Hang 10

Perhaps the market has just had TOO much time to think and plan and surmise and guess what will or will not happen with Europe, as it felt to us yesterday that there were few folks left with the patience to play and those that were, were just punting the headlines. Take the Euro for example, which did about 120 pts up, then down again on little more than a BTP auction and headlines. Which means +/-120pts is the slack in the market before you get to any reasonable old fashioned interests.

On the "will they, won't they?" front, TMM reckon Dec 9th is inching its way to a Schengen-shaped fiscal union leading to allowances (read: bailouts/rescue/aid/support) being extended to the debt-laden, with the ECB via the IMF the preferred mechanism ( if we are to follow the trail of German leaks) . A Schengen grouping would slice off the protestations of Finland and Ireland but it would be interesting to see how Schengen could use the ECB without total Euro-Zone involvement. And, of course, it is not obvious that the ECB are ready to play their part (though the latest MNI headlines suggest that opposition to a larger role by the ECB is falling).

Trying to talk to anyone about any good news out there (the US consumer confidence print yesterday, perhaps) and there seems to be a morbid gloom in response , as in "what's the point in talking about that when everything is going to be killed by the Euro implosion". Well what if, just if, we do wake up from this Euro-nightmare, or at least have a period of remission long enough to look at whats else has been going on in the rest of the World? For whilst some may argue that if German data is only just seeing impacts from Euro-chaos, then the US is back of the queue and we ain't seen nothing yet, TMM would prefer to think that the US is about to see its own resurgence and rather than being dragged down by Europe will end up helping to lift Europe up. In particular, TMM note that the Jobs Hard to Get measure from yesterday's number suggests that the US unemployment rate is likely to resume its downward march:

But still, Dec 9th is going to be D-Day though we do think the mood is remarkably similar to the end of September at the moment. Our no-commentsometer is definitely bleeping and flashing a turn and we hear that the Church of Doom is crammed with believers looking for salvation in each other. Dec 5th would make a befitting take-off day for markets in general (Equity-led), but it may strain at the leashes before that. The pattern of the past year has been a hope-driven rally into Europlan announcements, followed by the (inevitable?) post-plan sell-off. TMM see no reason for this pattern to be broken, especially upon the backdrop of an accelerating US economy (that appears to be driven, counter-intuitively, by the consumer - more on that in an upcoming post) and a positive seasonal (Santa Claus rally).

But let's be honest, end of month? Noise deafening? We are revving our engine at the lights but as for direction, we are heading East...

TMM managed to catch the bounce in Chinese H-Shares reasonably well in October as the deafening sound of the ongoing Chinese property market falls and potential banking crisis went Tabloid. Though they were spooked out of the trade when the Squideroos recommended going long vs. SPX a few weeks ago. Since then, H-Shares have underperformed the S&P500 by about 10%, stopping them out. Now, TMM certainly do not want to poke fun - we all have cold periods, and TMM have had some very cold periods at times over the years - but we reckon that now is the time to get back in.

TMM note that sequential inflation (TMM's model reckons November's CPI comes in around 4.2/4.3%, for what it's worth) in the key problem categories - food and particularly pork has been trending down for a few months now. Not only that but Li Keqiang and related entities (CBRC, PBOC) seem have done more than shown cold steel the the real estate developers - they've whipped it out, said "I'm gonna cap this guy right here" and sprayed Dalian Rightway's brains all over the room. Cue massive price cuts. Depending on who you talk to cuts have been in the order of 30% from last offer in month of September for various Vanke developments particularly in Shanghai - TMM don't see this slowing down until sales pick up - which they are not. If a 20% drop in prices is what they wanted they are well on their way with the attendant cost in rent-equivalent cost of shelter.

Despite this, recent rate cuts at more SME centric banks (China Merchants & their ilk) indicate that while the government is going to continue terrifying developers unemployment is a no-no and TMM expect loosening to continue with this recent rate cut. China's confidence with inflation is always given away when they stop suppressing power prices which were lifted today.

Of course, the noise overnight has been that a particular advisor to the PBoC - Xia Bin - stated that selective easing does not mean broad-based reserve ratio cuts etc. Coupled with rumours of tonight's PMI coming out as low as 47.5, this sent Chinese equities down. Now, TMM run their own Chinese PMI model, which is pointing to something closer to 50.5 (vs. the consensus 49.8), and while the difference there is not particularly large, the psychological function of the (essentially, arbitrary) 50-level means that there is potential for something of a sentiment turn-around. So, at the risk of (once more) looking stupid, TMM dipped their toes back in overnight.

Now, TMM are certainly not arguing that China is without problems, as the property sector stress and associated knock on effects to the banking sector are nothing to sneeze at. But TMM will point out, that when you borrow in the same currency as you lend in, nominal GDP running at 10% (even in the event of a so-called hard-landing) can help cover up a lot of poor lending decisions. TMM's approach here is to try and fade the sentiment extremes as the whole "China thing" appears to something of a semi-religious debate between the two Jims (O'Neill & Chanos). China may have a ton of deleveraging to do and the developers may be public enemy no 1 but the rest of the economy is catching a break for now.

UPDATE: Just as we finished writing this, the news hit the wires that China have indeed cut the RRR, so TMM guess folks won't be reading Xia Bin's blog again...! And to some extent, this could be seen as validating the weak PMI rumours and thus TMM's PMI model is probably wrong.

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Twenty Questions and a Box of Matches, Please

1. Where will SPX be trading when Santa comes down the chimney?

a) above1250
b)1150- 1250
c) below 1150

2. What will Europe have pulled out of the hat by December 24th?

a) A Schengen-based fiscal union around which to structure mutual support.
b) A battered can, to be place kicked into January.
c) Sorry, don't understand the question as Europe cannot currently be defined.

3. By year-end the Middle East will see (multiple answers allowed) :

a) The Syrian leadership be toppled.

b) Egypt have become the most democratic country on the planet.

c) Egypt be boiling in blood.

d) Libya be teetering on Somalian warlord rule

4. And Italy's 10 yr yields will be:

a) over 8%.

b) under 6%.

c) Unavailable due to the EU banning trading in them.

5. In 2012 China's economy will be:

a) A smouldering property market train wreck with HSCEI at 6k.

b) Moving BRICs like back in the day with 9% growth. Jim O'Neill will publish a note simply titled "Todja, didn't I?".

c) Bumbling along, 7-8.5% growth, with HSCEI no higher than 11k.

d) Revolution! All your equities belong to Great Hong, son of Holy same sex couple of Buddha and Jesus.

6. As BRICs has become an overused term which new country grouping acronym would you propose?

a) Turkey, Uzbekistan, Romania, Denmark & Sweden.

b) Chad, Romania, Afghanistan & Paraguay.

c) Brazil, Oman, Liberia, Lithuania, Oman, China, Korea & Switzerland.

7. The IPO of Facebook said to value the company at $100bn is:

a) A great opportunity to Buy (Like).

b) Groupontastic.

c) Facebook? Wasn't that soooo 2011?

8. If you are receiving fixed rates on Euro swap, what does paying 6m Euribor in EUR mean?

a) What it says on the tin.

b) 6M FIBOR in DEM.

c) 6M ATHIMID in GRD.

d) Some blended rate in ECU-2.

e) Who cares, my counterparty already went bust so I'm fucked

9. Where will DEM/ITL trade post breakup?

a) 1100

b) 1400

d) Down at the Mithras

e) On an e-platform run by the Vatican.

f) On an e-platform run by the Bundeathstar.

10. Gilts are:

a) The new safe haven.

b) A great way to stuff the Japanese.

c) Something you have after forgetting your wife's birthday.

d) something that an Italian would love instead of BTPs, but as the word is unknown in his vocabulary he will never have.

11. Merv's remarks about the massive bookkeeping profits on the AFP are:

c) Asinine as it will have every part of government clamouring to spend it.

b) Solely down to his financial brilliance.

c) Solely down to his own belief in his financial brilliance.

12. Silver is:

a) Money.

b) Metal.

c) Way to fleece clients through theta.

d) The word that normally comes after "hi ho".

e) Tarnished.

13. The Sun is:

a) A shiny bright object last seen in the UK by a past generation.

b) A shiiity light objectionable publication in the UK run by a past generation.

c) The first name of your next boss.

14. The disclosure that Hank Paulson gave a bunch of ex-GS hedge fund mates the heads up on how the Fannie & Freddie bailouts were going to go down is:

a) A friendly thing to have done.

b) Yet more evidence of Crony Capitalism, likely to add fire to the OWS campaign.

c) Not a surprise.

d) Going to land at least one of those guys present in jail.

e) A lie... He would never do that.

15. How do you make a billion dollars?

a) Start with $10bn and invest in airlines.

b) Start with $10k and invest it in that nerdy kid down the hallway's thing he keeps on talking about to stalk girls on campus.

c) GoldsheepleBer-nankfiatmoneyRonPaul.

d) Apply academic theory regarding optimal currency unions to CDS trading circa January 2010.

16. Who is coming to Jim Chanos' Xmas Dinner Party?

a) Wife 1.

b) Kids.

c) 6 Czech models.

d) All of the above.

e) Client No. 9.

17. Today's BTP auction was:

a) A disaster as Italy had to pay 7.5 % for 10 yr money.

b) A great result compared to what people were dreading.

c) An excuse to further squeeze the market shorts by the knadgers.

d) Only filled thanks to a buy one get one free offer on the back of Kellogi's Corniflakies?

18. The FSA report into the RBS/ABN deal:

a) Was amazingly insightful: "FSA CALLS RBS DEAL ON ABN `RECKLESS' GAMBLE".

b) The product of 3yrs of hard investigation.

c) Another example of regulator too busy looking backwards to allocate blame rather than looking forwards to prevent it.

d) Cost 40bn quid.

19. Wiedmann is:

a) The name of the German detective in Inglorious Bastards.

b) The name of a secret plot to cause the break up of the EUR.

c) The name of the man at the Bundeathstar.

d) Not on TMMs Xmas card list.

20. The current market moves:

a) Are great, we are loving them.

b) Are a 12 yr old quant's nightmare.

c) Are an excuse to shut up shop 'til Xmas.

d) Can be explained by feeding torn up news items into a rat's cage and seeing which ones they devour and then vomit out of the cage.

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Losing one's Religion(s)

TMM are, of course, fearless traders in the markets, valiantly striding forth over the bodies of the financially slain, effecting tactical advantage to their strategies as they out wit and out manoeuvre everything that the macro world can throw at them. Rugged-jawed, clean cut... well maybe a bit of designer stubble, commanding and heroic. Unless of course you like your traders with a feminine touch in which case we would advertise ourselves (as a recently divorced friend's mates did for him unbeknown on a dating site) as 6ft 4 Firemen who love puppies (it worked, by the way, he was mystified by the sudden 150 date requests in his inbox - some even from girls).

But we are human and whilst the Hedge Fund/Investment Bank way is to never show weakness in case someone uses it against you, perhaps once in a while it isn't a bad thing to share a bit of emotion. We aren't talking the emotion of dealing rooms which normally goes along the lines of "I'm 35 /45"... "Oi! You piece of shit, I need it more aggressive!".. "OK try... 35/45 YOU F**CKER!". Just as a side line on this point, aggression must still count in trading pits because have you noticed that when CNBC go "down to the floor" to interview a trader he never has a neck? And as a complete sideline could someone explain why they are always named after body parts - "Here we have Rick Patella with Scott Epiglottis"? We digress... No. Here, we mean that phase of bereavement when some of the things you believed in as foundations on which you built arguments and made decisions are crumbling to dust. Well, TMM are losing faith in a few of the things they believed in up until recently and though we are as described in the first paragraph above and would never show weakness, we are willing to share our bereavement over the recent deaths of a few old well-loved beliefs.

First Europe. As mentioned in yesterday's post we really really believed that the Germans wouldn't choke chain the rest of Europe to this extent. They may not have noticed yet, or worse not care, but the dog has stopped breathing and its eyes have glazed over and it may be even harder to revive than this one:

Reviving Puffy

But the Germans are only just noticing that they may just have set fire to their own house in the process as yesterday billows of smoke were spotted coming from their own bastion of probity, the mighty Bund market. In itself is a religion up in flames. Who would have thought in 2008 as the UK government took on the crippling burden of bank debt that only 3 years later a headline would cross the screen "Bunds sold for Gilts as traders seek safe haven" WHAT?! Has the world gone mad? Yup... Now, there are a couple of ways of looking at this. It's bad as this has now turned into a general exodus out of everything Europe including Germany, or its a good thing as setting fire to Germany may be what's needed to get them to FINALLY reach for the financial fire extinguisher. We would hope the latter occurs but are still terrified that the Germans are such sticklers for the rules that if they say "walk off that cliff", they will walk off the cliff. At least if they did that one of our core beliefs would remain. So, TMM have decided to use the Gilt/Bund spread as their NEW Risk On/Off metric.

Next... Wind Power - So the UK Government is sending signals that the energy generators are evil, global warming is real, we must go green. We have always believed that wind power works, otherwise why else would the countryside and coastal shallows be sprouting these things. So first we look at offshore wind vs onshore: Offshore costs 3x as much to build, 3x as much to operate and the connection to the Grid is expensive and complex. Plus the Capex is so huge that only the big boys can play. Simple, scrap that and let’s look at onshore and it doesn’t take long to figure out the following equation for wind power investment:

Success or Profit = Politics x Engineering x Nature x Market.

Engineering is actually pretty straightforward. Onshore wind turbines produce 98% of the power expected (for a given wind strength) and work 97% of the time. Impressive stuff. The trouble is that, of the wind farm sites you can find that might make sense and which you take to planning... 50% are rejected (by politics). Now let’s look at the Nature component: wind forecasting. In summary, its rubbish. Don’t be surprised by +/- 20% and its been -20% in recent years and they don’t know why – maybe global warming is going to change the wind pattern over Europe permanently. Great. Oh and recall that your leveraged by the laws of physics (10% weaker wind = 20% less energy extracted). The Market component is mainly power prices. Ask the expert forecasters again and they will tell you prices are going up for the next 20 years. Maybe. But you’re a minnow in the pond where the currents are being driven by world oil prices, carbon taxes, go/no nuclear politics, European recessions etc.

So as we look at the journey ahead and consider buying a plot of land and sticking up a wind measurement tower our profit forecasting says that is 50:50 that we will get planning and that if we finally generate some power our base case downside could be 80% of the production we expected x (say) 80% of the energy price we expected. But hey, that’s OK because it will only take 4 years to get to 20% base case profit. Forget it. Another belief dies...

Now then. Android phones. Last year we cheekily put up a post declaring our love for them over the latest i-Blx 4.whatever that had just come out. And indeed we just loved android for its super Linux like adaptability. Apps and controls that we could adapt to the nth degree. But Its all starting to go a bit "windows" on us. Just as a PC seems to run slower over time , the android phone is developing nasty symptoms probably due to that adaptability. Updates now take up greater and greater amounts of the "rationed like gold dust" pico-byte of RAM they are allocated and really we don't need a Taiwanese dictionary update to "maps" anyway. And as for data, is the thing in cahoots with our network provider to gobble "SETI project" amounts of data to ensure massive phone bills. Just stop it! At this very moment in another window we are having to dig around in some hidden root directory to erase a single file that blocks any update. Having spent a full man-week trying to get Macro-daughter's newest HTC "By-god-we-are-so-amazing" to talk to the home network even this stalwart has been forced to replace it with an i-blx phone. What a shame.

And finally, before you think TMM are losing faith in everything, there is one thing that they have been gaining faith in: Luck. As we look around us we are always amazed at the progress some people have made through life with little tangible ability. Survivor bias is a wonderful thing. Lets just look at the Bank of England, Australia ( and their banks), Hugh Hendry and David Ferrer and most of all...

TMM - for having such a charitable readership.

Happy Thanksgiving!

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What's Going On

What a week. We apologise for scant posts but it's been one of those "oh jeez, we are wrong, it really is falling apart" moments. Introspectively it leaves one sort of crushed with that feeling that you have been "had" in a card game. Why did we believe all their sweet talk? What's more even defend them? Oh well. You live and learn (then die and forget it all). Hence yesterday's lament, a sort of TMM towel-chuck and we lay ourselves on the altar to Toldjaso .. yeah yeah yeah ..This morning is seing more dominoes fall.

Spanish T bills at 5.11% for 84 day as we write. When the T-Bills go, thats it. Kaboom. "Bring me a new periphery waiter, this one is broken!" Ironic that the company that built its reputation on ferrying Brits to these now broken Peripheries is also going down. Thomas Cooke. Looks like the end to an era and an end to fx-dealing room cries of "Aaah much? Tell 'im to go darn Thomas Cooke's". While there are plenty of reasons to see Thomas Cooke getting in trouble as being simply the inevitable decline of a busted business model it is also a telling sign of what happens to people with funding issues or even plain old short term debt maturities in a credit crisis. Just ask Washington Mutual. We were going "yours" at the end of last week leaving us pretty flat in most respects and to be honest with Thanksgiving ahead perhaps we should just take a break and take a look around at what's going on as Marvin Gaye once said.

TMM think a few things are happening here. Firstly, there are some things that might be best described as "Paying the Bill" and a somewhat inevitable end to a massive developed world credit binge. Weak consumer credit, continued deleveraging in markets that are otherwise doing well like Australia and higher saving rates are par for the course of a post-bubble world. Sure it slows growth and is painful but that is life after a period of credit fueled growth - much like a big night on the town, you take your Berocca and aspirin and make the most of a bad situation. To that end it is still a weak market for growth whichever way you cut it even when politicians are behaving themselves. Equities are something you buy cheap and delevered - buyouts and leverage are more dead than contrast collar shirts in a recession.

Which of course, they are not. TMM like most people have low expectations of politicians that is informed by extensive periods of observation. That being said when faced with the eminently insane and the unpalatable but sensible politicians tend to have an ability to step up. Think of Jimmy Carter and mileage standards: Detroit was not exactly gagging for it but it had to be done. Or, for example, the Bush administration's war on everything and the Patriot Act: TMM have serious doubts about this period but ultimately when the chips were down stuff got done - whether aforementioned stuff was a good idea or not. In this regard the last few weeks have been an abysmal failure. The failure of the Supercommittee is just an embarasment. The last thing the world needs is fiscal drag right now especially of the kind that hits those with a high marginal propensity to consume. To that end the Tea Party solution of hitting benefits and not doing anything about payroll tax is stupid. TMM can only think that this is a cynical ploy to get Romney up because there is no way any sensible person would do this on its own merits.

In Europe, TMM continue to be boggled by the idiocy of Eurocrats and Merkel. What they fail to realize is that Euribor going bananas and financial conditions tightening is a little like holding your breath under water: a short burst is fine to instill policy discipline, a minute is pushing it, 2 mins you are likely brain damaged and 3 minutes you are likely dead. TMM won't hazard a guess as to where we are here but we are pretty sure the subject is not meant to turn blue and have its eyes roll back in its head. Ultimately its put up or shut up time because the longer the funding and bond run goes on the harder it is to reverse. TMM are unsure what would trigger a change - a bad IFO, a major German or French corporate bankruptcy (Holcim? Peugeot?) but lines in the sand have been crossed before and we have no reason to be optimistic here. Any resolution is better than the status quo at this point.

Which brings us to emerging markets which Jim O'Neill and the BRIC layers would like us to think can carry the day. While TMM are not part of Team Chanos we are not at all convinced: these countries have had their own credit binge over the last few years and have spent money on a lot of deeply pointless and stupid stuff. We also doubt they are going to selflessly inflate and repeat the West's mistake for the West's benefit - China's glide path is rehab, not a big night out with Charlie Sheen. Good for China long term but no short term bang for the West there.

It appears that the world does need a new deal of some sort, something that involves less imbalances and more progressive taxation though we doubt we will see it until the interest groups opposing it are facing the Gaddafi treatment. To that end TMM remain pretty cautious. There are rays of hope out there but they aren't macro: the EIA energy forecasts use solar power at $6 per Watt, well, market is $1 per Watt so cheap power for all and goodbye inflationistas (we hope). Similarly, agflation has come back and at least in the US gas is silly cheap - at $3 per GJ its ~20 per bbl on an energy content basis.

If there was more political cohesion, TMM could be pretty bullish but for the meantime risk premia in corporate debt is preferable to equities and USD is preferable to well, just about everything. If politicians continue to screw up loan to own might be the way to get long corporates because if financial conditions get much more messed up there will be a lot more accidents.

Dear European Politician

Dear Mr/Mrs/Miss European Politician.

Nearly 13 years ago you implemented a system of monetary union in Europe which, you told us, would be the framework on which to hang future prosperity and cohesion, allowing Europe to take the next step towards unity. At the time we pointed out that a common currency should be the last piece of the merger jigsaw to fall into place and not the first. Analogies of putting a fence around 2 TGVs as they crossed each other in opposite directions assuming that the fence would hold them together were pooh-poohed as the sign of a lacking of understanding as to how Europe worked. Since the introduction of the Euro, you have maintained that nothing could or would rent the Euro asunder as it is at the heart of what IS Europe. Yet here we are, hearing that distinguished institutions are now planning for the break up of the monetary zone and watching confidence in your grand plan evaporate. Yet what are you doing to defend this beating heart of Europe? Nothing. In fact, worse, you have positively rejected any solution that has been suggested to you. As such we would be grateful if you would answer the following questions

1) What has changed to make you realise that the Euro may not work?
2) Why are you doing so little to make it work?
3) Whose fault is it that we are in such a mess and what will be done to those responsible?

With respect to your answer to no 3, we would imagine that despite your "Buck stops here" status, you will try to blame anyone apart from yourselves. We also suspect you will try to blame bankers, but we would advise you to think carefully about your response. The banks may well have taken ridiculous advantage of sets of rules they were given by you, the regulator and the accountants, but in the case of Europe the world is beginning to suspect that the arrogance of the political classes is at the core of the problem. So perhaps humility after your hubris would be a better recourse.

Yours Team Macro Man

Swedish Vengabus

Well, after yesterday's utter carnage in European government bond markets with not even Finland - ironically, the only country within the Eurozone to actually *STILL* meet the Maastricht Criteria - being slotted as players try and sell anything they can, TMM reckon we are getting very close to the end game. It's pretty clear that liquidity in European bond markets and the price action within them has now become completely disorderly, non-functioning, and at the point of seriously impeding the flow of credit and transmission of the ECB's monetary sadistic policy. The front-ends of the core countries of Holland, Finland, Austria, have all sold off between 25bps and 100bps over the past few days, something TMM would argue constitutes a de-facto monetary tightening in those countries. Given these are, arguably, not the "profligate" iPIGS, a sound monetarist like the Bundesbank would loosen monetary policy. TMM reckon policy action is imminent...

...The question is, "by whom?".

TMM have been debating precisely what is going on behind the scenes, as to whether the Axis of Evil are merely ignorant to the seriousness of developments, or whether this is all part of a grand plan driven by Realpolitik. And TMM have come to the conclusion that it is a gigantic game of chicken... Not between the ECB and Italy or whoever. But between France and Germany. The former is desperate for the ECB to do the heavy lifting, especially so given that their AAA-rating is the one at risk when it comes to EFSF leveraging and the oncoming Euroarea recession. Germany, however, wants to push for "More Europe", with the EU being able to have a veto on national budgets and balanced budget rules across Europe - i.e. fiscal union on Germany's terms. The French, eager to avoid surrendering to the Germans... Again... Hope that Germany blinks first, and allows the ECB to step up. Yesterday's comment from Schaeuble, contradicting Buba's Wiedmann, coupled with German Wiseman Bofinger's warming to this idea suggest that the domestic economic debate and political stance are close to backing down. TMM would expect given the kicking the rest of Europe has been given the past few days that some of the Axis of Evil begin to defect, and the ECB's Nowotny on Friday was a notable example of this. But, with French 10yr OATs approaching 200bps, the pain level in the Elysee Palace must be approaching capitulation levels.

Who will blink first?

All TMM will say on this - as far as relevant analogy goes - is that in November 2008, when Fannie and Freddie AAA bonds were widening sharply in response to indiscriminate deleveraging and general selling of anything related to those entities, the Fed capitulated once this paper got up to 195bps intra-day and began buying MBS in size.

Moving on...

Something TMM have often shaken their heads in despair at is the perennial determination of commentators and market participants to present the "Theory of Decoupling" (repeatedly resulting in a massacre of EM assets) and "The New Safe Haven". The former theory builds over time as punters form the opinion that their portfolio has some uncorrelated trades, then all of a sudden there is a dramatic leverage-driven unwind that blows said portfolios out of the water, and the theory dies for about 9 months (Asian FX). The latter, however, appear in a sudden rush to buy a currency/asset, with strategy and sales notes spouting the virtues of said country. Said Nuvo-safe haven will then embark upon a worrisome backslide toward the level at which it traded prior to its status elevation and then promptly resume trading like the cyclical beta asset it always was, sending everyone off looking for finger-burn remedies. TMM have witnessed this with the Singapore Dollar, the Aussie and most recently, with the Swedish Krona (SEK)...

Now, TMM agree there are loads of reasons to love Sweden, not least the quality of their gene pool, but, as with many other exoduses to new safe havens, neither the numbers nor the fundamentals stack up. When thinking about what you might want in a safe haven, the key things are: (i) somewhere large enough to park your cash in a liquid manner, (ii) somewhere safe enough to park your cash, (iii) a current account surplus to remove capital flight risk, (iv) low government debt to help provide (ii) and prevent (iii), and (v) low beta to the global economy. Now Sweden certainly satisfies conditions (iii) and (iv), and its government debt is certainly safe enough to satisfy (ii). However, with respect to (i) and (ii), there are distinct differences with, say, Switzerland. In Switzerland's case, while there isn't much in the way of a bond market, there is a very large banking sector with a long history of providing safety for investors. However, Sweden is distinctly lacking in this respect: the stock of outstanding government debt is rather small, at less than $200bn (see chart below, orange line), and its banking system just isn't big enough. And while certainly, since the Eurozone crisis erupted there has been a flow of money into Swedish banks (white line - non-resident Swedish bank deposits, $bns), it has been a small net ~$31bn and has actually reversed over the past few months.

As far as point (v) goes, in developed market terms, Sweden is well-known to be a pro-cyclical market. The below regression of the change in Swedish YoY GDP vs. that of the Eurozone confirms its high-Beta status (1.67 since 1995) .

So TMM reckon it is hard to label the Krona a "safe haven" and are wondering if perhaps it has become the next Vengabus. Given the economic linkages with Europe, TMM reckon there is a trade here. Looking at Swedish Export growth (see chart below - blue line), a regression against Eurozone, US and UK import growth (red line) explains most of Sweden's export behaviour. But drilling down, it seems clear to TMM that the bulk of the variance is driven by Eurozone Imports (green line). As far as TMM can tell, Sweden is just a leveraged play on European growth which, coincidently, is going right down the Swannee...

...In recent months, Swedish economic data have disappointed, inflation has peaked and the curve begun to price in rate cuts. Additionally, the growing noise around EU bank deleveraging is likely to have a negative impact upon the asset quality of Swedish bank operations in Eastern Europe. Second-order feedback effects indeed. It thus surprises TMM that despite the curve pricing in rate cuts and financial volatility spiking that EUR/SEK has not really rallied much and when compared with a (very) naive model base upon rates spreads and the VIX, it seems too low to us...

And at a time of little divergence from Risk-On/Risk-Off, it's interesting that EURSEK's correlation with such factors has been pretty low of late. So, in the interests of adding low correlation trades to their book, TMM reckon scooping up some EUR/SEK is not a bad play but to avoid that Euro thing will instead go long GBP/SEK.
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While Europe Fiddles, TMM Correlate and Disperse

The most remarkable thing about Europe is that, as we posted last week, trying to get something positive out of the Eurocrats is impossible. What is sadder still is that throughout the whole of the crisis TMM have not felt such a level of resignation that the Eurozone is about to collapse. This morning the number of folks leaving the stadium thinking it’s all over is at stampede levels. Whether they are right or they are wrong is immaterial at the moment the crush can still kill. Now if you are listening, dear Eurocrats, we are at the point where even YOUR ivory towers are cracking. So how about you do something to restore a little CONFIDENCE? Because that is all it will take to stop this unwind of leverage that is causing all classic money multipliers to dry up within the zone and which you seem so adamant not to compensate with policy change. Though last spring was and then last summer was, NOW is the time for action.

TMM think that’s all we can do really as our bit to make things better. A couple of years back we adopted the ethos of only worrying about things we could change, which actually led to a less depressing life and a new liberation. So, despite the deafening roar of icebergs against hulls, we are going to look at something else to try and take our minds off it.

TMM thought it would be worth discussing some other stuff – namely equity correlation and its cousin, dispersion. One of the sustained features of this crisis is high volatility (both realized and implied) leading to progressively higher levels of equity correlation which makes trading individual stocks much less rewarding. If you regressed the returns of individual S&P equities over the last few years as such:

Return =β*S&P Return + β*Sector Return+residual

You’d probably find that the R-squared or predictive capacity of this regression was strong to quite strong – and probably a lot more strong than in the period prior to 2006. This poses a couple of obvious questions:

1. Why bother doing any work on individual stocks if its all RORO and sector risk
2. Why bother paying CEOs squillions when their value add seems utterly indifferent between one another?

So when there really isn’t much dispersion to speak of the stuff worth fighting over is macro – spreadsheets, cash flow models and sensitivity tables can take a hike. Its all positioning, economics, and broad based sector sensitivities. This likely explains why some very large funds have done very well over the last few years – the richest pickings have been in things that trade a lazy few billion a day and thus its possible to be very big indeed without being too big (or too weird) for the market.

Volatility and correlation have moved in lockstep and trended higher, arguably since 2007:

There is a pretty clear reason for this and that is that most of the aggregate risk out there is systematic in nature. Back in the 80s or 90s you might have worried about the likes of Microsoft eating your lunch, today the larger concern for corporate is a wholesale breakdown in the banking system, sovereign credit, or the like. Basically, trading DM is like trading EM used to be because like EM did back then DM has a leverage problem.

TMM think that following some – any - resolution of the Euro Crisis that is about to change. Why? Because while deleveraging is continuing, it is slowing in the US and there is a lot of noise - and one letter in Caixin - calling for normalization of interest rate policy in China. Once Europe falls into line (possibly with a few members dropping out) the new reality will be priced in and we can get over crisis phobia and move onto the mediocrity of cyclical growth. Not to mention that most Central Bankers worth their salt know that, “yeah, you know, we probably should keep an eye on that stuff” with the notable exception of the completely discredited JCT/Greenspan faction. To that end the tsunamis of macro volatility are going to get progressively less forceful and micro forces will reign.

This can only mean one thing: TMM are going to have to spend more time talking about industry or intra-industry macro rather than good ol’ Indices-Govvies-FX macro. And that means that the big gains will be made out of disruptive business models and technology – largely the latter combined with the former. You couldn’t manage the resurgence of the horse and buggy in the 1920s if you tried but great tech works best when married with great design as the late Steve Jobs showed on a few occasions. To that end what is TMM looking at?

Consumer: So banal it barely merits a mention but suffice to say if your 15 year old daughter buys everything online guess what – in 20 years high street is going to be gutted. TMM think that longer term physical retail franchises are going to struggle vs online stores in the Amazon fulfillment chain.

REITS and Property: On a related point if high street gets demolished then we will need a lot more warehouse and logistics centres but not much in the way of retail malls.

Energy: Two stylized facts about energy generation have held for some time. One is that the bigger you go the lower your capital costs and cash costs. The second is that coal (and high carbon emissions) are cheapest and best. TMM think this is unraveling fast, firstly due to super-efficient combined cycle gas turbines but perhaps even more so due to the efforts of Bloom Energy. Solar is getting a nice run based upon how cheap it is getting but distributed and scalable gas generation from solid oxide fuel cells is getting pretty silly cheap too.

This poses another really tricky question: if you look at retail power prices for most places the $/kWh bakes in a lot of maintenance capital expenditure on power lines, cables etc. But what happens when power usage starts to go off a cliff because major point users of power go for their own production on site? Well, you get the Bloomberg subscription model problem: as people get fired, you have ot charge more per subscription to get cover your fixed costs. And that to TMM makes grid companies and the conventional grid sound like things that could be due for a major shakeup. Utilities as defensive? TMM are not so sure in the longer term, and it’s that kind of “she’ll be right mate” complacency that is the source of the worst portfolio management accidents.

Finance: If everything gets moved onto exchanges by regulators, what would Interactivebrokers not be able to do better than most investment banks? Indeed.

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If this post helped you, please help them. TMM's Xmas Charity Appeal:

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Take a little, give a little

It is Veterans' Day in the US and Armistice day in Europe and rightly we should sit back and reflect on the suffering of others and the more important things in life. So TMM feel it is an appropriate day to launch their Christmas (only 6 weeks away) Charity Appeal.

Last year we were collecting for Great Ormond Street Children's Hospital, but this year our choice was swayed by personal family experience and so we are hoping to raise money to fight Ovarian Cancer, a disease whose subtle early symptoms make it hard to detect.

OK, here is the hard sell. Team Macro Man have continued to shun commercialism and advertising and write when they can squeeze it into their spare time. But once a year we will be asking for a little back. Not for us, we do have day jobs that keep us going, but for a charity. For us it adds more of a purpose to what we do and for you? Well that's up to you. But as we said last year, if you have either saved or made a little money thanks to something we have written (no we don't do refunds) or even if we have just raised a smile, then perhaps you could help "Target Ovarian Cancer" help others.

Special Feature! - This appeal is perfectly tailored to those of you looking for the end of fiat money. What better way to get rid of your useless bits of paper than to give them to a charity that can use them to alleviate and prevent the suffering of others?

Oh and finally. If you are reading this on a syndicated site then good for this site! We will continue to support you as you have of us in posting this request.

With deepest thanks to you for your continued support,

Polemic, cpmppi and Nemo (Team Macro Man)

https://www.justgiving.com/tmm

Raising the dead and the Axis of Evil

OK, that's it. Calling on a European policy to appear in front of us as a divine saviour is turning out to be nigh on impossible. We have tried the Ouija board of Greek debt, then the talking in tongues of Greek politics, we have tried sticking needles in the French banks, and finally the market has resorted to sacrificing, on the Altar of Merkozy, the whole population of Italian debt. All of it - old and young, short and long in a conflagration that has resulted in much wailing and gnashing of teeth. The markets now look North for signs of the second coming of the Saviour who was seen to redeem the Irish and Portuguese. But silence... nothing... rien...Tumbleweed. Then a familiar noise... a bickering from Brussels and apology from the guy behind for breaking wind. But no saviour, no redeemer no bloody anything.

And you know whose fault it is? Not the Greeks for lying through their teeth over their off-balance-sheet-off-market-cross-currency-swaps, nor the Spanish for building too many holiday homes, nor the Portuguese for spending too much time playing golf, nor the Italians for being Italian, nor the Irish for dancing little property building jigs in leprechaun hats as the EU gold rained upon them, nor the French for believing that they are not in Club-Med. No... it's not them...

Its the Axis of Evil. And no, wrong again, TMM don't mean Iran, North Korea and the like. We mean the Bundesbank, the ECB and the German & Dutch governments. And it's time for action.

TMM reckon that one of two things is happening:

(a) The Axil of Evil are indeed clueless: staggeringly ignorant and blinded by anachronistic ideology, they are unaware of (or even exceptionally pleased with) the collateral damage they are causing, not just within Europe, but to the global economy and financial system. Yesterday's Italian bond market crash probably shocked them, but it's all these periphery guys' fault anyway, they can clear their own mess up.

OR,

b) Realpolitik dictates that Italy is held over a barrel in order for the Axis (led by Germany) to regain the power over the rest of Europe, lost circa 1944. This view follows the mid-1990s ERM crisis and the Bundesbank cutting off Italy up until contagion eventually spread to France, whereupon, Kohl called off the attack dogs.

TMM reckon that if it is the case that the Axis Powers are of view (a), then it should not be long until either they capitulate in the face of external political pressure or the stark fact that the Italian bond market (and soon the French bond market) have ceased to operate. This line of thought would be supported by German Wisemen calls for a joint and severally-guaranteed fund yesterday of around EUR 2.3trn. Of course, this comes with German fiscal control. It seems, as many have pointed out elsewhere, that Germany does not seem to recognise that creditors are just as "in it" as debtors are, and that it has benefited hugely from a weak currency, low bond yields and a captive export audience. It's time to get off the moral high ground.

Under (b), the Axis Powers have de facto taken control of the governments of the periphery, effectively dictating their fiscal policy. The precedent of the mid-1990s is certainly there, though TMM would highlight that this time it is not the Bundesbank that is the monetary anchor, it is the ECB, upon which, the Germans control two votes. It could certainly be out-voted: particularly if the contagion spreads to France in a disorderly manner (seem for the first time this morning). Thus, there are two outcomes from this viewpoint: (i) Italy passes the structural reforms and a technocrat government is in place early next week, followed by ECB buying, (ii) contagion spreads to France and the Axis powers back down, a la 1993/4.

The key question, of course, is what that particular trigger point of pain for France is. And to hazard a guess, TMM would guess is 10yr OAT/Bund at 200bps and/or widening bid-ask spreads and illiquidity in the French bond market. The latter, arguably, was seen this morning. Who will blink first?

ADDENDUM:

German economic policy essentially consists of:

1) Tight fiscal policy to crush any signs of a recovery.

2) Tight monetary policy to crush any signs of recovery.

3) Tie yourself to some profligate countries so that you have a cheap exchange rate and can sell shedloads of exports.

4) When the countries you provided vendor finance to start having trouble paying you back insist that they follow 1) and 2).

5) Wonder why everyone hates you.

TMM's mate AH wryly observed: "It's a pulley system - you throw everyone over the cliff and let the rope take you higher. But eventually you reach the pulley."

Merkel's Lament:

A Partial Apology to Merve

This mornings news is firmly "price", and the price that matters is that of the BTP. And it matters because 7% is a magic number in the markets eyes as the last time it got there other countries needed bailouts. So despite their being no other news someone has decided to "have a go" and it's sent our PIN variable nuts. The 9am London drive by saw a machine-gunning of a variety of assets. 26K of eminis , 11k of Dax contracts in a 10min period as well as the obvious. Since then Price Is News has gone into overdrive and the market is expecting Europe to end by teatime. But TMM as usual, micturating into the wind, think that the key is whether this generates further action from Italian politicians and a final acceptance on the part of the Germans and the ECB that they are just going to have to buy more BTPs. Price Is News.

Now, it may sound odd turning our backs on Italy, but considering the deafening roar from everyone else screaming doom about it, at best we wouldn't be heard and at worst we would be blown away in the gale. So we are slamming our windows shut on the storm of mostly unthoughtful rubbish and returning to our writing table in the corner of our garret room to consider something else, far far away from current market fashion.

Regular readers will know that TMM are not the biggest fans of Bank of England Governor Mervyn King. His conduct over the past few years, beginning with refusing to recognise the BoE's lender of last resort responsibility with respect to Northern Rock amongst other things. But TMM reckon they owe the Governor at least a partial apology regarding their prior view that he was letting the inflation genie out of the bottle. In fact, in the context of the past year's developments, they must actually congratulate Merv and the good chaps on the MPC. And *that*, is because they've managed to (so far) pull off something that TMM never thought possible - rebalance the UK economy without losing the competitiveness gained since 2007.

TMM generally were of the view that the inflation expectations-augmented Phillips Curve still reigned supreme, but it seems - remarkably - that this is no longer the case. For whatever reason - TMM assume it to be a combination of the 1980s labour market reforms, coupled with BoE independence - past inflation and inflation expectations appear to have had very little effect upon inflation or wages since the late-1990s. And this is *despite* the fact that since the inflation target was changed to be CPI in 2003, that inflation has averaged an above-target 2.5%, that since the crisis broke out in summer-2007, it has been an average 3.2%, that it has only been below target for a mere six months in the past 48 months, and above the top end of the target range for virtually the entire past two years, hitting an eye-watering 5.2%.

It's not that inflation expectations haven't risen... indeed the BoE's inflation expectations survey (see chart below, white line) shows households expect inflation of 4.2% over the coming year. Markets, by contrast, have been more sanguine , with the 5y5y forward breakeven (orange line, usual caveats apply) having fallen sharply over the summer, but prior to the eruption of financial markets, had too held around the upper range of the past decade.

TMM's view was that in the face of sustained high inflation prints that eventually second round effects would appear, with wages responding to the inability of the Bank of England to meet the inflation target for such a long period of time. However, the Swerve appears to have managed to sell the idea that the reasons for such high inflation are entirely (TMM are less convinced), driven by a combination of the exchange rate depreciation since 2007 and the VAT-hikes. To illustrate, the below chart shows UK RPI ex-Food (blue) vs the weighted BoE Agents Spare capacity measure (red), which shows a remarkable divergence in the driver of inflationary pressure from the usual capacity driver. Even lopping off a few percent points to give a poor man's VAT etc correction should lead one to conclude that these "transient" effects are not the only factor between persistently high UK inflation.

But this has not fed into wages. The below chart shows the same BoE Agents spare capacity measure lagged 8months (red line) vs. Average Earnings ex-Bonuses YoY (blue line) since the BoE was given independence. TMM are amazed that the bulk of wage growth can be explained by this measure alone, and are forced to conclude that BoE independence has removed inflation from wage setters' radars. Indeed, if anything, the media coverage of a weak economy has probably helped contain wages here, and growth has been especially tepid relative to what might be implied from the capacity measure these past six months (probably a result of Eurozone media coverage).

So what has been the result of this? Falling real incomes which have put pressure on domestic consumption and certainly contributed to the somewhat, err, tepid recovery seen since 2009. But it has also meant that the UK has managed to hold onto a good part of the competitiveness gain that resulted from the post-2007 devaluation, by ensuring that UK real wages fall more quickly than those of its competitors [see below chart of UK real wages relative to their pre-crisis 2007 levels (blue line), vs. US (green line) and Eurozone (red line)].

Which, now that the ONS has been able to properly collate the national accounts data for the past couple of years, revising the current account deficit lower, to around -1.75% of GDP which, in the context of the UK Net Foreign Asset position, is probably about right. Some rebalancing, given that it was pushing 4% of GDP back in 2007.

And all of this has happened at the time of deep financial and sovereign crisis in Europe, while the government has been trying to put its own fiscal position in order, Gilt yields have fallen to multi-decade lows (though, admittedly this is partially a result of lowered growth expectations) as foreigners bought a significant chunk over the past few months given the lack of suitable "risk free" alternatives elsewhere. TMM are forced to conclude that this combination of macroeconomic policies (especially those from the Bank) appears to have been exceptionally successful...

...So far. TMM reckon that with the Whites/Reds Short Sterling curve so flat (see below chart of 3rd vs. 7th contract), that there is a relatively low risk way of putting on a trade that performs if wage growth picks up and the Bank are forced to take a less dovish stance in the face of second round effects. Alternatively, perhaps the World might look a lot different with Europe moving towards an eventual solution and the US/Chinese growth engines ramping up. Given that the BoE have this time got ahead of the curve with their latest QE2 round, they would presumably have to move more quickly on a reverse. Of course, this can be vulnerable to Libor-OIS blowing out in the short term, so a less risky way of putting it on would be in SONIA space, though the level is not quite as attractive there. But given that this part of the curve could easily steepen back out to around 120bps, TMM reckon this isn't a bad punt.

But in the meantime, Merv: TMM apologise.

Honesty. Cut to the bone.

TMM were surprised, nay shocked, last week when they went to buy some cat food. Not that they were having to do such (TMM do indeed have a cat and TMM do indeed go to the shops) but by the latest "hide the inflation, disguise the cuts" marketing ploy. Whilst TMM have gently been watching the weight of M+S prepacked  "steak for £5" fall steadily for the past 6 months and been in awe at how UK fuel price volatility has remained at zero throughout the collapse in oil prices, we sort of let them get away with it as, well, it is luxury steak and it is dirty carbon stuff. But here in front of us was our large carton of regular cat food emblazoned with "Super Saver! 44 sachets!",  with one of those ends designed to say "look we've coloured the last 4 inches of the box yellow to make it look extra long". You may think that TMM has better things to think about than cat food, but we know damned well that box, for the past 5 years, always held 48 packets. "Sorry Macrocats, you feel hungry? Take it up with Purina and their marketing men because they have convinced us that you are actually getting MORE so you'll be just fine"? Of course we are meant to respond as usual to the demand side opening more cartons blaming the macrocat's sudden increase in gluttony for the 9% increase in costs. Who would do that to a cat?

Now why do TMM bore you with such a small frustration? Well, dear reader, because we suspect this cat food scenario is being played out  near you in many guises. Be it at a peripheral European Sovereign, a Japanese company or even in the IT expenditure at a place of work all too close to you. Sovereigns and Corporations trying to improve their ratios, whether it be debt to GDP or earnings per share, generally first try and reduce costs, many of which, as a Sovereign too often finds out, are sticky, fixed-ish and generally involve a lot of heartache (read riots).

For most flow oriented businesses life is cyclical and so the volatility should be felt at the front office if say a bank, or front line if a sov/corp. In a bank, if flows drop 50% you can live with half as many salespeople/traders. But if you cut 50% of IT in the bank, or 50% of the bridge maintenance staff in a country, things stop working. Badly. Sadly, as TMM note, this is seldom how things work. Instead the thinking goes more like this

1) We need to cut costs
2) How much money does IT dept generate?
3) I know, cut tech!
4) Success! Costs are lower!
5) Oh nothing works. Collapse.

It is a very fine line to walk between a steady state "business as usual" and phase change collapse of a supercritical structure just waiting to be triggered by that butterfly's wings in a server under someone's desk. Which is interesting as we see the same thought process in action in the revenue side of financial firms end with similar consequences.

1) We need to increase revenues.
2) How much risk are we taking.
3) I know! Increase risk!
4) Success! revenues are up!  
5) Oh, those correlations don't work. Collapse.

Both of which scenarios end up with

6) Fire the management.
7) Retrench back to core activities.
8) Shut up overseas branches and go home to milk a low risk low volume franchise.  

OR .. Go bust.

Unfortunately TMM lay much of the blame for this culture on the need for growth. Growth for the sovereign is needed to pay for their Ponzi schemes of debt and growth in the corporate is driven by the shareholders demand for returns (normally pension fund managers, those guardians of YOUR future). TMM have long believed that the model for business sustainability is more that of the privately owned German Mittlestand, driven by long term objectives not short term gains at the cost of future stability. But whilst we are seeing the short-termism the incentive towards deceit is still too strong,

So whether you are a peripheral sovereign talking about your debt load, or a Japanese company that has found a way of hiding cameras in your advisor's briefs (or its bank going through its normal 10 year cycle), or a financial company that has decided to "help" bail out Europe, or bosses telling your staff that the IT is just fine, or just a cat food company trying to survive in the heady world of boiled animal parts, paring things to the bone (or cow lip in the case of the cat food), TMM ask you to please show some honesty in conducting your business as that is what we are really lacking in the world. We have always enforced a simple rule with our kids - "Tell us the truth and there is very good a chance we will support you. If you don't? God help you when we find out".



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Late PS posted at 21.15 ldn

Following this post about honesty and integrity, TMM could not believe their ears when they heard the rumour that the London Clearing House had held a call with primary dealers that reportedly went something along the lines of "Hello chaps, you OK if we raise the haircut on BTPs?", with all but one dealer replying "OK". And apparently everyone went away with the firm belief that a margin hike was a done deal... shortly followed by a 20bps widening in BTPs, spooz selling off 15-handles and TMM cursing. TMM were cursing, not so much as a result of the actual inevitable margin hike (though, the P&L damage certainly didn't help their mood), but at the fact that such if this rumour were to be true, a price sensitive move might be "sounded out" on the phone to dealers first, allowing them to sell ahead of everyone else ensure their books were in order. TMM shouldn't be surprised, really, but they do still hold this ideal that perhaps people might like to follow the rules of not trading on non-public information. *Sigh*...

Damp Squib

This weekend was "Fireworks day" in the UK and TMM attended their own share of both public and private displays of pyrotechnics. Unfortunately the display that they were most looking forward to was the European one which ended up going off with a pphut.

What should have happened - Greece restructured a cohesive government in Greece either with or without Papa.
What actually happened -  Still a mess but they might found someone else called Papa to lead it.

What should have happened - G20 should have come out with positive statements and an action plan.
What actually happened -  - They have no new ideas.

What should have happened - Italy should have released a roadmap of the path to austerity
What actually happened -  Its becoming clear that the Letch has to go, but there is no obvious alternative.

What should have happened - ECB should have put a firm bid under BTPs as today is obviously going to be Judgement day over their resolve.
What actually happened -  Flaccid bids that leave the market with the impression that they aren't up to the fight.

What should have happened - the BRIC countries should have pledged X amount to EFSF ,
What actually happened -  They hummed and ahh'd citing lack of Euro leadership being a problem. Well they may be rich but they aren't stupid after all.

What should have happened - THe Sarko/ Merkel show should have flag waved a new unity.
What actually happened -  Merkel appears to be washing her hands saying it could take a decade to sort out. Oh, if only they had a decade.

What should have happened - With all of the above then the plug should just have been pulled on the Greek life support system,
What actually happened -  The conditions of EU bailout got even weaker. They started as being conditional upon a plan for a balanced budget, then just a budget, and now, "hey, tell you what, we'll give it to you if you promise just to have a government. Can you manage that"?. Next will be "OK, you get it if your country begins with a G...... what do you mean it starts with an H ????"

What a damp squib. TMM think the ECB should take a leaf out of the small Scottish town of Oban's firework manual, and let all their fireworks off at once.

So TMM have emerged from their bunker post G20 and are somewhat surprised to see little changed. Reading the news and getting "IB Chat Italy meltdown" first thing we really expected prices to be a LOT lower. Yes BTPs are being toasted and yes the LCH 450 margin trigger isn't far away but it's all known and feels as though its is being gunned for. TMM have been playing their "Sell on Friday and go away, don't buy back 'til next Tuesday" rule but today are going to pre-empt it and buy London noon. Considering the panic first thing this morning everything has held up pretty well. If this really is going to turn into a 10 year problem do we really expect the market to stay that focused for that long?  No Way. TMM are going spiv and buying early. TMM are thinking that the markets are getting weary and are more likely to have a slow grind up 'til Christmazzzzzzzzzz ...

Rorotastic

 Team Macro Man have decided that these markets are a bit like a Photoshop project. We don't know if you have ever got sucked into using Photoshop when trying to simply touch up some basic picture, but it doesn't take long before you find it isn't quite as easy as you thought, with each little addition appearing as a "layer". You soon end up cursing the system for making it so complicated. But this layer system is exactly what we see the markets as right now. We have the nice economics layer that looks relatively serene, picture perhaps an overcast day,  but overlayed on that is this Jackson Pollock layer labelled "politics". The markets are constantly playing with the "transparency" function fading from one to the other.  But its all happening so fast. Today is a true "roro" market, but it now stands for "referendum on, referendum off" with conflicting headlines having a frequency only audible to dogs and bats.  So unless you are spivtastic headline trading there is little point in trying to play.  

TMM note that the problem with due political process as generally understood is that it takes time, something Greece, european bank maturities and deposit flight do not have much of. So, in an effort to get a quick indication of Greek voters' will for staying the the Euro TMM propose they set up a page on a social networking site, invite all the population to join as "friends", and then post 2 status. One being "The Euro and Deflation", which you can 'like', and the other being "Lose your savings, return to your village to press olives and revert to only charging the equivilent of a fiver for a meal in your taverna", which you could also chose to 'like'. TMM reckon we could have a result by close of today.  

We are off to lunch,  but leave you with a live feed from the Greek Parliament

Eliot's Eurocrat

Ok, as a response to this afternoon's request for some T S Eliot. Sorry Macavity, you mystery cat, for defaming you.


Berlusconi, the  Eurocrat.

Berlusconi is a Eurocrat: he's worse than Jacques Delors.
For he's the country leader who can defy the Law.
He's the bafflement of Europe, a democrats despair:
For when they reach the scene of crime-- Berlusconi is not there!

Berlusconi , Berlusconi , there's none like Berlusconi
He's broken economic law,  no chance of that austerity.
His powers of interpretation  would make a fakir stare,
And when you reach the scene of crime--Berlusconi is not there!
You may seek him in the Senate, you may look up in the air--
But I tell you once and once again, Berlusconi is not there!

Berlusconi is a Eurocrat, he's very tall and thin;
You would know him if you saw him, for his banks are sunken in.
His brow is deeply lined with thought, his head is highly doomed;
His budget dusty from neglect, his accounts, they are uncombed.
He sways his head from side to side, with movements like a snake;
And though you think he's trustable, he's always on the take.

Berlusconi, Berlusconi, there's no one like Berlusconi
For he's a fiend in human shape, a monster of depravity.
You may meet him at a summit, you may think his budget square--
But when the crime's discovered, then Berlusconi is not there!

He's outwardly respectable. (They say he cheats at cards.)
His country debt's in trillions (not as we thought in yards).
And when the coffer's looted, or the treasury is rifled,
Or when the assets missing, or another bung been stifled,
Or his country's back is broken,  deficit is past repair--
Ay, there's the wonder of the thing! Berlusconi is not there!

And when those folk in Brussels find a Treaty's gone astray,
And the ECB  buys  BTPs to help him on his way,
The promises he's made to them have vanished into air--
But it's useless to investigate--Berlusconi is not there!
And when the loss has been disclosed, the Germans they will say:
"It must have been Berlusconi !"--but he's a mile away.
You'll be sure to find him resting, or a-licking of girls thumbs,
Or engaged in doing dirty things with young lady's bums.

Berlusconi, Berlusconi, there's none like Berlusconi,
Never was a Eurocrat of such deceitfulness and suavity.
He always has an alibi, or one or two to spare:
And whatever time the deed took place--BERLUSCONI WASN'T THERE!
And they say that of the Eurocrats whose wicked deeds are widely known
(I might mention Papandreou and his massive unpaid loan..)
Are nothing more than agents for the Eurocrat they let
Control the southern nations, the Napoleon of debt !

So There We Were

So there we were balanced on a knife edge of confidence with a tweak of "you know what? They might just get through this at least 'til Christmas" when Greece, yes the place that has committed financial murder yet been given not only a reprieve but also a nice new home with a stipend for life, Greece, turns round as says "Hmmm..Though the idea of a life infinitely better than the horrors of the alternative may sound attractive, we'd like to have a think about it and will let you know early next year. That Ok?" What a bunch of typos of the name of an old English king that tried to turn the sea.

So there we were thinking that the last vestiges of the plague that was financial mismanagement had been eradicated from the banking sector in the aftermath of 2008, when up it pops again in a huge well known brokerage. Diagnosis to death in 4 days. THAT is frightening. If the positions being cited had been run up by a junior trader, that trader would currently be held in a police cell at the moment. As it was the boss that did it, he walks away with 12mil instead of 12yrs. Basically, their demise looks like a classic Investment Bank liquidity story. WILL YOU NEVER LEARN ??? What a bunch of typos of the name of an old English king that tried to turn the sea. It makes some of us feel like heading down with a tent to St Paul's Cathedral.

So there we were thinking that the break higher out of range would draw in more buyers as "Price Is News" turned sentiment indicators. And then came along all of the above which fell straight into the laps of those that no longer had positions but never lost the underlying bear faith and kaboom. Down we fall. Oh why didn't we take note of our favourite Wrong way first rule of rising wedges! (see FTSE). God we are a bunch of typos of the name of an old English king that tried to turn the sea.

So there we were this morning debating Kevlar glove usage and whether it was really worth trying to pretend to be technical or macro in the face of an old fashioned YOOUUURS panic, yet settled on a timing buy at our usual favourite "end of initial Euro-open panic, Asia go home" 9.30 London time. When we suddenly realised at 9.30 that we had missed it because as the clocks had changed it should now be 8.30am. Doh! But on reflection "Phew". On that point we thought a clock change was meant to make it lighter in the mornings. Well the London contingent of TMM can state that it's still pitch black when they get to work so what's the point of that? The sooner that someone works out that Scottish cows can't tell the time and that school kids are just as likely to be run over on the way home from school in the dark as on the way in, the better.

So here we are then. not as wealthy as we were yesterday realising that this has gone emotional again yet still playing the up side though not looking so clever.Now finally. Unfortunately the need for requiems is suddenly becoming depressingly regular and TMM are wondering if they need to start an official obituaries column. But for now will stick to their current trend of poetry. But in this case we were beaten to it by a friend of TMM's who penned and sent us this last night. So with thanks to him and apologies to WH Auden for playing with his classic Funeral Blues (Stop the clocks) we leave you with this.

Stop all the trades, cut off the telephone,
Prevent brokers from trading on the dog and bone,
Silence the cries and with muffled hum
Bring out the coffin, MFG are done.

Let vultures circle smirking overhead
Scribbling on the sky the message MFG are Dead,
Empty the bowels of the last share holders,
Let the FSA policemen wear rubber gloves.

They were my clearer, my broker the holder of all my cash,
My working week has turned to gash,
By noon, I'll know, if they settled my Won,
I thought that they would last for ever: I was wrong.

These fools are not wanted now: get every last one;
round up these 'bankers' shoot them with a gun;
Poured away oceans of money, couldn't see the trees for the wood.
For them nothing now can ever come to any good.