Wednesday, August 31, 2011
TMM get the feeling that the market is very well positioned for more bad news, which in the big macro scheme of things is just fine. The US economy is pretty screwed and until the great reckoning of wealth and cost rebalancing between East and West occurs, it will continue to be so. But we can't play a 10yr view everyday or this blog would become very dull with daily posts just saying "Still f**ked". Perhaps we should have a system of long term macro flags along our banner showing the 10 yr view which we hoist and rarely change.
But in the shorter term run of things, where we have to earn a dividend to pay the costs of our daily lives, we can't afford to just sit and wait for the great "F**ked trade" to pay off and that is actually the problem with playing the markets. The table is not level and the need to make a daily crust just to survive, or even to pay for all the infrastructure needed to trade makes the whole game biased against the player. As costs of entry are going up through taxes and regulation whilst the pot of returns is falling - dividends and bond coupons are effectively the only money coming into the game when interest rates are effectively zero with other returns just one side of a zero sum game. With this happening perhaps we should look for the amount of life that the financial ecosystem can support to fall, which is just what you want if you are a western government determined to rebalance power away from the evil banker and speculator. But as the financial pond dries up the fish within it start flapping and thrashing trying to survive. The UK banks are today protesting against being allowed to die (or be sliced up alive) and smaller investors are desperately looking for yield on their investments. In the big picture this is probably a good thing. You can't have a country running on the gains it hopes to make at a Casino despite the Equity bubbles and Housing bubbles doing their best to prove otherwise. Of course owning the Casino is a different matter altogether, and the major financial centres of the world have brought disproportionate wealth into their domicile economies. Unfortunately in London's case Vince Cable doesn't seem to see it that way and is determined to go Holy and upset the tables of the money lenders, no matter what revenue they may bring into the local economy.
The financial blogosphere is also doing its best to whip up action and, similarly to the main stream press, appears to thrive most on sensationalism and bad news sensationalism in particular (Hero Zedge - looking at you). The same signals are being picked up in TMM's IB chat indicator, with banks providing about a 20/1 ratio of bad news headlines to good. And that isn't just because there ARE 20 to 1 bad to good news stories out there. We mention this because we have noticed a trend in this blog's comments. Currently if we mention anything bearish the comments are alive and buzzing and article referral is rife. If we mention anything bullish and the markets then fall the comments are again rife (normally with goading). However if, like yesterday, we mention a bullish tone and the markets stay flat or creep up, then their is relative silence. Now is this an indicator of market positioning or not? Or just a reflection on the lack of any mention of anything frighteningly terrible?
So here is today's news:-
- UK August weather was unsettled and the coolest since 1993.
- No riots in the UK today, despite no action yet being taken to change society.
- Seismic activity around the world didn't cause any disasters.
- Italian unemployment came out at 8% exactly where forecast.
- The equity markets moved a little bit higher.
- The Eurocrats have not issued conflicting statements today.
- Libya is about to be reunified under a new leadership.
- The London Olympic construction is ahead of plan and on budget.
- Bill Gross didn't surprise the market when he used nonsensical and factually inaccurate analogy.
- No Republican contender has vowed to open a can of whoop ass on the Beard.
- The Oil price is virtually unchanged from where it was the day the FOMC announced QE2.
- Arsenal are still useless.
- Pro Farmer came out with a constructive 148 bushels per acre for this years corn crop. bang in-line with what was the most accurate reflection of their ear counts in the seven states they covered.
- TMM have a nice cup of tea, with a biscuit.
And finally, news from a year ago. 30th August was the start of a 6 month equity rally.
Lets see if that lot lights up the blogosphere!
Tuesday, August 30, 2011
Amazing how quickly time goes when you are on holiday isn't it? Also amazing how exhausting a "holiday" can be. Of course returning after a long break involves vast amounts of deck clearing as the x grillion emails and Bloomberg messages need deleting. TMM have long believed in the "composting" method of email management whereby they are all transferred to a "compost heap" folder and left to rot. Those that were important are bound to be followed by urgent chaser reminders which can then be actioned, otherwise if nothing results after 2 weeks the whole lot can happily be cleared out.
As an aside TMM are hugely in support of an idea once floated by AOL suggesting that emails are priced. Just a cent or so each, with the money paid by the sender going to the account of the recipient. For most usual users this should net off pretty flat but it would be enough to make folks think twice about the value of the mail or copying in the whole world. It would put an effective end to spammers and limit most of the crap we receive.
Anyway, back to less mundane issues. The markets.
It feels as though the past 2 weeks have been a rumour-fest with journalistic pieces running the show and markets following. Our long held view that 2011 is a rerun of 2010 with respect to sentiment and topical focus is still on track with the US having overtaken Europe as the focus during August and the expectation of more US QE rife. Our thoughts earlier in the summer were that the difference would be that this time there would be no further stimulus and, though that is looking less likely, we may still escape direct QE as we are now expecting something from Obama on Sept 6th. Having taken on Krueger there may well be some clever micro reform package on the way.
But the sentiment remains very similar to 2010 and that sentiment does seem to still be firmly parked in the bear camp. With equities having put in a potential double bottom and the carry monkeys coming out of their cages again it looks like the credit markets are the current banner being waved by the bears. In fact if we look at equities through SPX and carry through AUDCHF and credit through the European Itraxx Crossover, we can see how the last 2 weeks have seen some massive divergence.
But TMM feel that the credit markets are dominated by CVA desks and spec players with no hedging vehicles to play against in the summer months. In other words, we think that the credit squeeze is the part that is out of line and is just as much a function of a feedback loop in negative sentiment as are some of the effects we are seeing through sentiment driven data such as consumer confidence, Philly Fed, PMIs, ISM etc. So where as this soft data may be just that... soft, the hard data is beating it. Yesterday's consumption data was actually very strong and we think that US GDP forecasts are about to be lifted by about 1%.
Europe is on an edge still but the ECB does appear to be holding back the speculative hordes by forcing shut the BTP-Bund spread through artificial means. But with Jackson Hole behind us and a relative lack of Eurospeak for the last 2 weeks (August beach inspired STFU policy), we can't be far off another Euro tape bomb. However it does feel as though the market is already positioned for renewed strife (EURUSD with the risk reversals still hugely skewed to the downside) so any shock may well not see the calamitous price action many are hoping for. Of course we have month end madness ahead and it would appear that EURUSD selling is the bias for the fixings, so it may be hard to separate noise from news.
As for China, We were surprised at the (unannounced) change to their Reserve Ratio Requirement definitions. IT seems to have knocked onshore A shares but H shares and the Hang Seng have rallied with the rest of the risk-on move into Labor day. TMM can't really work out why. This change in RRR requirements is tantamount to forcing Chinese banks to bring a bunch of off balance sheet stuff onto their balance sheets and then reserve for it. We may be mad, but that does sound like credit tightening and might let the air out some of the letter-of-credit metal financing schemes that have been very fashionable as of late to say nothing of all other forms of sketchy trust (rhymes with SIV) structures. Add to that a whopping CB issue by Sinopec for... Um... Yeah, nothing in particular and TMM feel that anyone looking at Chinese equities as cheap needs to take a closer look.
In fact the move to push this stuff on balance sheet seems to come right out of Fitch's playbook, written by the way-too-smart-to-work-at-a-ratings-agency Charlene Chu. Here is a snap from her outline of how Fitch calculates total credit vs the PBOC. It appears the PBOC has just decided to adopt the Fitch approach now.
To that end TMM are casting their minds back to the last time a bunch of stuff got pulled back on balance sheet and end up find ing it hard to buy the dip here in China. Particularly as companies are doing a pretty solid job of blazing forth their capex in the face of collapsing returns on capital. TMM's Bete noire of the Hang Seng, Chalco and Suntech Power below. When TMM think of what they would say to Chinese corporates facing chronic overcapacity, declining margins and rising interest costs continue to invest, then the line "If you want to get out of a hole, stop digging" comes to mind.
TMM don't deny that hot money flows might keep liquidity loose onshore but that is hardly a good reason to buy their equities - it seems everyone is just hoping for RMB appreciation given that property is being persecuted by the government and companies cannot invest profitably anymore. We are inclined to think that something has to give here - companies have to stop investing thereby slowing growth before they bankrupt themselves and Chinese banks are going to have to raise a shed load of equity soonish. It's hard to love the HSCEI at 1.5x book when a lot of that book value in banks is inflated and the capacity for industrials is likely loss making.
And finally a quick word about the UK. Today's uber-flap is over how the % of ownership of homes has collapsed and how that must be terrible. We would like to point out that SOMEONE must own the houses that people are living in. Now it may be an example of the rich/poor divide getting wider with the rich owning more houses at the expense of the poor, or it may even be a sensible majority choosing to rent over own as house ownership is not the sure fire road to riches it was, or, more ominously, this is the UK selling off its final asset to the foreign investor. Will the UK be a nation of tenants to overseas landlords? If so the dividend flow of rent moving overseas will be a slow blood letting death. Perhaps the UK should introduce laws whereby only permanent residents can purchase or do what Singapore has done leaving the foreigners to fight over a Mickey Mouse condo market. And lets be honest its those inner city one bed flats that need the biggest lift.
God its just so great to be back. Greece, all is forgiven!
Tuesday, August 23, 2011
Team Macro Man are currently on vacation and will be back sometime next week, so probably no posts before then.
But first some notes from here in the sunny Aegean seas.
Lobster pasta in basic tavernas is 90 Euros and interestingly it appears to be on most taverna menues. TMM find it hard to believe that every restaurant has a fresh lobster ready for a rich Russian to order, or perhaps there is only one lobster held centrally, ready to be airlifted into whichever restaurant hits the jackpot.
A new generic squid is available everwhere. Not the old calamari but a new 9 inch long beast that looks suspiciously Pacific in origin.
Local business is nearly all "cash only", which implies that things are so tough that no one wants to pay card handling fees, or that no one wants audit trails re tax liabilities.
The lamb gyros kebabs have all been replaced with pork or chicken (cheaper imported protein). This was a real surprise to TMM who thought that it would be available but just more expensive. Which then has us thinking that of course in a recession quality goods don't get cheaper, they stop being sold completely as cost per unit rockets, leaving only inferior goods available. We suppose we have seen this already start with airlines, where routes are cut first leaving only the budget airlines and then nothing at all. TMM wonder if the second wave of European middle class woe is when routes are shelved to normally popular holiday destinations leaving holiday house owners stuffed.
Greek ferry drivers play ten-pin bowling using parked boats as the pins and their wash as the balls. The driver of the Highspeed 6, Santorini to Ios just got a strike. The Greek islands are serviced by stunning huge superfast waterjet ferries capable of 45 knots, but there must be massive fuel savings to be had going back to slow ones. As we tourists are constantly told here - Whats the rush?
"Greek Economics" is alive and well. If your trade has halved then of course you need to double prices to stay flat.
The mobile phone network and free wifi coverage is phenominal compared to the UK.
The owner of the new yacht TMM is sitting on is an Athenian public sector employee.
Most locals we've spoken to feel the crisis is not their fault, nor their problem.
Retsina is proof of TMM's theory that there is always a good reason why "local specialities" stay just that - Local.
But God its beautiful here and miles from the market madness. We will unfortunately be back next week.
Posted from my Android phone using greek cafe wifi and a solar charger.
Wednesday, August 17, 2011
So the SNB didn't hit the button on a floor for EURCHF in the end, though the fact that it is still "out there" in policy circles probably means that the disorderly one-way appreciation of the Franc that had been seen in recent weeks. The battle appears to have been won this time, but it will take a while to see whether the war has been won. TMM suppose that the Cantons are still reluctant to increase their investments in SNB LLC given it is on course to produce two down years in a row.
But the money market measures announced and enacted have been exceptionally aggressive, taking on a new level of intervention in the FX Forward market and driving 3m implied rates as low as -1.5% (see chart below). Now, this obviously is intended to provide something of a barrier to speculative longs in the Franc, but as many have noted, much of the move has been due to capital flight from the Euro periphery and Switzerland's running of something like a 15% Current Account surplus which had previously been intermediated and recycled by UBS et al...
...who have been shrinking their balance sheets since 2007:
However, in forcing the cross-currency basis so negative, the SNB are either unintentionally (or for the tin foil beanie brigade, *intentionally*) providing a mechanism to force the Fed's balance sheet to involuntarily expand... QE3 by stealth?!
TMM are, of course, talking about the impact that highly negative rates in the FX Forward market have upon the Fed/SNB FX Swap lines. It seems that Swiss banks can borrow USDs from the SNB/Fed FX Swap facility at around 1.1%, which means that as implied CHF rates fall below around -1.1% there is an arbitrage which when accessed will result in an increased supply of USD and expansion of the Fed's balance sheet. Given just how aggressive the SNB have been on their intervention, they are providing a significant incentive to Swiss banks to engage in such a strategy. TMM wonder how happy the Fed will be with such an expansion, though they would note that it requires no additional policy actions on their part. Something, perhaps, Ben will be pleased with given the recent vitriol spouting from some of the Republican contenders.
On a related note, TMM have noted a lot of commentary on EuroSwiss 3m Libor futures trading above 100 (See chart below). This is something that perplexes them somewhat, because back when they learned about the Eurodollar market and its origins, they remember being told that such deposits were "offshore" and therefore not subject to domestic regulations (with respect to USD deposits in the early-1980s , these were interest rate caps etc). The result was a significant difference between domestic rates and offshore rates - something that EM traders will instantly recognise.
This was one of the original drivers behind the introduction of the basis swap market and, indeed, the USDCHF 1yr basis (see chart below) has begun to move negative in earnest and following on from the recent money market actions. But markets have never really approached a point where rates have been so close to zero that onshore/offshore effects are so dramatic. Japan never saw 3m Libor go negative (offshore) nor 3m Tibor, though the FX Forward market again saw negative rates (again, a cross-currency basis effect). And TMM find it hard to imagine an offshore deposit transacting at all at a negative rate given there isn't really a mechanism for it to do so - though they do accept that it is plausible that money centre banks might impose depository charges independently, this seems particularly unlikely given that reserves at overseas subsidiaries of bank holding companies do not (as far as TMM are aware, count towards regulatory limits domestically - please let us know in the comments if we are wrong on this one!). Finally, TMM also are sympathetic to the idea that given the banks on the Libor panel for CHF, that they might collude in some manner to produce negative Libor, even if they were not actually transacting deposits at such a level. However, TMM reckon that given the uproar last time there were questions regarding the accuracy of the Libor fixes, that these banks might not want to open themselves up to further political and regulatory pressure.
That said, TMM are sure plenty of swaption desks are short 0% strikes and prices may merely move higher on their "hedging" activities, and thus it is hard to stand in the way of the train, even if they are relatively (though not completely) sure that 3m CHF Libor won't go negative and at expiry the trade would most likely pay off.
Other than that, TMM don't really have much of an opinion on markets at these levels, as we seem to be hovering around pivot points in Spooz, the Euro and pretty much everything else. The hard data (notably IP yesterday) seem to have generally been OK-to-good, but the soft data (Empire etc) have taken a further turn down, so it is hard to see the wood for the trees. But TMM do hold the view that as volatility decreases, it will not be long before the carry monkeys start to pick up some bargains.
Tuesday, August 16, 2011
Well that didn't last long - one rumored China rate hike, a messy German GDP print and we are back to full panic stations. TMM are tempted to hold on but, frankly, with data deteriorating this fast we are tempted to book it and run. Long term value? Maybe, but a few things have caught our notice recently:
1. The dreaded OIS in EUR is moving fast. Its retraced a bit since the ECB peripheral liftathon but not by much. Which brings us to....
2. 22bn EUR in the securities market purchase program? Damn. That is an awful lot - enough to likely cause a revolt amongst the German public and more than a few of their marionettes known as politicians.
3. Short sale bans? That's desperate and incidentally never really works. Apparently instructions going around the IBs are quite specific about how one is not meant to facilitate banks shorting Socgen but so long as Eurostoxx Banks futures are trading it seems a bit daft. TMM recently read a rather good paper at Voxeu.org here which argues that while European banks seem to be able to deal with some pretty adverse haircuts the more pernicious problem is that so long as those economies cannot plausibly stick with austerity programs / misaligned FX then their banks won't fund cheaply and can't make money. This is a lot more depressing than saying "you have a hole in your Tier 1".
TMM are booking gains and staying on the sidelines in many things though US earnings from the likes of Home Depot are heartening - who would have thought home improvements were coming back from the dead? Maybe if blue collar jobs are too we should take another look at Cabelas. While it is hard to fight weaker US data and the prospect of a bona fide Euro blowup sooner rather than later there are reasons to be bullish longer term. Sadly, TMM don't get paid on rolling 2 year performance and are finding a rock to hide under until Labor Day.
Thursday, August 11, 2011
Do you ever have one of these days where you wake up with a burning feeling with respect to a trade and that the rest of the world just can't see it but they are about to? When all the little bits of information that your brain have assimilated while you have been asleep has some how coalesced into a nugget of conviction? Well TMM has that feeling right now but is scared stiff by it because they can't really pin it on any one thing in particular and are worrying that it is emotional rather than rational. There are 2 ways of coping with this: the first is to act on gut feel and get the trades on before it moves on the basis that gut response often beats reasoned response. This isn't as daft as it sounds as Malcolm Gladwell describes in his book "Blink" in which, as "wiki" says, "describes our ability to gauge what is really important from a very narrow period of experience. In other words, this is an idea that spontaneous decisions are often as good as—or even better than—carefully planned and considered ones".
But we are more cautious than that so have at least had a quick scan of what has been going on to substantiate this mornings "feeling". The past few weeks have seen pretty uniform panic across the board and TMM have as usual seen a lot more noise than signal in market moves. So, lets step back a bit and look at what is going on here: Europe is still messy but anyone looking at peripheral bonds will see that JCT and the A Team are not messing around. All that dangerous vol and chop in BTPs appears to be getting suppressed harder than a Syrian block party (see chart below).
While haircuts are still above where they were a few months ago if they keep this up they won’t be for long. TMM are not sure how long the ECB can keep up the heavy lifting but for now it is working and the market seems to be ignoring it. Assuming the ECB can credibly continue buying the dip here the carry monkey cannot be far behind.
In equities, TMM are coming to the view that this has an awful lot more to do with a couple of high profile liquidations than anything else. As often happens in this business, people who practice the same kind of investing tend to do well together, get AUM together, and then when what they do stops working get stopped out together. Incredible dumps in names like Microsoft, Bank of America and the like appear to have a lot more to do with positioning than anything else. How does TMM know this? Lets look at it this way – if the US housing market were to explode then Annaly Capital Management would be in serious trouble and a lot of the action in banks would be consistent with that. As it happens, Annaly has not done much while Bank of America has traded down 50%+ YTD. TMM are generally of the view that US banks will be sued for an indefinitely long period of time and could be a longer term value trap as they de-lever. That being said, 0.33x Price to Book seems crazy – it is even lower than Japanese banks now which have been on the low-to-mid single digit ROE grind for some time and took much longer to have their “come to Jesus” moment on marking their books. Even during the 90s the Topix Banks index (see chart below) traded consistently higher than that.
But what about European banks? Here TMM would like to point out that not all banks are created equal. One party trick we learned from a guy in equity research is that if you want to know how much AAA or sovereign stuff is on a banks’ balance sheet and you can’t be bothered to read the annual report then compare total equity/assets to tier 1 capital. You see, if the bank is long a lot of AAA stuff and you think there is a AAA/sovereign bubble then those things will be a long way apart – as is the case for Soc Gen, BNP etc. What TMM cannot work out, however, is that regional banks in Europe with much lower leverage and are not facing insane sovereign issues or a deflating real estate market trade at the same multiples. Regional French banks in particular. This is another indication to TMM of how utterly disjointed the markets have got and in particular how cheap quality is to systematic risk land mines. Which brings us to European equities and European industrials in particular. Looking at Eurostoxx Industrials, Net debt to EBITDA is… wait for it... a whopping 1.2x EBITDA. Down materially since the start of the decade and way down since the bad old days of 2008. When things like Hochtief with a net cash balance sheet trade at 4.2x EV/EBITDA you really have to believe the world is going to end and while TMM are concerned about that, selling Dax futures is not the way to do it. If that is the case then there are plenty of other things we don’t like that don’t do so great in a global growth shock (BRL, AUD, ZAR) and which are plenty expensive already.
TMM's version of the Fed Model (see chart below) now shows equities as cheap as they've been since 1981. Of course, a good part of this has been due to TIPS yields falling sharply, but that is the aim of the Fed. And while arguments can surely be made about a return to the policy chaos of the 1970s - something that has been forced front and centre in recent weeks - TMM are not buying those arguments just yet, especially given the Fed's message on Tuesday.
TMM aren’t sure that we are out of the woods, but being a carry monkey in FX looks a lot less appealing than being a carry monkey in Eurostoxx or, our real favorite, European dividends. Having been through all of the above that original waking up feeling hasn't gone away. It's just got stronger. Rather than dawdle ECB-esque and miss any potential moves we are going in to pick our weapons of choice and fight back against the recent rioters in the markets. So armed with long EUR/CHF, long FTSE and SPX and short Dec11 EuroSwiss (more details on this next week...) and protected by exceedingly tight stops we are fighting back. For today we call a turn.
Wednesday, August 10, 2011
It may be a product of an era of comfort and cosseting or it may be a throw back to the guilt of Empire, but whatever the reason, The British Disease has appeared to TMM to be almost endemic. But now it may have finally been diagnosed and research embarked upon for a cure. The moral compass of the British people has for many years pointed towards one of self doubt and paranoid inward reflection leading to a feeling of collective responsibility for all the injustices of the world. This has led to UK involvement in conflicts around the world, huge payments in compensation and a media which desperately looks for links in any story that can blame the causes on something UK.
The riots may have finally broken this trend with even Guardianistas rebuffing idealistic arguments linking the riots to basically anything they don't agree with. TMM tried suggesting that the riots were a natural reaction to an expansion of the US Balance sheet and a grass roots rejection of the ECB purchase of Italian debt married to an uprising of an underclass that always doubted the enforceability of a 3% debt to GDP ratio in the original Maastricht treaty. We were gaining some traction in political circles until these two idiots betrayed the real reasons.
The outstanding "political betting blog" neatly expressed the latest YouGov survey of what the main causes of the riots are seen as, with a massive majority clearly angry that this is purely criminal and gang behaviour. Only 8% of voters blamed the "cuts".
As such, TMM don't think it will have any affect on the direction of the UKs austerity plans that have, during the latest attacks on Europe and the US, been a stand out differentiator leading to GBP becoming a relative safe haven amongst the carnage.
And we continue to like the proud pound in general. Especially GBP/USD. Which is an extreme rarity having been brought up through an era where there were ever only 2 conceivable positions in GBP - Short or very short.
Now, markets. In the mixed doubles the latest score is FOMC and ECB 1 - 0 SNB and BoJ. ESZ1 now trades 100.01 BID and Swiss customers are being sent letters saying they are being charged -ve interest to hold CHF in their bank accounts. Contacts of TMM have started selling their personal CHf and are moving out to EUR just in disgust that they should be charged for the pleasure, just like some US banks are doing. Which is interesting.
We have been suggesting for a while that the authorities have never had the banks out of their gun sights and have been seeking retribution for the damage they caused in 2008. We thought that ideally the regulators would gently nudge them back towards old fashioned banking where they would abandon all the newfangled investment leverage risk thing and appear as friendly high street bowler hatted guardians of society. But in the case of the Swiss and the odd American they appear to have gone one step further resulting in their being no incentive whatsoever to place your cash with them other than the most fundamental of reasons - a safe.
Which leads TMM to consider selling banks and buying safety deposit box companies as we head right back to the wild west 1800's of banking.
Oh and as to all that FOMC stuff last night? We think that QE3 will be the straw that breaks the Dollar's back.
We leave you with a quote from the man from whom one member of TMM crafted his pseudonym.
"There are a set of men who go about making purchases upon credit, and
buying estates they have not wherewithal to pay for; and having done
this, their next step is to fill the newspapers with paragraphs of the
scarcity of money and the necessity of a paper emission, then to have a
legal tender under the pretense of supporting its credit, and when out,
to depreciate it as fast as they can, get a deal of it for a little
price, and cheat their creditors; and this is the concise history of
paper money schemes"
Thomas Paine (1737 - 1809)
Monday, August 08, 2011
When we entitled yesterdays post "Judgement Day" TMM really weren't expecting the final S+P close to be a portentous -6.66%. We are at that point in the panic cycle where omens will be looked for everywhere. Now, being totally honest, we have not gone and checked (because we really aren't that competitive) but we would suspect that the book of charting revelations is right now being scanned Nostradamus style for any backward fitting scary curses that will indicate on coming doom. It's over a year since we heard about that Hindenburg thing, the BattleDeathcrosstar Galactica and all the other "Don't be fooled by randomness" portents about to be thrown our way. But one thing we are absolutely sure of is that this is certainly the first time this has happened since the last time.
Rather than getting worked up in a lather about collapsing stock markets, collapsing yields, burning buildings and ineffectual politicians. TMM are settled back in the cheap seats for the show. For we have little on the books and know that the first drop of rain will have the riots over within minutes. The English NEVER riot in the rain, we don't know whether it's something to do with getting their hair or their designer hoodies wet or whether its just too hard to smash a window whilst holding an umbrella, but it's the best case we know for introducing water cannon. They don't even have to be that powerful, just giant sprinklers. Alternatively, we could just have an emergency Royal Wedding to rebind the nation. There are going to be some interesting mean reversions to 1981 London relative property prices in some areas of recent gentrification that have suddenly found themselves to be in riot floodplains. Hackney?.. Notting Hill '76?
But back to the US collapse. Come on folks, they are only shares, only the values of companies. If they fall and the world screams then they are only screaming because they made the wrong decision. It isn't unfair, it isn't unjust .. it just IS. Asymmetry of emotion to falls in stock markets is almost a self proof that they are a ponzi scheme in which to hide perceived wealth. TMM believe that for every gainer in a market there should be a loser. With Stock markets the press would have you believe that EVERYONE is a winner if they go up and EVERYONE a loser should they fall. That is the sort of argument that got us into the great housing bubble. "X grillion billion wiped off the market value of shares" will be tomorrow/todays headlines (note they never ever say on a rally " X grillion magicked out of thin air to make us all feel richer"). So what if they go down? it wasn't real money anyway it was just a perception of wealth against which to spend, lever, borrow and hope. We are in the age of the great deleveraging for the private sector. First we passed on the debt to the sovereigns and now we pass on the leverage, in return for which we will be made to deleverage.
As for the cry of "what about the pensions!" this can be countered with "If you cared about your pensions why did you stick them in the stock market?". "But we need growth for them to be worth more when we retire". Well TMM feel that the very idea that ALL pensions grow can only be backed by either the young paying for the old or the whole thing being a Ponzi scheme - or both. Perhaps we really should be looking at a $ per $ pay off between what we put into a pension and what we get out. Perceived growth is now being challenged on all levels, why does YOUR pension deserve to grow at the expense of someone elses?
Now back to the markets. Pick a number between 1 and 100, any number, You got it ? RIght multiply it by 9, divide it by 7. Now add your age in years. Done that? Now add that to 1000 and take away the the sum of the day and month of your birthday and we reckon you are now in possession of a perfectly valid target / support/ bounce point in the S+Ps which will be just as good as anyone else's Fibonacci/Elliot whatever based number. Now please file this away and should any of you be within 5 points of the actual base we would like you to call and let us know and we will hold you up as an example to TMMs amazing new theory which will of course be followed, Meredith Whitney like, during the next crash.
Because for now there is no point trying to pick "levels" as the world has gone mad and we know the world has gone mad when (thanks here to contributions in yesterday's comments)..
US debt is downgraded - so it goes UP in value
France has a higher rating than the US
Swiss ESZ1 trades at 100.01
French Sovereign CDS trades 20 bp through Brazil
S+P think they are William 'D-Fens' Foster in "Falling Down.
GBP is a safe haven
French Sovereign CDS trades 35 bp through Panama
You have to pay to give money to an American bank.
French Sovereign CDS trades 10 bp through South Africa
The Chinese accuse the US of taking the piss.
French Sovereign CDS trades 25 bp through Columbia
The Swerve is vindicated in his interest rate policy.
People find it a surprise that Apple has more cash than the US treasury - even WE have more cash than the US treasury.
Greece is financially more secure than Italy (well until the bailouts run out)
TMM think Gold is the only thing to own.
UK petrol prices have fallen only 2p over the past month whilst GBP has rallied and oil tanked.
US debt is downgraded and AUD/USD goes down.
The Facepalming Pit Trader Picture is back
Europe is on the edge of calamity and EUR/AUD goes UP.
Iran urge UK to restrain police.
DM/EM decoupling is AGAIN fooling all of the people all the time
The "3 of 3 of 3 of 3" crowd is back
Switzerland are Quasi QE'ing
Iceland is looking good.
It's only August.
Like the rest of you we are up to our eyeballs today in work stuff, so will be brief.
Well they DID do something (see our translation in last night's post). We would like to think that once the real money laggards have done whatever they have to re their mindless benchmarks the discretionary mob can start buying equities again, but the early confident JBTFD has evolved into a "whoops to soon". This is still a deleveraging game because we are more and more sure that if you don't delever yourself then the authorities are going to do it for you.
Periphery bond intervention runs to the same jousting rules we described last week for FX. They are in and we are guessing as to how much they have done and how much ammo they have. The frightening thing this morning is the complete lack of solidarity they are showing amongst themselves with the Germans already complaining. The US downgrade is a sideshow compared to this. The early kick off to the London Olympics brick chucking competition appears totally irrelevant, but we would like to point to it as the first signs of the unrest we alluded to on friday, though we doubt the mob involved could even spell university let alone get into one. Free shopping appears to have been the main draw.
Right, back to work. TMM leave you with a letter they have seen from the ECB.
Dear Mrs Merkel,
Thank you for your very generous bid at last night's charity auction in support of poor Italians. We realise that your exuberant generosity may have been the result of the copious supply of Spanish wine provided, but though you are now suffering a God-awful hangover and in the cold light of day are regretting your actions, we are going to hold you to your bid and can assure you that the pain you feel now will be nothing compared to that you will feel tomorrow.
Sunday, August 07, 2011
Well we have just had the addendum to the original Euro Statement, Team Macro Man once again try and offer some clarity through their translation.
1. The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.
Italy and Spain are now in the same bucket as Greece and, likewise, should do exactly what we tell them if they stand any chance of us pretending we can help.
2. The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.
Hey, we don't make up these rules for you just to keep breaking them, so please, come on guys, at least try and look like you are playing by the rules.
3. The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.
Thanks to Germany and France reading their emails despite being on holiday we were able to have a quick conference call to patch something together. Now get on with it, we should be on the beach.
4. The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.
We've studied Neural Linguistic Programming and hope that by saying "inflexible determination to fully honour" enough, they really will.
5. It equally considers fundamental that governments stand ready to activate the European Financial Stability Facility (EFSF) in the secondary market, on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability, once the EFSF is operational.
We have just had a report from the 12yr old quants in our analysis department suggesting that there may be some stresses in the Italian and Spanish bond markets. Now whilst it might have been as plain as day to the rest of you for the past 18 months, we are now pleased to say we can move one slow step forward to doing the bleeding obvious and hope that no one dissents.
6. It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.
We are going to buy hopefully enough Spain and Italy tomorrow (with whose money we aren't sure) to "shock and awe" the evil speculator out of our garden. Lets hope that works and you don't realise how screwed we really are.
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.
Thursday, August 04, 2011
But are they strong?
Japan is joining the fray on its Intervention day. As with all intervention days the market puts down its economic playthings, dresses up in its finery and heads off down to the tilt-yard to either participate or spectate in the medieval sport of FX jousting.
The rules are fairly simple. The intervening central bank climbs its mount, usually an e-platform or a phone line to one of its primary dealers and pelts off full tilt towards the market. The market will meanwhile be heading towards the intervener. On passing each other they will try to knock each other off their mounts.
But what usually happens is that the intevener will try to get the jump on Market by charging down the course and delivering the first blow whilst Mr Market is still joshing with his knaves and hasn't even donned his armour. From then on the day consists of a series of jousts with the intervener taking on all comers, normally a bevy of relieved local exporters grateful for light relief, a few commited fundamentalist nutters and a collection of headstrong (some may say foolhardy) speculators, who remember the glory Sir Soros garnered defeating the Old Lady of England. Meanwhile the audience cheers on from the sidelines and makes bets as to how many yards the intervener can do before he gets knocked down.
We suggested yesterday the markets are getting closer to the point of major coordinated policy intervention as "price" has become the news. If price is the news then of course the way to counter the bad news is to move the price. "Price" even went Tabloid yesterday with the fact that the Dow hasn't fallen for so many days since whenever the last time was. With the BoJ now in play after the SNB and their quasi-QE yesterday, we debate if the ECB will declare its support. As with most intervention days the gossip and rumors are rife and economic data is but a sideline (though today's German data once again shows their exporters loving the benefits of the periphery weakening its currency).
TMM are meanwhile firmly in the stands watching rather than jousting and have started to play their own game of futility. TMM are trying rank in order of uselessness their collection of useless things.
Plastic wing-nuts to secure toilet seats
Lawn-mower on a yacht
Trying to get yourself off email lists
PC World (the UK store)
The Euro rescue plan
The US Republicans
"Baby on board" car stickers
US ratings agencies
Western Audit firms operating in China
Balance sheet accounting
Buying Swiss 1y govt bond, as it's yielding MINUS 0.047%
Your pension plans
Buying equities as you don't think 2 CBs reflating is bearish
Your children's futures
Increasing your luck by forwarding this on to 10 true friends
Wednesday, August 03, 2011
As per yesterday's post we are trying to stand clear, but the SNB action today has been a shot of adrenalin into the arm of the patient.
SNB SAYS CONSIDERS THE SWISS FRANC TO BE MASSIVELY OVERVALUED AT PRESENT
SNB SAYS INTENDS TO EXPAND BANKS' SIGHT DEPOSITS AT THE SNB FROM CURRENTLY AROUND CHF30 BILLION TO CHF80 BILLION
SNB SAYS SNB WILL NO LONGER RENEW REPOS AND SNB BILLS THAT FALL DUE AND WILL REPURCHASE OUTSTANDING SNB BILLS
And the response has been dramatic.
Not only has the CHF tanked, but BTPs have rallied, the MIB has shot from -ve to +ve territory, Spain has done likewise and Spooz have rallied up through the "do or die" 1250 level. Amazing. Who would have thought that the answer to periphery Europe's over-indebtedness would be solved by the non-European Swiss cutting rates. On this basis we recommend Brazil cut rates to solve the 14.2 trillion US debt overload and Laos increase vehicle duty to solve the Chinese trade imbalances.
Of course it isn't SNB action alone that has caused this general bounce, but more the debate about whether this is the precursor to something bigger and more coordinated (involving the ECB, Japan and even the Fed) falling upon a market where the panic is palpable and price has become the news (there really hasn't been any new news on Italy and Spain other than the prices keep falling). Whilst the market may be fixated by Trichet's mandate to control inflation it should not be forgotten that the ECB's other mandate is to maintain financial stability, in which they are clearly failing. They COULD cut rates on that basis alone.
Now stepping back a bit, If we say that the 2008 crisis was one of insolvency within the banks where the solution was to pass the debt on to the sovereigns via bailouts, then we could say that 2011 is a 2008 rerun at the next level up, where Bank = Sovereign. We could go further and even try and identify the players. Greece is obviously Bear Stearns, the first major casualty but rescued/bought at the last minute by Germany (obviously JP Morgan). Ireland is of course Northern Rock succumbing to massively geared property debt. Belgium? Probably WaMu - easily absorbed into the overall governing structure. The Italy/Spain lynchpin is the mighty Lehman; if they go then it's curtains and we need to find the bail-outer of last resort to pass the debt on to. So who will be the ECB? Well, China, of course. Just look at who is buying the EFSF bonds.
But there is one critical difference. Where the banks had to play to someone else's rules (once it was discovered that their own rules were a busted flush), the sovereigns can change the rules as they go along and the more that they see the "free market" causing chaos to their master plans, the more incentive they have to control the situation by rule change.
Since yesterday TMM see the biggest overall change in the Macro being the greater likelihood of a Louvre type of accord and a dramatic increase in central control of financial markets (or "financial repression" to borrow a more academic term).
Such action would also help the West in its struggle with China. So far this year, moves in the East to fix the current account deficit have been helpful (CNY appreciation, discussion of reducing luxury taxes to increase onshore consumption of imported goods, massive spending plans on renewables and water treatment), but clearly the market is just not buying it. China's current account may be getting closer to flat, but nothing is happening fast enough for the bond vigilantes.
So TMM think that the ultimate solution that policymakers will push towards is what Tim Geithner discussed at the last G20 - commitments by countries to sort out global imbalances cooperatively so that when bondholders in the periphery take a forward looking view of GDP they presume a less skewed world. With such coordinated action China might be able to stick to its own schedule and avoid the perception of being externally pressured. The other option being yield caps, monetization of debt and trade sanctions as per ultra-nationalist ideals peddled by the emergent right-wing parties.
But until we get to the ultimate day of reckoning, the Gordian Knot of European bailout plans will be further expanded. If you want to know how that European bailout mechanism is designed to work then watch this ..
Tuesday, August 02, 2011
As a friend of TMM said today "This is like picking the best-loooking horse at the glue factory".
TMM have had a terrible July. Probably the worst month for ages. As anyone who reads this blog knows we have been whipped and chopped out of sight. We have expected economics to lead just when politics takes over and we have found the economics then kicks us in the teeth when the politics fades. Which is our own stupidity really, as we got caught up trying to read leads, when of course confidence and hence growth actually lags and self-feeds. If you are a European seeing bonds blow to 6%, are you going to be planning investment and growth? Nope. If you are an American on the edge of making some capital investments or purchases and see your elected good and great ransom the economy for political purposes, are you going to press the buy button? Nope. Which of course means that confidence collapses and the forward looking sentiment indices (PMIs and ISMs) naturally collapse and create a self-feeding cycle. Just as they do on the up swings. If the Western politicians are looking for something to blame for the current gloom they should look no further than themselves. These feedback loops of negativity are being exacerbated as, once they hit the market, the momentum algos and model funds kick in. We are sure we are not alone in noticing that the percentage of the market being driven by human thought and discretionary action has greatly diminished over the past month and now, with August holidays well and truly upon us, any sensible battered and worn human is heading off for beach-based R+R, leaving the battlefields of the market dominated by the machines.
TMM do remember interviewing a candidate for a job once and asking how they would react in a game-based situation to frustration and not being impressed by the answer of "I'd tell them I wasn't playing anymore and leave", but now they sympathise. TMM are looking forward to their own periods of holiday-based relief and as such, after applying arnica and salve to their bruised bodies are not planning on playing until they have rested.
With turmoil in Europe booting off again we would expect to cross paths on our way to the sun with the Eurocrats dashing back from their sunloungers to reinforce their Eurosolution. Indeed TMM were relieved to see that the French are taking this seriously and are recalling ze Gouvernement - until they read the date.
*FRANCE TO RECALL PARLIAMENT FOR EXTRAORDINARY SESSION SEPT. 6.
So with the models self-feeding on momentum and the only bids around coming from Asia, this jungle echoes to the roars of Terminator vs Predator, leaving TMM, like the other humans, running for cover in fear of that nuclear self destruct button being pressed.