Tuesday, November 22, 2011

What's Going On

What a week. We apologise for scant posts but it's been one of those "oh jeez, we are wrong, it really is falling apart" moments. Introspectively it leaves one sort of crushed with that feeling that you have been "had" in a card game. Why did we believe all their sweet talk? What's more even defend them? Oh well. You live and learn (then die and forget it all). Hence yesterday's lament, a sort of TMM towel-chuck and we lay ourselves on the altar to Toldjaso .. yeah yeah yeah ..This morning is seing more dominoes fall.

Spanish T bills at 5.11% for 84 day as we write. When the T-Bills go, thats it. Kaboom. "Bring me a new periphery waiter, this one is broken!" Ironic that the company that built its reputation on ferrying Brits to these now broken Peripheries is also going down. Thomas Cooke. Looks like the end to an era and an end to fx-dealing room cries of "Aaah much? Tell 'im to go darn Thomas Cooke's". While there are plenty of reasons to see Thomas Cooke getting in trouble as being simply the inevitable decline of a busted business model it is also a telling sign of what happens to people with funding issues or even plain old short term debt maturities in a credit crisis. Just ask Washington Mutual. We were going "yours" at the end of last week leaving us pretty flat in most respects and to be honest with Thanksgiving ahead perhaps we should just take a break and take a look around at what's going on as Marvin Gaye once said.

TMM think a few things are happening here. Firstly, there are some things that might be best described as "Paying the Bill" and a somewhat inevitable end to a massive developed world credit binge. Weak consumer credit, continued deleveraging in markets that are otherwise doing well like Australia and higher saving rates are par for the course of a post-bubble world. Sure it slows growth and is painful but that is life after a period of credit fueled growth - much like a big night on the town, you take your Berocca and aspirin and make the most of a bad situation. To that end it is still a weak market for growth whichever way you cut it even when politicians are behaving themselves. Equities are something you buy cheap and delevered - buyouts and leverage are more dead than contrast collar shirts in a recession.

Which of course, they are not. TMM like most people have low expectations of politicians that is informed by extensive periods of observation. That being said when faced with the eminently insane and the unpalatable but sensible politicians tend to have an ability to step up. Think of Jimmy Carter and mileage standards: Detroit was not exactly gagging for it but it had to be done. Or, for example, the Bush administration's war on everything and the Patriot Act: TMM have serious doubts about this period but ultimately when the chips were down stuff got done - whether aforementioned stuff was a good idea or not. In this regard the last few weeks have been an abysmal failure. The failure of the Supercommittee is just an embarasment. The last thing the world needs is fiscal drag right now especially of the kind that hits those with a high marginal propensity to consume. To that end the Tea Party solution of hitting benefits and not doing anything about payroll tax is stupid. TMM can only think that this is a cynical ploy to get Romney up because there is no way any sensible person would do this on its own merits.

In Europe, TMM continue to be boggled by the idiocy of Eurocrats and Merkel. What they fail to realize is that Euribor going bananas and financial conditions tightening is a little like holding your breath under water: a short burst is fine to instill policy discipline, a minute is pushing it, 2 mins you are likely brain damaged and 3 minutes you are likely dead. TMM won't hazard a guess as to where we are here but we are pretty sure the subject is not meant to turn blue and have its eyes roll back in its head. Ultimately its put up or shut up time because the longer the funding and bond run goes on the harder it is to reverse. TMM are unsure what would trigger a change - a bad IFO, a major German or French corporate bankruptcy (Holcim? Peugeot?) but lines in the sand have been crossed before and we have no reason to be optimistic here. Any resolution is better than the status quo at this point.

Which brings us to emerging markets which Jim O'Neill and the BRIC layers would like us to think can carry the day. While TMM are not part of Team Chanos we are not at all convinced: these countries have had their own credit binge over the last few years and have spent money on a lot of deeply pointless and stupid stuff. We also doubt they are going to selflessly inflate and repeat the West's mistake for the West's benefit - China's glide path is rehab, not a big night out with Charlie Sheen. Good for China long term but no short term bang for the West there.

It appears that the world does need a new deal of some sort, something that involves less imbalances and more progressive taxation though we doubt we will see it until the interest groups opposing it are facing the Gaddafi treatment. To that end TMM remain pretty cautious. There are rays of hope out there but they aren't macro: the EIA energy forecasts use solar power at $6 per Watt, well, market is $1 per Watt so cheap power for all and goodbye inflationistas (we hope). Similarly, agflation has come back and at least in the US gas is silly cheap - at $3 per GJ its ~20 per bbl on an energy content basis.

If there was more political cohesion, TMM could be pretty bullish but for the meantime risk premia in corporate debt is preferable to equities and USD is preferable to well, just about everything. If politicians continue to screw up loan to own might be the way to get long corporates because if financial conditions get much more messed up there will be a lot more accidents.


WellRed said...


There is an enormous piece of the puzzle that you overlooked in this post.
"higher saving rates are par for the course of a post-bubble world. Sure it slows growth and is painful but that is life after a period of credit fueled growth "

If savings rates go up across the board, where is the new capital going to go? Somebody has to spend that money. In the pre-crisis world, a paucity of good investment opportunities (presumably measured by risk-adjusted exected rate of return) led to a lot of the world's excess savings being spent by Western consumers. Now that Western consumers are retrenching, it is governments that have been forced to step up big time in order avoid global deflation.

I think the paradigm moving forward is going to continue to be one of very low real returns as the (very long) transition from a capital-scarce world to one in which there is an excess of capital (relative to the historical norm) is continued.

So the question remains: who is going to invest that capital? The best place for it to go is emerging markets, but they aren't too wild about the idea (plus are generating a ton of savings domestically anyways).

Leftback said...

No worries. The IMF HAS NEW TOOLS:

'The IMF said the new tools “will enable the fund to respond better to the diverse liquidity needs of members with sound policies and fundamentals, including those affected during periods of heightened economic or market stress—the crisis-bystanders—and to address urgent financing needs arising in a broader range of circumstances than natural disasters and post-conflict situations previously covered,” it said in a statement.'

Good, that's it then, crisis over. Tiny Tim must have cashed my tax check and sent it to Lagarde.

Nemo Incognito said...

WellRed, last I checked some of the best investments out there were either paying back your debt for individuals or buying back your now heavily discounted debt for corporates. Saying one has to "spend it" assumes that you don't have a fair bit of leverage already.

WellRed said...


Agreed on the micro side. Paying down debt is definitely what a lot of overleveraged actors need to be doing. Think of the other side of that though. An investor has realized a payoff and needs to redeploy their capital. Not a problem in isolation, but when leverage is going the same direction across the board, that's a lot of cash with no home. From where I'm standing this is where negative real rates on "safe" govies across the board are coming from - a paucity of new investment options for to dump all this aggregate savings into.

Anonymous said...

C saya'
Neg reat rates and high corporat balance sheets reflect the same thing..unwillingness to spend and invest.We should be very wary because this was exactly the same song they were singing in 1930blob.
Policy is still too tight overall globally..period.

charles said...

Are you sure that the energy price "good news" are not related to macro ?
Both in the solar case and the gas case, the market price is not sufficient to cover production cost. It is enabled by money thrown in the wind by governments for solar(Feed-in Tariffs) and private companies for gas (short term for independents : drill-drill-drill to improve reserve based valuations; long term for majors : entice electricity generators to build gas-turbine plants so that they become forced buyers when prices go back over the real cost of production, I.e. 8-9 $ per MJ according to Berman http://www.theoildrum.com/node/8212)

Charles Butler said...

The bright side, Nemo, is that the politicians have stopped making announcements. Papandreous blew that game out of the water with his on-off referendum.

The window of opportunity is small, but Mariano Rajoy, with his undisputable mandate to act, is very soon going to be able to ask the Merkel something about the utility of her one-size-fits-all peripheral policy.

We can only hope he's got the balls to make a headline or two.

Anonymous said...

C says'
There is a sell on even stuff in the corp bond market that would usually be stuck away in a bottom drawer somewhere. Usually when I tick over this stuff it's zero action because of liquidity and lack of maturity date. It only springs to life when something of magnitude is happening.In other words when money runs from this stuff then you better start asking where are the buyers.

Nemo Incognito said...

Folks I got offered $250mm of Banca Intensa certificates of deposit at Euribor+1200bps. Make no mistake, this is real money throwing in the towel and that is always scary.

Anonymous said...

C says'
Yes,that is what I mean. People who normally either leave stuff growing moss on it ,or have enough money they will always chase the high yield are selling.I've only seen this very rarely so when it happens it's a signifier of great fear of loss and impending higher stress levels for funding.Also it implies price can move a long way looking for a buyer.
Think we've run out of road

Nemo Incognito said...

I agree C. Hard not to see some extraordinary value here but managing the MTM into year end is going to be tough - those with some performance to dip into will be well placed much as in late 2008.

Leftback said...

The story of the day is a temporary (?) buyers strike in German bund auctions, and you'd have to say that the end game is getting closer now:

Failed Bund Auction

This may be a one-off event, based on the extremely low yields offered, but it is certainly a warning sign. I don't think Germany wants a global capital flight into USTs and JGBs, or a run on the major banks. But if they don't get their act together, we might see some extremely ugly action when the periphery tries to sell debt in December.

jill said...

WSJ reports on the edge Fed chairman Ben Bernanke and other Fed officials are giving the insiders:

"Hours after an Aug. 15 meeting with Federal Reserve Chairman Ben Bernanke in his office, Nancy Lazar made a hasty call to investor clients: The Fed was dusting off an obscure 1960s-era strategy known as Operation Twist.

The news pointed to a boom in long-term bonds.

It was a good call. Over the next five weeks, prices on 10-year Treasury bonds soared, offering double-digit returns in an otherwise dismal year.

By the time the Fed announced its $400 billion Operation Twist on Sept. 21, the window for quick profits had all but slammed shut.

Ms. Lazar is among a group of well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank's next policy moves, according to interviews and hundreds of pages of documents obtained by The Wall Street Journal through open records searches. Ms. Lazar, an economist with International Strategy & Investment Group Inc., wouldn't comment for this article.

The access is part of a push by hedge funds and other traders to get more information about the inner workings of government. Developments in Washington have become more important after the financial crisis in 2008 spawned new regulations and a stronger hand by lawmakers in businesses...

Such talks are perfectly legal but create a delicate dance for the Fed, which tries to sate its need for information to help guide monetary policy without giving Wall Street an unfair advantage over Main Street.

Mr. Bernanke discusses only matters already public, a spokeswoman said. But hedge fund managers and Wall Street executives who meet regularly with him and other Fed officials—both in his office and through advisory committees—say they get valuable insights during the face-to-face talks.

"It's like an inquisition, they have a topic," said Laurence Fink, chief executive of investment-management giant BlackRock Inc. "By the questions they ask, by definition, you know what's on their mind."...

Mr. Fink had phone calls and meetings with Fed officials ten times over the past two-and-a-half years, according to their calendars and open records requests. He said most of the conversations related to BlackRock's role as a paid adviser to the New York Fed about complex financial structures formed during the financial crisis.

New York Federal Reserve Bank President William Dudley also meets regularly with investors, both in his office with individuals and in committee groups. The New York Fed, one of 12 regional banks that constitute the Federal Reserve System, has the strongest ties to investors because it conducts the Fed's bond-market transactions...

Over the past two-and-a-half years, Mr. Dudley has had dozens of private meetings, according to his calendar, which lists SAC Capital Advisors, Citadel Investment Group, Duquesne Capital Management, and Tudor Investments, among others. Lloyd Blankfein, chief of Goldman Sachs Group Inc., and Mr. Fink, of BlackRock, also had private meetings, according to Mr. Dudley's calendar...

Worries about Fed access surfaced a year ago. On Aug. 18, 2010, former Fed governor Laurence Meyer, who runs a research service predicting and analyzing Fed actions, told clients in a note the central bank's "bazooka is loaded" to buy bonds to stimulate the economy.

The note described how the Fed's "doves," members inclined to ease monetary policy, had said the Fed couldn't "sit on its hands," according to Mr. Meyer's account. An Aug. 20 note included some specific information about the Fed's balance sheet.

A week later, Mr. Bernanke said during a speech in Jackson Hole, Wyo., that "policy options are available to provide additional stimulus" to the economy. Stocks rose on the news, which by then had given Mr. Meyer's clients plenty of time to profit."

Anonymous said...

All the bonds are going down.

Even Germany, Finland, Austria.

The whole fucking Europe. You'd think that atleast German bonds would go UP.

Anonymous said...

C says'
I'm actually surprised that there appears to have been no indication that Corporate Germany has not taken Angie into a quiet room and told her the facts of life..sink us and you are f...ked.
Looking at the economic data building up and the thought of what any kind of debt is going to cost next year if there rates keep going then I don't see how german business is going to come out of this with anything ,but a bloody nose.

Secret--Sauce said...

Always with the negative waves Moriarty, always with the negative waves.

Europe survived the Black Death, the 100 Years War, Boy George. It will survive this too, albeit probably not in its current form.

Or would you have us believe that asset prices only rise? So what if pissant Greece defaults? Even Italy. I find hard to make the case that such a default is objectively worse than that of Argentina or Mexico, continuity of the EMU be damned.

While I must confess to some medium-term trepidation, I did not realize that I typed www.thesitethatmustnotbementioned.com in my browser.

Charles Butler said...

My wife, the small town high school teacher, came home the other day reporting that some of her mates had been discussing which non-euro currency would be the safest for their savings.

That these people who bought TEF at 30 in early 2000 and flats on the beach in 2006 might be right... it's just pure fucking science fiction.

Tradebot said...

hear hear. Great comments here. I been shorting bunds in expectations of the realisation that the Euro rot will take down Germany too. Sadly the volatility was too high to do this in size...

I always thought that in the end Germany cannot rescue Europe... it is more likely that Europe will sink Germany. Very hard to see a happy ending here.

Leftback said...

Charles, brilliant anecdote there. That group has often been an infallible contrarian indicator, a fact you can attest to, I am sure.

A few thoughts from a dreary and dismal NY. It's been a bad week, but typically the smart money trade at this time of year has been to fade whatever happens in these low volume holiday sessions. We are short-term oversold and media negativity is reaching a crescendo (or so I am told).

Looking ahead, we may find that amazingly Mrs Connie Consumer is still up to her old tricks of buying plastic products from China on Friday. Then we will see the ADP next week on November 30, and the NFP December 2. These numbers may not be great but they will be less than apocalyptic.

Massive US corporate bond issuance lies ahead of us but the bulge is more or less done by December 9. 10y/30y UST auctions on December 13/14.

Think about that lot, and you can start to build a case for the foundations of a EoY rally. December 9 and 12-14 may start to see a lot of money moving out along the risk axis in search of attractive yields.
I will probably start to reduce Treasury (TIP) positions a bit, selling into strength and taking profit.

DISCLAIMER: All of the above can (and will) be heavily influenced by drinking excessive volumes of Ch. Eurobolleaux™ or eating a large Eurofudge.

Anonymous said...

For anyone indulging in self-loathing today on the basis of recent mis-steps, feel better. Most macro fans here are kicking most of these HFs in the goolies YTD, metaphorically speaking.

It's Been A Lot of Hard Yakka in 2011

Amplitudeinthehouse said...

Teh caterpillar just ............


Kerpal said...

Reading back the first paragraph of this post after the day we've just had...I think you only lost the first hand of the card game chaps. Chins up.

Anonymous said...

C says'
Given the flow of funds away from the Eurozone i recalled the US and corporates were negotiating tax terms for repatriating large scale offshore cash. This came to mind as I wondered what would this do to the dollar and thus what would it do to dollar denominated assets.
Moreover I wondered if current events might speed such a process along via 'anxious' coproate treasury depts.

Nemo Incognito said...

C - had thought about that myself to be honest but its probably just going to Singapore or similar first.

Working the "loan to own" game while being short AUD here is already hurting - down 2.5%.