Out

As of yesterday, your author is out of all his macro positions, buying back the last of the EDZ5 he was assigned from Friday afternoon's silly expiry squeeze.  It's been a good run for him, largely as the result of a successful "pin the tail on the donkey" exercise in the aforementioned eurodollar contract.

From here, he is happy to sit tight and watch to see if prices move to any sort of overbought/oversold extreme.  Bitter experience in  2011-12 taught him that expecting rational market responses to what can only be called more nonsense in Greece is a fool's errand, and there's no point playing if he doesn't have to.

He doesn't trade Russia, as he makes it a policy not to trade the asset markets of countries that invade other sovereign states, unless they speak English.  Nevertheless, last night's panic rate hikes may introduce some more two-way volatility into markets, even if they ultimately prove unsuccessful.  Macro Man cannot shake the image of Putin as the little Dutch boy trying to plug a dike with his (middle) finger.

And of course, we have the case of the Federal Reserve and the game of "will they or won't they" with respect to the "considerable time" language.  Ordinarily a 300k+ payroll and an unemployment rate damned close to what used to be NAIRU would make a mockery of the question (let along current levels of Spooz, Treasuries, credit, etc.), but obviously we no longer live in ordinary times.

The collapse in oil prices clearly will have an impact on headline inflation, and while the Fed has spent much of the post-crisis period arguing that core is really what matters, one cannot help but worry that they will execute another "cherry pick the factor supporting ZIRP" pirouette.

One factor that does not argue for ongoing ZIRP is the level of capacity utilization, which is nearly back at the highs of the previous cycle.  True, prior cycles enjoyed much higher levels of CapU, but for reasons that Macro Man will detail in a future post it is probably unreasonable to expect those levels to return any time soon.  As the chart below illustrates, there is a solid general relationship between the Fed's monetary stance and CapU; suffice to say that we're well past the threshold that typically spurs the onset of monetary tightening.

How will the Fed play it?  Macro Man reckons they'll jettison considerable time and replace it with "patient", probably this month.   How will markets react?  Not  much of a clue.  Last year's December tapering helped "spur" a rampant equity and dollar rally into year end.   On Monday's evidence, neither of those is in the offing this time around.  Throw in the Greek mularkey and what still seems to be heavy USD positioning, and Macro Man feels like he doesn't have an edge.  And when he has no edge, he has no position.  So he's out....for the time being at least.