into local hotel that is "just a short taxi ride from the office" to save any repeat of above type of trip again. Leave office to find the local tube line is down and hence no taxis . Walk for 20mins through the snow to the Hotel. Check in and walk off to find the light railway station following instructions from the receptionist, armed with a "local map", which turns out to be just a schematic of the UK rail network. Risk life and limb running across a rush-hour highway and scaling a 5ft wall (are you sure this is the right way?) before arriving at the station. At this point the story gets so convoluted in its bizarrity that only regular London Transport sufferers would understand, so the next period shall be blanked over other than to say that a 40 min trip to get to the above mentioned art show ended up taking 2 hours.

So, the witty repartee and intellectual discourse? To hell with that, I need a drink. Lots of drink. Too much drink...whooops.

5am - Awake in hotel. Where's wash bag? It was definitely packed in the "man-packing". Oh, remember? - It got turned into neat "girl-packing" that involved leaving the washbag on the kitchen table. Oh noooo... And what happened last night? Did I really say that at the show? "You must have run out of blue doing that one. It's very...err...Blue" is hardly the cutting edge of critique and "Do you price them per square foot like wallpaper" may not have been the most enamouring question to ask hostess (who was indeed a famous actress). Oh nooooooo... Did I really make the taxi driver back to the hotel pull into a drive thru McDonalds at 1am to then have an argument with the janitor over how a 24hr restaurant could be closed? O, I did? .. Oh noooooo...

Wednesday, December 01, 2010


Well, it looked as though it was all getting a bit silly yesterday morning, with dealers even hitting bids in France 5yrs and reports of certain central banks and SWFs in Scandinavia desperate to get out of their Club Med exposures. As we mentioned yesterday, we are strongly of the view that a pre-emptive policy response addressing the systemic concerns that have grown is imminent, with our "preferred" response being a pan-European bank recapitalisation fund aimed at putting the banks in the position that they can buy more European government bonds and thus reverse the direction of the feedback loop between the banking system and the sovereigns. And while TMM accept that the Euro, peripheral bonds and EuroStoxx did not bottom immediately after the May 10th, as trapped longs used the bounce to get out (veterans of EM crises will be very familiar with this type of thing...), when things started to get silly in early June, with selling of France, the Euro and EuroStoxx put in a bottom almost to the day (June 8th) - see chart below (white line - EURUSD, orange - France-Germany 10yr spread, yellow -EuroStoxx). While yesterday's selling of France was not quite a large as it was in June, dealers do not hold the same volume of paper as they did then, so arguably there is now less leverage-driven selling. On that basis, TMM are wondering if *that* is *it* for the time being...

Now it appears from Baron Von Trichet's testimony to the European Parliament yesterday afternoon that he has come around to the idea that the ECB needs to step up a bit, as do the politicians. One of the problems for Europe has been the ongoing tension between the Bundeathstar wing of the ECB, which would very much like to hike rates, and the precarious position of Club Med, and the Baron's comments yesterday suggest that the former are losing the argument - it *is*, after all, about the future of the Euro... Indeed, the reports in the press overnight about a renewed round of stress test and a step-up in ECB bond buying has hinted at what is to come. But chatter in the market this morning about the ECB pushing the nuclear Eurobutton on two trillion Euros of bond buying seems a bit Dr. Evil-like to us, and TMM cannot imagine Darth Weber would stand by and allow such an horrific policy to be announced (mock shock horror) and we imagine he's powering up the Bundeathstar ready to take aim at those dusting off the ECB's printing press. But in seriousness, it does seem as though at least some sort of expanded bond-purchase programme is likely to be announced (and we are sure that Baron Von Trichet will remember the dramatic contagion seen after they did nothing at their May 5th meeting)...

...And it looks as though the political bribes are being dished out to ease Germany's objections to stepping up their Eurozone aid, with German Finance Minister Schaeuble being awarded the French Economic Prize for his role in fighting the EMU crisis. TMM will remind readers that this is the very same Schaeuble that ruled out aid to Greece in the first place, then called the Fed's policy "clueless" and finally was responsible for insisting on the Sovereign Debt Restructuring Mechanism (SDRM) post-2013, which in our view (and, it appears, many European politicians) is responsible for the most recent turmoil in the periphery. Sounds like the ideal candidate for such an award.

But given all the above, TMM is of the opinion that ECB bond-buying - if unsterilized - is a clear Euro negative, but it is a material positive for European equities and, with the S&P500/EuroStoxx relative performance back to the levels seen at the depth of the crisis (and Eurozone data surprises having turned up over the past two weeks) it might be worth countering this. On the other hand, if policy announcements are more along the lines of unsterilized bond buying coupled with a bank recapitalisation fund, then TMM expects both the Euro and EuroStoxx to rally.