Friday, July 27, 2012

Dr. Aghi is in Da Room

Can you hear it? Well pump up the volume ..! Can ya'll hear me at the back ?   I  say Hey!
And yeah, ya better believe it 
'Cos I'm gonna blow the house down ..
'Cos I am the doctor .. 
I'm the Doctor and I got my own beats 
What I'm gonna say'll  blow you outta your seats
With my plans of rescue and heroic feats

Ya see if yields in Spain are causing some pain
And spreads all over have gone insane  
F**k'in up transmission is the catch we'll use 
Prove responsibility lies in our shoes

'Cos Transmission streets are our home hood 
And we will do what we can, whatever we should.
It's in our mandate see, this mandate here
That you gave us yourselves, plain and clear

And with our mandate here it's clear to see 
We're free from the shackles of Germany 
So FRO Buba, as we SMP, 
Or EFSF up the periphery.

So back to your bunkers yee hawks of doom,
I'm a man on a mission,  gonna rock this room. 
We gonna party on down with our bloods down south 
Gonna save the nation with me and my mouth.    

Gonna cure this cold, me and my ECB
Using  ESM as a bank is key.   
I'm da man, I'm da doctor, Il Dottore
I'm the man with the cure I'm Dr Aghi !!!

I'm da doctor, I'm da doctor I'm Dr. Aghi
Gonna save the nation with my ECB
I'm da doctor, I'm da doctor, I'm Dr. Aghi
Gonna save the nation with my ECB

You better belieeeeeve me....

Tuesday, July 24, 2012

Celebrity Death Swaps

With all the chatter about Spain's credit curve inverting and the amount of associated press coverage going positively "Tabloid", we thought it would not be long before even the otherwise financially vacuous celebrity mags such as Grazia and Hello try to cover it. So in the spirit of open source journalism, Team Macro Man thought it would be an interesting challenge to provide comparisons and analogies that would make the complex subjects involved more understandable to their readership. So without wishing to offend anybody and humbly apologising in advance for anything that readers might consider "bad taste", TMM thought they'd have a bit of fun and look at the similarities between derivative pricing in the financial and celebrity worlds. God knows we are in need of a good distraction, so here is free copy for any celeb glossy to use at will:

So first things first, terminology: CDS - otherwise known as the Credit Default Swap"Celebrity Death Swap". This is a fancy insurance policy (you know, like those ones Sheila's Wheels give you for your pink VW Beetle) only in this case it will pay you some money if your favourite celebrity dies.

So how do we work out how much they cost? Well, as you know in far more detail than TMM, celebrities - with their hard party filled lives - often tend to burn out in a blaze of glory, often in their late-twenties/early-thirties. But if they manage to make it to 35 without copping it, they've got a reasonable chance of living a lot longer - which means lots more photos of them on the beach flashing cellulite/being caught having an affair/having a hair transplant. TMM have studied lists of the ages of various celebrities at death and have produced the chart below which shows the probability of dying (on the vertical axis) by age (horizontal axis). For normal people, it looks like the red line, with most people dying in their late-80s. Celebrities are different, though, as you can see in the blue line which has a "hump" around the age of 30 and another one around the age of 50.

By using these probabilities, we can work out what the survival probabilities of our favourite celebrities are based upon their age [this is all a bit naive and simple, but it's just a bit of fun]. From that we can work out how much insurance we'd have to pay each year to cover the risk of them dying. Let's take one of our current favourite divas, Lindsay Lohan as an example. Her lifestyle and age put her right at the point of maximum risk. So that means that if you were to buy a CDS on her that matured in the next few years it would be more expensive in terms of premium each year than it would be for 30yrs (see chart below, dark blue line). Lindsay's CDS curve has inverted around the 5year point - just like Spain's has - and may well invert further. Ah! There it is! We mentioned Spain... We are sure you've seen something about this on the TV just as you were flicking the channel over to TOWIE or Jersey Shore.

So just like Lindsay's hard partying means that she has a hump in her CDS curve which is in the process of inverting, so does Spain, which has also done a bit of partying and is paying the consequences. Now if Spain can manage to get through the next couple of years, it's also going to probably be OK, so its credit curve also slopes downward beyond its "hump".

So what about Keith Richards & Justin Beiber, you ask? Let's start with young Justin, whose curve gently slopes up until the 15yr point and then gradually slopes down. Well that's because he will hit the "hump" around 30 in about 15years and there after he will still be quite young, so the chances of him copping it are reasonably low. Ageing rocker Keith Richards, on the other hand, doesn't look so hot. At the pensionable age of 69, the chances of him dying in any of the next few years is quite high. And that sort of thing exposes investors to "jump to default" risk - no, we're not taking about a song - we mean the payout that someone who had sold the CDS would have to make. That means that they have to charge more premium on shorter dated CDS to compensate. A bit of trivia for you - using TMM's back of the envelope calculations, a CDS on a normal person at age 18 would be around 1/7th as the cost as one on Justin Beiber. Perhaps there is the proof that Justin Beiber can never truly say "I'm just a normal person".

So let's go back to the European crisis and have a look at some real country CDS curves (talking Credit Default Swaps now).

If Spain can be thought of as Lindsay Lohan, Greece is more like Keith Richards - ageing, having partied hard and had several health scares, but refuses to sink. France looks a bit like Kate Moss - good looking, but has had a few too many run ins with things they shouldn't (too much government spending). On to China, which surely must be Justin Beiber - young, good looking and growing, but with many people worrying about it adopting bad habits learned from its elder peer group. Oh yes, and the "Normal" Person must surely be Germany, for they would never do anything naughty... Ahem.

Readers might be interested to know that for a 5yr CDS, Lindsay Lohan is about as risky as Iceland, and Keith Richards is only slightly more risky than Ireland.

Footnote - We are of course expecting our new CDS to banned before it is even launched. It's illegal in most countries to take out life insurance on any person unless you have provable financial "insurable interest" and that doesn't just mean the cost of the most garish wreath with white carnations spelling "Our Justin" on it. But hey, why don't you stick an ad in the back of your mag with a premium rate phone number on it and see how much you make...

Newton, Europe and Casablanca.

Mr Newton had a theory that TMM often quote loudly on sailing holidays when watching folks trying to step from small boats onto quays. Every action has an equal and opposite reaction. In the case of boating it sounds like a "splosh". But in the case of finance it normally sounds like a "crash". 

In finance many resultant actions are often referred to as "unforeseen consequences", but to TMM it is all Newtonian. Every new rule or regulation results in an equal and opposite reaction, normally of bypassing the rule to try and regain the previous equilibrium, whether it be trade sanctions (trade via intermediary countries), speed traps (get a GPS with all cameras mapped), tax laws (build a structure and avoid even if immoral) or restrictions on short selling (borrow someone else's stock or stock market and sell that). 

The problem with bombshell regulations and rule change is that the explosion they cause, far from killing the problem, just blow it into tiny fragments, each harder to detect and spawning its own new set of problems. TMM thought this lesson had been learned with the oil tanker Torrey Canyon, where bombing the wreck just spread the damage wider.  

Yesterday's reaction by the Spanish to falling asset prices has seen their bombing of ALL short selling. Great, well that's stopped that but look at the instant effect elsewhere. Every associated market has tanked, hit by the Spanish fallout. Now instead of containing the Spanish situation the Newtonian reaction has meant the mess has spread further. Thank you Spain, next time you need to relieve yourself why not put a ton of TNT down the pan to flush it and see what your neighbours think.      

Indeed some unsuspecting neighbours have been hit by flying euroturd. Much as how a whole class, including the smug class swats,  is put in detention because of the rowdy behaviour of a few bad boys', Moody's has put the Holy Pious States of Holland, Luxembourg and Germany on negative watch. "Please sir it wasn't me", "Well you could have done something to stop it, so shut up".   

But today TMM are somewhat challenged as it would appear that the rules of financial Newtonian physics are being tested. In the case of Europe "No action" spawns a massive price reaction and the reverse also applies - price action spawns "no reaction".  Each action has an equal and opposite "no reaction". So what gives?  It would appear that the markets are testing European response by screaming "Wakey, wakey Mr Eurostrich, look I've set your nest on fire!" There are thoughts that if they push prices far enough Eurostrich rhetoric will turn to action, but with the Eurocrats on the beaches (where we will fight them) it appears that Draghi has been left in charge of the defences where he is yelling the policy script over the ramparts of fortress Euro - "Go away. We are really dangerous, really we are, you'll regret it ...and errr..  Your mother was a hamster and your father smelled of elderberries". 

But despite Draghi's public warnings, in line with European policy guidance, we think its all gone a bit Casablanca. 

Markets: Play it again Mario. 
Mario: [lying] I don't know what you mean, Miss Markets. 
Markets: Play it, Mario. Play "As Time Goes By." 
Mario [lying]: Oh, I can't remember it, Miss markets,. I'm a little rusty on it.
Markets: I'll hum it for you. Da-dy-da-dy-da-dum, da-dy-da-dee-da-dum... 
[Mario begins playing]
Markets: Sing it, Mario
Mario: [singing]  

I couldn't care much less  
A mess is still a mess 
A lie is just a lie 
The fundamental things apply
As time goes by. 
And when asked by the EU   
I'll say "and f**k you too" 
On that you can rely
No matter what the future brings-

Weidmann  [rushing up]: Mario , I thought I told you never to play-
[Sees Markets, Mario closes the ECB  and rolls it away] 

 So what has actually changed to kick off this latest Spainfest. What has appeared that we didn't know already? Spain need money. Yup knew that. The regions are in the kaka, yes knew that. Banks need funding , yes know that. And we also know they have a MOU for E100 billion. We know the troika is going back to Greece and we know that the European economy is getting a shoeing until this is sorted out. We also know that the issue has gone Tabloid again. But the difference now, probably thanks to Moody's, is that ALL European bonds are falling. 

 As Bob Marley would have sung  "Exodus .. dadada daa daa dadada .. Movement out of Euro"

Wednesday, July 18, 2012

The 2012 Financial Olympics.

As London prepares for the Greatest Show on Earth, Team Macro Man have been giving some thought to their own favourites for the 2012 Financial Olympics.

Sailing - It's going to be tough with so many competitors sailing so close to the wind this year. Barclays opted to do their own rigging, having allegedly refused the advice of their BoE advisors, however the sudden suicides of the team captain and cabin boy have left an opening for Iran's HSBC crew. With more storms forecast this year, we expect many of the field to be capsized. Team US-JPM have already spent billions on repairs having hit a whale.

Weight Lifting - The SNB is expected to challenge China's world record in reserve lifting with its attempt on 400 billion Euros, but such a tiny frame suffers serious risk of prolapse under such immense strain.

Judo - Elliott Associates is tipped to win for its skills in using other people's leverage and a strong understanding of the minutiae of the rules of the sport which has served them well in recent competitions.

100 meters - Facebook reached the 100 yard mark in record time but didn't quite manage the full 100 meters. Having thought they had won, they returned 30 meters back down the track and sat down moaning that the banks had guaranteed their victory.

Water Polo - Throwing a ball to each other in an outwardly civilised manner whilst underwater carrying out all sorts of dirty tricks, gives the world's reserve managers a huge advantage. The field is too evenly matched to call, though Sweden has been drowned before the competition even begins. Switzerland is protesting its innocence.

Synchronized Swimming - Paulson is the hot favourite having admirably demonstrated an unparalleled ability to hold his breath below high water marks over the past few years.

Cycling - Bill Gross's performance in the recycling of short bond calls had him tipped for gold, but having found to be using performance enhancing products when tested for derivatives, his inclusion in the team is debatable

Gymnastics - China have always excelled at this and their program this year looks to be the most creative yet with a completely new set of figures dreamed up especially for the event.

High Jump - Apple. Always beats the bar by a clear margin.

Decathlon - We'll go for Jim Rogers with his well practiced 10 commodity index components, although Jim really doesn't care what discipline he competes in as long as he wins GOLD.

Kayaking - The Greek team have excelled throughout the past 3 years, navigating the most extreme of rapids. Experts are left amazed that they are still afloat at this point in the competition despite their leaky craft, complete lack of leadership and large debts.

Equestrian Dressage - US Congress's ability to bore, parade around all dressed up with an air of over importance whilst not do anything vaguely substantial leaves them unparalled favourites.

Skeet Shooting - Germany's Weidmann is the obvious choice having proved himself to be able to shoot down any idea that is thrown up before it even leaves the ground.

Tennis doubles - FX dealers. Knowing the team orders of the opposition and exactly where they plan to play the ball gives them a clear advantage. Without it they wouldn't make the under 6's playground team.

Wrestling - Often accused of being scripted theatre, we rejoin the final that was never completed at Beijing 2008, China vs US. This tussle is centred upon US accusations of Chinese fixing and punching below the belt.

Fencing - Hugh Hendry. After being disqualified for sledging he has a new manager and has taken up fencing, hiding behind a mask and mindless jabbing away trying to hit anything at all.

Rowing - A sport requiring Herculean strength, endurance, precision, timing and coordination. So Europe to come last then. We tip Finland to win for its ability to look in one direction whilst going as fast as it can in the other.

Beach Volleyball - PIMCO. Who cares about results, it's the image that counts. G4S to come last.

Tuesday, July 17, 2012

Hamlet Act III

When TMM gathered this morning around the vast cherry wood conference table in the echoing caverns hewn from granite in the TMM-cave, the messages our ambassadors brought from the four corners of the earth were all stories of a strange new theme.

European corps buying EUR/USD - cant hold back those hedges any longer?

The Energy complex bottoming out.

Large buying of AUD not dominated as usual by corporates .

It's TMMs favourite turn "mood change" date: 16th-18th of July. Call it superstition but we like it.

And, most interestingly "they" are selling negative yield.

TMM's ears always prick up when they start to hear rumours and chatter about a change in behaviour from central banks and SWFs. As the largest players in markets, it is unwise to pick a fight with them. So we found it particularly interesting to hear that those central banks that had been the usual buyers of Schatz, Dutch T-Bills and other such prized 'risk-free' assets have been reportedly seen selling such paper. Perhaps reserve managers really don't care too much for negative yields? Given that this money has now found itself into the semi-Core - driving something of a short squeeze (particularly in that country our Yank friends love to be short of: France), TMM can't help but think that the ECB Governing Council must be feeling pretty pleased with themselves. For it appears that, rather than the assumed "short Gamma" at zero yield position in response to being faced with negative yields as a result of the ECB's deposit rate to zero, end users are voting with their feet. Such a compression of T-Bill yields across the EMU-complex could well be argued to be evidence that not only does monetary policy still have teeth, but that it also works as presumed via the channel of forcing investors to take more risk - in terms of extension along the duration and credit curves.

Which is why TMM think a lot of the recent discussion around whether the shift of cash from the ECB's deposit facility into its current account facility means anything or not is mostly noise, as is the debate over whether Fed should follow suit and cut the IOER. Because the operational aspect of bank reserves is kind of irrelevant in this case. If TMM were members of the FOMC, they would be viewing this credit and duration switch with great interest, because the evidence from Europe suggests that while the banking system is content to sit on excess reserves in the context of risk aversion (amongst other things), it seems that end users - such as money marketfunds, central banks and SWFs - have a something of an aversion to negative yields. In TMM's view, that is a far better argument for the cutting of the rate paid on excess reserves than any operational one they have seen to date.

Which brings us on to Chairman Bernanke's speech today.

One of the questions TMM set themselves was whether or not the Fed would do QE3. And having taken a closer look, they reckon it is indeed coming. Now many market participants argue that the hurdle for QE3 is very high, that with the election only months away, a stated opposition to QE from the Tin Foil Beanie Brigade Republican Party, the data has not yet deteriorated far enough in order for the Fed to risk political controversy. Sceptics also point to measures of inflation expectations, such as the 5y5y TIPS Breakeven and the Fed's "cleaned" version of it (see chart below) as not yet low enough to trigger a response from the Fed. TMM disagree on both points: the Fed certainly prefer to avoid political controversy, but history suggests that if the Fed believe they need to act, they will. An historical exposition on this subject is clearly well beyond the scope of your humble bloggers, but just two examples would be the Fed's multiple rate hikes in the run up to the 2004 election and their dramatic rate cuts, balance sheet expansion (e.g. AIG/Maiden Lane II/III) in Autumn 2008, though TMM concede that this latter period was one of crisis.

And what about breakevens? On this issue, TMM reckon that the market has merely become attuned to the fact that should accommodation be required, the Fed will provide it. Under such circumstances, the prior-presumed 2% level is not a required condition given that the Fed will too know that the market will be pricing in some likelihood of QE3 - i.e. the new "low strike" on this is probably somewhat higher. A similar argument relates to Financial Conditions, and the Equity market in particular. It is certainly hard to argue that these have tightened to the degree that signals pain in past easings in recent years, but TMM also reckon that the Fed will too be aware that these markets are also pricing a degree of policy easing. Simply put, TMM do not think that these represent much of a barrier for the Fed.

So will the FOMC feel compelled to act? As above, TMM reckon at the end of the day, it does not come down to the equity market alone. It is growth expectations that will ultimately decide whether the Fed move. And TMM reckon they will, for the following reasons:

One of those old trading adages TMM learned when they were desk juniors was that when ISM moves sub-50, the Fed cut rates, which in our brave new ZIRP complex interest rate world probably now means "when ISM moves sub-50, the Fed ease policy". Now this hasn't always been the case, but certainly over the past twenty years, TMM can only see two real occasions where the Fed had not eased within two meetings: (i) most recently, Dec 2007 - and the Fed would probably now agree with hindsight that they should have cut rates then, and (ii) Aug 1996 - which turned out to be a "one month blip". To those, you could probably add Aug 2000, which again, the Fed would probably agree they were too late to cut rates, responding with a 50bp intermeeting rate cut in Jan 2001 followed by a further 50bp cut at that month's meeting. Anyway, you get the idea - see chart below of initially reported ISM vs. subsequent Fed easing.

Next, it is not just ISM that has moved lower, yesterday's retail sales number was especially disappointing, and many PhDs are now looking for 1.1-1.4% GDP for Q2, a pretty poor outcome. TMM would also note that while the bond market has priced this data deterioration to a degree (see chart below, brown/pink lines), economists are still in the process of catching up (yellow line), and the "real" expectation for 2012 GDP growth is probably closer to 1.6%. That is clearly well-below trend. And speaking of trends, the past three months of Payroll data have been very disappointing. Couple that with falling inflation both at the headline and core level (regardless of the recent spike in grains prices), and it is pretty hard to argue that monetary policy should not be eased.

So TMM are forced to conclude that QE3 is coming by the autumn unless the recent ISM print proves to be a one-off... and if it does, then markets are likely to rerate growth expectations higher, taking on the view that we have just had yet another mid-cycle slowdown. But that is a discussion for another day...

Back to Humphrey Hawkins.

Taking the above into account, TMM reckon the Chairman is unlikely to signal imminent QE3 as the committee will likely want to see the upcoming ISM & NFP prints before pressing the panic button. But in line with the current concerns in markets that policy might be impotent, that he will highlight the potential new measures that the FOMC could embark upon. This approach has been long founded, and forms a key part of TMM's thinking on the Fed, based upon the Transcripts from the April 2001 FOMC Teleconference which concluded it was better for the Fed to be seen to have the tools to "fix things" than to be seen "powerless". Following such a testimony, TMM reckon the August data dump and FOMC meeting will set the stage for whether QE3 comes in September.

TMM have shipped in some Oct 1700 strikes in Gold, and have their finger on the trigger to sell USD across the board should the above transpire. TMM sense an especially high level of scepticism with respect to the likelihood of a hint/preannouncement and the potential for disappointment today. But would note that they cannot remember many occasions where the Chairman has not "out-doved" the market.

Good luck all.

Friday, July 13, 2012

Electric Dreams, Refiner Nightmares.

TMM were recently leafing through old “theme” trades and came upon the electric car one. Tesla released the Model S which seems to be getting good reviews and YTD numbers for hybrid and EV/PHEV sales seem to be very strong indeed, as can be seen below for this year. As such, we thought it was worth reviewing the lot and seeing where things stand.

First – are people buying them? The answer would appear to be a resounding YES. Sales YTD in the US are about 3.25% of all auto sales, up from 2.5% last year. Toyota can’t sell enough Priuses and even some of the less impressive EV models – Nissan Leaf, the much-politicized Volt – are selling roughly 2-3x the numbers they posted last year. Every auto maker seems to be coming out with a lot more models and particularly electric ones this year, so TMM are watching and waiting to see what full year numbers will be.
Second, does it make sense to buy them? This is not an entirely silly question – if 5% of the population is so green they will buy an EV whatever the cost, then demand today might be misleading as to where things are going. After all, the global population does not consist of bourgeoise bohemian bankers. It is on this point that TMM are feeling particularly punchy about where these sales might be going. TMM did some quick numbers on the Tesla Model S versus a 5 series BMW. Similar markets but the Tesla is about $8,000-10,000 more expensive.

In a world with sub 2% yield on the 10 year there are obviously dumber investments out there. TMM extended this table as per below to work out where the sweet spots are in terms of implied Brent prices (gasoline price * 35). As you can see, the luxury sedan segment (larger, pricier, 10-15L/100km) works for a lot of power prices and the head-to-head versus a Prius hybrid of ~5L/100km even stacks up at power prices not different from those across the continental US. Note however, that if you face high power prices and have good mileage as a German driver already driving a clean diesel might, it’s a tough sell.

Sensitizing it to the marginal cost of EV versus standard and it checks out pretty well using a $3.75/gallon petrol price. Basically, if you are paying anything less than 25c per kWh for your electricity this would materially outperform just about anything else you could do with your money, including giving it to hedge funds.

So what are power prices like in the US? Well, really, really low as it happens as you can see here.

To TMM it looks like there aren’t a lot of good reasons why the market share of these vehicles can’t increase a great deal very quickly since they are a fundamentally good investment if you’re the sort of person who drives a lot and is spending $50,000 on a car. That price point may drop soon as Tesla rolls out a 3 series competitor and a luxury SUV. These things may not be the people’s car just yet but that hardly matters – if you can take enough market share of higher end SUVs and sedans that is a big part of the over all market.
To that end, going back to an old chart, TMM think that if Vehicle Miles Travelled (orange) has peaked and average mileage of vehicles (pink) continues to do the hockeystick thing, then implied fuel demand in green has got to start heading south very soon. This is bad news for oil and really bad news for US refiners. Europe has already seen its first refiner bankruptcy last year and faces a similar malaise of falling fuel demand. TMM are not shocked that the likes of Exxon and others are in an awful hurry to sell off downstream and midstream assets.

In addition, it has quite broad implications for just about everything since it is such a major input. Declining oil demand would massively improve the Western and Asian world’s current account deficit and would put the Middle East and Russia back a long way – so far in fact TMM are reminded of a line from Syriana. Similarly, inflation in the West would slow a great deal as energy accounted for roughly 40% of the last decade’s inflation in the US. Look at the chart below. The biggest movers of the last decade were motor fuel and utilities. With the US surplus of gas and half the coal sector at death’s door due to excess supply the case for a utility fuel squeeze in the US is pretty weak in TMM’s opinion.

If Inflationistas sound pretty silly at the moment, they are going to sound really silly if this pans out as TMM expects, since money printing might be the only thing that could possibly get the US above 2.5% inflation.
So in summary, TMM are not in a mad hurry to fade the Ruble short or get particularly enthused about anything Middle East – between the secular decline in demand for a key export and the political risk there isn’t much to love. However we are pretty enthused with Tesla and US utilities. The world may be slowing at the moment but secular stories, especially those with a dividend yield 250bps above the 10 year look pretty good to us.

It should also be noted that this trend is as good for the US as China. The problem is of course that China, the home of the electric bicycle cannot get an electric car together to save themselves. Too bad.

Thursday, July 12, 2012

Macro Stocktaking Unearths 10 Questions

It's one of those times when so many different things are happening with no clear direction that a brain dump is required. So today, TMM are going to think about what is going on and ask some questions that we hope to find the answer to over the coming week. So without delay...

First, it's pretty clear that the past couple of months have seen a material slowdown in the data globally - especially in Europe, but also to a material degree in the US, and now Asia. Why has this come about and to what degree might we expect a reversal? Or has the World already entered a dreaded Global Recession? As many have commented, the degree to which we have followed the 2010/2011 playbook this year is remarkable, but in contrast to those years, this has been the consensus view in the macro community, stemming partially from the X-12 2008/9 seasonal echo effects. Thus, shorts in risk assets & longs in the Dollar have been widely held, so while the PhDs have been caught out (see CESIUSD...), it's not entirely obvious that this expectation was not in the market already.

Of course, we cannot blame seasonals for everything, given the ISM surveys have been adjusted for this effect and it is pretty clear that activity has slowed. But that is only half the picture, as the service PMIs globally are not in such a poor state. It kind of appears to TMM that in line with constant fears of a repeat of 2008 that inventory liquidation has been particularly dramatic over the past several months, and the inventory cycle can have material impact upon growth (TMM would note that historically, mild recessions are usually the product of a sharp inventory cycle as it is pretty difficult to get the US consumer to stop spending - 1981 and 2008 are the exception...). So if the services side isn't quite as bad (at least outside Europe), then it could be argued that things are perhaps not as bad as they seem at first sight. Indeed, even using TMM's back of the envelope year ahead ISM-based forecast model would have consensus economists looking for about 1.5% in the US over the next year. Mathematically it is unrealistic for the World to be in recession if the US is not. But that is not to say the deterioration will not continue...

...So is it a case of "2010/2011 Again", in which case, the recent bottoming of US Economic Surprises will soon be followed by a turn back up in the data, and this has just been another inventory cycle laid upon the Eurobllx? Evidence in favour here would be the high frequency data like Initial Claims & Rasmussen Confidence. If the deterioration continues, then growth-related assets have a long way to fall. Don'tcha just hate those binary scenarios...?

Hmm... So if claims & confidence appear to have turned for the better, does that mean the consumer is back? TMM suppose a lot of this is related to Oil, which took quite a tumble last quarter and has evidently lowered gas prices and thus in tandem with the disinflation of recent months fuelled real income growth. The consistent growth in consumer credit (and not just student loans) perhaps supports this theory and thus consumer is replacing capex as the driver of final demand? This is something that would be pretty significant. Of course, confidence is a fickle thing, and if the labour market truly is deteriorating to the degree that Payrolls suggest, then this tentative consumer recover could quickly fizzle. TMM will take a closer look at Oil and the consumer next week.

The degree to which earnings expectations have been revised lower over the past month is dramatic, with flat growth seen. Now, TMM's model (more in the coming days) has about 5% YoY EPS growth for SPX, but that does not include Libor-fixing related fines which can clearly make a big dent in the numbers. And it also implies that Q3 will see flat YoY growth, which isn't exactly fantastic news... But given TMM are not micro-focused, they will decline to offer an opinion here. The worries around Asian growth have too been cited as quite a big contributor to weakness in many of the international names, but TMM do get the impression that given the poor guidance provided so far and the de-rating undergone, that there is probably an exceptionally low bar for the earnings season now.

Europe? TMM once again find themselves utterly disinterested, as the A-Team appear to have engineered at least some demand for carry with banks bidding negative rates in EUR. As the Squid pointed out yesterday, this is the first time that institutions have been faced with depositing EUR cash at negative rates and the effect of this is uncertain. Maybe it will keep going negative as most stick with the safety of Schatz, or maybe some funds will increase the amount of risk they are going to take. Either way, it is clear that this has pulled short dated periphery rates lower and that has to be a good thing in terms of financial conditions. What it means for the Euro is perhaps less clear. It is notable that peripheral bonds appear to have disconnected from risk assets more broadly the past week or so - what that means is also not clear. Perhaps short covering, perhaps related to the summit, perhaps related to negative rates. TMM do not know. But it does seem as though the Eurostriches may opt for the STFU strategy this summer in the absence of further progress nor the German Constitutional Court Ruling.

Does that mean that the Euro-funded carry trade can progress without obstacle?

TMM suppose that with the can kicked for perhaps a month or two in Europe that this depends entirely on the outlook for QE3. And on this front, the three months of poor payrolls coupled with a sub-50 ISM probably mean that this is forthcoming, despite the argument perpetuated by many that they have not quite been "poor" enough for the Fed to move to ease. TMM accept that this is a valid point, and to that one could also argue that 5y5y breakevens are also not in the region of where the Fed typically acts, and neither have equity prices fallen to such a degree either.

The trouble with this view, in TMM's eyes, is that historically - at least since the early-1990s (and probably before, but TMM couldn't be bothered to check) - there has only been one occasion where ISM moved below 50 when the Fed have not eased. And that occasion was December 2006. TMM would guess that if challenged, Chairman Bernanke and the rest of the committee would probably agree that they *should* have eased then, in hindsight. It is also worth noting that in contrast to last summer, when the Fed merely twisted, that Europe is in deep recession, partially driven by last summer's dramatic tightening of financial conditions. Most observers would probably agree that the Fed under Bernanke tends to out-Dove the market. And it is hard to avoid the conclusion that three months of poor data equals a trend. And TMM also think the committee are unlikely to be influenced by the upcoming election (the 2008 election did not stop them from acting, though TMM accept that that was a time of crisis), given that preventing labour market deterioration is part of their mandate. As a result, TMM reckon the Chairman will use next week's Humphrey-Hawkins Testimony (or whatever it's called these days) to hint that QE3 is coming or at the very least, the conditions for which QE3 will be enacted. August is probably too early, so TMM are thinking September is the likely time. Which means the rest of the summer is potentially set up to be a large "sell the Dollar vs. risk" trade. But that is obviously dependent upon Bernanke's testimony and/or the FOMC statement at the beginning of August.

The alternative scenario is that there is nothing specific from Bernanke and then markets begin to probe where the Bernanke Put is struck and/or the tug between data strength and data weakness that *will* trigger QE3 leads to a choppy several weeks as the QE3 undercurrent runs through markets. We also should probably address the possibility that policy is impotent... TMM are not really ready to go down that road yet, but also not sure which of the above scenarios is most likely.

So... plenty of questions:

1) Are we headed for global recession?

2) Have growth & earnings expectations been lowered enough yet?

3) What is going on with the consumer?

4) When will the inventory cycle turn?

5) Have European rates markets moved onto the complex plane?

6) Is Asian growth about to tank? What about monetary policy? Does it matter?

7) Has Europe done enough to get through the summer?

8) Is QE3 coming and if so, when?

9) Will the Euro-funded carry trade continue or is the Dollar about to get smoked?

10) When will the Debt Ceiling debacle kick off again?

We hope to tackle these questions in the next few posts.

Wednesday, July 11, 2012

i-flation and negative money

Today something happened that TMM have only heard of happening in historical epoch pub stories of money market dealers of old. Negative cash rates in a major currency. Of course this has been the case with the Swiss Franc for some time, but TMM have coped with the logic of Swiss negative rates by confining all things Swiss to a little box that works in a parallel universe of finance on different laws of financial physics, where cuckoo clocks, expensive watches, hard cheese and mountain shaped chocolate bars operate in their own airport duty-free shop of unreality.

Yet this unreality has now permeated our own real universe with (and here cast your minds back to those post Maastricht glory speeches) the mighty Euro being so unwanted that you have to pay other people to take it off your hands. So in the case of this deposit, a fund manager has consciously placed your money at a known negative rate and he will charge you say a 0.50% management fee for this skill. Which does beg some pretty serious questions of fund management charges. As we are told that the fund mangager's fees are of course geared to performance so we expect negative management fees to be charged, with the manager receiving negative pay (paying to go to work).

At the moment negative yields sit firmly in electronic-money land with paper money immune from holding fees other than "wallatage", the cost of storage and security. In the case of Switzerland we have seen demand for highest denomination notes go up through the roof (we have posted the figures here in the past). We now expect the same to happen to Euro notes with "Wallatage" being replaced by "Mattressage" whereby wholesale cash moves out of banks, which is a shame as the last thing the European banks need is a run on deposits.

Mattressage in bond land has already resulted in negative yields in the front end of Germany and Denmark and today's moves in the Bund are pushing it further up the curve, but a negative yield is not enough to spur core domestics from taking cross border asset risk, with the related volatility risk, so it stays parked in euro stuff. However for the speculator the Euro is now firmly a funding currency and so on an fx basis the Euro is going very yennish, which means eur/yen goes downish.

But back to our thought experiment playing with the alternatives to paying to have someone look after your electrons (for this is all most money is, where the storage cost for a few bytes of data is remarkably low). We most simply end up with Europe storing its wealth in cash. How could the powers that be detract from this? Other than introducing unenforceable laws about maximum cash holdings, an alternative is to reduce the supply of bank notes in issue. This could lead, through arbitrage of holding costs, to bank notes trading at a premium to face. 505 Euros for a 500 euro note sir? Other fanciful ideas could include biodegradable notes that decay under your pillow or perhaps a reverse bank note auction on Saturday evenings on prime time TV where random bank note numbers are drawn and those notes cancelled.

But what do we call this new scenario? It's related to the cost of money itself in money terms rather than other asset terms. It isn't inflation and it isn't deflation. It's off on an axis all of its own creating all sorts of confusion as so far the only kind of 'flation' it has produced is imaginary and theoretical rather than observed. Just like the Imaginary Numbers we learned about at school, perhaps we should call it i-flation.

The whole idea of making money a costly and toxic asset does lead us into a parallel universe of negativity with negative money spawning from negative rates, where money avoidance is the game. Negative pay, you are paid to take food from shops, paid to fill up with fuel, muggers would hold you up at gun point and stuff your pockets full of money and most ironically Bankers are made to take the biggest bonuses possible (Bob Diamond being given £2 bio as a farewell gift). Basically the name of the game is to keep your bank balance as negative as possible. Which socially would be quite acceptable as the 1% and the 99% immediately find their positions in life reversed. Cheaper than revolution.

Tuesday, July 10, 2012

A Quick 20 Questions

Between now and the end of 2012.  

Which global stockmarket would you be longest of?

Which global stockmarket would you be shortest of?

Which Soveriegn bond would you be longest of? 

Which Sovereign bond would you be shortest of? 

Which corporate bond would you be longest of?

Which corporate bond would you be .. no forget that .. too many dogs out there. 

Will any corporate bond yields also have gone negative?

Which commodity would you be longest of?

Which commodity would you be shortest of?

If you are short of Euros what catalyst would you need to buy them again?

Where will Chinese RRR and depo rate be at year end?

How far will UK yearly rainfall have deviated in % from average ?

How far will US yearly rainfall have deviated in % from  average?

Will the UK coalition still be in place? 

Wil France have needed a bailout?

Will the US elections matter on a global level?

Will the SNB still be maintaining the 1.2000 EUR/CHF peg?

How many bankers be in prison  post Liborgate?

How many journalists be in prison post Leveson?

How many (more) politicians be in prison?

Will John Terry be in prison? 

Monday, July 09, 2012

The "B" Suffix.

What a load of rubbish out there at the moment. TMM apologise for the overuse of the "Bollocks" word but we think it deserved.

NFPblx - Neither too bad to guarantee QE3 nor too wonderful to kick it out of court. QE3, like oil, is the buffer in the solution of market pricing. Or the big brass balled governors on old steam engines. When it looks as though the economy is slowing oil is sold and QE3 expectations pick up supporting the downside. When things pick up QE3 expectations fade and oil shoots higher limiting the upside. Should this point to ranginess?

Euroblx - STFU is firmly in place and we are sadly reminded of the subject of many of our previous posts that are as apt today as they were when posted. "Plus ca change" and "plus ca change" is the problem - to the point that TMM wonder if benign neglect is becoming part of policy. Rather than being held accountable for positive actions towards a disintegration of Europe, an alternative, as any student who does not want to be doing their course but hasn't the balls to jump, or as any employee who really wants a career change but can't face walking away from a good income will know, "doing no work" will lead to the decision being taken away from the incumbent with any resultant loss of position being attributable to the decision of others, despite the incumbent being bloody useless. How much easier for countries to justify their departure from the Euro (and any ensuing sufferance) on the actions of other countries and not themselves? Politicians only survive if they can move the problem monkey onto someone else's shoulders. Greece are masters of this.

Liborrox - The UK having no other countries to blame for their woes are entrenched in banker bashing, which is fast morphing into political "fantasy banking", where politicians list all the best bits of banking they would like to have in their ideal bank. To TMM it appears that their dream bank is one with many branches providing basic counter services to serve the local community staffed by salaried rather than bonus incentivised staff who know their local customers and are part of the community. Which is all the more surprising because the State had exactly that under their control in the Post Office, where they chose to shut thousands of branches persuading everyone to go on-line. Errrr...

Chinablx - Inflation figures are lower than expected but the big brass balls of monetary policy are going to cut rates pretty hard. Last week's cuts were good but are already suffering from Eurofade as far as the market response goes. However they have more ammo than the rest of the world and so we take a low print inflation figure as good news as far as room for policy response, just as a low inflation US print leaves room for QE.

CHFblx - Racking up the reserves with no change in rhetoric but the waste disposal machine of Euros is looking as though it's getting indigestion. It's going to be one nasty explosion of partly digested Euros if they let that floor go. TMM have been debating internally what the result would be of them doing a supernova last ditch attempt before they give up, say by moving the band UP to 1.3000. How many marginal sellers would appear compared to the raft of stop loss buyers? And THEN give up.

Agriblx - The extreme heat in the US is not only causing the murder rate to rocket but also that of softs. Any chart of stuff that grows in the US is showing rallies over the last 2 weeks that are soon to become realities on the high street. 30% in 2 weeks on wheat? TMM also remember that the Arab uprising was partially blamed on soaring food prices so wheat up and oil down is not a good combination for the Middle East. Does that lead to the Saudi's selling their Gold bullion?

Tennisblx - It's only a game. Seriously, it only seems to matter as it's been decided, like Black and Scholes, that it matters when really it doesn't. It really doesn't and for tennis to become the focal point for UK devolutionary debate is sad at best. TMM doubt that Andy Murray would like to be remembered not as a great tennis player but as the Gavrilo Princip of Scottish devolution.

Weatherblx - At last TMM are allowed to use their hosepipes. The privatisation of utilities may have lowered short term costs and increased efficiencies within the local water companies but TMM do wonder if it has actually created inefficiencies on a national scale. TMM live in a region that is surrounded by full reservoirs with rivers bursting their banks yet, due to the demarcation lines of local utilities, is supplied by a company that relies on aquifers. Under one rulership cross-border water transfer would have been easy. Now the partisan companies cling on to every drop even if they have too much of it, with most of it is in our cellars. Is it possible to renationalise without reunionising?

Olympicblx - Apart from having "winning and succeeding in your dream (fk everyone else but don't let them see that)" rammed down our throats everyday in glory TV marketing, TMM are getting fed up of getting cut up on the roads by gleaming new BMWs clad in 2012 Olympic logos. Please can they contain their Banana Republic Dictatorship status until the event actually starts. As for how the Olympics themselves should be run TMM would like to point you towards their thoughts on sports sponsorship first posted here .

Wednesday, July 04, 2012

Glacial Interest

Having returned from various sunny climes TMM are still trying to overcome a state of chilledness that is positively glacial. We have slowed to an imperceptible crawl of decision making where deciding between a tea or a coffee has taken most of the morning.

What a week to miss. Keen non-glacial firebrands would say we missed a scorcher, but TMM are very happy not to have been here and to instead only now return to what has rapidly become a very quiet market where the US vacations today have stalled things to a crawl. Interesting that the US is celebrating independence from a far off government that imposed unfair and undemocratic laws and impositions.  Ooooh, where do we start with that idea and Europe at the moment? 

As for Europe, it would appear that last week's Euro summit was the equivalent to the Eurocrats chucking a smoke grenade at the market and legging it. TMM wonder if this is a rerun of 2010, with an implementation of the tried and trusted STFU policy which managed to deflect attention away from Europe and back on to the US. It does appear that we have returned to a "no news is good news" mode and there really is very little to add to the basic macro arguments that have been the debate ad nauseam over the last two months.  In the meantime we don't think the market is anywhere near cleared out in its anti Euro trades and, despite falling implied volatilities, is still very skewed.  

US -  Data data everywhere and not a thing to think. Sorry we are not yet in the zone and dissociating local issues from Euro induced global malaise is for later.

PMIs - Well fancy that. The figures come out just where they are suddenly expected to be 10 minutes before their release. 

Vols -  Cor they are low. What's all that about then? Massive squeeze in the "blow up" vol longs? Desperation in fund land for some premium? a REAL thought that things are steadying? Doubt the last one as the chatter is still "well if it hasn't happened yet, it will soon".

Equities  - New recent highs. QE3 some say and looking at discretionary spending component vs main index there is indeed a lag and the gold outperformance is also pointing to a QE3 bias, but we maintain our general favour of equities over bonds and commodities

IT depts. - Returns to work always appear to involve delousing the boxes under the desks that for some reason go on a password change frenzy combined with an obviously AI evolved ambition to be done with mankind in "The Matrix" fashion. This of course requires a few calls to the IT department. which has led TMM to suggest that IT depts are  replaced  with a large sign stating - "Log On - Log Off".  IT depts. are challenging London Public Transport workers in TMMs league of piss take "got you by the goolies" jobs. 

Barclays -  TMM are looking forward to a Gladiatorial conflict today .. "My name is Maximus Possible Profitus, commander of the Armies of 5 North Colonnade, General of the LIBOR Legions, loyal servant to the true emperor, Marcus Agius. Father to a murdered business model,  husband to a murdered derivatives desk. And I will have my vengence, in this life or the next"

Back tomorrow with a more detailed look at the energy and power sector.