A few observations from the new gaff

Macro Man is now installed in his new house, and the Wi-fi is finally up and running.  While the move itself was pretty seamless, the endeavour was not without its aggravations; Macro Man's GTI packed in on the first morning of the move, and now apparently needs a completely new engine.  Somehow, he's more interested in looking for the bid for the car as-is than he is in paying the offer he was quoted.

In any event, despite his automotive travails he still managed to keep an eye on things from afar despite his lack of Internet.   The following are a few of his observations on the news and price action of the past few days:

* All time highs are all time highs.   While Macro Man was prescient enough to take off half of his short near the post-Brexit lows, the bit that he left went sour in a hurry- so fast, in fact, that he didn't ever re-sell the bit that he bought back.   His long-standing M.O. was to exit the position on a break of the previous highs, so he is out.

* QE is not what's driving this.   Despite the apparent enthusiasm in some quarters for attributing the rally to global central bank easing policies, this explanation rings false.  Consider, it you will, the dramatic under-performance of equities in those regions that are actually experiencing QE, which is particularly stark given that the competition from fixed income is less than negligible.  The Eurostoxx 50, for example, yields 4%....and is still down some 10% year to date on a total return basis, despite the fact that most of the German curve trades with a negative yield.  The Nikkei has performed similarly.

No, Macro Man sees the (relatively) stellar performance of the SPX has a function of two factors.   The first of these is the corporate leverage trade, viz. issuing debt to finance equity buybacks.   This is a well-known and persistent phenomenon that provides a bid to a number of stocks- though interestingly, most baskets targeting buyback recipients have underperformed the SPX thus far this year.

As Macro Man sees it, the real driver of this rally has been the apparent conditional commitment of the Federal Reserve to do nothing on rates over the next several months.  Now let's be clear.   Rates are not on a pre-set course, the Fed is data-dependent, the dots are a forecast, not a commitment, etc etc.  We've all heard it, and frankly, we all know that it's a load of mularkey.

Markets take their cues from what the Fed does much more than what the Fed says.   And what the Fed does it to sniff out, with a perspicacity that would elicit the admiration of Sherlock Holmes, every possible excuse, no matter how flimsy, to avoid putting rates up.  Again, this is hardly new news.  In a sense, Fed monetary policy is being constructed like a life-size replica of the Eccles Building fashioned from playing cards.    It takes a long, long time to build up the case for a rate hike, and almost no time at all to collapse the whole thing back to its foundations.

Insofar as the twin concerns of June- the lousy payroll figure and the financial stability threat of the Brexit vote- have been mitigated to a large degree, in a rational world the Fed should be hiking at its next meeting given the state of play in late May.   But it's not in the price, and the Fed has shown a signal unwillingness to lead rather than follow the market.

From Macro Man's perch, the anomaly is not that the SPX has roared to new highs (a possibly rational response to a better growth trajectory that will go unchecked by rate hikes), but that fixed income has not sold off more.   The SPX has retraced its Brexit move- and more.   Copper is well above where it traded the day of the Brexit vote.   USD/JPY has retraced its Brexit move.   US fixed income, however, has not- bond futures are nearly 8 points above where they closed on the day of the vote.   Frankly, given developments in other markets and the pattern on the chart, that looks like a better short than the SPX these days.

* Japan: the triumph of hope over expectation?   USD/JPY was oversold after the Brexit vote and given improved sentiment elsewhere, was probably due for a bounce.  However, Macro Man would be very leery of piling on, expecting an Abenomics 2: Electric Bugaloo rally to match the original.  After all, the BOJ has been going pretty much full bore the entire time, and it's difficult to see how much more they could do.   Yes, with a fresh mandate Abe can deliver more fiscal stimulus (presumably with the aid of a supplementary budget), but that's hardly revolutionary, is it?   Japanese governments have been going to the fiscal well for nigh on two decades with little to show for it but a temporary flare of optimism.   Barring a deeper, more thoughtful economic program, that's what Macro Man would expect here;  enough to push towards 110, perhaps, but probably a stretch beyond that without the Fed doing some of the heavy lifting.

* The interregnum is over: what now?  The implosion of the other candidates in the Tory leadership election likely says more about their lack of quality than Theresa May's abundance of it.  However, at least the most fundamental uncertainty surrounding the UK has been resolved much earlier than feared, which has got to be good news.   On the other hand, the more monumental uncertainty of when Article 50 will be triggered continues to loom, with the new Chancellor offering little clarity in his remarks yesterday.

Although one can understand the EU's frustration with the uncertainty, at the end of the day it's Britain's choice on how and when to proceed.   Extending the trigger date indefinitely has benefits but costs as well,  given the impact of the limbo-zone on the business climate.   It seems a dead certainty that Mark Carney will finally do something other than count his enormous pay packet this week; Macro Man will be keen to see how UK banks trade after the (widely expected) rate cut and possible QE.  The banking sector has been a pretty good barometer of the efficacy of easing programs, both successful (US, earlier UK, initial BOJ) and failed (NIRP in the EZ and Japan).   The BOE has long resisted trimming the base rate on concerns over the impact on the banking sector, but at this juncture seem to have concluded that the signalling mechanism of "doing something" will outweigh any tangible costs to financial institutions.   Macro Man is somewhat sceptical, but confesses that this view is based on gut reaction rather than any hard science.

As for sterling, it's had a nice squeeze, so much so that many who were calling to fade the post-Brexit sell-off are now only a few figures offside.  The vehemence of the rally almost certainly says more about the liquidity and risk tolerance of the market than it does about the underlying merits of either the new PM or expectations of Carney's policy shift.  Macro Man would be inclined to fade any post-Carney rally in sterling; after all, the major case for being short does not rest on rate differentials or monetary policy, but rather the long-term impact of economic uncertainty.  Macro Man's model target of 1.26 was nearly reached last week, and he sees relatively little reason to shift his belief that it will eventually trade there.

* Volkswagen sucks.  $8k for a new engine?   Pull the other one....