Tuesday, November 13, 2012

Business Bicycle.

Our last post saw this as part of an anonymous comment -

"I am commenting for the first time to just point out that it feels like the global business cycle has finally turned, and bulls and bears alike are mistakenly attributing the risk-off nature of the past 2 months to the usual macro suspects of the past few years. Companies are making less money, plain and simple, and I see little to change that trend in 2013". 

Being a pretty complex subject we thought that rather than bang out a quick comment, it is worth opening this up as a separate topic and turn our opinion on it into a post.

It is obvious that companies have made less money because Asia and Europe slowed.  

China is turning back positive.

Europe is scaring the bejeezus out of many and whilst we will accept that the jury is out, we do think that it has passed the worst. PMIs that we believe have overstated weakness for a while, have stabilised and the current focus of German slowdown can be explained by them being "tail-end-Charlie" in the demand chain, so the full shock of weakness has only just hit them properly.

In the US we feel that with the election behind us there has been a reduction in uncertainty and the barrier to investment has been lifted.  With that there is good reason to believe that Capex will ramp up into the spring and  the employment situation with it. Put that together with the housing rebound and suddenly it looks like the demand side is lifting off again and with it, eventually, company earnings will recognise that interpretation of the situation. We would argue strongly that the evidence from 2004/5 would support that when Capex fell ahead of what was perceived a close election (as did consumption) there was a strong rebound in growth in Q1 2005 after the election. 

The fact that consumer confidence and Capex intentions have parted ways so dramatically can be squared by viewing the world through this lens and given the consumer now has the ability to spend, corporates will have to catch up to meet that demand.

We understand that many want to view it like the 1990s stop-start cycle of Japan and it is certainly a valid position to take, but as Credit Suisse's Wilmot has pointed out, so far the recovery in IP from the recessionary depths has been largely in line with similar deep recession/recovery cycles. Historically, the next 6 months would be when it begins to accelerate. TMM are quite happy to bet that, as Wilmot argues, "This time is not different".

We understand that many want to view it like the 1990s stop-start cycle of Japan and it is certainly a valid position to take, which may well turn out to true. However, as Credit Suisse's Wilmot has pointed out, so far the recovery in IP from the recessionary depths has been largely in line with similar deep recession/recovery cycles. Historically, the next 6months would be when it begins to accelerate. TMM are quite happy to bet that, as Wilmot argues, indeed "This time is not different".

But TMM certainly are not afraid of humiliation.  If they are wrong (we have been wrong many times before) and activity hasn't taken off by the summer, then it will be time to reassess. But to argue that we only face the Japanese outcome despite a great many differences, when the evidence so far suggests we are following normal deep cycles, seems to be somewhat tunnel-visioned. After all, the Japanese outcome is unique in this respect (so-far)


VandalsStoleMyHandle said...

"With that there is good reason to believe that Capex will ramp up into the spring and the employment situation with it. "

The source of my uncertainty is the question of the extent to which earnings have been boosted exactly by dormant capex and tepid employment growth vs the fillip that earnings can expect from the normalisation of the demand side.

If the economy reverts to some semblance of normality (whatever one considers normal), is there not a strong case for corporate profit margins to likewise revert? Or is this time truly different?

I'm reasonably agnostic on this in the near term, but I don't see margins as sustainable under a normalisation scenario.

cpmppi said...


Ah... that old chestnut. For a few years now, people have used the argument that margins are unsustainable and have to fall.. but they haven't. Maybe they will, maybe they won't.

TMM's own work on this front suggests that with such a massive output gap, even with employment growth taking off for a year or two, there is a significant way to go before upward pressure on wages begins to dent margins to a particularly large extent. Given the Fed have promised to keep monetary policy exceptionally easy even after the recovery fully takes hold, financing conditions for corporates are likely to support margins for a while yet.

TMM would suggest that bears are getting this back to front: either margins fall as employment growth goes to the moon to such an extent that the output gap closes and puts up the wage bill (in which case, TMM would imagine that earnings are rocketing too... hardly a poor environment for equities, unless the Fed are going to take away the punchbowl - seems a long way off to us...).

Or (the *real* bear argument, perhaps margins remain high as employment growth remains tepid, which eventually hits demand again enough to drag the economy back into recession. This would provide the final hit to margins as revenues collapse.

TMM are far more worried about this latter outcome than the former one. But they would caution against using margins as an argument for being long or short - they are more a residual.


amplitudeinthehouse said...

We extrapolate past cycle data as much as the next guy,may be not, but the previous capex cycle you spotted to be analogous to today's situation isn't enough alone to get long yet in my book...the other factors you mentioned have been well advertise. I'm sensing a lower layer of bids with any flavor of strength...

The feel the markets throwing at me is even if the US macro was to turn down quickly over the next couple months, it's likely to be shallow and that's how it's been traded all year with QE thrown in to boot...the long trade got stale after the election.

Hotairmail said...

This is perhaps one of my favourite charts Polemic which is somewhat descriptive of our future.


It sets out the recessions over time. You can see that recessions became much less frequent after the second world war, firstly with the spending of private savings that had built up during the war and then with credit growth (public and private).

Now that credit growth is severely crimped, I foresee a pre war pattern of more frequent recessions. Possibly frequent periods of anaemic growth punctuated with recession conditions. But it will all feel like recession as per Japan is entirely feasible. America may be different as they have been tackling the private debt problem (via default it has to be said) which is the first and main thing to tackle.

China is, of course, the deflationary heart of the global economy and will suffer the Greatest Depression with over investment, as profit signals have been too high as global demand falls with (their) average wages. ;=)

And the path of entropy means we're all gradually dissipating anyway.

Leftback said...

Can't have it both ways, logically speaking. If corporates continue to sit on cash and grind their small workforce into the dust, then margins will be fine, as there will be no hike in input costs.

On the other hand, if they see a spike in demand and cap ex increases, and/or (Heaven forbid) companies actually do some hiring, then isn't this probably going to be reflected in top and bottom line growth? It will be a while before wage inflation rears its ugly head, and short term money remains cheap.

The thing about slow inexorable recoveries is that they tend to continue to be slow and inexorable.... I refer the Honorable Gentleman to the usual source on balance sheet recessions, Rogoff and Reinhart. It's all in there.

Yes,I know. Japan. I know... very slow.....

marcussejanus said...

TMM worships at the altar of his own blather

abee crombie said...

LB your mREITs getting cleaned out today.

Might the stock market start to reflect a more bifurcated market with different industries having thier own growth patterns instead of risk on /off. Looking at implied correlation seems to say yes.

My thoughts are that the only ones playing the equity markets are insitutions and fast money. Retail is out. Institutions only looking for solid companies, divy paying. These type of stocks are kinda expensive now. Fast money will always find something new, but right now there isnt so much growth so they are waiting. I'm just not sure who will be the marginal buyer of equities here. That doesnt mean sell, but its hard to make the compelling case for equities with valuations near highs (for S&P, europe is a bit better but earnings growth is lower)

we need retail to switch out of bonds and into equities. good luck with that

Polemic said...

Dear mr Anus

Welcome back Marcussej my friend, you were missed. Does your family you come from a long line of Anuses?

corbulo said...

Keep punting and wanking Polemic

CV said...


Still some feisty trolls out there! Anyway, my 2 cents on this (since I after all, call myself a macroeconomist) is to keep it very, very simple. I largely agree with TMM here although I of course also will put on my tinfoil hat if need be.

The Global PMI peaked in Q1-11 (!) and is due a comeback. Also, look at EM ... they have been crushed in the last 18 months and have implemented substantial steps of conventional easing. These economies still have some semblance of a transmission mechanism with respect to monetary policy you know as well as a high beta to global excess liquidity. All the things I look at suggest that the macro data should get gradually better from here (ex Japan which is screwed due to LNG imports and a dead domestic economy).

Of course, the Black Swans, tail risks etc are all there, but take Europe for example. Do you really think the Mangler will risk a Greek exit before her 2013 elections ... it will be fudge factory all the way!

As for the cliff, well its full effect would mean an instant recession, but then we would just trade-off current demand for future as I see it as very unlikely that the US government would NOT borrow heaps of money with the kind of yields they would be looking at.

Fiscal dominance over monetary policy makers all the way.

The silver lining in my view though is to overweight EM and stay clear of US equities.


Secret..Sauce said...

Parodos, Greek Chorus. Interesting device.

Anonymous said...

C says'
Given your view on the German survey ,do you have aview on this survey.I admit I am not familair with it at all?.

"The Markit Global Business Outlook Survey of 11,000 companies worldwide shows that optimism dropped in October to its lowest since global data were first available in October 2009."

Leftback said...

Agree on overweighting EMs. Too much of this type of analysis on China. Blokey called Richard Duncan went to Beijing in April and saw only one construction crane... talk about looking in the rear view mirror. That's really NOT very useful, but is typical of the scare stories being peddled by the media this week. In fact I think we'll call this Dick our Knob of The Week:

China Slow Says Bangkok-Based Dick

I am fascinated by the trolls. Are they 12 year olds being educated at top secret right-wing training camps? Or perhaps they are unemployed erstwhile investment bankers currently "consulting" in their mom's basement in Parsippany?

Leftback said...

More blather about The Cliff here from a variety of rates desks, you can more or less tell who is long Treasuries (this week) from the comments:

OMG! The Cliff

Leftback said...

Bear sightings have peaked in the media. Rosenberg, Shilling and Bob Jam Jar have all been trotted out.

"Today's the day the Teddy Bears have their picnic.."

If you go down to the woods today
You're sure of a big surprise.
If you go down to the woods today
You'd better go in disguise.
For every bear that ever there was
Will gather there for certain, because
Today's the day the teddy bears have their picnic.

Picnic time for teddy bears,
The little teddy bears are having a lovely time today.
Watch them, catch them unawares,
And see them picnic on their holiday.
See them gaily gad about.
They love to play and shout,
They never have any cares.
At six o'clock their mummies and daddies
Will take them home to bed
Because they're tired little teddy bears.

Every teddy bear, that's been good
Is sure of a treat today
There's lots of wonderful stocks to short
And wonderful bonds to buy
Beneath the trees, where nobody sees
They'll hide and seek as long as they please
'Cause that's the way the teddy bears have their picnic

If you go down to the woods today,
You'd better not go alone.
It's lovely down in the woods today,
But safer to stay at home.
For every bear that ever there was
Will gather there for certain, because
Today's the day the teddy bears have their picnic

Anonymous said...

Re OMG....

"While the economy is creating jobs, housing prices are recovering and consumer confidence is the highest in five years, bond investors are seeking safety from a possible downturn next year."

That is some unwind in the offing should sense - as expected - prevail.

Anonymous said...

First off, I'm honored that you would respond to my comment with a post.

Setting aside Asia and Europe for a moment, I think the crux of your argument rests on this paragraph:

"In the US we feel that with the election behind us there has been a reduction in uncertainty and the barrier to investment has been lifted. With that there is good reason to believe that Capex will ramp up into the spring and the employment situation with it. Put that together with the housing rebound and suddenly it looks like the demand side is lifting off again and with it, eventually, company earnings will recognise that interpretation of the situation. We would argue strongly that the evidence from 2004/5 would support that when Capex fell ahead of what was perceived a close election (as did consumption) there was a strong rebound in growth in Q1 2005 after the election."

The 2004-2005 argument is a good one. I don't agree with it based on commentary from Q3 earnings, though that might just be corporate rhetoric rather than legitimate concern.

I do think that if U.S. end demand does indeed accelerate in the first half of 2013, then my argument about the business cycle turn is incorrect.

In true internet commenting spirit, if I am proven correct, I will be sure to post a comment here in 6 months time. If I am incorrect, you will never hear from me again.

Anonymous said...

As far as secular trends go the world my turn into Japan one day and that would not be such an unpleasant place on balance. Though for this to happen world combined GINI coefficient should come close or exceed the one of Japan, as far as wikipedia tells me it is second lowest in the world after Denmark and it certainly feels like. I find there is a two way channel between social realities and economy. At the end of the day flat line or downward slope (as opposed to the cliff) are much more palatable or in fact welcome in ageing, somewhat rigid (though that apparently does change slowly) and equally wealthy society. The rest of the world has to move on which means competitive pressure, desire to make money and advance. Just need a bit more data to make up my mind at what stage of a cycle we are right now. Short term commentary is not supportive but that could change any day. Long term it is difficult to argue with liquidity and cheap money (combined with high degree of inequality of distribution). Nick

Anonymous said...

world GINI to be lower than the one for Japan right now... that is what i meant

Anonymous said...

Gini, that's better. Nick

Leftback said...

When faced with Cliffs, Exits and Panics, the response of central banks has always been to print, and the response of governments has always been to activate the fudge factory. Well, there was that one exception, in 2008. But that was once in a lifetime.

Same as it ever was....

Once In A Lifetime

Anonymous said...

If we are going down the Talking Heads route, there are plenty of good market appropriate material on that 77 album.


So many people...have their havens
I'm not interested...in their havens
I guess I've...experienced some havens But now I've...made some decisions Takes a lot of time to push away the nonsense
Take my compassion...Push it as far as it goes
My interest level's dropping, my interest level is dropping
I've heard all I want to, I don't want to hear any more
What are you, in love with your havens?
I think you take it...a little too far It's...not so cool to have so many havens
But don't expect me to explain your indecisions
Go...talk to your strategist, isn't that what they're paid for
You walk, you talk...You still function like you used to
It's not a question...Of your personality or style
Be a little more selfish, it might do you some good


Leftback said...

REITs on sale today, starting to think about the Kevlar. TWO, AGNC and dear old NLY were all under the cosh lately b/c of tight spreads, but closing in on long term support levels even as yields have soared back into the 15-20% range. You could cut those yields in half and this would be a good deal.

We have been sitting on ARR and TWO and some NLY-A but that's it. We bought a basket of REITs into the close today and we'll watch what happens tomorrow. Typically there are only one or two fire sales a year of REIT stocks, so you have to take your chance when it comes along before the big fund guys scoop them up. Some of these stocks have puked 20% in a few weeks, but there is more value here than in CMG and GRPN...!!!

Anonymous said...

Or DDs November so far:

I can't seem to face up to the facts
I'm tense and nervous and I
Can't relax
I can't sleep cause my PnL's on fire
Don't touch me I'm a real live wire

TWINE killer qu'est ce que c' est

Leftback said...

LB is trying very hard to remain logical this week and ignore not only the red stuff oozing from his portfolio but also all the sentiment, the pundits, the noise-o-sphere and the emotion associated with this extremely low volume Kabuki market.

A majority of people who normally don't pay attention b/c they are watching The Simpsons are now all over economic news, and are convinced the Republicans will drag Big Ears over the Cliff. It has to be said that widespread public interest in economics is usually a contrarian indicator:

Pew Poll Predicts Cliff Dive Ahead

There are a few things out there to focus on while everyone is ranting, emoting, being polled about macroeconomics and toy chucking, and the most important of those is yield. So for value investors everywhere, here's another installment of LB's world famous YieldWatch™:

Fixed income instruments:

JNK 7.64%, LQD 3.73%, AGG 2.66%
30s 2.72%, 10s 1.59%, 5s 0.62%

Various Equities and ETFs:

MORT 10.46%, NLY-A 7.56%, T 5.30%,
DVY 3.61%, EFA 3.27%, EEM 2.00%
SPY 2.07%, IWM 1.68%, AAPL 1.95%

So the Boring Portfolio (dividends and IG corporate bonds) still looking good relative to Treasuries. The disparity between equity ETFs and Treasuries is becoming unusual, although not at 2009 extremes. Still, small caps are trouncing 5y Ts, and it's very unusual to have EEM, SPY and AAPL so far ahead of the 10y note. DVY and EFA both yielding more than the 30y bond.

Higher yielding stocks like REITs are included here to show that they are ahead of HY credit and in all honesty, most carry far less risk as the cost of money remains low. Junk bonds may not default under prevailing conditions, but they do carry duration risk. If rates rise even by 50 bps, JNK and LQD will definitely under-perform equities by a wide margin.

The tax on dividends is really NOT going to 40%.... the pension funds and endowments (not to mention members of both Houses) would absolutely have a cow if that happened. That means some of these divis are easier to pick up here than ladies at an Army base...

It's time to Fill Yer Boots....

sextuspompeius said...

the garbage posted here in the comments (save those by corbulo and this one) would not be worthy of freshkills. what a bunch of pathetic posuers. not a trader among you flashdancers.

Anonymous said...

C Says'
"Two of Britain’s leading bankers have called for all the existing debt issued by the country’s banks to be made “bail-inable”

Suspect that will go down like a lead balloon.Of course it has nothing to do with the Humongous charges they took on their debt in the last quarter.

Anonymous said...

C says'
Given your view on the German survey ,do you have aview on this survey.I admit I am not familair with it at all?.

"The Markit Global Business Outlook Survey of 11,000 companies worldwide shows that optimism dropped in October to its lowest since global data were first available in October 2009."

Earlier post lost amongst the silliness that's crept in.

From what I have read this appears to be a fairly decent attempt at reading business outlook. The danger is of course it may like many such surveys carry with it a behavioural lag influenced by activity in a prior quarter which 'sours' outlook in an excessive way.
That notwithstanding,if you believe that Capex should rise from here we first have to explain why so many managers presumably responsible for taking such decisions are on the face of it very unlikely write that cheque.

Anonymous said...

C Says'

A read from Rosenburg,and bears won't like it.

“The Fed has also completely altered the relationship between stocks and bonds by nurturing an environment of ever deeper negative real interest rates. Therein lies the rub. The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises future profit expectations. It’s that simple. And the fact that the S&P dividend yield is triple the yield in the belly of the Treasury curve has also lifted the allure of equities, or at least those that have compelling dividend yield, growth and coverage characteristics.

I think that for those investors who are running into cash or cash-like instruments or government bonds in the name of safety need to realize that interest income is in a full-fledged bear market and dividend income is in a massive bull market. This is again at least partly related to what the Fed is doing because its incursion into the fixed-income market has dragged five-year Treasury yield down to 60 bps, at a time when the dividend yield in the stock market is closer to 2.3%, for a 170 bps gap we haven’t seen since 1958.”

Polemic said...

Thanks c et al

But back to mr anon who started this..

We would be most disappointed if you waited 6 months before returning. As you have triggered a theme we would also like to name it. As "the anon sometime last nov question" doesnt have a ring to it are you willing to either name or pseudonym yourself?

Anonymous said...

Rampagingruss said...
The arguments that US will not emulate Japan are valid. However it is irrefutable that the US has copied Japan in first moving interest rates to zero, and using a policy of quantative easing to weaken the currency.

From the Japan experience, we have learnt that zero interest rates make it impossible for retail banks to make money as deposits go from being a profit centre to a cost centre. Secondly, the artificial weak currency leads to artificial high margins on overseas sales. These margins then correct once the currency begings to appreciate. Both these problems are becoming apparent in recent quarterly results from US corporates.

If the US is emulating Japan, then from bitter experience, I suspect this sell off has a good chance of turning into a bloodbath.

Leftback said...

The rich are protesting higher taxation again today by throwing some of the remaining toys out of the pram. LB has been carefully collecting some of those toys under the assumption that they will be a good source of income in the year ahead. Fill yer boots again today, just don't use all yer cash at once...

Meanwhile, America's average IQ level appears to be rising by Darwinian selection:

Man Kills Self Over Election

Anonymous said...

C says'
Yes,I'm not filling my boots,but I see some very decent trading opps. Picked up my first today and have laid a couple more limit orders EOD for a spikey move.Let's be clear,people over react thank god and leave vacuum price ranges behond them then the cover lads get's shafted right into them.There are times when I depsair the irrationality of markets and others when I simply wouldn't want them to be any other way.

Anonymous said...


What do think of CIM. 40% owned by institutions, int rate around 13%

abee crombie said...

Crushing the mReits again. I think its time to start stepping in

Leftback said...

Agree. We must be within a few % of the lows for the REITs. Funny, about 6 weeks ago we were talking about how they are slaughtered once a year.....

One can't always pick the bottom but you know it's closer when the trapdoor opens and cliff diving begins. Really and truly, it is getting a bit ridiculous now some of these names are off 20-25%. Both days, the REITs have picked up before the broad market, and traded well into the close. Institutional buyers.

LB had bad experience with CIM in the past. Have nibbled on AGNC, HTS, CYS, CMO, ARR, TWO and NLY. Happy to have been a seller of most of these at somewhere nearer the top this summer.

Leftback said...

Investors to Big Ears: "We don't like you. Part Two". All a bit reminiscent of early 2009, after the inauguration. Some of it seems completely irrational.

The problem for those on the sidelines in politically determined markets is that some reasonable compromise on the major components of the "Washington impasse" or "the Greek/Spain question" could very suddenly be reached at any time behind the scenes, and probably while the markets are closed. The result of that information becoming known will be the market gapping up massively before the majority of people have time to react.

teddy bears said...

Took me time to read all the comments, but I really love the article. It proved to be very helpful to me and I am sure to all the commenters here! It’s always nice when you can not only be informed, but also engaged! I’m sure you had joy writing this article.teddy bears

Leftback said...


Maybe it's time for negative interest rates on overnight loans? Everyone knows the banks and corporations are stuffed full of cash, maybe it is going to require some unusual measures to unlock the inactive capital and increase velocity in the economy?

The dollar isn't unnaturally strong nor weak here. I cannot see that the FX -based argument holds any water at all for the US, at least not at this juncture. Future recovery and increasing energy independence may well leave us with a much stronger DX but that seems far away at present.

One wonders how many days inwestors can scweam and scweam before they are thick..... in the mean time, keep on chucking 'em and we'll keep on catching 'em. Ta very much, guv, don't mind if I do.

k1 said...

Darn it, didn't C' post the teddy bears song recently? Now thanks to the comment above LB's, I can't get it out of my head:

"Today's the day the teddy bears have their piiiiiiiiiiiicnic."

Thanks to Anon for bringing up today's topic. Shall we call him Gary?

WellRed said...

I am a little perplexed by this market at the moment. A good dose of selling, but with very little movement in vol (especially futures). That would typically indicate to me that people aren't expecting it to last, but I have also learned that the action in the last hour or so is fairly indicative of things to come, and on that basis, the outlook is not good.

On the fiscal front, I can't help but feel that the Republicans understand that their debt-showdown style was not appreciated by companies (or the electorate) and that they will be reluctant to be blamed for another confidence-shattering blinking contest. That being said, they have to grandstand for their base to some extent, but capping write-offs is a de facto tax rise (for the wealthy in particular). Can you imagine such a proposal from those notorious House Republicans at ANY POINT in the last 2 years? So far as I can tell, if the numbers add up (my understanding is that they don't), this may not be a bad alternative to Democratic proposals. Either way, I am already seeing the parties much closer than they have been at any point since that 2 day period ahead of the debt ceiling where it looked like Boehner and Obama were going to reach a deal. Then again, I have underestimated the intransigence of the Republicans before.

So cautiously optimistic much like the rest around here?

WellRed said...

Oh and can't forget the oh-so-accurate MM commentometer, which is screaming "massive turn" from the rooftops.

Anonymous said...

Today's "Anti-Obama conservative radio talk show Pitch" is: Obama is trying to destroy the American Family. How? By raising taxes on families making more than $250,000. You see singles making less than $200,00 are not subject to the tax increase, while married couples making more than $250,000 are. A more fair rationale would be that if a married couple is making $400,000 a month, then they'd be on equal footing for a tax increase. Obviously the president and his administration are trying to curb the number of marriages, by making it financially disavantageous.

Oh and they say you're wrong TMM, LB et al, we're going below 10K by April, they're calling it the Obama Drop!

Anonymous said...

sorry I meant $400,000 a year

Anonymous said...

C Says'
I'm looking for the monster spiky.The one that really is toys' out.Have not seen it yet,but planted some nets ready and waiting.

WellRed said...


I was sympathetic to your recent arguments re: the long bond. Any change in your view based on the recent minutes? Seems like a bit of a game changer: Bernank & co are getting an itchy trigger finger already and Twist hasn't even ended. If they are already discussing additional purchases in the long end, what do you think their response would be to a run-up in rates. Betting against the Fed hasn't been productive since Bernanke unleashed the floodgates in 2009..

Anonymous said...

anyone have thoughts on non-agencies and the like?

Starters in DX, PDI, EFC and NCT.

Leftback said...

Some enforced changes in my portfolio, but basically just moved out in duration as far as the long bond is concerned. I just have to repeat the argument I have laid out many times here, that was first outlined by fixed income observers like PIMCO.

Fed involvement in the Treasury or MBS market is medium term bearish those bonds, b/c the whole object of Fed policy is to drive investors OUT of those instruments and into riskier assets. Once the front running of the Fed is complete, there is no more profit available for fast money and there will be net selling. So in this scenario, betting against the Fed would be to remain short equities and higher yielding instruments in the face of the liquidity tide.

Watching the political puppet show here is really exasperating. Bloody Nora! I mean, in Britain, when the election is over, it's over. The loser goes on telly and says "Cor blimey, we got a right old spanking, sorry and we won't do it again, off to the back benches now innit", while the winners get on with governing.

Not the case in DC. The Republicans are still acting as though the election is still on and they think they are winning. GOP, Grey Old People, indeed. It is appalling that they can even contemplate throwing the US back into recession. Heaven knows why they think they have a mandate to hold the economy to ransom and along with it the future of younger generations. Brylcreem Boner looks like he could have stepped out of any newsreel from the 1930s.

On the other hand, LB suspects that Big Ears is just enjoying an opportunity to grandstand a bit about taxation to appeal to the Left, which has been totally disillusioned with his leadership, but did become concerned enough about Romney to go out and vote. Pretty soon, Big Ears will show his true colors and another gift to corporate America's kleptocratic leaders will be duly signed, sealed and delivered.

Leftback said...

Meanwhile The Glove man is still using his tin ear to listen to America, while playing on his silver spoons:

Romney Blames Loss on Wealth Redistribution Policies!

Well, yes, Governor. That's the point. Americans have more or less wised up to the fact that supply-side trickle down economics trickles down as far as the VP layer of Wall Street, and not at all to Main Street. But, really, the effrontery of Obama to take some of that money from the citizenry of New Canaan, CT and Short Hills, NJ and deliver that hard-earned trickle directly to the poor, sick, indigent and the young! Shocking! This from a man who made most of his money by leaving his mother's womb !

We are indeed fortunate that this devout moron didn't ascend to the Oval Office. May he soon be consigned to Landon-Wilkie obscurity.....

For Goodness sake, let's put the election behind us and I can take a break from being a modern Alastair Cooke writing latter-day Letters From America. LB would prefer to return to Mr Shorty and his most unfortunate encounters with Cold Steel....

Anonymous said...

C Says'
Beggar it ,times are good so let's have some fun.
Today,I particularly liked the Hamas quote ,"Open the gates of hell". I mean,come on guys,Russell Crowe did that one far better. Compare and contrast, 6 foot of brawny roman legionary mounted on yee great big arabian waving a sword with a savage looking wolfhound by your side,or 5 foot of 'scrawny big issue seller' with what looks like your babies unwashed nappy wrapped around his head? Hams definitely need a new chief of spin to get their message across.

Anonymous said...

C Says'
More to the point we really like markets that move for trading.It's all that compression crap we don't like.When the markets get moving it's like someone just gave the moneytree a good shake.

Anonymous said...

Meanwhile, EURJPY continues to move higher.


Anonymous said...

Ramapagingruss said:
Negative rates may or may not help the economy. It also may or may not raise asset values. It may or may not increase loan growth. All this is unknowable. What is knowable is that current fed policy and bond yield curve is collapsing interest rate margins. If you think rates are going negative then get short US deposit taking banks.

As for USD is too cheap - I think it is a nothing done verus, EUR GBP and JPY. But it certainly way too cheap verus commodity currencies and some EM currencies. I suspect a correction in these currencies (ie some dollar appreciation) will do much more earnings damage to US multinationals than the market is predicting... Much like we saw with great Japanese companies like Toyota when the yen rose from super cheap to fair value over the last few years....

Anonymous said...

Rampagingross (see what I did here), I would actually take the other side of this, at least as far as the regional banks are concerned, because I think the asset quality improvement story is going to dominate.

In fact, we have gone back to work on the equity of some of the names where we used to nimble on prefs earlier on in the cycle, and so far, we kind of like what we are seeing.

It's definitely micro work, so outside the scope of most people around here I suppose, but to us they do sound like a decent play on US upside risk. Ties in with XHB leadership off the '11 debt ceiling lows as well.


abee crombie said...

I'm not seeing much movement in the preffs I follow, but I will step in if prices get to 2011 levels again.

NCT is very interesting.

LB you are getting me more interested in shorting the long end. damn you. price action there i think is telling, especially on these sell offs

Anonymous said...

C Says'
"preffs 2011" in your dreams old chap. Yield chasers of all colour and creed have mopped these up and frankly I doubt your bog standard sell off is going to have any effect on them whatsoever.

Leftback said...

Someone likes the REITs at the open today. Possibly the footsteps of legendary Real Money manager, "Gary", an avid reader of Macro Man and follower of LB's investment moves...?

Or perhaps not.... Gary never did say sorry to LB about his horribly incorrect bond market calls of 2010.... he's probably balls out long 30y notes and wondering what to do with Spanish CDS.

DD is becoming fixated on EURJPY. LB is also, as it seems to be the FX barometer that best reflects the global assessment of risk lately. This pair sold off sharply in April, well ahead of the most recent Euromageddon. EURUSD has been grinding in a range, but EURJPY is breaking out again to the upside here and if it clears 105, has room to roam before meeting serious resistance.

Leftback said...

What I think a lot of people are missing just now is that we have become rather conditioned to the markets being essentially a USD carry trade for the last year or so. This is comforting, both for those of a rigid ideological bent (Bernanke trashing the currency etc.) and for those with a shortage of synapses who can only process RORO concepts.

It's entirely possible we could have a relatively stable (i.e. range-bound ±5%) dollar in 2013, while equities rise on the back of an aggressively reinstated JPY carry trade. Many are pushing funds that are long both Nikkei and USDJPY, which is essentially a leveraged yen short. This is what makes EURJPY worth watching, I think. A much lower JPY seems the only viable option for Japan, after the tremendous hits taken by their exporters from the earthquake and the Chinese disputes.

Leftback said...

ofquesv 46NLY-preferred A traded at $25,00 this morning, that's probably as low as that one goes. Most financial preferreds don't move at all, unless there is a debt problem and conversion to common shares seems possible. In this interest rate environment, debt issues would be strictly company-specific.

Leftback said...

Obama wants the line at raising taxes over $250k, House Republicans willing to consider $1M. Meet in the middle at $400-500k/yr?

Millionaire Tax On Table

$400k catches an awful lot of NYC lawyers and mid-level Wall Street employees, but without hitting the majority of more socially useful economic units, like hospital doctors or true small business owners. That should be acceptable to a plurality....?

The dividend tax will be fudged as well.

Anonymous said...

Rampagingruss says:
DD - I think I may have misrepresented myself. I am looking at large deposit taking financials like WFC, PNC, BBT, RF and USB. I said regional banks as in not investment banks.

All are now struggling with Net interest margins, and are all are trading in stark divergence to homebuilding stocks. The destruction of their Net Interest Margin so that the can not generate reasonable income is very much inline with the experience of Japanese banks

Anonymous said...

C Says'
Give that man a banana for;
"unless there is a debt problem and conversion to common shares seems possible" plus the movement of the spread can do it if it moves far enough.But,essentially you're right,because you have to think who is the typical buyer of this stuff and what is their typical risk profile? The answer is clearly that they fall outside of the usual margin called mom artist.
Note the scale of interest reported by Barc in them issuing coco. We're not in margin land here for this type of buyer.These are imo typically income rich/positive and are still out there in large numbers looking for yield.

Anonymous said...

Understood, R-Gruss.

I did misunderstand you as I was indeed referring to lower size institutions (and equity rather than prefs, not sure if that came out right).

That said, compared to the Japanese experience, I do think an underappreciated fact is that B/S have been purged more forcefully (relatively speaking of course).

That in my view makes the NIM issues more of a loan demand problem than credit supply (ignoring reg, as I believe US will not pull a Swissy on its own banks).

So 1) the NIM gap can be somewhat filled with buying securities rather than making loans (and my suspicion is that the non agency craze is in part related to this), and 2) if loan demand for whatever reason were to come back, watch out above.

Now, don't get me wrong, I am not calling for mega bull cycle in regionals. I just think that the gap to other sector driven by roughly the same variables is tradable at these levels.

We shall see.

And to LB, I think EWJ needs to be added to the next episode of YieldWatch™


Anonymous said...

Sentiment plummeted this past week ...

...the oxymoron Investors Intelligence has Bull/Bear gap close to the June lows:-

...while AAII has bears at 15 month high

...plus a volume spike in the UltraShort ETF that's historically occurred around turning points:-

scipio said...

is there a more wrong commenter than leftback?

Leftback said...


The regional banks have been a strong part of the recovery, but you're correct, they are losing money on deposits and they are absolutely buggered if the YC doesn't steepen to some degree. It's a concern, but I think it will take care of itself after the current puppet show is finally over.

As the Bernank's FIRST PRIORITY is and always has been the health of the banks, one would expect the Fed to use a variety of tools to slowly facilitate a steeper curve, now that everyone and their corporate uncle have successfully rolled over that 2007-2008 vintage debt for another 5 years....

Once we see any signs of firmer economic data, and especially signs of resolution to European problems, watch out for some hints of earlier tightening or even outright jawboning about reverse repos etc. to get rates higher at the long end. The long bond can be a highly volatile animal, and is likely to stampede when spooked by predators.

Clicky-Link-U-Like said...

Inverse ETF volume spikes
AAII table
AAII bears
II survey

Anonymous said...

Rampagingruss said..
Leftback - you are absolutely right - at the first sign of the yield curve steepening these banks are going to fly higher - but unlike 1994 - the yield curve is actually very steep, and we are now getting late into the cycle. Seems to me that the yield curve could flatten out a lot more. Short interst has evaparorated in these banks. They look like great shorts to me.

Leftback said...


I may be wrong. Classical scholars have likened me to Sisyphus in seeing a possibly steeper YC from here. But..

One of the reasons it is hard to compare this cycle with others is that we are in ZIRP, and in ZIRP the YC does not behave normally b/c of central bank involvement. For my 2c, the business cycle cannot truly end until long after we exit ZIRP, and for that to happen we must be a lot closer to full employment and wage inflation than we are now.

Within ZIRP, the Japanese experience suggests that the business cycle no longer exists. Instead, there is a series of QE-driven business mini-cycles, where the YC goes from what would be steep under normal conditions (now) to "very steep" (US, April 2010). Eventually, the economy may grow enough to break out of ZIRP, although Japan has not done so. Some time AFTER that happens, YC will flatten and a true business cycle may ensue and then end.

I am not betting that 2013 looks like 1994, only on it perhaps resembling early 2010, when a series of growth concerns (Europe, China, Fiscal Cliff) had yet to weigh on the long end of the curve.

Leftback said...

It's Gary !!! I've found him...

Gary Kaminsky Towel Chucking on Camera

This really is a serious contrarian indicator. Big time media towel chucking, trying to whip up a 2008 style panic ("the big boys are saying one thing and doing another") combined with political paranoia ("the next 4 years of this administration will be bad for stocks"). Not that he was saying anything like this in September.

Quite honestly I have always found this CNBC talking head to be especially unreliable, and he typically reflects the most egregious type of recency bias ("it went down, it could go down some more"), cloaked in a patina of (I just talked to all the really big guys on the floor) pseudo-authenticity.

Kaminsky is one of the most likely people to come on and tell you to buy stuff that has been going up, and to tell you to sell at the bottom of local minima. I have also never heard him say anything cogent in terms of macro influences on the market.

A more balanced and long-term view can usually be had from a real live experienced equity portfolio manager. I bet he has been buying this week:

Howard Ward: Market Had a Tantrum

Anonymous said...

C Says'
From my point of view all I can say is I wanted a dip to buy rather than a new high so thanks scipio et al. In my next life I'll come back as a proctologist.

Anonymous said...

C Says'
Capex ? Not sure ist half next year at all.However, something strikes me at this juncture regarding capital investment prospects.
For years the US has suffered a loss to it's manufacturing base and also to it's employment and real income prospects.The latter they have camouflaged by using loose monetary policy coupled with expansionary credit.
Could change for the better.

Costs overseas have been creeping up,not to mention other issues.
US now has a sizeable output gap,but also is in the upward swing to change the balance of energy power/costs globally in their favour. What I am saying is for the first time in decades corporates have a damned good reason to want to go CAPEX onshore ,not offshore.Their major barrier must be the decades they have spent accruing their capital gains offshore.Given I am not that smart there must be others who have already seen this issue and see it has a possible major gamechanger to get Capex moving in the US.One other thing though ,this would be a long US Dollar play with all that that implies for those assets that are inversely correlated.

Leftback said...


Yes, perhaps it will be the yen carry trade going forward and not the dollar. Your thesis would be a US over EMs trade. But I think that may be some way off in the future, as the US still has a lot of structural problems in the labor market that need to be fixed (one of which is housing) before it pays to do CAPEX at home.

Things that make you go hmmmm....

Foreign Net Sales of USTs in September Hit Record

Leftback said...

EURUSD making higher lows and higher highs, since Tuesday's sharp reversal, as the US equity market continues to grumble... did the last leveraged momo hedge fund sell AAPL yet?

AAPL right now exploring its chart support level in the $510-520 range, looks like we are finally getting there. You might expect that any dive down to or below $500 would attract a lot of buying. Dividend still beating Uncle Sam's ten year offering, and he's broke compared to The Fruit. Just sayin'..

Anonymous said...

Re Yen carry trade,

"Bull market in USDJPY has begun".


Japan to invest 1.2T Yen in India. Dispute with China is shifting investment to elsewhere.


Leftback said...

Right. Bull market in USDJPY, and all EURUSD has to do is march in place within a tight range and everyone will probably be fairly happy as far as exporters go.

The Isaac Newton trade is over (Long £, falling AAPL), time for the William Tell trade (AAPL over a Swissy)?

Saul Bollox said...

I bet the media half inches that one.
Go on, you know you luv it, you old slags.

Anonymous said...

C Says'
From treasury data today;

"Foreigners were big buyers of US equities in September but, in offsets, were big sellers of Treasuries and corporate bonds. "

Don't know if that really does anything for my earlier argument per se.It does however,undremine the link you posted.I don't have the numbers which might shed more light on the net position as to what the exact switch was.
I still think in macro terms it would be a mistake to overlook the possibility of a stronger dollar.
Indeed,it isn't a mistake that I boomarked US small caps for further future attention rather than large caps. The small caps in my view should still ride any future imporvement in the prspects of the US ,but do so without the drag of the dollar on foreign rev.

Leftback said...

LB is loving him some REITs today. MORT up 3.5% today, wonder if there were some short positions in these names. MM commenters were all over that this week.

AAPL reversed hard off $505.

.... as we predicted, cough cough .....

Tricky market for Mr Shorty, as despite all the fear and loathing in the media, the potential is there for equities to jerk upwards so quickly it will snap his neck off....

Where are our friends, the Roman Countrymen today?

Anonymous said...

"Starters in DX, PDI, EFC and NCT."

I'm taking a bow on that one, especially NCT.

Leftback said...

Quality. Assuming we didn't just ride a big short squeeze only to get puked again by some bogus tax negotiations press release from Ballbag News...

Speaking of which, it's time we had another special edition of Ballbag Unwound later on. LB loves that show.

abee crombie said...

good work bottom picking boys... I had some TWO at $10 as well.. but I'm not gonna overstay my welcome

amplitudeinthehouse said...

Hunger Games 2012

The Worlds Gamemasters converge for higher yield

More than ever Amps needed to start the year off in style, having the previous year been quite comatose contrasted to many other trading years that he had been involved in.

After years of living obscurely among the sentient beings and taking on nondescript positions in the workforce for reasons that are so obviously clear to him now , he now found himself pushing through the thick surroundings of research papers gathered around his bed each morning when starting the day anew, in the dream of finding that one trade that would set him free from the vicious cycle that he had now come to be trapped in .

Having been picked randomly many years prior to compete in the games he tried to remain under the radar for as long as possible , if not for ever, if his life was to be short. But living in district SYD, it wasn’t long before other past and future tributes had sensed a competitor was lurking among the ranks and it was only a matter of time that their collaborative plan to push out thee one who would so dare not to share their resources or lest be it reveal who they were and, thereby strip them of any creditability and force them to contest without any sponsor backing from the bourgeoisie.

The early part of the year saw in the present and future QE rush in the SP500 , but amps having found out his trading partner in NY had packed it in and moved to an exotic island due the exhaustion wasn't in any frame of mind to put to work any cash on the sideline .This had thrown him off balance and into the sights of fellow tributes who were now swarming all around In wait of any opening of weakness , so as to moved in and take over the precious resources that are so desperately needed to survive without any sponsorship from the bourgeoisie.

When, back in the day , amps heard stories about the tributes in his district and their great battles and so forth , he didn't give a shite , his secret battle laid versus the racehorse on the racetrack and, he would just go along for the ride in the hope of not drawing any attention from certain tributes that he knew would become a hurdle if the bourgeoisie were to pluck him out to soon for the Hunger Games. Now amps wasn't quite sure what was more disturbing, the years of living an incongruent life , albeit, away from all the one eyed green monsters or now being pushed out into the open with no quarterback to run off. Luckily it wasn't long till he found a new trading tribute partner , but it wasn't long before their different district lineage gradually emerged to the surface and their bourgeoisie sponsor being caught front running the betting on the 2012 hunger games before other investors from district SYD had placed their bets.

While the other tributes chased the scent of amps resources around the woods of Nottingham , he found another partner that had the same SYD district lineage and athletic ability that the bourgeoisie would definitely sponsor and plunge on when the bookies opened up for business in the morning ,when another set of games would be set out in front them.

With only a little amount of time left in 2012, the SP500 is looking similar to the tributes on the tail of amps and his district tribute. The bookies have refused to take any more bets on the games and gone to the bar for a stiff one while any bull punters chasing into year end have ordered extra kevlar gloves . Sitting and biting his time into year end , amps , is just tickle pink with his new district tribute.

Polemic said...

amps.. are you ok mate?

amplitudeinthehouse said...

( walks outside nightclub)

ok here, polemic.

ps...enjoy the original


Anonymous said...

This is no market for young man. Imho we are reasonably close to a market clearing moment รก la 1932 or 1982. Not measured in days or weeks, but probably months rather than years. If you have the courage then go BOLIVIAN with everything you got. Until then forget the Kevlar gloves and put on your bomb squad equipment. The ride to the bottom will be a bumpy one.

Pls note that I am not a perma bear like Roubini. I just read the data (industrial production in Germany going down finally, durable good orders in the US... well, Europe entering a recession and every central bank being all-in). What really worries me is whether the Chinese can keep their property bubble afloat (and don't tell me there is none with ghost cities being built and contruction making up a major part of the oficially faked Chinese GDP) until the US and Europe had enough time to get out of the woods.

Those who think China is doing overly well pls go and look at hard figures like energy consumption YoY (up 3.4% if mind serves me correctly) or goods transported by rail or ship. Compared with an alleged growth in industrial production of around 10% YoY the figures don't add up by quite a margin. Balance sheets also don't look pretty, accounts receivable make up a big portion (if not all) of the current revenue growth.

Sorry if that sounds overly randy. My feeling is that it's not different this time and we are heading for a nasty surprise where Kevlar gloves alone won't be enough.

My 2 bps.

Anonymous said...

C Says'
The problem is after citing all those data points you make a fundamental mistake witha central assumption of;

"every central bank being all-in"

That is almost certainly wrong. What they can do does not simply stop because rates are already low.
Indeed,because once again we see multiple pile-ups of recession in Europe and Japan the probability that they there will be yet further G20 global loosening is increased.There is no way in which I would wish to be on the opposite side to that.The most negative I wish to be is to be market neutral,happy to see sellers take markets down ,but willing to buy when oversold measures become clear.

Leftback said...

Anon, to paraphrase John Paul Jones, "Sir, I have not yet begun to print".

The problem with all of the doomy scenarios is that we recently had a taste of disorderly deflation, and they are NOT going to do that again, believe me.

The Europeans have, if anything, consistently erred on the side of too tight a monetary policy, presumably in fear of German inflation rates. But now that inflation and economic activity are clearly slowing in Germany and other core countries like the Netherlands, there seems to be a far lesser chance that moronic austerity policies will be continued and a far greater chance of looser policy from Draghi, who has plenty of policy tools at his disposal, once they untie his hands.

If China is really as slow as some suspect, then we are more likely to see massive stimulus from the new central committee. Plenty of bridges and roads to be built in the Chinese outback. Think 1930s US highway construction and you will get the picture.

At the risk of stating the obvious, the slowdown in Germany was extremely predictable and well telegraphed. Once your customers are essentially broke, the order book tends to dry up. In addition, the markets have largely anticipated the current slowdown, and it has been priced in. The only thing that matters from now is the path forward, and there seems little doubt that this must be a reflationary one.

By the way, with respect, you could not have chosen a worse analog than 1982, when raging inflation and spiking rates made market conditions about as unlike today as has ever been the case. If you want a doom and gloom analog then the "not enough QE" crashes of Japan in the 1990s would be your choice. With essentially unlimited QE in the US, LB is not sure that the Japanese path will be the one taken.

Anonymous said...

Until Bernanke holds a press conference where he states he's buying S&P futures with both fists until nominal GDP is to his liking, central banks are most certainly not "all in".

Anonymous said...

I would also say that the biggest limit to central bank intervention is on the politics side, and I would say that the opposition to liquidity and reflation policies (either the Germans or the sound money republican types) is nowhere as strong politically speaking as it was in say 2010-2011.

Even Marc Faber is surprisingly quiet these days.


Anonymous said...

C Says'
Week most notable US for break by Thanksgiving.Should make the week choppy as prior trend get's blown about by people going flat for the break.

Vasastan said...

Re. Anon 7.59
The electricity consumption rise for industry in October was closer to 6% (source: http://uk.reuters.com/article/2012/11/14/china-power-consumption-idUKL3E8ME0SJ20121114). While I agree that a lot of fishy things are going on in China, this particular figure seems to point to a soft landing rather than to an on-going crash.