A few thoughts about yesterday's bombshell

For many punters, yesterday was either the most fun they've had in ages or a potential one-way trip to the unemployment line- depending, of course, upon their perspective and (more importantly) their positioning.  Either way, it certainly re-ignited interest in macro, if the blog-o-meter is to be believed:



Judging by the reaction of the IMF and corporate Switzerland, it was not just lazy longs in EUR/CHF who were sideswiped by the SNB's decision.  It's hard to know whether the SNB misjudged the likely market reaction or whether they just didn't care.   Ignorance or apathy- which is a more cardinal sin for a central banker?

Regardless, yesterday served as a reminder that while old-school macro has seemed dead it was, to quote Billy Crystal in The Princess Bride, only "mostly dead."  That there was damage reflects how our markets have changed; in the old days, pegged exchange rates were targets to be taken on and wiped out if they deviated too far from fair value.   The ERM, Asia, Latin America; in the 90's breaking pegs was a great source of macro return.

Sadly, the post-crisis era has changed macro markets in a number of ways, none of them desirable:

* The myth of central bank omnipotence and credibility.  Although a lot us us here moan about "CB X is a fraud with no credibility", the fact is that the vast, vast majority of market participants believe in aphorisms like "don't fight the Fed."   Small wonder, too, since CBs did a generally excellent job of crushing vol, lowering the term structure of rates, and emasculating anyone who presumed to bet too heavily on an eventual change in the policy regime.   Europe has been the notable exception, but even there Draghi managed to extinguish the sovereign crisis throughout most of the Eurozone without buying a single bond (to date.)  

Of course, the problem with this myth is that no central banker is either omniscient or infallible, and policy error will occur eventually.   At the very least, policy shifts will occur unlike any that many market participants have ever seen before.   The last Fed rate hike, for example, was in 2006- meaning that no market participant under the age of 30 has ever seen one on a professional basis, and no one much younger than 35 has seen one whilst in a position of substantial responsibility.  Perhaps it's OK for such a significant cohort of the market population to be entering such uncharted territory...but you'd damned well better be prepared if they aren't. 

* Natural selection away from buyers of vol and risk premia in favour of sellers of vol and risk premia.  For intellectual and temperamental reasons, Macro Man has traditionally been a buyer of optionality.  He had a very good 2008-09 and a poor 2012, and for the last 9 months he's been sitting at home, cycling and doing some PA punting.  He knows another of other PMs and traders with similar profiles who've been spending their time in similar ways.  At the same time, some strategies focused on clipping coupons/selling vol/trading mean reversion in rates + FX have performed quite strongly.  Unfortunately (and your author will try not to sound bitter here), allocators and funds do not have the appetite to warehouse macro guys who merely pay for themselves during the lean years when the coupon clippers are having it off.

EUR/CHF has been a nonsense trade for the better part of a year, and it was pretty clear that a) the SNB wasn't going to raise the floor, and b) that EUR/CHF wasn't interested in rising by itself as the drumbeat of ECB QE grew louder.  If you really believed that it was going to rally, you could have been long calls with plenty of embedded leverage and modest (and pre-identified) downside.  Unfortunately, many punters who think like that have been naturally selected away, leaving those (not exclusively, of course) who have been rewarded for picking up the pennies.   However, if you never look for the steamroller, you won't see it as it's about to flatten you.

* Market liquidity has deteriorated very sharply.  It seems to be en vogue amongst a cadre of never-traded-professionally policymakers and regulators to state that a decline in market liquidity from pre-crisis levels is a good thing, as it will discourage excessive risk taking.   Be careful what you wish for, because you just might get it.  Lower liquidity, higher vol, and larger risk premium are certainly a recipe for substantially smaller nominal positions.  Unfortunately, lower liquidity, low vol, and low risk premia are a ticking time bomb, as VaR frameworks allow for large nominal position sizes.

However, low market liquidity warps the return distribution to a more non-normal shape, as witnessed by the EUR/CHF debacle.   Comments that the move was a "33 SD" event are nonsensical;   price action below 1.20 was never going to be normally distributed, so it is worse than useless to compare volatility there with that pre-peg break.  That EUR/CHF could trade down 30% (!!!) intraday should tell policymakers something about markets' ability to synthesize new news in an orderly fashion- it's evaporated.   OK, EUR/CHF impacts FX punters and Swiss corporates, but it's not an A-list financial price, is it?  Fine, but what happens when the same thing occurs in credit?   Hell, the same thing has kind of already happened in slow motion in crude oil, but because it helps consumers and screws Russia no one's complaining too much except a few holders of wildcatters' bonds.

Putting it simplistically, there are three classes of traders:

1)  Those that size trades based on current (low) levels of vol
2)  Those that size trades based on a perceived normal level of vol, and thus run 'low risk' in the current environment
3)  Those that do #1, but tell investors/CIOs/themselves that they'll switch to #2 when the time is just right.

In many ways, getting the sizing correct is just as important as getting the market direction right.   For the last several years, trader #1 has reigned supreme, but the rumblings over the last several months strongly suggest that you might want to think about switching gears to #2 earlier rather than later.  As for #3, they are like a (literal) black swan:  Macro Man knows they exist, but he's never seen one in the flesh.
Previous
Next Post »

49 comments

Click here for comments
Nico G
admin
January 16, 2015 at 7:43 AM ×

the dudes around the world who still had some money hidden in Switzerland got a nice bonus yesterday

o Tempora o Mores

Reply
avatar
Anonymous
admin
January 16, 2015 at 9:21 AM ×

MM you're still the king in my book.

Reply
avatar
Leftback
admin
January 16, 2015 at 10:38 AM ×

Plenty of victims, apparently. The morality of the SNB move can be debated, and I suppose it will be. Will we see Tiny Punter and Dodgy Broker sue the SNB at the Hague? If we needed reminding of the perils of leverage and the value of having one's most daft ideas expressed via tiny options punts (and thus limiting one's losses to a bit of fun money rather than job, house, solvency, etc), then I think this was it. It's frightening what "normal" folks can get up to in FX, Mrs. Watanabe has a lot of company out there.

Now, two more thoughts: 1) There is never only one bombshell/bazooka these days. 2) The MM Blog-o-meter above is flashing a great big BUY signal, if I'm not mistaken.

Reply
avatar
Nico G
admin
January 16, 2015 at 10:52 AM ×

true that

but you gotta admit option punts seldom pay big when you need the right direction the right timing AND the right speed. i started as a market maker for index options 20 years ago and our stuffing of retail was legendary and totally outrageous. Writing options is just so profitable

and still, nothing compared to the Capone and Luciano crowd of warrants thieves who will totally take 6 vegas off your price when you want to cash out, the biggest extortion in financial history and i still can't believe there has not been a lawsuit, or a few mob hits directed at them

2015 so so interesting so far feels like 19982008

Reply
avatar
Anonymous
admin
January 16, 2015 at 11:17 AM ×

Losses starting to come across the wires.

After Japan's Tsunami, insurers released their loss estimates on the Monday morning pre-market. There was some carnage that morning. Banks to repeat?

Opex in equities today. Europe might come off after Dax expiry.

Reply
avatar
CV
admin
January 16, 2015 at 11:43 AM ×

Japan Tsunami?! Pardon me, but are these events comparable?

Anyway, the cost of CHF liabilities will be counted and weighed in coming weeks, and more boiler room type FX brokerages will probably hit the deck. I won't mourn their demise!

Now, on the market. We should not be blind. It is trading shit and anyone being long risk the last six months must feel a bit like Neo from the Matrix (I know I do). So you managed to dodge the oil bullet, you managed to dodge the HY bullet, you managed to dodge the copper bullet and you managed to dodge the CHF bullet ... but will you dodge the next?

Meanwhile, the bull market in benchmark fixed income is now getting silly, as in reaaaally silly. So I ask ... what comes next. In EM for example, the higher USD is bad but people are forgetting that the huge move lower in US rates is normally associated with all kinds of milk and honey in these markets, especially with many of them running yield levels that now look like very juicy indeed.

In the Eurozone and Switzerland you have huge external surpluses and zero percent yield for as long out as 10years(!) ... many a carry monkey just got nuked, but I cannot help but feel that this is part of the final capitulation towards the mother of all carry trades, to end them all! This doesn't make me particularly "bullish" per se ... just trying to analyse it rationally really. Do people really think the CHF is a buy here?! Please ...

Reply
avatar
Leftback
admin
January 16, 2015 at 11:55 AM ×

Impact of SNB move on equity markets is being overstated by the media. As usual, the ink-stained wretches are obsessed with yesterday's action.

Agree with CV on EM debt, where else are you gonna go for yield? EMs are happier with a slower US (rates stay low, USD to reverse course) than a slower China, which is what really matters for most commodity FX.

Reply
avatar
B
admin
January 16, 2015 at 1:08 PM ×

http://www.bbc.com/news/business-30827910

BP sees $50 oil for three years

Reply
avatar
abee crombie
admin
January 16, 2015 at 2:13 PM ×

On EM debt, we hold some as I do think it is a distinctive asset class and offers some diversification. But the fundi's right now are really bad. The past several years has seen a lot of real money pile into this trade and now with oil down and also the likely bid from soverign wealth, I am not sure who is going to step into buy if there is another move lower. Do I think Russia will default. Nor Brazil, Nigeria or Columbia. But I am very cautious now on those 9% Sberbank USD yields. Sure I might miss the bottom but EM Debt, IMO, is a trendy asset. I'll wait for the bottom to be put in first, which means a bounce in oil and DXY. Then I will go back to clipping coupons ;-)

Reply
avatar
abee crombie
admin
January 16, 2015 at 2:20 PM ×

FXCM down 90% today ;-)

Reply
avatar
Macro Man
admin
January 16, 2015 at 2:23 PM ×

yes, and you could buy Feb 12.50 puts yesterday for a couple of dimes....had a good mate who did just that. Why oh why didn't I follow along?

Reply
avatar
Polemic
admin
January 16, 2015 at 3:03 PM ×

FX intermediaries that leverage leverage and expect free and constant liquidity from 3rd parties needed a serious culling of the weak and punters who use them need to READ THE F'KING SMALL PRINT.

now THAT would be a great SNB excuse .. "We acted at the request of the regulators to stress test the FX margin trading industry"

Reply
avatar
Anonymous
admin
January 16, 2015 at 4:09 PM ×

"Comments that the move was a "33 SD" event are nonsensical;"

At least they can quantify it? WELL, LA DE FREAKIN DA.

https://www.youtube.com/watch?v=waeu4WXqbTU

Reply
avatar
Corey
admin
January 16, 2015 at 4:16 PM ×

Everyone keeps harping how QE = lower rates and a weaker currency but if you look at what it did to rates in the US which is raise them, the. To me there is no reason it won't do the same in Europe which I would think will lead to a stronger euro and higher rates globally including the US. Traders buy the rumor and sell the news. Everyone seems to have it backwards or Im missing the blindingly obvious that rates at all time lows are going to go lower, really?! Stockes are priced for this l, bonds are priced for this the only thing I'm unsure of is whether commodities are telling us something about China demand that we don't want to believe is true. All this focus on Europe and no one is commenting on that elephant keeping their eyes closed that it's just a supply issue...pleaaase.

Reply
avatar
January 16, 2015 at 4:34 PM ×

Mkts decided that EU equities Will be The same story of ja pan equities. ..cash is King Now for me

Reply
avatar
abee crombie
admin
January 16, 2015 at 4:57 PM ×

Jefferies/Zervos has been pumping the Dollars and Dax trade. So far working like a charm. Dax really strong.

BondStrat. I think you can use the Japan playbook right now pretty easily. I dont think its gonna reverse in one session.

Nico, your the resident EuroStoxx bear, any thoughts?

Reply
avatar
Mr. T
admin
January 16, 2015 at 5:01 PM ×

As someone who is fairly active in FX, and uses VAR-based methodologies all the time for position sizing, I feel really lucky to have not caught this hand grenade. My immediate reaction was to delever, in a big way. Does that make me a lucky #3? I can't say the same for some of the other desks.

If we needed reminding of the perils of leverage and the value of having one's most daft ideas expressed via tiny options punts

Here's a daft idea that warrants a small punt - the euro is done.

Reply
avatar
January 16, 2015 at 5:11 PM ×

@abee :sure i Close stoxx long this afternoon.
if draghi will confirm huge expectations i'll reload long stoxx /Short spx

Reply
avatar
mattyboy
admin
January 16, 2015 at 5:29 PM ×

this came right after european close... greeks left hung out to dry?

(Bloomberg) -- ECB President Mario Draghi presented German Chancellor Angel Merkel and Finance Minister Wolfgang Schaeuble with his latest ideas on quantitative easing at a Jan. 14 meeting in Berlin, Spiegel magazine reported, without saying where it got the information.
At this stage, ECB plan envisages national central banks buying debt of their country to avoid risk transfer between member states
Plan envisages 20% to 25% percent limit on purchases of each country’s debt
Greece will be excluded from QE because its debt doesn’t fulfill necessary quality criteria
Dutch Governing Council member Klaas Knot supports putting national central banks in charge of QE implementation
Knot says “if each central bank was only buying debt of its own country, the danger of an unwanted redistribution of financial risk would be lower”
Says “we have to avoid that decisions are taken through the back door of the ECB balance sheet that have to continue to be reserved for elected politicians in euro-area countries”
By keeping the risk of government-bond purchases at the national level, the ECB would show that it is “exclusively concerned about monetary and not fiscal policy”

Reply
avatar
CV
admin
January 16, 2015 at 5:44 PM ×

@ Mattyboy

1) Greek will not be left out in the cold, if they do what the Mangler says. Expect a stand-off though. Syriza will not go quietly into the night, but all will be solved in the end.

2) Buying through the NCBs gives Germany the illusion of power, power to shut the door on an NCB that goes off the reservation if it wants too, power to throw a country out of the euro, or even power to leave the euro itself without taking a loss on other NCB purchases. But will they exercise such power? In the end though, it is a charade ... the ECB is on the hook because the alternative is that it gets dismantled.

Reply
avatar
January 16, 2015 at 6:44 PM ×

I don't want to be a hero when brokers around fail...
people are buying bonds at 0.05 yield to sell them at 0.03% ....
FI mkts in general has been destroyed....
asset management industry is on the edge of a precipice.
i'm honestly looking for a new job outside AM world... is there any innovation left to discover in this industry???

i remain in cash before ECB... ready to be long eustoxx in relative trade space...

Reply
avatar
Anonymous
admin
January 16, 2015 at 6:55 PM ×

Does it really matter if the ECB or a national central bank does QE?

A Euro is always a Euro. Right?

Furthermore, what is to prevent a bank in Spain or Italy from taking QE cash and immediately buying assets in Germany?

Lastly, Target2 imbalances are already quite large. Germany is already on the hook. See here:

http://www.eurocrisismonitor.com/

Reply
avatar
Anonymous
admin
January 16, 2015 at 7:17 PM ×

@TheBondStrategist,

I am in LB's camp so I actually see many opportunites for FI land, EM FI of course. Just saything now probably is the bottom of the FI industry cycle.

Reply
avatar
abee crombie
admin
January 16, 2015 at 7:22 PM ×

FixedIncome Stat

I was thinking the same thing about yields. Is the German 10 year going to go negative? Otherwise it makes no sense to be buying here unless EU is really going to have a Japan style deflation, which you can argue its having already, but Bumble Bee Draghi seems intent on not letting occur.

Its odd that we now live in a world of almost unanimous support for capitalism and yet capital earns no return. Or maybe that is the way it was always supposed to be?

Reply
avatar
Leftback
admin
January 16, 2015 at 7:50 PM ×

Today's prize for insight and clarity goes to Corey!! Good on yer,
mate. Here's what he said:

"Everyone keeps harping how QE = lower rates and a weaker currency but if you look at what it did to rates in the US which is raise them, [b/c rates had already been front run lower before QE began]. To me there is no reason it won't do the same in Europe which I would think will lead to a stronger euro and higher rates globally including the US [YES! give that man a coconut]. Traders buy the rumor and sell the news".[abso-fucking-lutely, dead right]

This is the reverse of what we {MM, LB and others] said here at the END of US QE, that it would lead to LOWER US rates b/c hot money had already exited USTs in search of risky assets. We predicted that rates would fall, which they did.

Short the long bond is actually looking quite good today. Now wait a little bit longer and we'll see it was a case of "sell the rumor, buy the news" in the €.

US-centric punters who have enjoyed having it off in everything - USD, UST, SPX might soon get a lesson in hot money flow reversal, and its effect
on parabolic asset price movements. Go on, cue the ritual abuse....

Reply
avatar
Nico G
admin
January 16, 2015 at 8:10 PM ×

the price action on EU equities yesterday resembled the 'whatever it takes' day when, few people remember, markets tanked hard first - so hard down to clean weak hands then a monster run up i can only say the tape is strong now, very supportive

if people want to go long the big world 'laggards' it is ok they need a story to sell their clients and justify their existence - my timeframe is probably much longer than their quarterly quest for performance fees. Europe can definitely sell Gucci bags and BMWs at a much attractive price, that is about all today

Can it be saved only on exports? No. One sure thing is that whatever the ECB may do, and most is already priced in, should never exempt our ill southern countries from reforming

a 500n package QE? one trillion? it does not matter if France and Italy and co do not reform, Those countries are not functioning, period. Overall It is very odd to see a CB jumping to 'save' treasuries when treasuries are already so high

Let's see what they can actually DELIVER next week. Depending on your timeframe squaring longs on expiry day squeeze ain't bad you can celebrate some this week end. As long as i see lower highs on my longer timeframe a great surf in the sun can be enjoyed every day



Reply
avatar
Polemic
admin
January 16, 2015 at 8:19 PM ×

No further comment on the SNB from me - said it all in the other place though of course MM put the salient points much better than me

As for the rest of everything else so much is hanging on ECB that next week will probably set the trend for the next year.. no sorry i mean for the next week. This year is going to be choptastic.

With -ve rates kicking in dramatically perhaps we need to revisit the post on the mad world when Jo public actually finds Cash with its 0 yield the most attractive asset in Europe. But I suppose that is why gold is heading up again.

Reply
avatar
knk
admin
January 16, 2015 at 8:20 PM ×

In this type of market or you directional (no matter price or vol...) being synchronized with the market moves, or you dead. Or you live slowpoke snail "i'll never be ruined to zero" life simply accumulating "small" losses and hoping...

Reply
avatar
January 16, 2015 at 8:31 PM ×

Many opportunities in EM... i suppose Local currency... mhh ok... but also here i burn my VaR with few exposure...so.. about remaining assets???

@abee: for me 10yr bunds could go also negative but does it make any sense to me to buy it??? do i have to be paid to buy something at negative yields??
Is this the innovation in finance???

NicoG, you're right finally... but in the meantime the risk is to be put out of the game.. today my head told me that is risky to be without risk!!!!!! Everyone bought 30yrBTPS and doing 2.5 figures in a day...why are you so stupid???

Reply
avatar
hipper
admin
January 16, 2015 at 8:32 PM ×

Yes agreed on QE theme and €, sell the rumor buy the news.

This theme is already 100% public and expected and has already had so much time to be front-runned that with 100% certainty it has been. A bit dubious to assume that it would be a surprise anymore, the most important mission of the ECB is to protect the integrity of the currency (even more so than "price stability"). And when they are pushed to a small enough corner, they will pull it off. Even thou it doesn't make any difference in the long run, because within the EU the greater portion of nations are doomed to run a chronic deficit budget and current account.

Starting to believe in the theme that Spoos might not look so happy this year. FX fluctuations, buy back slow downs, modest EM slow downs etc. will all be a headwind for earnings, starting to become obvious partially in Q1 and fully Q2 results. Maybe lower commodity input costs will offset a bit but only that much. Don't know about small caps thou, perhaps Russel will outperform this year?

Reply
avatar
Leftback
admin
January 16, 2015 at 8:55 PM ×

Extra lubricant for Mr Shorty over the weekend. He'll need it next week. VIX making lower lows and lower highs today.

Reply
avatar
Bruce in Tennessee
admin
January 16, 2015 at 10:51 PM ×

http://www.bloomberg.com/news/2015-01-16/yen-reaches-3-month-high-versus-euro-as-swiss-franc-roils.html

Dollar at 11-Year High Versus Euro on Franc Fallout

...Exports?

Reply
avatar
Trader Joe
admin
January 17, 2015 at 9:31 AM ×

Does it strike anyone odd that the notion of the constituent central banks only buying their own debt to implement QE might, indeed probably, increases the wrong way risks in the system and encourages centrifugal policy thinking?

Reply
avatar
Corey
admin
January 17, 2015 at 12:55 PM ×

Thanks LB enjoying the coconut. I'll go one further and suggest that the bottom is in for crude. Not bc I have special insight into the oil mkt but for the simple fact that QE is reflationary.

Reply
avatar
Anonymous
admin
January 17, 2015 at 3:33 PM ×

Could Italy's CB buy the bonds of its gov until it absorbs all of the issuance under this scheme?

And if it could, why on Earth would it remain in Euro after becoming self-sufficient this way?

Reply
avatar
January 17, 2015 at 5:28 PM ×

@anon 333: why not, now everyhing is permitted and tolerated... BUT it has to remain in the euro because only in this way rates won't explode or currency won't escalate. Italy within the euro and with QE is transfering credit risk to Germany

Reply
avatar
Nico G
admin
January 17, 2015 at 5:45 PM ×

'self suficient', and bankrupt. Not everything is not permitted, not so fast. It is crazy to read what people (market?) now expect of ECB next week. Danger danger

the big main difference between US and Europe was than traditionally American customers were net borrowers, debt slaves until the die whereas Europeans are traditionally 'savers'. When QE nuked borrowing/mortgage rates American folks could only benefit i mean, the ones who did not go totally broke in 2008, who could deleverage and start anew

in Europe it has killed every mamma and papa favorite saving vehicle, our OATs, BTPs and other bunds of bygone days. 99% of European will NOT go seeking yield on other risky assets like the yield obsessed Yankees or the gambling Japanese telling each other Nikkei is one big Pachinko. If you have ever felt the shock of entering a pachinko room in Japan well you can imagine how playful the Nikkei pit must be

so back to Europe, Europeans exporters for now are the only ones to from a cheap Euro that is a sure fact, while the European individuals who like to travel outside EU are now needing lubricant (i live in the US every winter the year to year difference is hefty). Europeans will not go nuts on European equities surely hedge funds and co.are already trying to do that for them this time not punting on the prettiest of the beauty pageant, but sort of the least ugly. But still ugly.

Reply
avatar
January 17, 2015 at 9:08 PM ×

Nicog you're totally right about qe impact in europe Vs usa... Here it's a drama for families
.. in Italy people lost two monthly wage yearly going from 3% To zirp. .. is It so difficult To undestand why recovery is missing?
But about eu equities They are cheap To Buy in particalar for uk/us investors/firms.... only game in Town remained

Reply
avatar
hipper
admin
January 17, 2015 at 9:42 PM ×

Hmm, could someone more knowledgeable kindly explain what's the difference between the ECB holding everyones sovereign debt vs. each countries "national central bank" holding their own sovereign debt?

So far my perhaps deficient understanding on the subject has been that the national CB's are "branches" of ECB and thus it's exactly the same thing. Or is the point here, that the benefit of this kind of arrangement manifest itself only in a scenario, where one of the countries would split itself adopting it's own currency, and thus that nations CB assets and liabilities would be removed from the "aggregate" ECB balance sheet.

What am I missing here?

Reply
avatar
abee crombie
admin
January 18, 2015 at 6:33 AM ×

Everest, a miami based EM hedge fund, said to have lost $800M on the Swissy.

To buy Euro equities, yes QE will help, but what we really need is some positive earnings momentum. Its not that complicated. Past 3 years have disappointied in this respect, lets wait and see.

Reply
avatar
Anonymous
admin
January 18, 2015 at 7:58 AM ×

@TheBondStrategist

Italy runs primary surplus and trade surplus. Its main problem is negative (permanently) nominal GDP growth and debt that increases as % of GDP even if they balance their budget.

Out of all the countries in Eurozone, it looks like the best candidate for exiting the currency. What it needs is enough credibility and time to buy a lot of bonds. Once the QE starts, they won't be able to stop it, which provides all the time and credibility Italy needs.

And at some point when they're buying most or all of their own bonds @ 0.0something and still in deflation, somebody in Italy is going to get an epiphany that they might as well be buying bonds denominated in liras.

I really would like to understand where I'm getting this wrong. And if I'm not totally wrong, surely this has occurred to the Germans too?

Reply
avatar
CV
admin
January 18, 2015 at 9:32 AM ×

@ Nico and bondstrategist ... I don't think anyone here disagrees with your long-term/structural arguments on the Eurozone. I know I do. Instructing the NCBs to buy could exactly, if you take it to the extreme, be a precursor to breaking up the currency union, but consider a situation in which Germany has to run a fiscal deficit too in order to keep the lights on (I mean, no country is ageing faster than Germany, except Japan). So, over time the objectives of the EZ economies might actually converge, even if it doesn't look like it right now.

Now on QE ... Mr. Draghi can only disappoint here given expectations, but sometimes a pre-commitment is just that. Still, in the midst of all the talk about QE, deflation, etc leading indicators in the Eurozone have quietly firmed in the Eurozone in the past six months. Real M1 is turning up, trailing growth and inflation is low, and this is usually conducive for equity returns. And all this started even BEFORE the ECB started to move, more or less, desperately. Of course, no one is telling this story (well, almost no one ;)).

Reply
avatar
Gnome of Zurich
admin
January 18, 2015 at 10:05 AM ×

Interesting times... Germans et al are transfering their money into CHF. And the Swiss are buying Euros like mad.

Lots of ATMs and banks in Switzerland ran out of Euros this weekend. Some banks are rationing the amount of Euros you can BUY. Lots of traffic jams at the borders to Germany caused by Swiss shoppers...

Prices in Germany feel now even more like a third world country for a Swiss that gets paid in CHF. A meal in a solid restaurant is at 1/3 the price.

You can't trade on PPP, but over the longer term, CHF can only go down.

Reply
avatar
Polemic
admin
January 18, 2015 at 10:27 AM ×

Great observations Gnome Thanks.

Businesses across the border must be doing roaring trade. Nice to see raw economics at work arbing real differences. Goinbgg to be a lot of Brit skiers taking their own packed lunches on pre booked swiss ski hols now too !

But surely it wont take long for Swiss supermarkets to cut prices with their next restockings. That should show up in much lowering flat inflation figures.

Basically the safe haven seeker is seeing his wealth subsidising the swiss shopper, so agree. It can't last long. I still think that negative rates is still too selective and for real impact it needs to alloy to the Joe on the street.

Reply
avatar
Anonymous
admin
January 18, 2015 at 5:01 PM ×

Wages:

"Bay Area tech company caught paying imported workers $1.21 per hour"

"Imported workers" and millions more on the way.

What I don't understand is why they even paid the workers at all.

Mohamed El-Erian calls it the "wage puzzle"

Bill Gross says “The creation of jobs is one thing; the creation of wages is another. Minus 0.2% in the month and a 1.7% annual hourly increase just isn’t enough to sustain the U.S. economy."

Reply
avatar
January 18, 2015 at 5:29 PM ×

@anon 7.58: what a wonderful country.. primary and trade surplus!! that's what i see, but how do i got there?... because imports have collapsed and because govt cut pensions and hiked taxes... good receipt to have a negative growth...infact...
can't really understand why NOW Italy need to exit from Euro.. it's getting a currency devaluation and zero rates with a debt trajectory doomed... there's a problem, yes.. we can't make more debt because europe limits us at 3%... maybe outside euro will be possible to spend more.. but with which consequences?? Venezuela style??

so reversing your question, what's your aim exiting from euro?? a huge devaluation?? maybe... but this won't resolve Italy problems

Reply
avatar
washedup
admin
January 18, 2015 at 5:55 PM ×

hipper - my best understanding is that this would convert the ECB purchase into a senior debt like structure (i.e. provide liquidity to NCBs though mechanisms that have already been set up, who then buy the actual debt) as opposed to buying it directly - so yes, this only makes a difference in a s@#t hitting the fan situation.

Reply
avatar
Anonymous
admin
January 20, 2015 at 6:29 AM ×

@TBS

In this case Italy would try to achieve no more and no less than what the Japanese are trying right now. The goal would be to stimulate economy via improved competitiveness and reduce real value of debt with cost-push inflation.

And just like in Japan they'll fail to get any significant positive nominal gdp growth. "You can't print babies." It's mostly demographics. Doesn't mean they won't try. Better uncertain hope than certain death, right?

Reply
avatar
Corey
admin
January 20, 2015 at 1:12 PM ×

Lol..exactly.

http://guggenheiminvestments.com/perspectives/macro-view/buy-the-rumor,-sell-the-news

Reply
avatar