A bad day to have a bad day

It's just as well that it was a quiet day yesterday, because in Macro Man's little corner of Connecticut it was a stunning 70 degrees F (21C) with brilliant sunshine: not too shabby for November.   Sadly, he had to spend an unhappily large portion of the day in a stuffy dentist's office and running errands; it was a bad day to have a bad day, alas.

Speaking of bad days, the NZD is doing a wonderful job of proving Macro Man's Monday assertion that sporting glory does not necessarily translate into currency success.  While NZD/USD is down a little more than a cent so far this week, the real notable damage has come versus its antipodean neighbour (thus also demonstrating that sporting defeat need not confer financial weakness as well); AUD/NZD is up a full 3% this week at the time of writing.

The reason for the Aussie leg is obvious- the RBA's decision to stand pat- though last night's better-than-expected trade number certainly doesn't hurt.  The raison d'etre for kiwi weakness, meanwhile, is equally obvious to the cognoscenti.  It's all about milk, namely the declining prices that Fonterra is achieving in its milk powder auctions.  That milk can have such a significant impact on the kiwi's fortunes comes as a timely reminder that NZ is, after all, only the size of Melbourne or Kentucky.  Anyone who's traded the NZD for long enough has a story that underscores that fact.   Nevertheless, the recent surge in AUD/NZD gives Macro Man a chance to dust off one of his very favourite long term charts:

The 1.05 "no fly zone" was actually breached earlier this year, but the pair swiftly recovered....only to retest it again very recently.  That the milk market has turned sour and the RBNZ looks poised to cut again could give further impetus to the topside.   Obviously, from a big picture perspective we remain in the midst of a downcycle in this pair, thanks to China and the hard commodity market.  Historically, the bottoming process has typically taken 2-3 years, suggesting that we may only be halfway through.  Nevertheless, it's pretty clear that the long-term equilibrium price is closer to 1.20 than it is to 1.00.   It's probably not a great idea to buy after a sharp 3% gain, but looking to structure longer term upside on any relapse offers solid risk/reward- particularly if and as the monetary divergence continues.

Elsewhere, Stan Druckenmiller made a few headlines (and waves in the comments section) with his comments yesterday, among which were that he believes an equity bear market started in July.  While Macro Man certainly has sympathy for some of Druckenmiller's views- namely his bearish outlook for the euro- he just cannot quite accept that the fundamental drivers of equities as he sees them are consistent with a bear market.

Regular readers will no doubt be familiar with Macro Man's fundamentally-based equity model, which projects SPX returns 12 months forward.  The standard disclaimer applies- the shape of the line is usually more important than absolute levels, and in any case the projection needs to be vol-adjusted to have any meaning.   In any event, the forecast remains incredibly bullish even with a rather tepid outlook for earnings.

The main driver of the forecast is, unsurprisingly, what Macro Man characterizes as "liquidity" factors; "growth factors" have contributed nothing or negatively to the forecast for several years. 


Now obviously, with the Fed potentially perched at the brink of lift-off, it is foolhardy and potentially dangerous to anticipate the liquidity factors to remain as supportive moving forwards.   This is one of the reasons that Macro Man has treated the model forecast with scepticism over the last few months.   Nevertheless, the model gave ample warning of the secular bears that started in 2000 and 2008...as of yet, no such warning exists.   Moreover, the "scorecard" version of the model remains at its maximum positive reading after turning only moderately bullish for the first half of the year.

The fact is, no one can say with certainty how markets will react to lift-off when (or if, cynics might add) it comes.  As noted yesterday, the set-up for a tactical short for Opportunists and Bears alike is excellent...but there's a big difference between a tactical short and a secular bear.  Though distorted (like the market itself) by modern monetary policies, Macro Man's indicators have a demonstrated history both in and out of sample of getting the big bear calls right.   From a process point of view, therefore, every day is a bad day to conflate tactical opportunity with structural turning point.
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amplitudeinthehouse
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November 4, 2015 at 8:13 AM ×

Last comment..(FFS)...Just read Baring's housing report and guess what.. wait for it..the Sydney housing bubble is the TWIN SISTER of the New York housing bubble...yeah, I hear ya London..I told ya so.
Well, I went long with good intentions, but now Macro Man with rates obviously at the forefront of buyers intentions in this market and myself not caring for short term capital gains, but only to survive in the current market environment to eventually being able to one day put my money where my mouth is I'm begging to you Ying and Yang cancel the Sydney real estate trade. I fell on my sword in this market over year ago when venturing to the Byron Bay annual investment conference , where it was known the New York housing bubble had spread to Sydney. There remains only one trade left on the books that represents the New York housing bubble...and I promise the Ying and Yang if you cancel this trade I will wake up 4am every morning for the next ten years and pick up ten acres horseshit every morning , rain , hail and shine , and bleed on my hands and knees in search of winner and ask for nothing in reply...so as to eviscerate the New York jonah's last element of bad karma so as to do what I'm fuckin suppose do and get the fuck on and find winners!

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Anonymous
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November 4, 2015 at 10:21 AM ×

Great Druckenmiller interview, he makes the v pertinent point that whilst everyone is (rightly) concerned about USA's $19 Trillion debt, when you calculate government liabilities (Medicare/aid, Social Security etc) alongside the Boomer retirement demographics due to hit in 2-3 yrs, the actual USA debt is actually $205 Trillion !!!

Pause a second, and read that again. Yes.... USA's debt is $205 TRILLION !!! Not might be. It is. So, $19 trillion is w/o off-balance sheet liabilities. $205 trillion is with those liabilities factored in.

Wait... it gets worse... for fiscal yr 2015, USA ran a $0.4 tn deficit. And we have ZIRP. So eventually rates go up (Yellen implies soon). Once the Boomer demographics peak (in circa 2-3 yrs) with rates at 4%, the USA has a $8.6 trillion pa deficit !!!

Choices:
- US government abandons all it's liabilities (they don't get paid - ever).
- ZIRP forever (well say, 20+ years).
- $200+ trillion of QE.

I invite responses from you all.

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November 4, 2015 at 11:10 AM ×

An excellent interview with Druckenmiller indeed. Many signs of a bear market and sentiment driving markets. CJ's take:

Sentiment's impact on market

And the NZD fits right into the sentiment theme. It seems that since one can remember, NZD has been a CCY proxy for "risk on" "risk off". Particularly Kiwi/Yen

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DownWithTheBeanCounters
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November 4, 2015 at 12:11 PM ×

Anon 10:21-

Is that you David Walker?

I've long thought that the intense, round-the-clock pressure and punctuated moments of terror that are part and parcel of wrestling financial markets causes a form of PTSD. You see it in some of the loopier comments made by Singer and you see it when you read David Einhorn's "Jelly Doughnut" attack on Fed policy. The stress of this business makes it's participants imagine tigers behind every rustling bush.

That 200tr number is Pete Peterson Institute B.S.

When you sit down and consider your household financial position do you included on the debit side of the ledger all the food, clothing, gasoline and toilet paper you will have to buy from here until the grave? Doesn't make sense does it? If you're going to do that you should also total up all expected future revenue from your various productive endeavors. So why do the same thing with government liabilities?

No doubt there are some imbalances to address, but they are better addressed with clear headedness than wide eyed panic.

Incidentally, what are the total liabilities for other developed countries? Are we all doomed? If everyone is doomed is anyone doomed?

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washedup
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November 4, 2015 at 12:51 PM ×

anon 10:21 - I will keep my comment short - as you may have learnt in accounting 101, its useless to talk about a country's liabilities without also mentioning its assets - 1) the hard and soft capital theAs US possesses far exceeds its liabilities , and 2) the resulting leverage ratio is way better than all of EM and OECD ex US - invoking countries like Russia and the ME oil producers would be overstating the case.

So calm down with the exclamation points - there are tons of issues for America to contend with, but a sovereign debt crisis due to a lack of confidence in its finances is not one of them. Talk to me when 21 Yr old kids in the US start being denied visas to go study in India or China. I'd give it 50 years.

As for druckenmiller, if he was saying all this in the early 90's when he actually gave a s@#t about things I'd care - he isn't exactly a great market timer as we all know - if anything it would be more bearish when he throws in the towel on his bear call.

MM - your model may be missing the idea that the previous secular bear cycles in equities were still within the context of a secular bull market in bonds - if thats changing those models won't work in the future.


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Anonymous
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November 4, 2015 at 12:55 PM ×

Well, some bond traders have raised the 10 year to 2.22 today,up 14-16 basis points in yield in a couple of weeks...

...Is that you LB?

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abee crombie
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November 4, 2015 at 1:03 PM ×

thanks for the dealbook refrence. Drukenmiller is great, but a trader first, imo

Perhaps he, Elliot Singer and the rest of the bearish crowd are buying bitcoin, which is up 50% in 3 days... or maybe its the Chinese as its rumored..

in spite of all that, and more VW problems, Eurostxx looks to be breaking out of the past few days range...

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Macro Man
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November 4, 2015 at 1:08 PM ×

@ washed, without knowing the contents of the model, how can you possibly say when it will or won't work? In fact, I have a trimmed down version of it that goes back to 1970, and it seemed to work just fine pre 1982.

@Abee, the BTC rally is on tiny volume, which again sort of disqualifies it from serious discussion IMHO. The chart is more reminiscent of pets.com than any legitimate store of value/medium of exchange.

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washedup
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November 4, 2015 at 1:23 PM ×

@MM, without divulging the contents of the model, how can you possibly criticize my critique? I have stitched together a mental picture of how it works based on your narratives over the last two years and am doing the best I can with it - no disrespect meant, obviously, and good to know it worked well in the 1970's (I will add that to my mental picture).

The bitcoin rally may or may not imply anything about the illuminati's investment decisions, but if I was a gold bug I would be really dismayed - looks like the world is ending crowd have a serious alternative now.

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Anonymous
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November 4, 2015 at 1:29 PM ×

Interesting legal precedent for spoofing. Following criminal prosecution, a spoofer faces 25 years in prison. NB If you read the legal fine print in this judgement, many HFT firms face the possibility of criminal charges going forwards.

http://www.cnbc.com/2015/11/04/us-trader-found-guilty-in-landmark-spoofing-case.html

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Anonymous
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November 4, 2015 at 1:40 PM ×

Druckenmiller re-iterated the point many have made, about how central banks have destroyed price discovery in markets. This morning I read that: "China’s central bank unintentionally sparked a surge in the nation’s stock market by publishing five-month-old comments from governor Zhou Xiaochuan... the Shanghai Composite jumped over 3%".

Couldn't make this sh*t up.

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amplitude
admin
November 4, 2015 at 2:15 PM ×

No...fu!ck off Abee..I dont want it...and I dont want to be lumbered with its cousin stocks...or its sidekick option never no touch option spread...I dont want anything to do with it. Its all a lark for these twenty something year old. Fuck off..take your lark somewhere else

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Polemic
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November 4, 2015 at 2:22 PM ×

One person's deficit is another persons surplus. The ownership of IOUs is a complex relationship between issuer and owner that comes down to inforcability. Current accounts are balanced by captal accounts and the capital account investor is as beholden one way as the current account debtor is the other. It is not a simple argument to say you are screwed if you have grillions of outstanding debt. the other thing is who owns that debt. If it's overseas folks they are beholden on US to pay them back, if its local then its all in house. ie if I lend Mrs Pol £10bio and she spends it on me, then what's the difference to that and me spending it myself, other than who decided what to buy with it. Which is actually all money is anyway. A distribution of the power of choice.

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Macro Man
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November 4, 2015 at 2:32 PM ×

Language, amplitude.

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Anonymous
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November 4, 2015 at 2:40 PM ×

CNBC:
"Icahn repeated his prediction of problems ahead, telling a crowd at the annual DealBook conference Tuesday that he agrees with hedge fund titan Stanley Druckenmiller, who spoke before Icahn and said Federal Reserve policies are going to cause woes for the market. "There are going to be real problems. We're walking into a minefield of what's going on with the Fed," Icahn said. "I could go on and on here, but I think we have problems."

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abee crombie
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November 4, 2015 at 2:41 PM ×

welcome back amps... missed ya

From Cornerstone
It’s clear to us investors want to believe that the current rally will last, but the wall of worry is a tall one at this time. The most widespread fear we hear in meetings, aside from China going off the rails maybe, is that the Fed will start raising rates and that it will prove to be a game changer for markets. This is a myth. The Fed does not have the near-term impact on financial markets that most investors give it. The market follows the economy. This is a fact. In as much as the Fed can impact growth prospects, it can impact equities. Still, if the Fed were to raise rates next month, it would do little to change the outcome of the economy in the near-term. Indeed, it takes almost a year for a change in policy to impact the trend in growth. In the near-term, investors need to focus on the PMIs far more than on Fed policy.

Here is where the good news comes in. The PMIs in October were VERY good for the markets. Indeed, PMIs rose in most countries around the globe. The even better news is that past policy (ie rates coming down around the world in the past year) argues that there will be many more months like October in the coming quarters. Macro research for equities boils down to one thing: economic momentum. What lies ahead, an uptrend in PMIs, is as good as it gets for equity returns. This is what the beginning of a bull market looks like. Enjoy the rise while it lasts. The Fed’s actions will help sow the seeds of growth, and equity returns in 2017. For now, focus on the road ahead … it should be a good one for equity investors.

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amplitude
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November 4, 2015 at 2:43 PM ×

Well..Pol..I tell ya what..you keep your fifty million in the bank and I "ll keep saving up at the local sperm bank and will both pretend theres nothing wrong with the economic model as progress regress

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Anonymous
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November 4, 2015 at 2:51 PM ×

US Trade Remains in Contraction: Imports -4.00% YoY, Exports -3.67% YoY

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Anonymous
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November 4, 2015 at 2:52 PM ×

*TREASURY SAYS IT WILL INCREASE BILL ISSUANCE IN COMING QTRS; SAYS DEMAND FOR BILLS IS HIGH AND EXPECTED TO GROW

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DownWithTheBeanCounters
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November 4, 2015 at 3:25 PM ×

Polemic:

This is a very nice formulation: " Which is actually all money is anyway. A distribution of the power of choice. "

Is it yours?

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Polemic
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November 4, 2015 at 3:45 PM ×

Downwith ..

Yes. It came to me on the fly just then, but it's the shortest distilation I could come up with of the whole 'money/power/getting people to do things for you' thing.

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washedup
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November 4, 2015 at 3:45 PM ×

@Pol -"A distribution of the power of choice"

says the guy who thinks his wife will soon spend money on him - dream away at the patent office einstein!

JK.

@abee - are these guys(cornerstone) known to make prescient calls, or just another one of those 'i close my eyes and buy and it tends to all work out somehow' type shops.?

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Anonymous
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November 4, 2015 at 4:36 PM ×

@DWTBC/washed/Pol - Here's why I disagree with your comments on debt&deficit:

To quote Druckenmiller, "All you do when you're doing this is you're pulling demand forward to today".

You can pretend (to use your analogy) that you're spending the wife's money on yourself, that it all balances out, but that's not the case. It's more accurate to say that you're spending your kids college fund on your bar tab. Good luck with that.

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Macro Man
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November 4, 2015 at 4:36 PM ×

@ abee: " The market follows the economy. This is a fact." Since 1952, r^2 of quarterly changes in GDP and quarterly changes in SPX = 0.1. The R^2 of y/y changes in the GDP to y/y changes in the SPX is 0.075. There's an old saying that "the market is not the economy"....and it is rather dangerous IMHO to wave away the impact of liquidity/financial conditions, particularly when my work suggests that these explain the vast bulk of equity returns!

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abee crombie
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November 4, 2015 at 4:47 PM ×

washed and MM, i just copied and pasted what I thought was an interesting point of view in what seems to be a sea of bearish comments. Cornerstone is pretty good IMO, some ex ISI ppl including Francois Trahan who wrote the note

From the website:

In 2014, Fran├žois was voted to Institutional Investor magazine’s All-American Research Team as the #1 Portfolio Strategist, and has been selected as #1 for eight of the past ten years. Since 2010, he has also been ranked among the top analysts for Quantitative Analysis as well.

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washedup
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November 4, 2015 at 5:30 PM ×

thx for that abee - interesting comments from him - I'm with MM on the economy driving the markets idea - he is right about the improvement in PMIs, but thats a much more useful indicator for equity returns coming off a recession, not when you have seen steady growth for 3 years.
Clearly the market agrees with him, so there's that!

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Anonymous
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November 4, 2015 at 7:52 PM ×

Welcome to NIRP

*YELLEN SAYS IF OUTLOOK WORSENED FED MIGHT WEIGH NEGATIVE RATES

YELLEN SAYS NEGATIVE RATES COULD HELP ENCOURAGE BANKS TO LEND

This is so bizarre, I really don't know what to say. What is wrong with her?

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Anonymous
admin
November 4, 2015 at 8:14 PM ×

@Anon 7:52 - Ignore Yellen, she's senile. Anyway she just says what the Obama administration tell her to say.

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washedup
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November 4, 2015 at 8:38 PM ×

i think yellen made that statement under the assumption that doing so would decrease the probability of it actually happening - u know, otherwise known as jawboning.
She is making it up as she goes along - if we do go to NIRP i have just one suggestion for you - mortgage REITs - their carry would be positive on both legs.

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Anonymous
admin
November 4, 2015 at 8:49 PM ×

re pmis- they are a diffusion index and dont say much about actual level of growth...would rather focus on IP, retail sales, exports( germany) etc...activity data more important than sentiment data i think
short spoos here and basically given away early oct pnl in this rip:(

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amplitudeinthehouse
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November 5, 2015 at 12:26 AM ×

Yeah!

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