Friday, August 31, 2012

Draghi joins Bernanke on the QE wheel.

What happens when Draghi joins Bernanke on the QE wheel.


Tuesday, August 28, 2012

GOP - G Old Parity.

TMM don't think we are going to get any major new direction in markets until next week, which really isn't that surprising a view as Jackson Hole and the European "6th of September" event are so well flagged. However we still smile at how easily the market can switch from panic to subservient minion

"Please take a seat Mr Panic, Mr Crisis is busy at the moment but will see you in September. Could I get you a coffee while you wait"?  
"Err. ok yes please. Oh is that a magazine on China on the coffee table?"
"Yes, and please feel free to leaf through the "Fiscal Cliff Weekly" or perhaps "The Australian Mining Review", you may find them an interesting distraction"
"Oooh yes ..   err sorry .. Why am I here?

Indeed Dr. Aghi sure is busy - ECB'S DRAGHI WON'T BE ATTENDING JACKSON HOLE FORUM, *DRAGHI NOT ATTENDING DUE TO WORK LOAD IN THE COMING DAYS - TMM are hoping that the work load involves fixing the decals to his model of a European rescue package rather just not being arsed to go to a forum where everyone will just tell him how to do his job. 

Meanwhile the US is getting even more embroiled in a debate as to by how far the Republicans are going to win without noticing the absurdity of some of their  "And I'll tell ya something else" policies being drawn up on a napkin at 2am. The latest being for a return to the Gold Standard.  We've all heard the rants from semi-literate candidates complaining that "the government is manipulating prices" and that "we should privatise money". But TMM thought they were the preserve of the loony right, because we cannot for the life of us understand why anyone would want to return to the days of pro-cyclical monetary and fiscal policy. You know - the sort that tends to blow up emerging market  countries and Peripheral Europe, amongst other things.

It's not like the development of economic policymaking over the last 80yrs was dreamed up purely to depreciate the dollar. In fact, despite all the FX volatility of the past 30yrs, the real trade weighted dollar exchange rate  sits only 15% below its pre-1971 delinkage from Gold, a level it fell to by 1973 in the post-Bretton Woods adjustment.

The presence of the US's elastic money supply has greatly dampened economic volatility, something that would be greatly amplified by the necessity of pro-cyclical fiscal and monetary policy within the rigidities of a Gold Standard. It is thus far from obvious that the current ability of countries like the US and UK have suffered from having such an economic policy framework.

Those making the calls for a return to the Gold Standard clearly haven't read their history well enough to recall that *all* economic entities suffered from the frequent and severe depressions and financial panics resulting from the lack of a lender of last resort and elastic currency. For all its failings, the study of economics has shown that counter-cyclical economic policies are the most successful way of a) maintaining stable but low inflation [there is a good deal of evidence that low but positive inflation is optimal] and (b) reducing economic and financial volatility. Such a framework is clearly not sufficient, as the excesses of the financial sector over the past decade or so demonstrate, but it is a good place to start, rather than throwing out the hard-won policy lessons of the past 80 years. 

Indeed, where countries have gone wrong in the past decade it is because they have run pro-cyclical policies of the sort a gold standard would imply. In the case of the UK, running too loose fiscal policy. In the US, running too-loose monetary policy in the 2003-2005 period, and too-tight monetary policy since 2006 and in Peripheral Europe where (a bit of an over-generalisation) both fiscal *and* monetary policy were too loose in the run up to the crisis, and now both are too tight.

And this is where TMM strongly agree with John Taylor. Where policy has departed from rule-based prescriptions, problems have developed. But then what can you expect from the bass player of Duran Duran.

Monday, August 27, 2012

Holiday Poem - Debt Dealers

Frantic room of ribald chatter
Don't slip behind, keep up ahead.
Use pilot reflex, jockey balance
As prices flash or you'll be dead.

Strangled as the sucker young
Drag up the old trunk's flanks
Steal the light as ivy grows
Stifle off the "old world" banks.

Mighty trees rise high in forests
Compete for light in canopy.
Favours those who fight the hardest
Through their ingenuity.

We are smart but they're connected
Loyal to themselves they be
Gladiators all where teams blur
One for all and all for me!

IQs torn from worthy pursuits
Trained to claw the smallest gain
In a way that should be simple
Lost in its own complex game.

Creating worth that's all fictitious
Measured not on human scale
Electrons storing information
Systems built, yet set to fail.

And when they do the whole World wails
Blame to those that gave it thee
"Not my fault I squandered freely"
No responsibility!

Same with nations scattered South,
Greece and Spain and Italy,
"We just borrowed what they gave us
T'was Germany, not me, you see"

Drug dealer guile, the lending men.
But if the fix is stopped by Merkel
Should dealer give or addict turkey?
Break the evil debt drug's circle.

All are guilty, State and system.
Yes you and me and he and she.
Sucked in to party, now we're paying
Heads sore with past insanity

Wednesday, August 22, 2012

Life's Little Luxuries

One theme that is growing in our minds is that if Europe is a slow car crash then the reaction of the world's populace to the wealthy is a slow lynching.

TMM have always observed  that every dictatorship needs an archaic law with draconian penalties that is never enforced. Well to be more exact, that is only resurrected to nail an individual that can't be nailed through traditional measures. In most emerging democracies such laws are normally covered by a  general "against the state" catch all. Unfortunately the UK has repealed most of its ridiculous laws and hence Julian Assange is left filing visas to the Galapagos in an embassy in London instead of being done for riding in a taxi with no hay bale in the boot, or some such.  

However, Italy and Greece have been successfully resurrecting ancient laws to nail the unfashionable (yet up to now untouchable) rich.  Here the quaint and old-fashioned  law being invoked, having been forgotten and lost in the mists of time, is called  "PAYING YOUR TAXES".  In Greece we heard last year of swimming pool ownership becoming a scent for revenue inspectors to follow, leading to pools being netted over and camouflaged from prying eyes in the sky. In Italy, in a masochistic piece of self flagellation, the revenue inspectors are targeting the owners of super-cars, in particular owners of their very own icon that sports a stallion. The persecution of Ferrari owners has become so severe  that Italians are selling them in their thousands as this mark of prosperity becomes a Shakespearean  "damned spot". We have even seen the effects of this first hand as a friend of TMM has just picked one up for less than the price of a new VW Polo. 

TMM imagine that Ferrari are doubly knobbled by this. Not only will sales be hit due to the general austerity, but the global second-hand prices also get hit by this exodus driving down prices and reducing their status even further. A vicious value collapse. What is more, NOT owning a Ferrari becomes a sign of financial acumen. It's natural that fashions change and indeed the fashion of ostentatious wealth is already being decried by many young in the West. A friend of ours who, after years of toil, has saved enough to buy his dream car but has just been branded a loser by his son (control tested, it was only due to the car). Aspirational purchases nowadays reflect less the wealth of the owner but more their percieved cool or intellect. The fashion of austerity has already arrived in the west but TMM are debating how and if this will translate to fashion changes in the East. 

Asia has always been a bastion for bling conspicuous consumption. Whether it's cultural norms like gold and silver at Indian weddings or China's recently found love of high end watches ( described by John Hempton ) it's been quite a bull market. TMM think that the reason you buy luxury stuff is signalling "look at me, I'm loaded, gimme a table!" which matters when your wealth is not well publicised because either you don't want it to be (i.e., you stole it) or because it's some obscure rent extraction exercise like a clove monopoly.

Signalling works if it has no costs (aside from the $50k to buy that iced out monstrosity on your wrist) but if you are in an environment where people think the rich person’s wealth is ill-gotten and rule of law gets a bit loose or capricious, it can get expensive very fast. TMM think that rising ire against the rich over the impoverishment of the middle class in DM and stagnation of wages in EM is going to make selling luxury pretty hard going forward. Now TMM note that Richemont was a widow maker these last few months but results from Chinese jewellery retailers like Hengdeli are telling in that inventories are piling up. TMM think its time to call out channel stuffing as exactly that and look harder at shorts in this space. 

Richemont: "Why aren't you buying as many watches? I won't hit my sales target."
Shop: "sales have dropped, whaddya gonna do about it?"
Richemont: "Cut you off as a dealer and not give you the super dooper reverse cowgirl Patek Philippe tourbillon made entirely of endangered species and platinum infused with the blood of South African miners."
Shop: "Ok, I'll buy some just this quarter or else I'm in big trouble."

So where does this leave us. Basically we want to short traditional luxury companies not only on falling disposable incomes, but also because we expect their very fashion to fade as a display of ostentatious wealth itself becomes unfashionable and attracts unnecessary attention. We reckon this has started in the West and fashions do tend to travel West to East. We have very rarely seen the reverse.

Friday, August 17, 2012

TMM’s Guide to Macro Tourists

TMM thought so highly of the Mark Dow piece we thought we’d expand upon it and explain a few garden varieties of macro tourists. Much like mushrooms after heavy rain they have sprung up all over the place and while some of them can give you tasty insights, others will send you on extremely bad drawdown trips or worse. TMM think that in investing there is both such thing as a little knowledge being extremely dangerous (a certain credit manager’s foray into JGBs comes to mind) and a little knowledge being enough to know it's time to get up from the table, find a hardhat and hide (Elliott Associates’ and Baupost’s evasion of the 2008 bloodshed for most credit/equity/value managers). This should not be construed as an argument against trading cross product or that “only big boys can do this”, but that deciding to put a lot of your fund into something you’ve been doing for 12 months is seldom a good way to keep the losses away - or the redemptions.

The Credit Manager Turned Macro Manager: After a few got 2008 oh-so-correct it was never going to be easy for these managers to keep their egos within the confines of a single asset class. However, for a good number of them, they probably should have. TMM think that the one problem with corporate credit guys (who know a great deal about corporate solvency) moving into sovereigns is pretty simple: they’re totally, completely and utterly different. While there are some analogues between countries and corporates, when you can’t issue local FX debt, those issues dissolve when you are looking at countries with a lot of FX reserves and big local debt markets like China and Japan. TMM think there’s a pretty simple solution to this – getting those accounting nit-picky types to learn how a balance of payments works as well as they know how a 10-Q does. Sadly most of them fail to bother.

The “Big Idea” Guy Turned Macro Manager: TMM think that if you want exhibit A of “Big Idea” blowups look no further than some of Jim Rogers’ calls. Light on detail, long on extremely long run trends (“entropy in resources!”), but light on intermediate catalysts, these guys,whose skill set is probably best adapted to betting on long run non mark-to-market trends (e.g. venture capital), seem to drop into macro every now and again with volatile results. TMM love listening to them because they are so interesting, but the lack of risk management does not make for great fund performance.

Event-Driven Equities Guy Turned Macro Manager: TMM know a few event-driven guys and their core competency is talking to everyone in an industry or supply chain and working out what will happen, given what they are thinking. Sounds like betting on political process? It more or less is and some of their skills have really come into their own during the Eurocrisis since it really is all politics. TMM think that while these skills might be here to stay, a time when fundamentals matter might not be so kind to them.

FX Guy Turned Macro Manager: In general FX could be considered the overlapping bit at the centre of the Venn diagram of all asset classes and so a general broad knowledge of all asset classes that is important in FX should give the FX shag a head start and indeed, if married to a decent economics background, they do very well. However, their history of being exposed to value being embedded in knowing what other people are doing makes it very hard for them to stay loyal to their own ideas. In fact we would suggest that this sector of Macro Tourist is more susceptible to influence from “well respected” research sources and peer behavior than any other. However macro their short trade may be, they will run for the hills on a whisper of “China on the bid”.

Wednesday, August 15, 2012

Thinking Aloud.

UK - More data that flies in the face of the growth figures of the ONS. Some component of Okun's Law doesn't add up and, as the market is becoming more aware, it's the growth side. So despite the UK press deriding the government for lower growth levels than Europe it would appear that we are in for a pretty good bounce in growth figures  - or further dismissal of ONS reliability. TMM are beginning to think that the ONS should open source all their data so that people can do their own analysis as the ONS are so useless at it.

Aus - Aud appears to be the new Tabloid trade with a the only disagreement being what to short it against. GBP, EUR and CAD being favourites, but TMM are slightly concerned that too many short term specs have piled in leaving them vulnerable to a squeeze from ongoing reserve manager purchases. We'll wait for a rally to sell into and we may just pick NZD to sell it against. 

Equities - Technicals look as though we are rolling over on many counts and with the market driven by models we wouldn't be surprised if that function dominates, though we are looking for much more upside there could be a couple of days of bear food. 

Oil -  Toit as a Toiger. So our oil mates tell us. Slow down in production in Brent soon adding to price hikes but our normal premise of oil being the "govnor" would lead us to believe its a pre-emptive growth trade rather than middle east warning, though indeed Syria is turning into the thunderdome for extremists to punch it out in. On that point, USD/ILS? Two days of rallies unwinding fast and oh look at that - a double soothsayer sell . 

Greece - Unlike last year where TMM found a population in denial this year there appeared to be more of an acceptance of the situation and, dare we say it some, humility. Good to see more local goods on the shelves even if the price of olives is still more than at top end supermarkets in London. And butter at E4.30 for 250 grams? Glad to see opportunism is alive and well. TMM are going to arb Lidl against Fiskardo supermarkets.    

US data -  Back to the QE trade. Inflation weak + weak Empire manufacturing = QE3 chance heightened = sell Usd/Jpy and buy gold.  Buy equities too but with technical signals pointing lower we end up flat ...Blaaaa. 

Assumption day in Europe - As TMM love to tell their juniors - "Assumption is the mother of all f**k  ups". If only the market would take heed.

Back to sleep.