What a difference a day makes

What a difference a day makes.  There's loads to talk about today; so much, in fact, that the piece that Macro Man was planning to write for today will have to be put off until tomorrow, as there are other developments that merit comment.

First off is the news that Fortress is shuttering its macro fund.  Macro Man doesn't watch CNBC, but gathers that the usual suspects there were cackling and calling this the death knell for global macro as an investment strategy.  (By all means correct him if this appraisal is incorrect, but it certainly sounds in character.)

Let's be clear about something from the outset: although the FIG macro fund certainly traded macro products, its investment style was not one that typically characterizes global macro in its purest sense.  Consider two of the fund's most high-profile gaffes this year, EUR/CHF and Brazil.

Macro Man has touched upon both of these issues separately, so there isn't need to fully dissect each trade exhaustively in this space.  Suffice to say that in EUR/CHF, they were betting on a (perceived) high percentage chance of a small gain versus a (perceived) small percentage chance of an enormous loss.  While this position carried a modestly positive expected value ex ante, a raw expected value calculation is not the appropriate way to judge trades, particularly in the macro space.

Risk-adjusting the EUR/CHF expected return for what was clearly going to be a non-normal distribution in the event of a peg break should have disqualified the position from any serious macro portfolio.  Scratch 100 macro punters, and you'll get 100 versions of the same spiel about selecting trades with a positively asymmetric payoff profile.  This trade, on the other hand, was vol-selling, pennies-in-front-of-the-steamroller stuff....and pretty clearly contrary to the pressures exerted by macro fundamentals upon the market.  In other words, not "macro" as it was intended to be run.

As for Brazil...well, Macro Man has made his feelings known there for a few weeks now.  Of course, it is entirely possible for people of reasonable intelligence and goodwill to looks at the same set of factors and disagree.  The thing is, though, Fortress correctly identified that the fundamentals were lousy and deteriorating a year and a half ago...and still piled in and stayed in (if press reports and FIG's own public comments are to be believed) as they deteriorated further into what was pretty obviously a crisis.  That is less excusable.

So getting crushed by an FX peg break and a blow up in an emerging market country with large current account and budget deficits....it's not exactly breaking the Bank of England or recognizing the imbalances that led to the Asian crisis, is it?  Somewhere out there, those skill sets still exist, and the current environment suggests that they may be useful soon.   The death of macro, therefore, has been greatly exaggerated.

Moving to the Fed, it's interesting to see that two heretofore largely anonymous Fed governors, Brainerd and Tarullo, have both come out over the last day and a half and repudiated the by-now boilerplate language that "lift-off in 2015 may be appropriate, depending upon economic conditions."  No, these were two doves who don't think lift-off is required because inflation isn't rising and neither are wages.

It's difficult to argue with either of those observations, and if you think that both higher levels of wage and PCE inflation are absolutely required before taking rates off of zero, then it's difficult to argue with their conclusions as well.  We have thus apparently filled out the roster of the non-2015 dots in SEP plot:  Brainerd, Evans, Kocherlakota, and Tarullo.   Now, if one more Fed speaker hits the wires pooh-poohing the chances of lift-off this year, then it's time to sound the klaxons because something will have definitively changed.

(Macro Man was originally going to pen a long-ish post on this item, tying in the Taylor Rule and financial conditions as well...he hopes to be able to get it done for tomorrow.)

Finally, the about-face in markets.  Yesterday was really fascinating, as the microcosm chart of the SPX found a way to screw as many people as possible- it formed a double bottom, surged to new highs...and then crashed back to new lows in what was close to a straight line.  Ouch.

The reaction from emerging markets was particularly interesting, with some of the vulnerable usual suspects taken to the woodshed.   Macro Man noted yesterday how the shortest he will let himself get in a secular bullish macro trend is flat...the last couple of days' price action is a perfect example why.  Judging by the market action and indeed the comment section in this space, anyone with a bearish bent has not been dissuaded in the least by the corrective activity of the last couple of weeks; just as the SPX reached a critical technical threshold offering an attractive shorting opportunity, so too has bearish sentiment apparently reignited in the EM space.

Tomorrow sees the one-year anniversary of the fixed income "flash melt-up."  Only a brave man or a fool would bet on lightning striking twice, but if more dovish Fed speakers appear and EM and popular equity sectors get taken to the woodshed again, a 10 year close below 2% will leave yields looking awfully vulnerable.