There are a lot of talking points today; so many, in fact, that Macro Man isn't sure that he has the energy to muster the sheer volume of smooth transitions to cover them all in prose form. So let's just hop right in with a series of bullet points:
* One reader asked what a chart of Macro Man's equity model predictions would look like when overlaid with the actual subsequent 12m performance of the SPX. This data is displayed in the chart below. As Macro Man generally qualifies when presenting the model signal, it's the shape of the line rather than the absolute magnitude that provides the signal. For this reason he has displayed the model signal on the right hand axis to make changes in trend more apparent. In point of fact, the model is best used when volatility- adjusted; when the expected Sharpe ratio is above 1, US equities generally deliver much better than average results. Also note that while the model apparently lagged the crash during the crisis, in fact it delivered just in time; it delivered its most bearish reading at the end of August 2008.
* Regarding corporate profits and their tepid performance, one possible explanation is that effective tax rates have gone up quite a bit for the corporate sector as a whole since the nadir during the crisis. While the data depicted below also includes non-listed companies, it certainly seems plausible that effective tax rates have moved higher as crisis-related losses are finally offset and, on the margin, tax avoidance is frowned upon by the authorities.
* So the Italians managed to sell 5 billion euros of 50-year paper at 2.85%. The mind boggles, particularly given the overwhelming demand for the issue (some 18.5 bio in bids.) It's reminiscent in Macro Man's mind of the Greek auction in January 2010, which saw some 20 billion worth of bids for 5 year paper despite alarming headlines. Hmm, how did those bonds turn out again?
* Just a few hours later, in a move that seemed straight out of the Trichet ECB's playbook, certain sources were quoted in a Bloomberg story that the ECB would look to taper its asset purchases when the time comes. While there was no overt suggestion that that time would be in March of next year, nor was there any reason quoted to imply that it might not be. Anchoring is a well-known behavioural phenomenon, and by throwing that story out there, even as a trial balloon, the sources must have known the market would fixate on the entire concept of a taper. Predictably, Bunds tanked, BTPs shanked, and even Treasuries dumped. The 5 bp rise in 10y BTP yields must have been particularly galling for anyone "lucky" enough to have gotten filled in on the 50 years by the Italian Treasury. Reuters ran a ham-fisted denial, presumably from different sources, but the damage appears to have been done. The BTP futures chart (as well as many other bond charts) doesn't exactly look bullish...
* Speaking of not looking bullish, 2016 Macro Man darling GDX has apparently given up the ghost after yo-yoing for the last several weeks. Yesterday's sharp down-move not only broke established support, but came on the highest volume in at least 5 years. By way of disclosure, Macro Man contributed to that volume yesterday, fortunately cashing out at the open (which also proved to be the high of the day.) When an ugly chart meets bad newflow, that's when 10% down days (or thereabouts) happen.
* The flipside to the GDX ugliness is that the dollar is looking perky. Macro Man has previously mentioned CNH/JPY, which is like USD/JPY with a prom dress on. Well, that pair broke out properly yesterday, cutting through a downtrend line that has held on six or seven previous occasions over the past year. With US bonds having failed again at the "corridor of uncertainty" and JGBs (ahem) pegged at 0% yield, further weakness in fixed income should the ECB story have legs should support further upside in USD/JPY from here.
* Finally, the UK Government is coming perilously close to disgracing itself if yesterday's news is to be believed. The story that UK firms may be forced to list foreign nationals working for them is a headline straight out of 1984 if not 1930's Germany. Perhaps foreigners should be grateful that they aren't forced to wear a scarlet "F" on their clothing? Granted, Macro Man is hardly impartial in this matter, having lived (and paid taxes) in the UK for many years, but the apparent Government view that non-British residents are mere bargaining chips rather than valued members of society (which the vast majority are) is beyond obnoxious. Indeed, one wonders why Donald Trump is bothering to run for president in the US when he also appears to be directing the Government policy on Brexit.....
* One reader asked what a chart of Macro Man's equity model predictions would look like when overlaid with the actual subsequent 12m performance of the SPX. This data is displayed in the chart below. As Macro Man generally qualifies when presenting the model signal, it's the shape of the line rather than the absolute magnitude that provides the signal. For this reason he has displayed the model signal on the right hand axis to make changes in trend more apparent. In point of fact, the model is best used when volatility- adjusted; when the expected Sharpe ratio is above 1, US equities generally deliver much better than average results. Also note that while the model apparently lagged the crash during the crisis, in fact it delivered just in time; it delivered its most bearish reading at the end of August 2008.
* So the Italians managed to sell 5 billion euros of 50-year paper at 2.85%. The mind boggles, particularly given the overwhelming demand for the issue (some 18.5 bio in bids.) It's reminiscent in Macro Man's mind of the Greek auction in January 2010, which saw some 20 billion worth of bids for 5 year paper despite alarming headlines. Hmm, how did those bonds turn out again?
* Just a few hours later, in a move that seemed straight out of the Trichet ECB's playbook, certain sources were quoted in a Bloomberg story that the ECB would look to taper its asset purchases when the time comes. While there was no overt suggestion that that time would be in March of next year, nor was there any reason quoted to imply that it might not be. Anchoring is a well-known behavioural phenomenon, and by throwing that story out there, even as a trial balloon, the sources must have known the market would fixate on the entire concept of a taper. Predictably, Bunds tanked, BTPs shanked, and even Treasuries dumped. The 5 bp rise in 10y BTP yields must have been particularly galling for anyone "lucky" enough to have gotten filled in on the 50 years by the Italian Treasury. Reuters ran a ham-fisted denial, presumably from different sources, but the damage appears to have been done. The BTP futures chart (as well as many other bond charts) doesn't exactly look bullish...
* Speaking of not looking bullish, 2016 Macro Man darling GDX has apparently given up the ghost after yo-yoing for the last several weeks. Yesterday's sharp down-move not only broke established support, but came on the highest volume in at least 5 years. By way of disclosure, Macro Man contributed to that volume yesterday, fortunately cashing out at the open (which also proved to be the high of the day.) When an ugly chart meets bad newflow, that's when 10% down days (or thereabouts) happen.
* Finally, the UK Government is coming perilously close to disgracing itself if yesterday's news is to be believed. The story that UK firms may be forced to list foreign nationals working for them is a headline straight out of 1984 if not 1930's Germany. Perhaps foreigners should be grateful that they aren't forced to wear a scarlet "F" on their clothing? Granted, Macro Man is hardly impartial in this matter, having lived (and paid taxes) in the UK for many years, but the apparent Government view that non-British residents are mere bargaining chips rather than valued members of society (which the vast majority are) is beyond obnoxious. Indeed, one wonders why Donald Trump is bothering to run for president in the US when he also appears to be directing the Government policy on Brexit.....
45 comments
Click here for commentsIf true the UK are stoking a potential fire - what about the millions of Brits who own property in the EZ? Not to mention the pensioners who live there! With the rhetoric and potential for the actions above it doesn't bode well for a happy divorce
ReplyOf course expats/foreign nationals in most other countries have to be listed, and preference is shown to hiring locals first (especially in African, Middle-Eastern and Asian countries) but I guess it's ok for them to be "racist/nationalist" right?
ReplySeriously, this stupid, liberal mindset that some of you have really is pathetic.
EURJPY is the stand out buy. ECB taper, BoJ peg yields. What with OPEC making a deal and crude strongish, if CPI starts to rise globally, the BoJ will get filled in, in size, and therefore expand their monetary base at a rapid rate.
ReplyYesterday's move in both Spooz and AUD in relation to my position was sheer luck... I'm not going to even try to pretend that I knew such move were going to occur.
ReplyInto the European session, I added a bit more to those positions now that they are firmly back in the green - felt like I should press it w/ house money.
Better lucky than...
I'm surprised at your closing comments MM, interesting framing of the predicament, if this is just to increase the flow in your comments section it obviously worked!
ReplyMaybe it's part of preliminary negotiation with Europe over the UK's exit terms prior to article 50.
Of course, if it was found a UK company didn't have many non UK employees, they may increase the ratio of hires?
Your bond commentary was as informative and relevant as ever... Thanks,
Zombie markets now - can't really go down, nor go up. Feels like perma-zig zag.
Replyhttp://crackerjackfinance.com/2016/10/no-mans-land/
Thanks for the comparison Chart MM. Frequent divergences since 2010 (that I'd rather suspected when asking in first place) - any concerns that there's been a fundamental change in one or more of your drivers?
ReplyBad ADP jobs number - exceedingly bullish for stocks.
Reply@ Down side, I think I have been quite clear over the last year or so that the model's forecast is being driven by liquidity factors, which there have been some reason to doubt (ie, the model doesn't know that the Fed is ostensibly hiking rates.) That being said, I can't have too many quibbles with a model that has remained bullish Spooz to all time highs, despite my personal reservations along the way.
ReplyWith the degree of crosscurrents in the market I'm not really trying to get a grip on macro. So much of what we see is attached to rate spreads and mindless bleating over political issues why even try to decipher a message where there isn't one.
ReplyI'll stick with this being a decent select picks environment. I still like the technical spec trade of USD/CAN$ a la LB (beat you back on that by just the odd session albeit the entry got whacked by the so called 'oilathon'.
Still like the other UK sector stuff ,but will bank it and run when someone like TSCO gives me 28% to run with. Keep hold of the rest for the moment particularly the construction bag which are up +20% ,but may yet have room to run into the Autumn budget. It's mostly all well in the money with just the odd flat trade no yet gone anywhere. Thinking you W Hill.
MM, love your blog in general ,but I have marked your political commentary to underweight pending a sell downgrade if you continue to spout ***** pick one to fill in.
RE: your last point - hardly screams "Britain is open to the world for business", does it?
ReplyInteresting times.
@ checkmate, funny, spouting effluent is exactly what members of the Government have been doing the last few days, culminating in Rosa Klebb's remarks today. If you prefer to wallow in that, go crazy. It seems like half the country already has.
ReplyI'm in agreement with checkmate. MM's market commentary is worth reading, his political commentary is less than worthless.
ReplyI should add to the above, that France (and many other countries) already have this policy of registering foreign nationals. I believe the UK govt mentioned they are modelling it after a similar US govt policy...
Reply@MM - I had to dumbly google the rosa klebb/theresa may reference - learn something new every day.
ReplyThe most interesting thing about the ECB taper talk affair was the data point about the reaction function of the market - its clear to me that 1) positioning in govvies remains very long and fairly nervous, and 2) Its not enough for CBs to merely re-iterate their purchase targets, there has to be an upward slope to them to keep the party going.
I do wonder how many of you who find my "political commentary" so worthless have actually lived in a foreign country. I wonder why you find the concept of closing the national door so acceptable. I wonder why you find the idea of having one's cake and eating it too in the Brexit negotiations so credible. Given the record employment rate in the UK, I wonder how bad things will get when the next recession comes. I also wonder what the Little Englanders make of the google result for "UK national dish". But perhaps irony is also something that is no longer welcome in Blighty.
ReplyAlso, registration of foreign nationals is not the same as requiring each company to separately publish how many they employ.
ReplyAdding to short CADUSD and short USO this morning.
ReplyCrude is becoming (hyper) extended. The upper Bolly band is stretched as tight as Kim K's spandex.
Leftback - Agree on the USO trade - there's just enough juice risk/reward wise on that trade.
ReplyI do wonder how many of you who find my "political commentary" so worthless have actually lived in a foreign country.
ReplyI have lived in half a dozen foreign countries (I was born in one). It's these type of naive assumptions, and the view that everyone who doesn't fit your worldview is wrong, that makes your political commentary so tiresome.
Brexit did not destroy the UK economy. The UK does not revolve around a small, circle of left-wing, introvert elitist foreigners who live/work in London. I'm done with this drivel. Goodbye.
Ta-ta. The conflation of classical liberalism with modern left-wing ideologies is really quite tiresome, and if you can't tell the difference, you're probably better off at ZH anyways.
ReplyOh dear, people are thin-skinned today. As a UK national living in the US, LB tends to agree with MM's sentiments.
ReplyThis is a great time to re-read Evelyn Waugh. Waugh was a witty satirist of British life, especially the self-importance, insularity and delusions of grandeur of the evergreen upper-middle classes. The writer of Decline and Fall and Put Out More Flags would have very much enjoyed documenting the current period of Little England-ism.
I can certainly sympathize with the forgotten man who has found that the factory where he was employed has packed up and left for a foreign land, where he now competes with millions of foreign workers who have driven down his wages, where he is treated to a daily shit show of screaming religious zealots in dirty night shirts who mock his culture and threaten him daily, where he constantly fears for his daughters safety after reading the about the mass rapes and rampant drug addiction in Rotherham covered up by the police/governing council, in the interest of political correctness, where he finds there are certain areas in his own country where he and his family are not welcome, where he was constantly lied to by politicians about the effects of mass immigration.
ReplyMost here, I assume, are very intelligent and make their living, after careful analysis, one mouse click at a time. But you do not suffer the life of the forgotten man who wakes up every morning worrying if he still has a job, or can pay the rent, or put food on the table. Instead you mock his very existence.
Well he has finally decided to fight back.
Well, unless it is about how politics affects markets, I pretty much ignore political discussion on economic/financial websites. Believe me, the political gossips on political websites are much juicier.
ReplyOn the market, I cannot believe when I say that I now agree with 12yrHF on short term direction. The beginning of the earning seasons usually bring us the big financial and big tech: all very good at manipulating numbers/or eating traditional industries' lunch. I won't bet against them right before they hand out some beautiful numbers. Even if the market reacts to the Friday's NFP lottery badly, it should be an opportunity to buy for a quick sell.
If these stories are somehow marking the beginning of the end of eurozone QE euro banks are going to be a great trade. I'm using EUFN as a vehicle. I also wouldn't touch anything even remotely related to the anti-fiat trades like gold.
ReplyOn the other hand, there seems to be a disconnect in the current thinking about what is actually being affected by QE versus what is not. Assuming even a modest (5%?) trickle down from assets to consumption, how much of say AAPL cashflow is actually a byproduct of loose money? Is there zero correlation between ad spending and QE? I think the impacts of global coordinated tightening will extend well past financial assets. A lot of the US stock market gains are being driven by huge growth expectations for already huge companies. For example the top-5 US companies by cap, with their current consensus (median) long-term-growth rates: AAPL-10%, GOOGL-15%, MSFT-6%, AMZN-46%, FB-33%. Those are WHOPPER growth rates, for already very large companies, operating in a distinctly low-growth macro world. They look cheap on a growth-to-cashflow basis, but I put a nonzero chance on the idea that they have been much bigger beneficiaries of easy money than the street is currently giving credit for.
@Anon 4:11 - FANTASTICALLY WELL SAID SIR.
ReplyYet another example of why the left-wing, EU-loving, fascists don't understand why they will be voted out of existence:
Replyhttp://www.express.co.uk/news/uk/717627/free-speech-crackdown-EU-report-British-press-hate-crime-violence-terror
MM,
ReplyYou are obviously a very clever guy as indeed is LB. It is thus extremely disappointing to read your collective responses that frankly seem to be based upon some media spin bites and certainly not any real consideration of what are quite complex issues. However, if you wish to write this whole issue off in terms of 'Little Englisher' please do so ,but it does you little credit.
My views are not wallowing. They are very pragmatic and based upon personal experiences of being involved in drawn out negotiations. All we are seeing here is both sides taking turns to move their 'chess pieces' seeking some advantage for what we are eventually heading towards. A negotiated outcome. I cannot understand why on earth you would wish to read more into it than that.
Brexit did not destroy the UK economy
ReplyAt the risk of stating the bleeding obvious, that is because it has not yet happened.
The dire warnings may have been overcooked, but to say that there has been/will be no impact of the UK leaving the EU is preposterously premature.
@checkmate, Well said. I would ignore the narrow-mindedness of MM and LB's political views at this juncture. Taleb had it right when he called people like this "IBI" (Intellectual But Idiots).
Reply@yassa, stop talking rubbish. Let's state facts, NO-ONE knows what will happen tomorrow (if you did you'd be a billionaire many times over). Stop projecting your false assumptions out into the future. I can equally say that Brexit will increase UK GDP to 20% pa - "it just hasn't happened yet". Here are some figures from the IMF, that further point to you being wrong...
ReplyThe International Monetary Fund (IMF) has backtracked on its gloomy post-Brexit forecast for the UK, saying it is likely the country will be the fastest growing major economy in 2016.
Sigh. Should have just stuck to the bund short. Cut the ZAR. Also giving EURGBP a rest, to see whether a reversal develops here. Got back into AUDNZD yesterday and letting that run. Glad to hear MM hit the opening bid in GDX yesterday :) Good trade.
ReplyAs someone who appreciates MM's insightful market commentary/blog, I also appreciate his rational political points. The suggestion that companies in the UK be required to register foreign nationals, is probably, imho, little more than political gamesmanship vs the EU.
ReplyOf the 'talking points' of the past 24 hours, I can't help but be amazed at the oversubscription to the 50 year BTP issue and wonder if that is the bond market's equivalent of a 'Time magazine cover' type event!
Wait. So the people that think it's a bad idea to become inward looking and provincial are narrow minded? Right...
ReplyClearly it is impossible to have a proper conversation about this (as always, it seems) so consider the subject closed. Any further comments will be summarily deleted.
@Anons and impolite pals: please take it to NNT's twitter feed. I am happy to read opinions and analysis with which I disagree. I do not enjoy listening to dimwitted children squabble.
ReplyOn topic, bonds, yen and gold still down. Doesn't this look like a simple risk-on rotation?
No, it's not. It's me as the sole proprietor of this place saying that this poisonous dialogue is neither useful nor welcome. Feel free to start your own blog which you can moderate as you see fit.
ReplyMacroman, long term lurker and punter, I like this blog and the debate about markets but I share the frustration of other commentators here because your political comments on brexit are worse than tabloid.
ReplyTo hear intelligent people view the brexit debate entirely through the prism of immigration is frankly maddening. It shows total disregard for the rights of a people to democracy which have been utterly subverted by a europhile elite over the last forty years.
Sadly my American mates are of the same ilk but I put that down to ignorance. How people can spout such vitriol about Britain leaving an expansionist supranational responsible for humanitarian disasters in Greece and other periphery countries is frankly obscene.
My comments were directed towards a specific speech by the Home Secretary regarding a potential policy change vis a vis immigrants currently in the UK. I know and respect people who have weighed the issues and the balance of evidence, and come out in favour of leaving the EU. I may not agree with their conclusions but can respect their arguments.
ReplyWhat I cannot respect, however, is people polluting this space with blanket assertions of "criminals and rapists", as has happened in the past, or people who attack the author rather than the argument. Unfortunately, this subject matter provokes vitriol on both sides, and I am tired of it (as, it seems, are others) , which is why I would like to move the conversation elsewhere.
People have every right to express their views, whatever they may be; I am under no obligation to provide a forum for that.
@Leftback:
ReplyI followed your calls in late August re: CAD and oil. Very well-timed and much appreciated. The recent OPEC meeting seems to me a desperate attempt to prop up the price, setting up for another round of disappointment. However, timing this stuff is very difficult, and I am always very impressed with your ability to do that. When I look at crude I think the risk/reward looks good, but it's also fairly uncertain whether this will go on a stupid drift up to mid-50's.
http://blog.yardeni.com/2016/10/just-say-no.html
Replyinteresting comments on CB's buying equities, and also mentions the ZIRPNIRPQE-4-eva as fueling deflationary forces. Will this view trickle down to other economists? and after many years of trickling maybe even CB's?
this is ballsy: pension carry trade
Reply@Panda will have noted that LB is often, but not always, a few days early (and hence begins small). With crude, another spike is always a possibility, and if someone really wants to f*ck with that market short-term via options they can certainly do so.
ReplyAgree on OPEC smokescreen. This is a mean reversion trade that is backed by fundamentals in terms of overwhelming evidence of a global glut (supply) in the face of weak global growth (demand). An over-stretched trade is usually signaled when the asset price in question pierces the upper Bollinger band, which has happened for several days now. A snapback to a lower price, perhaps blamed on a firmer dollar, would not be a surprise. Note that we are not playing the front month in oil but looking at November. CADUSD already is looking weak, so any risk off or strong dollar move should result in a sizable correction.
With regard to the politics, I don't want to get into this too much, but Brexit cheerleaders should really consider whether; (a) the new right wing Tory cabal in charge will actually work out well for the down-trodden working man in Rotherham; (b) whether the EU [rather than the era of Pink Bits on the World Map] is solely responsible for the uneven history of immigration to the UK (which goes back well before Enoch Powell's "Rivers of Blood" speech, in fact there have been large immigration waves going back to 1066 and the Roman Empire); (c) whether a swift 10-15% devaluation in GBP is all that the country needed to perk up the CPI and GDP [how about another, or another? Go Venezuelan!]; (d) that 2017 might, just might, reveal the true consequences of unraveling a lot of complex business inter-relationships...?
I do think MM should be able to say what he wants ON HIS OWN BLOG, without being yelled at. We are in his house, yo.
As the various Anons show little interest in either respecting the wishes of the proprietor or discussing the numerous interesting facets of whats going on in the market, the comments for this post are now closed as I have better things to do than moderate it.
Reply