Thursday, December 20, 2012

2012. The Year that Cried Wolf

As we come to the end of 2012 we find that, like a movie, the stresses and strains, the thrills and spills and loose ends are all being tidied up into a relatively happy ending. However, like any blockbuster worth its salt, there are the odd questions left open ready to be picked up again in any sequel (2013). 2012 has seen the resurrection of many dark evils but TMM can't see one that has actually resulted in the type of global disaster that many tail hedgers had placed their chips on. The European Zombie Dawn has not torn the heart out of the EU leaving it a bloodied corpse as Greece is still in the Euro and Spain has not defaulted. The US is not in recession, China has not had a hard landing, Iran hasn't been invaded or closed the Gulf, inflation hasn't gone hyper through QE and, lo, we are all alive and well (if you are reading this after 21st Dec).

TMM would like to summarise 2012 as "The Year that cried Wolf". Tail hedging became a theme that saw premiums rise rapidly, whether it was straight volatility for tails or the tail risk products such as CDS. But at the end of the year, though there was money to be made by cunning tail risk traders ( as there is with any market that is wildly moving) the underlying events that these products are designed to insure against did not occur leaving the net sellers of tail risk the beneficiaries.  TMM have had some interesting debates with friends about tail risk and we will probably do a post on it soon, but our simplistic view is that if you bet on a 33/1 horse and the price comes into 20/1 then you have made money irrelevant as to whether the horse actually wins or not. And this year saw a lot of betting on ultimate losers. 

This is probably going to be the last post of the year from us but we hope to come back strong in January with our Non-predictions for 2013 and the marking of the 2012 set. We can't even remember what they were now and daren't look. For now we leave you with the 2012 Christmas viewing schedule.

2012 Christmas viewing-

"The Shirakawa Briefing"- Staring Matt Damon. A tale of intrigue as one man fights to discover ancient policies shrouded in mystery since the dawn of time. Only he know's the dark truth and is determined to warn the world of a frightening new plan being plotted by a mysterious organisation known only as the BoJ.

 "The Fiscal Cliff" prequel to "Into the Void" - Two climbers have to overcome bitter personal resentment and hatred stemming from their disturbed childhoods as political orphans in the House of Representatives in order to overcome adversity and certain death as they face the uncontrollable natural forces of budget control.

"Dead Calm" - A portfolio manager and his Sovereign CDS holdings are becalmed in the once stormy seas of the European markets when they come across a European Central Bank whose story doesn't tally. The investor is left on a sinking ship hoping that the central bank's plans fail and his CDS rescues him before he drowns.

"Big Trouble in Little China" - When an All-British fund manager Anthony Bolton agreed  to take his funds to the Asian stock markets, he never expected to get involved in a supernatural battle between good and evil. Bolton's funds are rich in greenbacks, which make them a perfect target for an immortal bent system and its three invincible state structures. Suffering huge losses, how can Bolton's funds now defeat data that can't be seen. 

"Green Card" - A French national leaves France for tax exile in Belgium to much derision from his homeland, only to find that a benevolent Russian President is willing to give him residency with no questions asked. 

"Tom 'n' Rog'll Fix it" - Far East dealers Tom 'n' Rog try to make their own dreams come true by fixing it for themselves. However their shady activities catch up with them years later once they think they are immune from capture leading to huge embarrassment and fines for their employer. Unfortunately, unlike the other old "fixer", they are not already dead and are about to face prosecution for their outrageous crimes. 

"Apocalypse Not Now" - A  website in the US is inundated by true believers of the ZH cult expecting to be rescued by Aliens and long gold positions from a doom writ large in ancient calendars. However when Greece doesn't leave the EU, Spain doesn't default, the US doesn't go into recession and China doesn't have a hard landing, as the ancient prophecies predicted, they all have to pack up their meagre belongings, having sold everything else, and trudge back to the realities of a normal curve with their "tails" between their legs.

Happy Christmas and a Happy New Year from Pol, Cpmppi and Nemo.


Charles Butler said...

Big time Happy Holidays to TMM and everybody in the comments asylum.


mt99 said...

Merry Christmas. You chaps not doing the charity appeal this year?

amplitudeinthehouse said...

Nice finishing touch , TMM , having come into this game on the heels of some old school Fx traders ,therefore that's where I get my rush , this year was a non-event...

Enjoy everyone, see ya next year!

Polemic said...

mt99 ..nah...
We actually don t think we've done enough this year to justifying asking for anything this year.

We don't expect the 20 and not even asking for the 2.

Thanks cb and amp and all our loyal commenters who keep this space alive..

Anonymous said...

C Says'
Merry xmas chaps.
I too am laying down my Aspis and Kopis for the season.Feels like I've been a Marathon so time to recharge.Leave the machines to enjoy themselves.

Anonymous said...

Happy Holidays! Nick

langone said...


Leftback said...

Nice one, TMM. Merry Christmas, lads.

We promise to keep the asylum entertained from time to time during the week off.

marcusbalbus said...

absence of evidence is not evidence of absence.

Anonymous said...

Fitting post TMM. Can help thinking that the boy does get eaten in the end though...

Thanks for sharing your thoughts this past year.

All the best for the holiday season

langone said...

Told you chaps long Yen. Risk off.


Anonymous said...

C Says'
counter trend so be careful.Santas prezzy.

Vasastan said...

Merry Christmas, and thanks for this year's entertainment! My machines say: 01000001011011000110110000100000011110010110111101110101011100100010000001100010011000010111001101100101011100110010000001100001011100100110010100100000011000100110010101101100011011110110111001100111001000000111010001101111001000000111010101110011

Anonymous said...

Happy holidays and a good start into 2013 everyone !


abee crombie said...

Cheers for a great 2012. Thanks TMM for keeping the blog alive, where else could I get my macro fix.

Happy festivus and kwanza ;-)

VandalsStoleMyHandle said...

Happy holidays, guys (I'm assuming you're guys, at any rate).

Thanks for plenty 0f thought-provoking material in 2012, and look forward to reading your thoughts in 2013.

Leftback said...

Macro-free session underway in the US.

Retailers being sold hard, especially those with a big footprint in the Northeast where it has been a lousy holiday in so many ways, financial and existential. Saks, Macy's, Tiffany's all down, and even Amazon. JCP not so bad along with other more national chains.

The combination of Fiscal Follies, Hurricane Sandy and mass murders was too much for the New York area in the end - people stayed in and shopped on line. But that's in the rear view mirror, it's 2013 Q1 and 2 that matter from here on.

Jawed Ali said...

Get your own home based job in data entry, copy pasting, clicking and different more jobs

Anonymous said...

langone ... the all things Japan ramp up feels like fading it is in order, but perish the thought of going against the trend in liquidity-thin holiday sessions

I am a fx simpleton but I can't stop wondering whether fxvol could be making an unexpected comeback in 2013 after a 1 1/2yr of benign neglect (and most people therefore writing the concept off entirely)

- DD

Leftback said...


Leftback said...

REITs on sale this week as they go ex-divi. CMO, AGNC, AGNC-P, TWO, CYS-A etc... Not a bad way to lock in some yield and reduce volatility, if one is that way inclined.

Leftback said...

Another classic today in the year-end series of Dump 'n' Pump days. Anyone who didn't fill their boots with high yielders today before lunch was definitely missing out, and we were at the trough.

We continue to like REITs for 2013 for a few reasons: continued recovery/stability in MBS market, a bit of modest yield curve steepening will provide a more advantageous business environment for REITs, short-term borrowing costs will remain nailed down thanks to the Fed, early repayment risks have been once gain overstated, and the chances of a runaway inflationary recovery in the US this year are close to zero.

Even if there were to be an unwind in fear trades yielding a +100-150 bps spike at the long end this year, we now have that possibility very nicely hedged so there isn't much for us to fear at the moment. Being long REITs isn't at all like being long Treasuries or even corporate bonds, which carry much more risk from here in our opinion.

Leftback said...

A reminder of the importance of SPX 1390... the support line has only been breached briefly in 2012. So, nothing very bearish about the price action so far:

SPX Long-Term Chart and Moving Averages

Anonymous said...

C Says'
For the same reason that I would never try to fade a trend in a thin market so would I not try to impose importance on any price action that reinforced trends in a thin market.
I'm more interested in what the New Year action brings by way of positioning.
The trouble is the political crap works for the mom action enough to hurt when you get on the wrong side.Yet it invariably is only very short term. I'll step back to weekly action only and wait for the smoke to clear on this one.

Leftback said...

Agreed this is usually a Mickey Mouse week, but if they do a deal, or there is a leak that a deal is done, this market will melt up and we will see an almighty face-ripper. LB will review the current state of play later in the Cliff Pantomime, which seems to be having an extended run at the Capitol Theater. Right now, we are out bargain hunting and dumpster diving.

Anonymous said...

C Says'
"face ripper" followed by backside tripper. Short term mom action going into the credit dead zone period combined with earnings season.Potential mess.
The tell for em was the way markets outside the US tried so hard to stay up into the year end.When they've hit the year end trip wire I expect too see some door rushing activity.

Leftback said...

So let's review where we are in Panto:

BIG EARS has the elephants right where he wants them. If they sit on their hands, they enact tax increases on the rich, which is what BIG EARS has campaigned for, thus screwing the only group the GOP really cares about. The GOP would also be enacting a huge cut on Pentagon spending, thus also screwing their backers in the defense industry. All in all this would be a massive own goal for Republicans, so he isn't going to give them anything unless he wants an early capitulation on the debt ceiling. No wonder he looks calm and confident.

BONER is between a rock and a hard place. CANTOR has encouraged the Tea Party nut jobs to stab him in the back, and Boner is bleeding in the Capitol cloakroom before limping to the emergency room. He will be forced to do a can-kicking short term deal with BIG EARS to save the Pentagon budget, and then the right wingers will can him and replace him with the odious and ambitious ERIC the GREASER.

TINY TIM is quite happy as he has been able to sell more bonds at ridiculously low rates. That's his job, and it's almost over. He will depart having sold a huge amount of debt for very little to unsuspecting punters, banks and foreign governments.

The BERNANK is just waiting for the Panto season to end as he has the helicopters ready. Once this is out of the way and the spectre of reduced government expenditure has been banished, the dollar is going to take an almighty shellacking as the BERNANK continues to drop liquidity from helicopters.

Assuming the can-kicking scenario by Jan 2nd, any serious move toward austerity is off the table for now. As a result, we think the dollar opens the year by being pounded, which means the yen carry trade probably takes a breather here. EM equities are already being bid up in expectation of this, as are some commodities.

Eventually we expect to see a lot of safe havens (USTs, gilts, bunds, JGBs) sold off as US and China data continues to confound the recession callers. With an initial relief rally, rotation from bonds to stocks, new funds due to enter the market at the start of the year, real money under-invested, and a few obliging shorts bending over, the ingredients are there for an almighty melt-up. We would not be surprised to see a move upwards of 5-10% between now and the start of earnings season. That, as they say, is another story entirely....

Anonymous said...

While mostly agreeing with the overall sentiment above, one cannot exclude that Washington needs a TARP-style equity washout before they get serious about agreeing to even a Mickey Mouse deal.

In the mean time, e pericoloso sporgersi


Leftback said...

Well, let's change the metaphor. Now here we are, there is a hushed silence as the shadows lengthen on the 18th green, and it is BIG EARS who is looking over an 8 footer to win the match, but he actually has three strokes in hand so he isn't exactly sweating it at this point.

BONER has short-sided himself and is stuck in a pot bunker about six feet deep and CANTOR is coaching him on how to get it out, which apparently involves playing it out backwards with a tennis racket provided by their buddy MITCH.

The Tea Party loonies are wearing those striped shirts from the Ryder Cup and whooping "USA USA USA" as BONER flails at the ball. TINY TIM is grinning and holding the flag for Big Ears, and the BERNANK is holding the scorecard which has already been eased quantitatively.

This really has been the silliest of Silly Seasons. Not sure what the GOP hoped to gain with all of the brinksmanship, as almost all of the blame for this debacle seems to be sticking to them. Still what a fantastic extended Panto Season it has been for the US media, with every semi-literate news anchor from Portland, OR to Portland, ME getting in on the scare-mongering. Let us all hope fervently that the Fiscal Cliff joins Jim De Mint in retirement next week.....

Your US-based correspondent in wintry New England.

Anonymous said...

seems to me the Yen trade has become crowded. Such a rapid move in such a short time with COT leverage participant data showing record levels of net shorts. The change of the guard at the BOJ doesn't happen until April and a lot has to happen from now until then for yen to drop from helicopters again. Laws have to be changed etc. I covered my short last week waiting for a pullback.

Happy New Year all!

Anonymous said...

C Says'
I think it is worth stepping back and looking again at what we have seen post GFC.
Initially the pressure was on the US$ not it's govt debt. Time passed and the markets interest moved on to Europe.Harder nut to crack in a sense because of what the Euro represents and we saw the market force a different outcome disbursed in the Euro to soem degree,but far more in the way it dealt with various forms of European debt. Time passed (iteration) and the markets interest has now put Japan in it's sights. This is shaping up to be an outcome more aligned with what we saw in the US than Europe. Because the govt debt is hard to get at the outcome of the markets pressure is likely to be seen much more in the currency than debt.
This looks to me to have a long way to go because the combination of debt level and low growth,age demographics,bureaucratic intransigence all point to an ongoing and dramatic change in Japans fortunes which would really be overcome only with a substantial devaluation a la UK 1992. The market will force it rather than Japan opt for it.
This one could run and run.

Anonymous said...

Isnt it that USD broadly bottomed out with the GFC (except precisely vs JPY), as the subprime disease simply signaled that America's habit of importing capital at will was no longer sustainable.

The resetting of yen levels would simply be the flipside of that coin, with adjustmemts being forced on those who have exported capital a plenty for the past decade (this being also the case for Mangler & Cie, but via the fiscal route).

In short I am not sure $ was pressured rather than relieved really, but agreed JPY may have very very far to run. Chasing too hard here does not like a great idea though.

Happy new year to all


Leftback said...

Downward pressure on JPY was arguably amplified by being the only source of FX volatility in the last 6-8 weeks. Expect that one to take a breather now and Uncle Buck to be sold quite briskly once investors see the might of the fiscal pimple we end up with in the cold light of the New Year.

China continuing its quiet bull run. EMs over DMs remains in effect until further notice. China-linked trades like iron ore, miners all bottomed long ago. Now will we ever see the shippers wake up?

Leftback said...

That was amusing. We did say there might be a 5-10% rally into earnings, wasn't expecting close to 3% in a day. Usually on a 3% up day there is an active short squeeze on. Who would be that stupid?

Just caught a piece of CNBC's idiotic "Fast Money" show, and you could tell who the shorts were today. Steve Grasso (are we allowed to say "that annoying cock-sucker" on MM? Oh well, we said it) was looking a bit uncomfortable, rather as though he may have spent the afternoon being rear-ended by a rampaging and rather amorous rhinoceros.

Some of the US media pundits are so fixated on their political leanings that they are completely unable to stay focused on making money.

Anonymous said...

C Says'
"Who would be that stupid?"
Indeed.Thin markets?People who have no idea how to enter a market,thin or otherwise?.
Uk gave some tips just watching some oreders placed on the close.BEFORE the mom event.

Leftback said...

SURPRISE! We jumped off The Cliff, but it was 2 inches high..... Panto season is now declared officially over.

But be aware that the Capitol Footlights Amateur Dramatic Association reserves the right to stage repeat performances at a future date.

Now, what do we get next? RORO restored? YGDF? How about we wait until US earnings season begins and then see where we are... our best guess, everything melts up into Friday's jobs report and then we see a pullback, followed by a pause as the early earnings reports are digested.

Leftback said...

The usual comments about Mr Shorty enjoying the attentions of Cold Steel, China bears being slowly roasted over an open fire and UK 10y longs being Edward the Seconded are appropriate this morning....

Happy New Year to all from New York ... even LB was surprised to see how spineless the US politicians were in the end. We think this rally has room to run, at least as long as the US media is distracting the populace with The Debt Ceiling. Markets don't peak until all the news is good.

This week sees the December jobs number, which is rarely a source of apocalyptic news. Watch out for the slim possibility of an extra warm number this Friday, as the consensus is +155. Anything over 200k might provide a larger than expected spike in Treasury yields and would provide a nice opportunity to take profits on equities ahead of what might be a lukewarm earnings season.

Anonymous said...

C Says'
Re my earlier post I fiund a suoer piece today that explains superbly why we have seen the macro actions post GFC.

Anonymous said...

C Says'
And if you can tear yourself away from Ali's hotspots...

I really liked the colour barchart by Industry which shouts Construction and it's associated Financial services etc.

Anonymous said...

Forgive,that was Trade/transport etc,not financial services,but we really should keep the eye on that now.Colour blind!

Anonymous said...

C Says'

Keep those reports coming. The US property market hit the wall a good year before the US. By my reckoning the US property market clearly bottomed out and turned in 2012. It's been my expectation that the UK will do the same ,but in 2013. Credit reports will be one way of montitoring that. Let there be no mistake here. The UK has got approx 5 years of buying demand at the bottom of the chain pent up and ready to go when the lending T & C are ready to deal with it.
I've read the opinions about people on this topic and to be honest most are worthless,because they simply do not understand the long run trends and the underlying psychology behind them. They should have an opportunity to watch and learn in the not too distant future.

Anonymous said...

Is there no edit function on this thing so I can correct my frequent typos?

Leftback said...

Ah yes, another sign of the apocalypse. 215k jobs in the ADP report and the lowest number of layoffs in December for 5 years. Now, as we have noted here many times, in a country as large as the US, the jobs number is essentially 0, ± noise.

But the chances of some real better than expected data are inching up slowly. Will the bond market start handicapping the possibility of a +250k NFP number today? With no POMO until Monday, the Fed is on the sidelines, so selling might be prudent.

Yes, of course, we are short the long bond.

Anonymous said...

Errr, rather than persist in the reasoning that underpinned your miss on Australian monetary policy, you should perhaps reconsider your assumptions. The was indeed a big miss, huge, down 125bps, not flat.

Your miss not due to a high dollar as you claim. If you forecast steady rates you must also have been forecasting a high dollar, even higher that it is.

You missed for the simple reason that you misunderstood the structural shift in the Australian consumer, who has largely given up on building a bigger debt burden meaning both house prices and retail are caught in lower structural trends.

Hence your conclusion that rates are now too low for this year is also very wrong. They remain overly tight and will fall further once the flush of iron ore passes deeper in the year.

I also read Nemo's good take on the thermal coal crunch yesterday and given he clearly gets what's going on vis China and the implications for Australian bulk commodities, I can't help wondering why you're not also joining that dot to this year's interest rate settings.