Now What?

Friday, August 05, 2011

Where do we start? It's like returning home after your teenage kids accidently had a few friends round. Do we scream at the politicians for being totally unable to maintain control? Or tell them to get out of their daze and tidy up the complete devastation they were responsible for? Or just be resigned to the fact that they are like the teenagers, completely clueless as to how the real world works and roll up our sleeves and start doing something about it ourselves. OR -  Just put a torch to the property, move in with friends and call the insurance company?

Equities are the obvious expression of the underlying stresses visable to the media and the public, but the pain that really hurts the world is in the bond markets.  Equities matter squat by comparison and are only a response.. This weekend better see some serious policy response as the markets are in cardiac arrest and in our eyes well beyond responding to any NFP sticking plaster.

We could put up reams of charts and graphs that show that these sort of moves haven't occurred since [insert last time] but that's pretty pointless unless you are a 12yr old quant trying to justify your losses to your boss.

Yesterday's FX jousting became a side show in the scheme of things, both BoJ and SNB were dismounted by Mr Mkt by sundown and we are  now in the main arena ready for the big fight. Markets vs Politicians, or in Europe the final showdown between European Socialist ideals and capitalist business practices. The European dream of equality has always been based on assumptions -  the first that treating everyone as equals and ignoring differences meant they did not exist (the Eurostrich syndrome we have seen echoed throughout the last 2 years of crisis management). The second assumption was that if barriers were removed to trade, funding and nationality then geographical mobility would iron out local hot spot differences. The third was that the dream was perfect, unassailable and defendable by regulation so there would never be the need for safety nets.

In 2008 we had the attack on capitalism and now with Euro 2011 we have an attack on Euro-socialism. We think this will end up with both socialism and capitalism left wanting but with no clear alternative. Sadly, on the way we have to endure the Politicos chucking everything they can legislatively at stemming the attack, which will most likely lead to an acceleration of socialist policies with central control and an acceleration of federalism. To the purist Eurocrat this could be seen as a short-cut to the dream but the cost of the gamble is going up. The key point that the great European assumptions  missed is that someone has to fund the dream and that lender is effectively Europe's client. Whilst the Eurocrats have always felt that they are running their shop along the lines of a Moscow store in the 1970s, where supply side control dictates what the customer gets, the modern investor has choice and Europe now has to compete for global capital. Unfortunately instead of improving the quality of their product we expect the European response to be to lock the doors to prevent the customer leaving and to threaten extortion on those that don't buy. Which may work short term but doesn't encourage repeat business.

If we look at the very big picture and look at history (well we do like looking at what happened "last time" in markets) we normally need a revolution or uprising to sort these sorts of things out, where a super-critical political state  has phase transition triggered by an event. Traditionally a stretch in wealth differentials is needed to catalyse such an event. The serfs have a greater tendency to chuck bricks at their overlords as they have little to lose. But with an abundance of middle classes with too much vested interest to upset their own boat it harder to see a trigger. In Europe the brick chucking is probably going to be triggered by a disaffected youth as they spill out of their higher education to find no jobs available. As an aside TMM wonder if the next UK misselling scandal will be led by said young demanding to know why they were told to borrow huge amounts in order to pay for degrees that don't lead to the promised jobs.  But the middle class uprising model could be the Arab uprisings, where the Egyptian middle class revolution has resulted in a sort of stalemate of democracy, where swiss style referendums are instead effected by racing down to the town square shouting a lot until the overlords act.

We are sorry if we have gone into a bit of a ramble but hey, is that not allowed once in a while? As for the short term .. do we buy here? .. does it bounce?.. TMM would like to think that the politicians around the world may have finally got the message form the market and will respond in some way and that by Monday "something" will have been announced, but are fast losing faith. If  nothing is forthcoming we might as well take up farming.

Posted by Polemic at 1:15 PM  


This is simply too much...I am off to report you...

“Anarchism is a political philosophy which considers the state undesirable, unnecessary and harmful, and instead promotes a stateless society, or anarchy. Any information relating to anarchists should be reported to your local police.” – City of Westminster Police

Anonymous said...
1:23 PM  

Bravo TMM, that was a very cogent layout of the problems at hand. Bravo.

Anonymous said...
1:27 PM  

It's one thing to be calm and cerebral but this market is full of limbic systems on steroids and computers. We had a shocker yesterday trying to be logical.

In retrospect, yesterday was a confluence of a few factors: anticipatory selling ahead of today's NFP and a disorderly unwind of dollar carry trades set off by a short-term dollar squeeze that was perhaps inadvertently triggered by the joint Swiss and Japanese interventions.

Once again we are sitting waiting for the number. A few people have a negative whisper number. Once again today, we may see some the results of high leverage and inappropriate positioning.

Leftback said...
1:27 PM  

So, bounce back day or simply luring in more longs to the inevitable slaughter?


CV said...
1:33 PM  

See? TWINE trade. The World Is Not Ending.

Now, steroidal market participants, get in line, take a number, and I will allow you to come and buy some leveraged long vehicles from me, and yes, you horribly mispositioned overnight shorts are going to get squeezed, and then the wretched trading bots will have to climb on board. It's going to be messy.

Leftback said...
1:34 PM  

Claus, one might easily imagine that a textbook 50-61.8% fib retracement is in the immediate future - the longer term picture still depends on how the latest vintage of Ch. Eurobolleaux™ is received by the critics after the vignerons and négociants have finished their deliberations.

I am obviously in the minority here, but for the US to create +150k private jobs in July is a step in the right direction, as this is traditionally a very weak month. There are clearly a few non-indications of non-collapse here (in keeping with TMM's non-predictions). Wonder how long it will take punters to catch on to this low rate environment and snap up all the 10-20% high yield that is sitting around?

If the Europeans were to get their sh*t together, and make an appropriately supportive statement today, these markets might absolutely scream northwards.
Of course, it's temporary, and the underlying instability of the Euro area remains, until a more lasting solution (the easiest is a twin speed EU, with North/South €) can be found.

Leftback said...
1:44 PM  

NFP day can often be curious affair--think MM's old "five minute macro." Looks like cooler heads are prevailing and doing the sensible thing in light of the ongoing EZ blaze: panic.

Anonymous said...
1:47 PM  

Not sure if there is anyone left to panic who didn't already do it yesterday. It may be slowly developing today or even Monday, in view of the backdrop, but I think that a lot of people have their nuts in the vice this morning, and starting a squeeze is simply too tempting for the fast money. Add in the real money guys out looking for bargains and most of the pieces are already in place. Once the spooz surmount 1230 and the computers join in, it will definitely be falsetto time.

Leftback said...
2:01 PM  

...and here comes "Notorious" Nouriel Roubini to let off a few shots and deliver a démarche to the bulls.

Anonymous said...
2:02 PM  

The too-late equity shorts have entered the room, undone their belts, and turned around. They will soon bend at the waist, trousers around ankles, ready to receive the customary punishment. Good heavens this will be ugly.

More sensible folk will see the festivity as occasion to unwind what they can at more favorable prices.

Anonymous said...
2:09 PM  

You reckon the euro may just sit on their hands until the FED next week.
One step after the other but not necessary following each other in the norm.

Its was nice being wrong.

Ambo said...
2:20 PM  

Yes, there are certainly one or two things that LB will not be hanging on to for long today! But some of the dips into the muck yesterday might prove profitable.

The longer term picture for the US is turning out to be a lot more Japanese/New Normal than some observers expected. We have been railing against the drivel spewed by the over-heated hyperinflationistas for as long as we can remember, and eventually the other inflation hedgers will meet the same fate as the crude oil speculators yesterday.

We still think that there is a strong case to be made for equities that have a healthy yield. This decade promises to serve up a slow growth, low rate environment for what The Beard likes to call "an extended period".

Leftback said...
2:21 PM  

Had a go at GBPCAD at 6000. The Swerve is on deck next week, and the return of the carry minions (as per LB's point above) after they have been rightfully crucified this week should open some downside on that pair.

Anonymous said...
2:24 PM  

Mr Shorty is loving it this morning, I am sure. Cold Steel for brekky today, and then Edward II over lunch?

Leftback said...
2:37 PM  

Great post TMM, but left me wondering. What sort of a policy reponse are you looking for? The only thing that seems at all possible at this juncture is an expansion of the EFSF.

WellRed said...
2:38 PM  

I am not feeling the big short squeeze here. The thing I am thinking about is where the lemmings go?

Pile furhter into shorts or cover to squeeze the bunker crowd? But then I remember the market can go up, down or well sideways :)


CV said...
2:45 PM  

As the narrative of the trapped bulls develops, their hopes are pinned on a eschatological-type killer rally, to end their bad dream and prove them correct in the end. Indeed it represents the triumph of hope over experience.

Anonymous said...
2:50 PM  

Claus, I think the lemmings are all slowly being herded into precious metals. There is still ample scope for a decidedly non-apocalyptic end to the year, even if we can clearly see that a new expanded EFSF solution is held together with duct tape.

Anon, the trapped longs may yet turn out to be those in gold and 2y USTs. Last time I looked neither of those things could be used to generate income.

Leftback said...
3:11 PM  

When you have huge market moves like this, you need to recalibrate yourself to the lemmings. Every MSM news program had the markets as their lead story. This is going to provoke some action from Joe Sixpack. Mutual fund cash levels are at the bottom of historical levels, and I have to think that there are so many common people whose memory of being badly burned a few years ago is quite recent. Now three years on, they are going to be a lot faster to pull the trigger, out of fear. Bottom line is that market action may be driven by a different cohort from what we are used to when markets are more stable, and less headline grabbing.

PPM said...
3:17 PM  

Trapped in gold? That's a good one, China has actually placed a semi-permanent bid under the market, not sure why so many can't fathom it.

WellRed, IMHO they should let Banco Santander file for bankruptcy, Lehman style. After that everything should sort itself out.

Anonymous said...
3:18 PM  

Well LB, difficult to disagree with you on UST and of course gilts too which seem to me to be extremely rich.


CV said...
3:21 PM  

Agreed PPM, the limbic system is in charge, led by the amygdala (the brain's fear/anxiety centre). I am inclined to agree that this morning's selling was a bit of leftovers from Joe Sixpack on the phone to Brian the Broker, and the mutual funds having to raise cash for those who wanted to bail yesterday.

Anyway while we are sitting around, time for another edition of Yield Watch™ (I have to do this to stay sane).

DVY 3.73, EFA 3.18, DIA 2.69, SPY 2.02, EEM 1.99, IWM 1.32.
30y 3.74, 10y 2.49, 5y 1.20, 2y 0.29. Gold 0.00.

It is unusual for DIA to yield more than the 10y and especially rare for small caps to yield more than the 5y. It isn't going to take forever for the rest of the world to take note.

Leftback said...
3:39 PM  

Thanks! I was going to ask for a list to so I know what I can expect to pickup at the Leftback Liquidation Sale.

Anonymous said...
3:42 PM  

BTW, here is what Gold actually yields, ol' chap.

GOFO 1 Month 2 Months 3 Months 6 Months 12 Months

05-Aug-11 0.34250 0.35750 0.37750 0.41750 0.44000

Anonymous said...
3:46 PM  

Hi wellred, ....plaza 2 style or louvre accord? Local restrictions on short selling short term, more restrictions on leverage, enforced increase in margins on exchanges..

There does seem to be a lot of chat here in the comments trying to catch knives. Is it really worth it? Are you really that convinced? I m sticking to short term "if in doubt-stay out". For the bigger moves its worth waiting for clarity.

Polemic said...
3:49 PM  

gold call vol is in the 20s. not stellar but the negative carry moniker hardly fits. silver's is in the 40s. i'm ready to pocket theta all day long.

Secret Sauce said...
3:53 PM  

It's always a pleasure to hear from Goldfinger and Long John Silver on days like these, isn't it? They are invariably cheerful, yet sadly absent when it finally melts.

Banning short selling never works, P, and would be a terrible idea. It usually just starts a panic as there is no-one left to cover at the end of the day. Margin limits would be a great improvement, though, and prevent a lot of commodity volatility. Expound further on upcoming global debt pow-wow?

LB's long term holdings are fine (I think everyone else here likes NLY and a few cases of red wine). The short-term punting wasn't too clever this week. Still have a decent pile of cash for a suitable entry point. These events don't turn around in a heartbeat.

Leftback said...
4:08 PM  

Actually gold hasn't "melted" below (or even touched) its 200 DMA since you were shorting the breakout more than two years ago. Keep those recommendations comin'.

Goldfinger/Long John Silver said...
4:24 PM  

PP - left the US out of your good historical review. What Europe accomplished by permitting simultaneously a low savings rate and a below replacement birth rate was achieved over there by handing out credit cards with 25,000 limits to any Schmo with a pulse.

Structural market measures have to address the supercharged herding behaviour (like this week's sudden discovery that there's a real economy out there, too) that computers have engendered. A progressive Tobin tax, rate linked to volatility?

My pipe dream has it that today's Merkel/Sarkozy/Zappo conference call didn't include Silvio because they're going to politely ask him to take his country out of the EMU. Throw the earmarked money directly at German and French banks and be done with the debt issue.

Charles Butler said...
4:45 PM  

Oh, and farming? Consult first.

Charles Butler said...
4:52 PM  

Look, Goldfinger, we do enjoy your commentary but there are entire sites dedicated to your ilk so you could go over there and engage in mutual activities.

A cluster of November 2010 intra-day lows were SPX 1173-1179, which is more or less where we are. Technical types will probably have their eyes on that as a zone of potential support. Unless we have already knifed through it by the time this appears, he typed, not having lost his dark sense of humour.

Leftback said...
4:57 PM  

Time to clutch at falling cutlery, eh? How many have the stones to hold shorts over the weekend? 1170-80 are indeed popular with the phrenologists.

Secret Sauce said...
5:05 PM  

Haha, where else could I find that combination of unadulterated arrogance and folly that you so graciously provide, day after day?

Goldfinger/Long John Silver said...
5:07 PM  

Careful now, Goldfinger, you might burn yourself with the laser of your own brilliance, or cut yourself with your rapier-like wit. He jumps out of the plane in the end, you know.... the movie always ends the same way.

Leftback said...
5:26 PM  

I have not held gold so Im hardly a goldbug,but the simple fact is it's been called down time and time again.Yet where is price today? Yu can't argue with that without looking a little like someone trying to justify their fixed position. As to the latter it's something I try to avoid says' 'Confused from Cheltenham' as my shorts have hardly been ticked and certainly not squeezed said 007.

Anonymous said...
5:44 PM  

Shorting the PMs is strictly a 1-2 day opportunistic activity. Until the day of the final denouement for shiny stuff. Then it will go down and down for years....

Looks like it's time for the Spooz to choose: Will it be "Down, Down, Deeper and Down"? LB would prefer we go with "Die Another Day"...

Leftback said...
5:52 PM  

C'mon Mr Shorty, off you pop, it's almost the weekend. Time to cash in your chips.

(You just know that those chefs are in the ECB kitchen whipping up another splendid helping of Eurofudge™).

If the market closes green, we can pop open a magnum of Ch. Eurobolleaux™, mes amis...

Leftback said...
5:56 PM  

"Time to cash in your chips" ...

You read my mind LB, I am thinking 1175 was as good a time as any to take home the winnings and clock out for the day.


CV said...
6:01 PM  

Polemic, I am often accused of being cynical (especially when it comes to politicians in this day and age), but I think it is going to take a lot more red for politicians to actually sit down and hammer out anything comprehensive. Maybe because what a comprehensive agreement would contain doesn't seem at all obvious to me (so how on earth would they figure it out).

The European periphery is pretty straightforward I guess (something along the lines of what has been in the The Economist time and time again), but the US is in a consumer liquidity trap of sorts which does not lend itself to effective policy. Pile on a litany of structural headwinds, and I really do not see room for a short term fix (nor do I hold hope that the necessary long-term fixes will be put in place - people are too myopic to support such reforms).

WellRed said...
6:38 PM  

Yup. Unless Mangler and Silvio feed each other fudge and get it on over live TV this weekend, there might still be lingering Euro concerns. Can't rule out another mini-plunge to test that low zone, before The Beard rides in with another "Extended Duration" and hints of more OMOs.

Still shaking my head at having steadily Kevlar'd a pile of NOK this week. It is going to zero one day, but not immediately.

Right, don't hang around and overstay your welcome today, Mr Shorty, you are really going to regret it if you do... lunchtime....

Leftback said...
6:39 PM  

ECB on the wires saying that they are ready to buy Italian debt if Berletchsconi brings forward reforms.

I guess if you've already blown your bankroll, you might as well double. I mean hell, it's Germany's money anyways, right?

WellRed said...
6:52 PM  

That'll be why he's confirmed accelerated reforms then ;)

ntwsc said...
7:11 PM  

VIX peaked at 39 but it is falling fast here, I reckon Mr Shorty has indeed left the casino and is off to spend his winnings. Anyone who lingers too long is going to get a visit from the Proctologist.

Leftback said...
7:16 PM  

LB, what do you make of BAC and C's performances today? Pretty nasty stuff. From where I am standing, this doesn't bode well for next week

WellRed said...
7:43 PM  

So what's it to be chaps ...

Enjoy the rest.

ntwsc said...
8:24 PM  

Well Red, sure, BAC and C are loathsome dogs, and the market can't rally w/o financials and energy. All true, but both have been taken behind the woodshed this week, and there is only so much flogging that can be handed out before the profit-taking inevitably begins.

Leftback said...
9:07 PM  

Wonder what the correlation is between MM comment frequency and market lows? On quiet up days in April you could hear the crickets chirping...

Leftback said...
9:09 PM  

LB re short selling bans and effectiveness i fully agree but that has never stopped the in the past.

Wellred .. Yes, unfortunately that is so true re response speed. But we do feel that without anything at all then that red is going to be all over the screens early next week . Of course the BTP buying came in after my last comment and could be the "better than nothing". How much ammo tho and where from? . Expanding swap lines with BoE and Fed?
Do we get joint coordinated QE? Or Capital controls?
We just hope there is a small surprise present in the markets stocking by monday open.. even if its just an orange.

thanks Charles, nice point re US - i d love to talk farming.

Have a good weekend all ..

Polemic said...
9:11 PM  

Thank you, TMM. I am putting couple of lines from here as my quote of the day.

Sincerely, Moreliver

MoreLiver said...
9:24 PM  

Thank you MoreLiver, most flattered. Had a peek at your site.. good lists of reads, thanks again.


Polemic said...
11:57 PM  

Thank you Mr Standard for making us all poorer. Impeccable timing as usual. Does anyone else feel that someone had to know this ahead of time or am I just paranoid? I mean it seems to explain quite nicely thursdays action on lack of major news flow. Oh well we will soon see what's blacker than black. My stomach hurts, do you have any of that hymalayan pink salt handy I have the feeling I may need a few pounds.

Jack Flash said...
2:28 AM  

"We think this will end up with both socialism and capitalism left wanting but with no clear alternative."

There is an alternative.

The problem is that there IS an alternative.

I'm not talking about the one with lots of nice useless yoga.

Chaos Theoretician said...
7:42 AM  

So, is it back to the TWINE trade here?

More generally and looking beyond short term punts which luckily represents a small part of my total portfolio, now (and the next couple of months) appears to be a good time to cost average your way into some of the long term stocks you have on your list.

This would especially be the case if the world is not about to end as politicians start to believe that austerity and bloodletting are the only ways to salvation.


CV said...
9:03 AM  

Secret Sauce regarding gold - you and I have been on the same grind for some time. The skew is really great since there are enough people that believe we get some explosion with gold gapping a few hundred bucks over a quarter. The slow grind seems the most plausible outcome here for a while yet.

Nemo Incognito said...
4:17 AM  


I would expect nothing less than cerebral analysis from a Dane in this situation, even though Dubai is down 13% as I write, and JCT has only hours to Save The World. LB just wishes the market were full of clear-thinking analytical Northern Europeans and not populated by leveraged limbic systems on speed.

Completely agree that unless the world actually ends here this week is probably a good time to stock up on yield. More than a few reliable dividends are on sale here, and Australians, Brits and South African money managers might be thinking it wise to use some of their unnaturally elevated home currencies to snap up some bargains with both the USD and US equities relatively cheap at the same time.

It appears that the BoJ shares our view that now is the time for them to take the reins again and begin another episode of Yen Carry. They are jawboning to anyone who will listen about their willingness to debase their currency by printing and intervening:

BoJ Continues Yen Intervention Trash Talk

It is notable that a few countries (India, especially) have taken note of falling commodity prices and are now saying that rate hikes may be off the table. Look for some hints of easier ECB policy later today, or this week, along with the serving of Eurofudge™.

Are we going to see mREITs bashed again this week on the US downgrade or did everyone price this S&P action in long ago?

Leftback said...
2:39 PM  

FYI, the Site That Shall Not Be Named has some complete bollox today, referencing Der Spiegel as saying that Germany refuses to bail out Italy etc..

Now if you follow the link to Der Spiegel, and if you read German you will find a rather dull article about the US debt downgrade....

Leftback said...
3:10 PM  

Very interesting point on India LB, one of my favorite trades at this point and especially if this turns into uber fear mode is to look at some bargain beta in emerging markets since the market is already discounting considerable more tightening to come across the board.

With headline inflation already a non issue in h02 due to high base effects I think that the market is pricing in too much tightening. I mean, the yield curve is already inverted in India (or essentially flat as a pancake) and it is virtually the same in Chile.

I don't know about Brazil but the aggregate P/E is under 5 now. But then again, the big cap in Brazil are levered towards energy so I am not sure here.

Agree on the BOJ and carry trade but they will need to shed themselves of the safe haven tag.


CV said...
3:56 PM  

The Millionth Monkey has decided that discretion, etcetera, and taken the item down. Headline still there, however.

Charles Butler said...
4:00 PM  

The EM beta trade would be interesting but pick your target wisely.... sadly the stuff that isn't insanely credit driven and which isn't suffering from dutch disease doesn't come cheap (Thailand, Indonesia). India may be worth a punt - oil relief really matters there though Brazil is suffering from weak policy guidance when they really need it IMHO.

Nemo Incognito said...
4:15 PM  

Duly noted Nemo, those points all make sense.

More generally, when did Middle Eastern markets ever become a leading indicator of anything?! I mean, one can only hope that this is leading people to pile on short orders for the EU market open tomorrow only to realise that a new vintage of Eurobllx has been put on the table.


CV said...
4:46 PM  

LB - the problem with the link is that the article has yet to be published. Seems that Dow Jones reported, without further detail, that Spiegel magazine will report on Monday that Germany (or a selected functionary therein) thinks Italy is too big to save.

Post back up at the Millionth Monkey.

True or false, if Germany doesn't China must - unless they want to see shoe manufacturing reborn in Murcia.

Charles Butler said...
5:24 PM  

Good, They are going to do "something "

Haven't seen the "What" yet but Euro zone are gong to act decisively. lets have a lottery pick a choice .. a) Raid the Buba and bail out italy and spain b) introduce straight jacket mkt regs.. c) Qe3 with or without global Qe3 coordination .. 4) swap lines with PBOC and the debt holders 5) NeuMark 6) Order another sangria and arrange an emergency conference for nov 30th 2015, preferably in Bali.

Polemic said...
9:19 PM  

LB, word to the wise is that it's simply simpler not to read, let alone quote, the site that shall not be named.

Der Spiegel, however, has a long track record of investigative journalism, with a reputation for uncovering political misconduct. They employ the equivalent of 80 full-time fact checkers, reportedly now most likely the world's largest fact checking operation.

These days elements within the German Finance Ministry have found a reliable vehicle to express their less palatable persuasions, almost always presaged with a Sunday leak.

ntwsc said...
1:27 AM  

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