What have we learned so far?

As Macro Man sits at home, staring forlornly at the computer screen where flashing market prices used to twinkly merrily, he is learning to come to grips with his new, temporarily Bloomberg-less reality. He can take the time to read the joke emails about West Ham and exchange messages with old friends and colleagues that, if not representing a 21st century speed of communication, at least best that of most of the 20th century.

What is he to do with himself in the time it takes for emails to wing their way back and forth? Ruminate, of course! It's been an eventful year already, and it may be profitable to spend this downtime on considering just what we've learned so far in 2008:

* The US economy is in serious trouble. For most of the existence of this blog, Macro Man has been willing to give the US economy the benefit of the doubt, thanks to generally healthy corporations, decent wage growth, and latterly the beneficent trade impact of a weaker dollar. However, all three of these factors have waned somewhat, courtesy of the financial sector, inflation, and terms of trade. Whether Macro Man is late to this particular party is, to him, irrelevant; his job is not to be early (oft used as a synonym for "wrong"), but to make money trading financial instruments. And in that, he ahs been broadly successful.

* Major market equities may be perched on the edge of a bear market.... Although a recession will not necessarily produce a bear market in stocks, it sure as shinola won't help the equity market outlook. What's curious to Macro Man is how quickly some EM indices have bounced back towards all-time highs. Viva de-coupling!

*...though don't assume thatthere is a fundamental signal embedded in every large price move. Merci, Jerome!

* You can take Ben out of the helicopter, but you can't take the helicopter out of Ben. While Mr. Bernanke was a fine academic and is no doubt doing his best as Fed chair, his performance in January brought back memories of 2002-2003. At this point Ben resembles nothing so much as the shady bloke on a street corner, selling little plastic bags of smack to a long queue of badly-addicted customers.

* Contrary to popular belief, the dollar is still toast. With real two year govvy yields of -2.7%, why would anyone in their right mind hold dollars? The carry trade is alive and well (just see where AUD and NZD and BRL are trading!) but this time around, it's funded in dollars and not yen.

* The market is colluding to lie to itself about the monolines. In his fifteen year career in finance, Macro Man isn't sure if he's ever seen anything as odd as the willing suspension of disbelief surrounding AMBAC, FGIC, MBIA, et al. It's as if the market has collectively agreed to ignore reality, and that if CNBC runs a story often enough suggesting that a rescue package is imminent, perhaps someone will believe it and actually step up to offer one. Yep, this is likely to end well....

* Commodities 2008 = Nasdaq 2000? A study that Macro Man was hoping to run before his Bloomberg vanished was to do a simple overlay chart of the Nasdaq from 1996-2000 and whate from 2004-2008. It sure seems like the marked increase in volume and volatility are reminiscent of a blow off speculative bubble top, all the fundamental reasons for higher food prices notwithstanding. Obviously, if commodity prices collapse like the Nasdaq did, that would put paid to Macro Man's view of an inflationary world (at least for the near term), but one would presume that there would be some fireworks.

* Fixed income markets are buggered. The TAF may have helped, but it hasn't fixed the problems with fixed income markets. As on on Macro Man's buddies pointed out today, some long-dated, erstwhile high quality instruments are not clearing at yields that one hasn't seen in a long, long time. Meanwhile, two year govvys yield 1.6% nominal. Macro Man maintains that these latter instruments are moving close to the zone where one cannot afford NOT to sell them...but it seems clear that we ain't there yet.

* Credit rationing applies to EVERYBODY. I don't care who you are or what you made last year, baby. Show me the money or I'll show you the door.
Next Post »


Click here for comments
March 6, 2008 at 9:31 AM ×

Listen. If you get real bored, I'll forward you everything from my spam box. But, in the meantime, I'm fishing around for takes on the 7% that was lopped off euro exchanges on January 21st and later neither responded to on January 22nd in the US nor recuperated in Europe.

Generally speaking, the stronger the 'signal' the more likely it is be an artefact - at least for the short run. In the case of Kerveil, I believe the apparently generalized rationalization that it was somehow one-off or extraneous may prove wrong, although it may provide hope for a considerable length of time.

March 6, 2008 at 10:05 AM ×

why not put on a record and listen to some music morals man. which group made this song?

"money its a hit dont give me that do goody good bullshit im in the hi-fidelity first class travelling set and think i need a..."

bloomberg fix?
airbus 340?
new rolls?
scotch and soda?
all of the above?

CDN Trader
March 6, 2008 at 10:12 AM ×

What are your thoughts farther out the curve? What about short 5/10 yr US Teasuries vs. long German Bunds?

And yes, the commodity story has got out of hand, even as the long-term fundamentals remain intact. I think we will see a point in the next few months when everything implodes, including commodities. That will be the time to re-enter.

March 6, 2008 at 10:29 AM ×

Hi MM, good repose!!!
However today we're seeing a fixed-income dislocation as like as 2001 or LTCM, or worst!!
Watch SSA spreads, club med spreads, or watch AAA GE at amazing levels on the curve..
There are a lot of liquidations around..
@CDN trader: one good trade is long 30yr bunds vs long treasury, it has a lot of rationality, both with inflation or deflation. Behind you have a US cbk that devaluates, negative real yields and a dramatic level of debt. Insteas ECB at least try to keep value on its currency and value of money. If inflation keeps on will destroy value of 30yr treasury more than everywhere, if deflation happens the amount of US debt explodes and however yields need to go up!!

March 6, 2008 at 11:42 AM ×

One remark with question remark attached: could we say that one of the differences between Nasdaq 2000 and Commodities 2008 is the limited supply for commodities as opposed to high tech stocks? Once there was demand for high tech stocks, this could easily be solved via more IPOs (suppose we all agree that you can't create Platinum out of thin air, hence the "no build" condition a manufacturer of catalysts faces is pretty much real). It's just a thought and I am not saying that the inflow of hot money is not causing price disturbance. BTW: any thoughts on ZAR?

Macro Man
March 6, 2008 at 12:05 PM ×

CB, high inflation and high interest rates ain't exactly a winning combination for equities, are they? Given Eurostoxx outperformance throughout the Noughties, surely a bit of downside outperformance is not terribly surprising!

MP, you're right on platinum. But one can, of course, plant more wheat. (At Christmas lunch, I chatted with a PM from a well-known macro fund, and we agreed that buying wheat vol was a nice looking trade for 2008. If only I'd acted on it....)

As for ZAR, my thoughts are as follows:


March 6, 2008 at 2:48 PM ×


Are we going to see a EUR/USD of 1.60? It would not surprise me after Trichet's statement today. Of course, him and his Frankfurt caball might be pushed into reality at some point but so far, it is over to you ... Bernanke.