2012. The Year that Cried Wolf

As we come to the end of 2012 we find that, like a movie, the stresses and strains, the thrills and spills and loose ends are all being tidied up into a relatively happy ending. However, like any blockbuster worth its salt, there are the odd questions left open ready to be picked up again in any sequel (2013). 2012 has seen the resurrection of many dark evils but TMM can't see one that has actually resulted in the type of global disaster that many tail hedgers had placed their chips on. The European Zombie Dawn has not torn the heart out of the EU leaving it a bloodied corpse as Greece is still in the Euro and Spain has not defaulted. The US is not in recession, China has not had a hard landing, Iran hasn't been invaded or closed the Gulf, inflation hasn't gone hyper through QE and, lo, we are all alive and well (if you are reading this after 21st Dec).

TMM would like to summarise 2012 as "The Year that cried Wolf". Tail hedging became a theme that saw premiums rise rapidly, whether it was straight volatility for tails or the tail risk products such as CDS. But at the end of the year, though there was money to be made by cunning tail risk traders ( as there is with any market that is wildly moving) the underlying events that these products are designed to insure against did not occur leaving the net sellers of tail risk the beneficiaries.  TMM have had some interesting debates with friends about tail risk and we will probably do a post on it soon, but our simplistic view is that if you bet on a 33/1 horse and the price comes into 20/1 then you have made money irrelevant as to whether the horse actually wins or not. And this year saw a lot of betting on ultimate losers. 

This is probably going to be the last post of the year from us but we hope to come back strong in January with our Non-predictions for 2013 and the marking of the 2012 set. We can't even remember what they were now and daren't look. For now we leave you with the 2012 Christmas viewing schedule.

2012 Christmas viewing-

"The Shirakawa Briefing"- Staring Matt Damon. A tale of intrigue as one man fights to discover ancient policies shrouded in mystery since the dawn of time. Only he know's the dark truth and is determined to warn the world of a frightening new plan being plotted by a mysterious organisation known only as the BoJ.

 "The Fiscal Cliff" prequel to "Into the Void" - Two climbers have to overcome bitter personal resentment and hatred stemming from their disturbed childhoods as political orphans in the House of Representatives in order to overcome adversity and certain death as they face the uncontrollable natural forces of budget control.

"Dead Calm" - A portfolio manager and his Sovereign CDS holdings are becalmed in the once stormy seas of the European markets when they come across a European Central Bank whose story doesn't tally. The investor is left on a sinking ship hoping that the central bank's plans fail and his CDS rescues him before he drowns.

"Big Trouble in Little China" - When an All-British fund manager Anthony Bolton agreed  to take his funds to the Asian stock markets, he never expected to get involved in a supernatural battle between good and evil. Bolton's funds are rich in greenbacks, which make them a perfect target for an immortal bent system and its three invincible state structures. Suffering huge losses, how can Bolton's funds now defeat data that can't be seen. 

"Green Card" - A French national leaves France for tax exile in Belgium to much derision from his homeland, only to find that a benevolent Russian President is willing to give him residency with no questions asked. 

"Tom 'n' Rog'll Fix it" - Far East dealers Tom 'n' Rog try to make their own dreams come true by fixing it for themselves. However their shady activities catch up with them years later once they think they are immune from capture leading to huge embarrassment and fines for their employer. Unfortunately, unlike the other old "fixer", they are not already dead and are about to face prosecution for their outrageous crimes. 

"Apocalypse Not Now" - A  website in the US is inundated by true believers of the ZH cult expecting to be rescued by Aliens and long gold positions from a doom writ large in ancient calendars. However when Greece doesn't leave the EU, Spain doesn't default, the US doesn't go into recession and China doesn't have a hard landing, as the ancient prophecies predicted, they all have to pack up their meagre belongings, having sold everything else, and trudge back to the realities of a normal curve with their "tails" between their legs.

Happy Christmas and a Happy New Year from Pol, Cpmppi and Nemo.

THE CLIFF - A Pantomime

A friend of Team Macro Man has offered us his script for a seasonal dramatic romp. Though you may think it is remarkably familiar, we now present for the first time, but by no means the last -

THE CLIFF - a Pantomime; an AMUSEMENT for financial dramatists.

Featuring our hero BIG EARS, his elf-like accomplice TINY TIM, BONER,
a pantomime villain, and PC BERNANKE, a POLICEMAN, wielding a truncheon
and a QEaser.

TINY TIM :   "Look out, Big Ears, there's a Cliff behind you"
BIG EARS :    "Oh no, there isn't"
AUDIENCE:  "Oh yes, there is"
BIG EARS:     "Oh no, there isn't"
AUDIENCE:  "Oh yes, there is"
BIG EARS looks over shoulder, recoils in mock horror.
Exit TINY TIM, stage right.

BONER appears, stage left.
BIG EARS:    "Hello, Boner, do you want to go over the Cliff?"
BONER looks over shoulder, recoils in mock horror.
BONER:         "Why you... socialist wealth distributing rascal..."
(BIG EARS:    "You, you, you, small business owner.."
BONER:          "I built that business with my own two hands"
BIG EARS:     "Oh no, you didn't"
AUDIENCE:   "Oh yes, he did"
BIG EARS: reflectively "Really? People do that? I never knew"
AUDIENCE:    "Oh yes, they do"
BONER:            "Son of Satan. Socialist!"
Big Ears and Boner engage in play wrestling by the Cliff
PC BERNANKE: "Break it up, you guys, before I QEase you"
Exit the Policeman, waving truncheon, stage right.

BONER:             "Maybe we can compromise, Big Ears?
BIG EARS: suspiciously "How so, Boner?"
BONER:             "How about we axe some deductions for middle class"
BIG EARS:         "How about we axe your mortgage deduction too?"
BONER:              "Why you, double crossing... Hawaiiian socialist.."
Big Ears and Boner engage in play wrestling by the Cliff

BIG EARS:          "Careful, you d*ck, there's a Cliff there, you know"
BONER:               "Oh no, there isn't"
AUDIENCE:        "Oh yes, there is"
BONER:               "Oh no, there isn't"
AUDIENCE:       "Oh yes, there is"

BONER:               "OK, I'll sell out the $500k crowd, save my mortgage"
BIG EARS:          "Deal. Do you want to try Michelle's arugula?"
BONER:               "Is that European socialist lettuce? No thanks."
BIG EARS:           "Suit yourself. It's quite peppery. So, deal then?"
BONER:                "Deal. Now I have to call off the dogs."
BONER exits stage left

Enter TINY TIM stage right
BIG EARS:            "Yo, Timmy, what up, bro? Wanna play HORSE?"
TINY TIM:           "Really? You want to play a 5 foot 2 guy at hoops?"
BIG EARS:            "I like winning"
TINY TIM:            "Apparently... and you did beat THE GLOVE."
BIG EARS:            "Like beating Barkley at golf. No contest."
TINY TIM:             "It's too early for the deal. Carry on wrangling"
BIG EARS:             "How so?"
TINY TIM:             "Long bond auctions next week."
BIG EARS looks at audience quizzically
TINY TIM:             "Imagine if we could sell a load of 10s at 1,50%"
BIG EARS:             "Good point. I could drag it out until my vacation.."
TINY TIM:             "Now you're talking, leader of the free world"
BIG EARS:             "NO later. Michelle would kick my ass."
Exit TINY TIM, grinning, stage right.

Enter BONER, stage left.
BONER:                  "OK. We hog tied De Mint, you got your deal"
BIG EARS:  grinning "Hey, BONER. Your deal stinks."
BONER:                   "Why you dirty double crossing socialist...."
Big Ears and Boner engage in play wrestling by the Cliff)
BIG EARS:               "Careful, you d*ck, there's a Cliff there, you know"
BONER:                    "Oh no, there isn't"
AUDIENCE:            "Oh yes, there is"
BONER:                    "Oh no, there isn't"
AUDIENCE:             "Oh yes, there is"

Enter the  POLICEMAN, stage left, waving truncheon.
PC BERNANKE:      "Break it up, you guys, before I QEase you"


CURTAIN - INTERMISSION.

Repeat until December 17th, when Big Ears goes on vacation.

Cliff Up. The Broker Call

It's a quiet Friday afternoon and as we know when there is nothing else to yell about "The Cliff" takes center stage. So TMM are anticipating their lines lighting up any moment with brokers yelling their word.

Remember "Word Up"?

Word up (The broker call) 

Yo, pretty clients around the world
Got a disaster for you, so tell the funds and corps
Sell your Brother, your Apple and your S+P too
Cause they're about to crash down and you won't know what to do

Wave your hands in the air, it's a real scare
Scream at your punters as they start to look and stare
Do your dance, do your dance, to make em scared stiff.
Come on baby, tell 'em there's a cliff.

"Cliff up", everybody say
When you hear us call, you've got to sell it anyway 
"Cliff up", Use the Cliff word 
No matter how you say it, you'll know that you'll be heard.

All you sucker bulls who think it'll fly
There's got to be a reason but there ain't no reason why
You try to put on those longs and your fancy calls
But ya got to realize that you're acting like fools

If there's panic, we can use it, to pay the rents
We don't have the time for your common sense
"No 'greements", "no 'greements", is all we have to yell,  
Come on baby, tell me what's the word

  The word is SELL

Knights That Go Yen

Every bar in every town in every wild remote unforgiving desolate landscape has one. No matter how ghostly the neighbourhood, how empty the streets, how dusty the tables and chairs in the room with the cracked panelling, peeling paint, and greased windows, there at the back of every bar will be a sole figure hunched over a laboured glass, stretching time until, like a curious statue, they catch the eye of the poor soul who has just walked in with a medusa stare. The victim's small vestigial ganglion of primative neurones that is their last chance of escape, cannot muster enough adrenalin to persuade the rest of their stunned nervous system to register blind panic and RUN. It is too late, for soon the creature with the glass will open its mouth and slur in a drawl:

"Did ah tell you about the days I used to run a Hedge Fund?"

There was a show in the UK called the Fast Show and one of the characters was "Archie" he was the UK's version of the creature described above. And we sorely wish he had been the early 1990s Macro Hedge fund manager...

"Hardest game in the world, yer hedge fund managing. But there was yer glory days too. I can remember when DollarYen used to move. An' I don't mean yer poxy little wobbles of today. No. I mean REALLY move. We was all at it in them days, DollarYen that is. 88 to 140 no problem, would 'appen in an afternoon. We made boat loads. RKO's was me favourite. Only just come out then an' no one knew how to price 'em proper and we just took the piss. But it was tough. Lost it all the next week on some correlation trade that didn't correlate longer than it took me to put the trade on. Hardest game in the world that hedge fund game... Do you want to get me a drink?"

Yes... USD/JPY was the weapon of choice for many an old Hedge fund warrior.

But TMM are detecting a deep infrasound. A low rumble mostly detectable through the feet rather than the ears. And its intensity is growing as USD/JPY climbs higher, accompanied by ghostly clanks of armour and distant warrior cries as the call to arms rejoins across the world, summoning forth the once brave and mighty from their slumbering hollows, bars and Bide-Awee rest homes for Hedge fund managers, to once again rise and fight the old foe... THE YEN.

TMM have been lucky enough to have made decent cash on the move higher since the end of September, but in true dedication to one of their main mottos - "USDJPY will be not be easy" - have taken off most of their exposure, only really having a token position to "intellectually be in it". The recent commentary from PM-to-be Abe that FX intervention won't work, and the seeming clarification that a change in the BoJ Law is not in the LDP manifesto have obviously taken some of the shine off the trade. But TMM think it's a bit more subtle than that as he also continued to pile the pressure on the BoJ to meet a 2% inflation target while arguing for a fiscal response in concert with monetary policy.

Now, orthodoxy would suggest that loose fiscal policy coupled with loose monetary policy in the context of a very poor Balance of Payments position (see chart below) is bad for a currency as expected returns on domestic assets are not enough (as monetary policy prevents them from rising) to bring in capital flows. Similarly, government policies aimed at encouraging domestic investors to send funds abroad for M&A/FDI are keeping the needle pointing away. You don't need FX intervention to weaken a currency if the fundamentals look like this - it will weaken anyway.

Up until recently, TMM had been sceptical of the "short Yen" trade that has continually confounded punters, partially a result of the fact that US rates are so low. So it is clearly worth questioning why this time is likely to be any different? And TMM reckon that the above alignment of policies mean that domestic investors, hitherto the primary driver of the rates/FX relationship, have less incentive to own Yen as the rates relationship is really a "real rate" relationship - and pushing for a 2% inflation target de jure means a rise in expected inflation and commensurate fall in Japanese real rates. Shirakawa & Co. may not believe that that is possible, but the evidence in the US & UK suggests that aggressive easing has indeed kept inflation expectations high. The other consistent buyer of the Yen - exporters, who have consistently hedged receipts have discovered those receipts evaporating in the face of Korean competition and the need to import energy appearing to have become more structural. TMM must admit to being very surprised that the Nuclear plants have not been quietly switched back on.

It almost seems to TMM as Keidanren have finally spurred The Establishment to accept that protecting The Post Office (and pensions) is no longer as important as the potential collapse of Japan Inc. And if that is so, it would arguably be the biggest change to macroeconomic policymaking in Japan for a decade. Not to be ignored.

However...It is the end of November. And the election is in just over two weeks. The move has been dramatic, and *everybody* TMM speak to loves the trade. Which makes TMM nervous, as profit taking into yearend takes hold, the fact that many structures have been put on such as RKOs which have caused people's exposure to evaporate and then buy spot at poor levels. And it's not as if the policy is going to be implemented in two weeks time. TMM therefore reckon that the risk of a Yen washout in the near term probably outweighs the opportunity cost of "missing the move" and have trimmed most of their position, with a view to putting it back on 30th December in anticipation of the traditional piling on of New Year 2013 trades.

—————————————

How it may ultimately end... the script:

George : You fight with the strength of many men, sir Yen.

(The Yen does not respond)

George : I am George, King of the Hedge Funds.

(no response)

George : I seek the finest and the bravest in the land to join me at my family office in New York.

(no response)

George : You have proved yourself worthy. Will you join me?

(no response)

George : You make me sad. So be it! Come, Stanley.

(As George and Stanley start to ride past the Yen, he suddenly speaks)

Yen : NONE SHALL PASS.

George : (taken aback) What?

Yen : NONE SHALL PASS.

George: I have no quarrel with your good support, but I must cross this level.

Yen : THEN YOU SHALL DIE.

George : I command you, as King of the Hedge Funds, to stand aside.

Yen : I MOVE FOR NO MAN.

George : So be it!(draws sword)

(A short battle ensues, where George, relatively unencumbered by regulations and committee mentality, easily dodges the slow and heavy responses of the Yen. Finally, George dodges exporter selling, steps aside, and cuts the Yen’s left arm off with his RKO’s. Profit spurts from the Yen's open wound.)

George : Now stand aside, worthy adversary.

Yen : 'Tis but a scratch.

George : A SCRATCH? Your old BoJ governor is off!

Yen : No it isn't!

George : Well what's that then? (pointing to Shirakawa lying on the ground)

Yen : I've had worse.

George : You LIAR!

Yen : Come on, you low VaR lightweight!

(There follows an even shorter foray, George easily cuts through the Yen's upper support, causing it and the Yen's current account to drop to the ground. Profit spatters freely from the stump.)

George : Victory is mine! (kneeling, praying) We thank thee Lord, that in thy mercy-- He is kicked onto his side by the Yen.

Yen : Come on, then! (kicks George again)

George : (on the ground) What?!?

Yen : (kicking him again) Have at you!

George : (getting up) You are indeed brave, sir Yen, but the fight is mine!

Yen : Ohhh, had enough, eh?

George : Look, you stupid bastard, you've got no exports left!

Yen : Yes I have

George : LOOK!!!

Yen : Just a flesh wound! (kicking George again)

George : Look, STOP that!

Yen : Chicken!!! Chicken!!!!!!!

George : Look, I'll have your JGBs!

(The Yen continues his kicking)

George : RIGHT!(He chops off the Japanese Post Office with his sword)

Yen : (hopping) Right! I'll do you for that!

George : You'll WHAT?

Yen : Come 'ere!

George:(tiring of this) What're you going to do, tax me to death?

Yen : I'm INVINCIBLE!!!

George : You're a looney....

Yen : No I'm a Yen and The Yen ALWAYS TRIUMPHS! Have at you!! (hopping around, trying to kick George with his one remaining leg)

(George shrugs his shoulders and, with a mighty swing, removes the Yen's last limb. The Yen falls to the ground. He looks about, realizing he can't move.)

Yen : Okay, we'll call it a draw.

George : Come, Stanley!(they "ride" away)

A Thanksgiving Quiz

1. Thanksgiving is 

a) A time to remember and give thanks for coming through dark times. 
b) A time for family.
c) A time to make wide prices and ram stops. 
d) A time for pretending you are an American even if you aren't and going to lunch all day.

2. Turkey is 

a) Better if basted in butter and herbs 
b) My book this year. 
c) Trading 160bp  over US 10yr  
d) The home to amusing sounding companies such as "Arcelik" 

3. Cranberries are 

a) Used to make a sauce to accompany the Thanksgiving Turkey. 
b) A 1990's Irish music group.
c) A euphemism for irksome troubles in one's derriere 
d) The names of the next regulatory packages designed to straight-jacket finance.

4. Stuffing is 

a) Sage and onion.
b) What I am getting in long vol positions. 
c) What HP is accusing Autonomy's books of containing.  

5. Pumpkin Pie is 

a)  A pie consisting of pumpkin based custard. 
b)  A mathematical constant used for working out the volume of pumpkins. 
c)  The code name used when describing the efficacy of cancer treatments to non-specialists.
d)  A term employed by males to address their spouse just before supplying an implausible excuse for malfeasance. 

6. Black Friday is

a) Something to do with shopping on which all retail hopes lie.  
b) A large stock market crash.
c) A technical signal involving eclipses.  
d) How you feel after Monster Thursday Night.

7. A Thanksgiving Parade is 

a) A parade that features a variety of floats and marching bands.
b) Best watched on TV whilst vegging out. 
c) A sly bit of department store marketing.   
d) Mr Stupid charging around the dealing room punching the air screaming "Yes, Oh yes" claiming genius after a random event yields him a profit.

8. Thanksgiving Football matches are

a) A traditional activity giving families an additional  focus to their day. 
b) Not Soccer
c) The EU and IMF negotiations over Greece.

9. The Presidential Turkey 

a) Each Thanksgiving Day since 1947, the President of the United States has been presented with three turkeys by the National Turkey Federation. One live turkey is pardoned and gets to live the rest of its life on a quiet farm; the other two are dressed for the Thanksgiving meal.
b) Each Thanksgiving Day since 1947, a turkey has been presented with three potential Presidents by political parties. One is pardoned and gets to live the rest of its life on a quiet farm; the other two are dressed for an election.   
c) The winner of b) 

10. Which of the below are quotations from Thanksgiving

a) "Let us remember that, as much has been given us, much will be expected from us, and that true homage comes from the heart as well as from the lips, and shows itself in deeds."
b) "Do we have to have your parents over this year?"
c) "Nah, sorry he's left early, try Monday"
d) "Well tell him it's closed and if he expects to get filled flat on his stop on a theoretical price he needs to go back to reality school" 
e) all of the above

...................
And a final Topical Bonus Question

The Yen is 

a) Fairly priced 
b) Gonna be taken to Zimbabwe by Abe. 
c) Yet another head fake.
d) The dusty old light sabre of the 1990's Jedi Macro Hedge Fund Knights and they are fingering the key to the sabre-cabinet again with a twinkle in their eyes.

Bingo Calls

We have felt like involuntary bungee jumpers over the last week, praying for the cord to tighten before we hit the concrete. This week sees old themes get rehashed but with Thanksgiving coming it's most likely to be a short term lottery, indeed many of the numbers before us might as well have been drawn from a basket. However as alternatives to the traditional Bingo calls, TMM would like to suggest more pertinent alternatives

Korean	1
"Bob bit" Diamond	2
Trap	3
What did I buy that	4
Minute Macro	5
In by	6
Series	7
In late, something I	8
Lives already used	9
TYA	10
Swap legs	11
Lunchtime	12
On your Demarks	13
How much of my 300 have you done?	14
Headhunter on line	15
Clauses unseen	16
Years without a rise	17
Age I should've got a proper job	18
System password changes a day	19
Two and	20
FSA registered	21
In a Desmond	22
Euro slaves	23
Stop run pre Singapore	24
Unchanged BoE	25
Line's out you pricks	26
No honest, that's where I got 'em	27
French boss "zorry ah am a liddle bit late"	28
Pierre's weekly work hours	29
None Farms one	30
All gone quiet again one	31
Take your jacket and go to room	32
Percent let go.	33
Fire Drill, walk down from floor	34
When you hoped to retire	35
I used to be a 32inch but now I'm a	36
Salt and pepper chilli squid	37
Fibonacci mumble	38
God I hate this Job	39
Winks in the sick room.	40
First heart attack	41
Disabled Loo	42
Libor fixings	43
Shown the door	44
Conference call stupid questions	45
King Canutes	46
Minutes before my pricing system crashes	47
Minutes to run my curve on this pricing system	48
Toes you've troden on	49
fired the day before	50
Interviews and still didn’t get in	51
Weeks of pain	52
PMI better than	53
No swearing, client on the floor	54
Minutes late, tube strike.	55
I don’t believe it	56
Varieties of excuse for no bonus	57
Wrong value date	58
Blocked websites I actually need for work	59
Eur/Usd spread in a ton full? Like hell it is	60
Can I improve?	61
Cancelled Christmas doo	62
Decent claret	63
Regulator at the door	64
Dave get me a coffee, number	65
Vampire squid six	66
Hours my boss thinks there are in my day	67
Drink up or we'll be late	68
New intern, form a line	69
Voldermort on the bid at	70
Okay work mine at	71
BoJ goes De La Rue	72
Forms to fill for KYC	73
Filled on your 80 stop at	74
Himalayan Pink Salt Margin	75
Times shafted on expiry	76
Money market dealer's age	77
Emails to amend a trade	78
Meeting rooms named "bretton woods"	79
Broken support at	80
Older than a Sinclair ZX	81
Sales IQ	82
Base of oil	83
IB chats open	84
Legs in this structure.	85
Minutes to log-on in the mornings	86
Feels like	87
Client account 888	88
Wasted Euro-summits	89
When you'll retire	90
Days down last quarter	91
Pound to poo	92
Not as good as the '92	93
Bonds out the door	94
Statistically significant chance of redundancy	95
Degrees as aircon's bust again	96
Compliance officers per trader	97
Russian fate	98
Percent you belong to but wished you didn’t	99

Business Bicycle.

Our last post saw this as part of an anonymous comment -

"I am commenting for the first time to just point out that it feels like the global business cycle has finally turned, and bulls and bears alike are mistakenly attributing the risk-off nature of the past 2 months to the usual macro suspects of the past few years. Companies are making less money, plain and simple, and I see little to change that trend in 2013". 

Being a pretty complex subject we thought that rather than bang out a quick comment, it is worth opening this up as a separate topic and turn our opinion on it into a post.

It is obvious that companies have made less money because Asia and Europe slowed.  

China is turning back positive.

Europe is scaring the bejeezus out of many and whilst we will accept that the jury is out, we do think that it has passed the worst. PMIs that we believe have overstated weakness for a while, have stabilised and the current focus of German slowdown can be explained by them being "tail-end-Charlie" in the demand chain, so the full shock of weakness has only just hit them properly.

In the US we feel that with the election behind us there has been a reduction in uncertainty and the barrier to investment has been lifted.  With that there is good reason to believe that Capex will ramp up into the spring and  the employment situation with it. Put that together with the housing rebound and suddenly it looks like the demand side is lifting off again and with it, eventually, company earnings will recognise that interpretation of the situation. We would argue strongly that the evidence from 2004/5 would support that when Capex fell ahead of what was perceived a close election (as did consumption) there was a strong rebound in growth in Q1 2005 after the election. 

The fact that consumer confidence and Capex intentions have parted ways so dramatically can be squared by viewing the world through this lens and given the consumer now has the ability to spend, corporates will have to catch up to meet that demand.

We understand that many want to view it like the 1990s stop-start cycle of Japan and it is certainly a valid position to take, but as Credit Suisse's Wilmot has pointed out, so far the recovery in IP from the recessionary depths has been largely in line with similar deep recession/recovery cycles. Historically, the next 6 months would be when it begins to accelerate. TMM are quite happy to bet that, as Wilmot argues, "This time is not different".

We understand that many want to view it like the 1990s stop-start cycle of Japan and it is certainly a valid position to take, which may well turn out to true. However, as Credit Suisse's Wilmot has pointed out, so far the recovery in IP from the recessionary depths has been largely in line with similar deep recession/recovery cycles. Historically, the next 6months would be when it begins to accelerate. TMM are quite happy to bet that, as Wilmot argues, indeed "This time is not different".

But TMM certainly are not afraid of humiliation.  If they are wrong (we have been wrong many times before) and activity hasn't taken off by the summer, then it will be time to reassess. But to argue that we only face the Japanese outcome despite a great many differences, when the evidence so far suggests we are following normal deep cycles, seems to be somewhat tunnel-visioned. After all, the Japanese outcome is unique in this respect (so-far)

Decoding the Soundbites

Decoding the soundbites...

GREECE - EU-IMF FEUD ERUPTS OVER GREEK DEBT

Market response: If even the EU and IMF cant agree on a package what hope for EU/IMF-Greece resolution? Bad news Greece is going to blow up. Sell Europe, sell "risk".

TMM response: It is preety clear that the IMF and EU are not going to let Greece go and just like TMM and Mrs TMM may fight over how to bring up the children, we certainly don't want them dead. Greece has funded all its bills today and the level of progress Greece has made with its budget is impressive. This is a non-story.

GERMAN ZEW INDEX FALLS TO MINUS 15.7 VS EST. GAIN TO MINUS 10

Market response: Germany is going down the pan as local sentiment is collapsing, this must be forward looking as to market price, so sell Europe.

TMM response: TMM have never understood why people look at the ZEW. It's a survey of "investors" not "business". The IFO is worth looking at, but not ZEW. Presumably if we going to react to investor sentiment surveys in this manner, we should be selling equities when the AAII Bearish sentiment survey shows people are bearish. Or buying USTs when the CFTC shows investors are bullish on bonds. Why do we view these as being counter-indicators, but the Zew as directional? Do we somehow think german private banks and funds know something special? Given they were the ones that bought all that fantasticly well-performing ABS CDOs and Southern Periphery debt, we are somewhat sceptical that they do not know much at all, other than how to buy structured toxic waste.

REPUBLICANS SHIFT STANCE ON TAXING WEALTHY

Market Response: Stay quiet as it doesn't quite fit what we were saying about the fiscal cliff last week and anyway have you seen the ZEW and Greece (we may adapt our view on the cliff though).

TMM response: As we were saying "Policy Uncertainty Falls"  - and we would add that those rumours we mentioned with respect to Nancy Pelosi are friming up.

GERMANY PRESS: GREECE TO GET E44 BILLION IN AID IN ONE PAYMENT - MNI

Market response: Oh, so Greece IS going to be OK? Better buy all that Euro stuff back.

TMM response: It'll probably be denied, but it's a hint that Greece will be OK.

RTRS - GERMAN FINMIN SPOKESWOMAN, ASKED ABOUT NEWSPAPER REPORT, SAYS NO FINAL DECISION YET ON GREEK LOANS

Market response: I'm not selling again, I've just been taken out... I'll wait for more news.

TMM response: Back to sleep.

Moral Petards

A US partial holiday today is being used as an excuse for quiet markets so micro-numbers are of little interest today. But the past week has seen some interesting news stories that TMM think are building into a theme.  

Nanny State relaxation -  Two US States legalise the recreational use of  weed and then Denmark scraps it's " Fat Tax"  on foods. TMM would like to think that this was a move away from the nanny statedom of  "Thou shalt not consume things that you like that I think are bad for you (and I don't like anyway,  but that could all change daily by Daily Mail edict)

Shoddy BBC Journalism -The BBC Director  General resigns over shoddy Journalism. Yip diddly doo, perhaps someone will soon ask if shoddy journalism stretches into some more benign, though equally misbalanced, reporting of other subjects and hopefully we see a move away from styles that  haven't improved since we wrote this . However the backlash of the moralisers over Entwistle's "Goodbye" payment is typically unthought out. "He's only been in the job 54 days". That post yes, but he's worked at the BBC for 23 years. So that's, what, 2 1/2 weeks pay for every year served? Not THAT excessive over the UK legal statutory minimum for redundancy of 1 1/2 weeks per year.   

Figurehead caught fiddling with his author. TMM won't mention his name as he probably still has lots of friends reading this blog (under a mountain somewhere), but he has caught a version of Lance Armstrong disease.  Symptoms being an institutional figurehead trusted to be the pillar of the establishment/sport  found with a midriff resembling a toroid  caused by the blast from their own petard, having just been hoisted with it . As our Doc friends would say "A lot of it around at the moment" . 

4 ways of avoiding this outcome

1) Don't do it.
2) Don't get caught.
3) Write a computer code to do the job instead of you, make sure it has no human traits, then retire anonymously to Las Vegas (or Zurich in the case of UBS) and party up hard until you die of your own excesses or the algorithm fails. In which case deny it was your idea and point to a 25yr old quant.
4) Don't be a pompous arse stipulating lists of your own moral codes that you will then trip yourself up on. But make sure you don't damage anyone else in the process. Preferably start with, "Hey, I have few codes of conduct but will get the job done. Am I hired or what?". Berlusconi wrote the manual and  Financial Institutions got away with this method pre 2008 until they started spreading the equivalent of STDs to their best friends.  

But there is a theme running through all of the above stories. Whilst popularist policies such as freedom of choice we support, pillars of the establishment are now having their credentials examined in such a detailed manner (whether by social media or FBI agents) that we see these pillars falling around us. All well and good, but our worry is that edifices we actually need are being pulled down faster than they are being rebuilt.

Banks - Moral lepers in the populace eyes, but the populace has not yet found an alternative to their perceived evil. 

BBC - Most trusted news source in the World (was) and now with a news department in shatters. Where do we turn ? Murdoch? really? Was it worth it?  

The UK West Coast Main Line tender - What started as a moral crusade against Branson (= big corp.) vs "tax payer money" (= little man), turned out to be a dumbed down civil service error own goal and remains a mess.

Lance Armstrong / Petraeus et al - All brought down harder and faster by moral hypocrisy.

 On one hand we want our leaders, institutions and figureheads to be more understanding and representative of society's massed average, warts and all, and yet we also want them to be super-human in their own lives.

Is this a growing paradox that will either result in a mass dumbing down of service, ability and responsibility with strong leadership and policy succumbing to the twitterati? Or will the masses, having destroyed all around them, start to compromise on their "moral" demands in return for some pragmatism. 

For now we watch with interest the latest moral lynching of companies that legally pay their tax somewhere with a lower tax rate and sincerely hope that society is not going to do its own "Petraeus" and trip itself up on its own moral rectitude.

Holiday Poem. Phone frustrations.

Phone Frustrations

I just wrote
A poem for you.
Took some time.
A good one too.

Clever words
Describing dealing.
Lilts that jangled,
All with feeling.

Then phone went "bing"
Done dollar/asian?
So switched my app
For confirmation

But found a mail
Just selling crap.
So then switched back
To writing app.

But screen is blank,
There's nothing there.
All those thoughts
Just turned to air.

Panic screams.
Whoops of denial.
Search function
Checks every file.

Bloody phone!
I know... I'm daft.
I should have pressed
"Save to draft."

Policy Uncertainty Falls.

This afternoon's dramatic moves lower in equities and oil have been pinned on Romney trades being unwound, but we do get the feeling that there is a lot of Price is News and tail chasing going on when very little has actually changed. We will go into whether that is the problem or not below, but for now are happy to concur with our faithful reader "Leftback" when answering the question of this morning's post "Now What?"

"The answer appears to be "throw all the toys out of the pram" this morning, or as the Australians say "spit the dummy". Of course there is a limit to the profit available on that trade once your favourite plastic rattle and squeaky ducky is on the floor."  Indeed.

Historically the markets rally out of elections due to reduced uncertainty and we still believe that there is less uncertainty today than there was yesterday, but this post event dump is being blamed on Romney trade unwinds. It is surprising to TMM that so many had Romney win trades on but also for the following -  Although politicians and pundits like to claim otherwise, the evidence is that tinkering with tax policy (US tax rates wouldn't exactly be out of whack with other G20 countries) does not materially affect economic outcomes to any real degree. Of course Wall Street, eyeing up their own tax rates wanted Romney, seemingly blind to the fact that slashing spending and tightening monetary policy at an economically fragile time would plunge the country back into recession, and somewhat ironically, hitting their own wealth via falls in the value of their assets (particularly bank equities). Indeed there is no free lunch in "Diner USA"

Beyond the whiplash in the CTA and 5 minute macro crew, excitement on Bloomberg chats about "poor price action" and many trying to argue that "the status quo is the worst of all possible outcomes", TMM would actually point out that Obama and the Democrats have been handed a pretty strong mandate here, despite Boehner's spin early this morning. The electoral college was definitive, with most of the swing states going Obama's way, and gains were made in both the Senate and the House. Add to that, the fact that Tea Party candidates failed to gain any mandate whatsoever, the apparent split in the Republican party over strategy (and likely infighting over the coming months as a new position is decided upon for the midterms) and it becomes clear that the path to a solution to the fiscal cliff has become much cleaner: -

- The hurdle in the house for compromise is lower, so fewer moderate Republicans will need to be persuaded to pass a plan

- There are reports of Nancy Pelosi being replaced by a more moderate democrat as minority leader. This also narrows the gap that needs to be bridged.

 Whether measured by popular vote, electoral college, Senate or House, all either show a continued firm mandate for Obama and/or a swing toward the democratic position. It is thus exceptionally hard for Boehner et. al. to argue that they have a significant mandate for dramatic spending cuts and a rejection of any tax rises. Simply put, digging in their heels in the face of any compromise plan put on the table does not look like a credible strategy nor launch pad to the mid terms.

Finally, it is worth noting that President Clinton managed to get through his budgets after re-election, despite facing a Republican Senate and House. In yet another echo of the mid-90s, this came shortly after a government shutdown and debt ceiling debacle (cf Aug 2011)

Team Macro Man believe that the path to falling policy uncertainty began this week and the fiscal cliff may have to be downgraded to "road hump".

Now what?

So that's that then. The US X-Factor is over, we hope the winner,  as chosen by YOU the voting public, goes on to have many hits and the $6bio spent on producing the show are recovered through record sales. We know that Mitt really, really wanted it and his dream has been shattered but hey, you gotta give it 110% and he is really grateful to the voters for getting him this far, its been onehelluva experience he wouldn't have missed for the world, we are all really best buddies and he would just like to thank ... yaaawwwwn. 

So what next ?   

If you are a Republican market participant do you now -

a) Sell out all your fossil fuel investments

b) Buy gold as its obvious the US economy is now going to be a disaster and QE will run out of control (plan A).  

c) Sell everything as doing so may push markets lower and the resultant price action can be held up as a vote of no confidence for Mr. O.  whilst screaming "Money printing and Toldja so"

d) Nothing - you knew that Romney wouldn't get it anyway 

e) Wonder what all the fuss is about, plan Thanksgiving  and get back to trying to haul your yacht out of the trees in your neighbour's garden.

If you are a Democrat market participant do you now - 

a) Stay in bed with a hangover after partying hard celebrating a win that you think makes you special. 

TMM always tend to see election victory parties as a bit strange.  Errrr ..you are sort of by definition representative of the largest chunk of the voting population so what's so special? In extremis if we had an arbitrary election to vote for either mass public puppy executions followed by global nuclear holocaust OR no change to current status quo, would a resultant massive global party as 99.9999% of the population celebrated their stunning victory over certain death REALLY be justified?  If so, then in true "Olympic Economics" style, we ought to be running one every month. 

b) Buy Gold as you need presents for christmas, and well, you can never wear enough gold. 

c) Buy everything as doing so may push markets higher and the resultant price action can be held up as a vote of confidence for Mr. O.  whilst screaming "Money printing and Toldja so"

d) Nothing - you knew Obama would get it anyway. 

e) Wonder what all the fuss was about, plan Thanksgiving and get back to finding a job. 

 If you are Team Macro Man do you now -

a) Just buy the dip (JBFTD) as it straight-lines up til Xmas.

b) Sell Gold because we really dont think that Obamafication of the Bendral Reserve is going to directly lead to an inflation gift in our Christmas Stockings. 

c) Scream "Nahnahnahnah" with your fingers in your ears when anyone mentions cliffs. 

d) Get ready for JPY to dump and instead of buying risk in FX via Usd crosses do it all verses yen.  

e) Run a sweepstake on which subject will now replace "US Election" as top of the "you gotta trade on this, aren't we clever" league of analysis filling their inboxes. We guess Greece's X Factor.

f) Wonder what all the fuss is about and get back to a 2001 L'Esprit de Pennautier

Hollande's Regrets

Today is box-ticking day in the US, but we really haven't got anything to add to the debate.  Instead we are more interested in the data coming out of Europe and it is looking as though France really is in a spot of bother.  TMM think they can hear a  wistful tune emanating from the Elysee Palace

Non, je ne regret rien (je pense)
Non, je ne regrette rien
Non, je ne regrette rien
Non! Rien de rien ...
Non! Je ne regrette rien
Ni le bien qu'on m'a fait ni le mal
Tout ça m'est bien égal!

Non! Rien de rien ...
Non! Je regrette rien ...
But cars Citroen et cars Peugeots
Aujourd'hui they start to close

Non! Rien de rien ...
Non! Je ne regrette rien...
Mais ce n'est pas payé, pas balayé,
Je me suis fous les Alemandes!

And now the PMI's
Worse than Italy's
Mes chagrins, pas plaisirs
I'm up to my ears!

Hey, let's raise the VAT!
I said I'd not touch that
But times are dire
So?  I'm a liar...

Parce que

Je, je leve le tax
Je, je leve a la max.
Mais j'ai dit
C'est interdit

Mais maintenant
J'ai besoin du dosh
Parce que tout
A tournee a merde

Je, je ne leve rien ..
Mais maintenat je leve 
Parce que je suis
Dans le club mediterranee

Oh,  I wish I hadn't won
And let Sarko, take the election.
Je, je regrette it all
Can't even blame
Les Anglais for the fall. 

Oh shit ..
It's gone wrong, you see
And now we're back
To nineteeen twenty three

When the loo
Was just a hole
And  the " l'eau"
Non-potable

Je, je regret tous.   
Je, je regret le tous
Da da di daaa.. da da di daaaaa...

(fade out)

Investors and the Fiscal Cliff

Team Macro Man can't believe that the US administration will take the economy over the fiscal cliff. However we can see some investors going over it.

Here is a documentary about investors and the fiscal cliff.

I'm a CTA... Get Me Out of Here!

 One of the elephants in TMM's room has been the behaviour of the markets in the US morning. Strange things have been afoot that have had us scratching our heads as to what piece of macro is missing from our puzzle. But of course as we alluded to yesterday, one can never just focus on one of the many functions that drive a market and indeed TMM are following a scent that leads them to an old favourite - positioning. 

Glancing through some of the recent performance figures at some of the larger CTAs,  it's apparent that the last month has not been a time of deep joy. So putting 2 and 20 together, along with some clues from some recent regular intraday move timings, TMM are getting the sense that the past two weeks' correlation break down can be explained by CTAs reducing their equity and bond longs, and also their Usd/Jpy shorts in a "Help! I'm a CTA, get me out of here" exodus. 

Interestingly, whether because of the "get me out of here" move or just because of [insert popularist reason for equities going down], Eminis have now done a 5.01% (remember spurious accuracy confers authority) move peak to trough. One argument we have heard from bears was that we haven't had a 5% correction for ages. Well we have now. Will that do? the 100day moving average is not far below around 1391, but without further significant CTA unwinds it may be hard to breach. 

Now something else. As one goes through an existence in markets one of the human characteristics that displays itself is, despite all logical reasoning, spurious pattern recognition. In fact the market and media rely on it. It was only a week ago that every down move in equities was being blamed on the 25th anniversary of the 1987 Great crash. But anniversary events are rarely repetitious. Ok, yes they are in a calendar terms and yes, some of TMM's family Christmases have been exceedingly repetitious re sock presents, but anniversaries of horrors rarely repeat the horror. If you are concerned about anniversary dates then we recommend a temporary flip back to the Julian calendar from the Gregorian and then back again thus avoiding the problem. Just as we advise reciprocating round numbers in FX to avoid "Bigfiguritis". 1.3000 Eur/Usd becomes a lot less important when it's 0.7692307 Usd/Eur.

But having said that, there has been burnt into TMM's mind a couple of seasonal turn dates. One has been the 16-18th of July and the other has been that you buy  October the 27th. This has always been a supposition rather than anything proven but we did find THIS  that does sort of substantiate the feeling.

 Of course we have a wee event coming up that we should meld into our date selection. US elections. Sitting on the London side of the pond TMM get the feeling that our US friends are still overestimating how close the election will be and we wonder if this actually due to a reporting bias coming from our Wall Street brethren, driven by their own desire to have a tax cut (Tin Hats TMM - Think that might light the comments column up as we have just broken rule 1 - Never mention politics, religion or gold prices). But we do have to have a look at our scenarios. 

Option a)  (our expected one)  Obama wins - perhaps we see a knee-jerk sell off in SPX - But we buy the dip.

Option b)  (not expected) Romney wins - look to sell late December given his economic policy will be sure to cause a near term recession.

But whoever wins we think equities run higher 'til Christmas.

 So when do we buy? Well to be honest we have a fair amount onboard already and are toughing it out despite some delta adjustment style trimming, but what little room to add we have we will be using on Monday and then the famed election. 

But for now, whilst the CTAs cry "get me out of here" TMM are hunkering down eating Witchetty grubs hoping they don't get voted out of the competition.

Calculated Stupidity

Yesterday TMM were tripped into thinking about the complexity of algorithms and their place in this world against old fashioned humanness.

 This subject quickly emerged in our chats with respect to markets, with most of TMM expressing the opinion that none of  them had an intelligent thought to express today. This then led to the observation that there was little point in having an intelligent thought as this year has seen supposedly intelligent process regularly run down by algos anyway. So perhaps the non-clever clever thing to do instead, to counter the algos, would be to put on trades that are so unimaginably stupid on conventional levels they may just be stupid enough not to be sniffed out by the clever bots. "That'll fool em !"

Which led us to consider the background issue of the European Parliament and their budget process - Could it be that they've been using this method of "so stupid it may just work" for years?

 But back to High Frequency models. Though TMM have found themselves run over by them in the past, we don't feel it fit to complain other than about ourselves as we are not evolving fast enough to anticipate the "thought" processes of this type of player that now sits at the poker table of markets. TMM do not think the answer is to ban them from the casino just because they win at other people's expense but to learn and adapt. TMM simplistically think that if algos are causing distortions in markets that move prices to places they really shouldn't be on your own measure of value, then you should celebrate the opportunity they give you (even in flash crashes) not curse them.  If however your view is that they are terrible because once you own the position they push prices through your stop loss, then really you do have to get a grip on what markets are. If someone owns a share then they should be allowed to sell it for whatever reason they like, whether you agree with their method of analysis or not. That's just how it is. If we start stipulating the methods of investment process a fund manager has, or even day punters, then you might as well fix prices daily at a committee made up of members who have elected themselves as spokespeople to represent only their own views over those of a huge disparate seething mass of differing opinions.

Oh good Lord. No! It can't be that we have just described the EU Parliament and their budget process again, could it?

But HF algos weren't actually the trigger to this debate, it was started by the problems we humans have now convincing computers that we are humans and not other computers. Most web pages insist on the user going through some sort of test. It started fairly easily with typing in the clear letters displayed in a box, but now one has to squint through reading glasses at a blurry picture of someone's door number and then untangle a ball of string to pick out the letters of a word that isn't a word. It's a nightmare. Even persuading a bank telephone service that you are a) human and b) not a human criminal mastermind is equally challenging. Don't they realise that they are creating, through Darwinian selection, a process that will ensure that only algos will ultimately be able to pass these tests?

  If computers are so so smart these days, then TMM suggest that instead of trying to prove our humanity through higher intellect we should switch tactic and instead prove our humanity through our stupidity. 

"Can we have the 3rd, 75th, and 125th Cyrillic characters from the original Tolstoy novel we gave you to read when you opened this account followed by the hash key?"

" I never saw Toy Story and what the f is a hash key? Just gimme my balance you f'in stupid machine" 

"Thank you we have identified you as human, we will now connect you with another human who will be able to understand your low level intellect"

 " XXXX off"

Or just stick a "please use other door" sticker on the only opening door of a pair. That should keep the bots out but let most of humanity in.

Or perhaps we should just go short of usd/jpy.

Introspection Day

Today the financial blogosphere has lit itself up with some introspective self-illumination as to what is happening within the structure of the financial blogging space.

Abnormal Return's Tadas Viskanta  kicked it all off and has obviously twanged a nerve throughout the community as the marvellous Josh Brown picked up on the theme , Felix Salmon then wrapped up those 2 posts and others are joining in.

Team Macro Man, for their pennyworth, cast their vote behind Josh's Third theorem of Financial Blogging evolution.

"My third theory is probably closest to reality, though:

3. Many bloggers have simply been so completely dead wrong about the post-crisis period we've been in (Hyperinflation! Depression! Social Unrest! Hoard Water and Dry Goods!) that they simply have no audience left. Keep in mind that many of the 2008-2010 generation of bloggers were misanthropes who had been rooting for a collapse all along. They came out of the woodwork and began blogging motivated by a mixture of I-Told-You-So schadenfreude and the desire to predict the next crisis, which was obviously an imminent thing. Only it didn't happen (I know, I know, any day now). And having blown all of their personal credibility on failed Cassandra-ism, having recognized what a horrendous disservice they've done to those who've heeded them, they've simply moved on. Many went to Twitter instead where there is a less permanent record of their bullshit.

It should be noted that we witnessed this exact same exodus in 2007 and 2008, but during that period it was the more bullish bloggers and stock pickers that disappeared. They too experienced this sense of guilt and purposelessness when the wheels fell off and all of their investment ideas became humiliating at best and dangerous at worst. Inevitably, the wheel will turn again and the doomers (along with their blogs) will make a comeback. I look forward to it - those bloggers are far more fun to read than today's Apple-worship crowd."

Bravo.

But TMM would like to add their own metric to the calculation. The actual interest out there in all things financial to the non-financial folks who only become marginal financial folks when there is a buck to be made, a trend to be followed or a disaster or boom to be called. When things flat-line they swiftly retreat back to the real world. We have long held that our readership figures and indeed comment count, are highly correlated to bearish disaster markets. This accounts for the disasternista blogs and followers that Josh alludes to and certainly our trend towards bullish views over the past year seeing a fall in readership. We have long felt that the blogosphere is an environment where readers go for substantiation of their own prejudices, "free money" ideas, self-promotion through comments, humour and finally for intellectual self-improvement.

So what has 2012 given the reader? A year of stalemate between bull and bear, a year of no bust and no boom and a year of flat returns (yeah, yeah OK apart from you dear reader, we know you've done really really well through genius etc etc). But really, if you are a disasternista you have retreated to Zero Hedge's citadel, the bulls have retreated to regular bank research where, excepting the showmen "Albert Edwards" of this world, there is a tendency towards positives and everyone else who was being kept interested by the high octane of the past has basically wandered off to pursue their proper jobs. Lucky buggers, as some of us are left HAVING to scratch a living in the drying pond of finance.

And have the markets been tough? Yes. And are the men in the middle feeling the pinch? Yes. And is it just coincidental that the outbreak of introspection is not confined to the financial blogger but is being expressed right across the field of finance? Here is a very interesting take from the inside on FX.

So if the markets are rubbish and the readership is losing interest then why carry on? Everyone has their own reason but as far as Team Macro Man go we have had our doubts as to the worth of why we are doing it and have been through our own period of introspection.

We took on the role after being asked to keep the flame of Macro Man alight as the original had to depart the blogosphere due to a reason not quoted elsewhere - Employer restriction (it is worth considering this function as a filter bias towards the type of folks that do actually blog). We were hugely flattered to be considered for the role as none of us had any experience in public writing and it was a huge challenge, but the ethos of writing to test one's own ideas in a forum has always been key and has indeed been very useful. As long as you have some. When we started, ideas were coming as thick and fast but this year has seen long periods of us just riding old themes and yes, post frequency does suffer. Unlike a newspaper that always have to have something on the front page no matter how trite, we can just not publish.

However it has been tough and we have been pretty close to calling it a day this year as the other great pressures we have in our day jobs dominate. When times are hard work has to take preference over the hobbies. And as a non-profit non-advertising blog, this really is a hobby.

In summary, we don't think the introspection of the evolution of the financial blogger is a one off. It is more a symptom of a general introspection the whole financial world is feeling in the face of a rapidly changing environment.

However, Team Macro Man will keep plugging on.

False Dawn Or False Dusk

Much like watching animals in a zoo, particularly dangerous ones, rangey markets create excitement the closer they get to their boundaries. Last week's excitement in the bull pit has already faded as the beast retreated back into the shadows and today the excitement is in the bear enclosure as equities approach various supports. But TMM are as sanguine as ever towards many of the screams of encouragement.

As far as earnings seasons go, this one has been somewhat disappointing. While earnings have beaten expectations, they have not done so at historical beat rates, revenues have missed and guidance has been rather downbeat. The question, as always, when interpreting such releases is deciding whether (a) the information is new, and therefore forward looking, and (b) what the implications of that news are. So what do we learn from these reports then? Global growth was pretty weak over the quarter - particularly in China and in Europe, CapEx intentions have fallen in the face of electoral and fiscal cliff-associated uncertainty. Well TMM would argue that none of those are particularly ground breaking observations, in the light of the macro data over the summer and the constant barrage of debate around the election and the fiscal cliff. And on the guidance front, it doesn't exactly seem as though corporates know any better than the rest of us, with Caterpillar, for example, forecasting that their earnings over the next year would be in the range +5% to -5%. i.e. - "We'll either make more money... or we'll lose money". Thanks guys, really insightful.

So in our eyes, while bears are excited to seize on disappointing earnings news, TMM reckon these are all a bit backward looking. And there are several reasons why. First, unlike late-2007/early-2008 when earnings news began to worsen, policymakers are no longer behind the curve - cast your mind back to that period, and it was marked by large intra-meeting rate cuts by the Federal Reserve, attempting to catch up with the fast-deteriorating economic data, while the ECB and BoE refused to ease policy due to still worrying about inflation risks. This time around, earnings season has come just a few weeks after the most extraordinary central bank easing measures introduced to date: QE-Infinity and the ECB's OMT. These have had a dramatic effect in easing financial conditions over the past six weeks, the effects of which will not have fed through to the real economy yet - it's just too early. Markets, as forward discounting machines, are likely to concentrate on future earnings, rather than backward-looking ones.

Second, again - unlike late-2007/early-2008 - the economic data has begun to rebound: particularly in the US and Asia, but also in Europe. The bottoming in PMIs, exports in Asia and the reacceleration of China into the New Year are all positive for earnings going forward. Third, it appears to TMM that many are extrapolating the weakness seen in Tech earnings to the broader market, but that masks a rotation that is ongoing and a positive one at that - out of defensives and into cyclicals (See below chart of GS Cyclicals vs. Defensives).

Fourth, the weakness in risk has thus far appeared restricted to equities themselves, as cross-asset correlation has collapsed, as has that of the index itself (see below chart of implied correlation). Add to that the volatility bleed across the board as central bank liquidity suppresses risk premia, and it is hard to get to get too excited about a down trade. That said, as per TMM's last post, we do advocate buying cheap tails for protection.

Fifth, regarding the election and fiscal cliff debate, TMM are of the mind that this is a two stage wall of worry. Once the election is over, that is one hurdle of uncertainty passed, and markets are likely to squeeze higher, no matter who the winner. And secondly, TMM struggle to think of an "issue" that markets have discussed both so much and so early, than the fiscal cliff. The result of that, in TMM's minds, is that the market already discounts a significant probability of going off the cliff, and that even a going over the cliff for a few days until an agreement is made is unlikely to phase markets much beyond a knee-jerk, and certainly not anything like last August's broad de-risking. This is as much a fact of investors not exactly holding a huge amount of risk.

Finally, while last night's late rally was attributed to a spurious article suggesting further FOMC easing, it has been noted by many that there are often mutual fund inflows at the close. And the large nine-week stretch of equity outflows finally came to a close last week. So TMM are of the view that real money is likely to be accumulating length into weakness - and the low volume sell off this morning feels to us as though it is merely HF and CTA activity. Absent major macro news, TMM would argue the old adage applied "don't sell a quiet market". Buy the dip.

Buying the wrong tails

The Chinese data overnight isn't a game changer, but supports the increasing sense seen both in data elsewhere and in prices that China has indeed had a soft-landing and is beginning to recover. Of course, while the lack of catastrophe and the turn in the Pork cycle means that easing is unlikely to be aggressive (2008/9-style), in the absence of "new" news to conflate the Asian recovery story that the trend is in place. As indeed it appears to be in markets in general, as somehow Spain has managed to get its 10yr bond yield down to 5.5% despite a lack of ECB buying. Remarkable.

Now, onto something else that's been bugging TMM and spurred something of a debate. What is going on with the seeming monotonic collapse in the Libor fixings and commensurate cheapness of the 2yr USTs. It seems somewhat incredible to consider that 2yr swap spreads at 9bps sit at close to their record tights given all the Libor shenanigans, and general concerns about bank solvency in Europe. But that is where we are.

And when compared with Schatz, in particular, it seems even more confusing. TMM totally get the EMU-break up option priced into Schatz. The trouble is, that while the pay off in such an event will of course be massive, the probability of it being triggered was always pretty low. And put in the context of what appears to be a drive in Europe towards fiscal union (of a sorts) and the ECB's determination to "do whatever it takes to preserve the Euro" (see OMTs...), even the most sceptical would have to concede that the probability of a Euro-break up has fallen by a significant degree.

But upon drilling down into the constituents making up the swap spread, comparing 2yr UST with OIS and Schatz with EONIA, it seems that the value of the liquidity option priced into Treasuries is less than that priced into Schatz, at -11bps vs. 7bps. This relative premium began to appear in Spring 2010 as the Euro-crisis flung itself centre stage and reached its wide just prior to the LTRO.

Though the Schatz leg especially has retraced quite a bit since the Greek election, TMM still reckon that this relative pricing is wrong. Because back in the old days (well, not even that long ago), when there was a liquidity crisis, or EM crisis or even any old "risk-off" event, it was the front-end of the UST curve that saw the greatest flight to quality and associated liquidity premium. And in all such events, German short-end paper underperformed the US. Of course, that all changed in 2010. Or did it? Since then, the majority of liquidity events have been Europe-centred, and particularly around the potential break up of EMU. So given the Deutschemark call option, it certainly makes sense. But TMM have found themselves wondering if the market is mispricing the relative liquidity premia here: Schatz may well have performed better in recent history, but it is only likely to perform in an EMU-breakup event, while USTs can perform in any idiosyncratic risk shock (Iran, a Brazil blow up, a Chinese government collapse etc etc).

A discussion with fellow punters yesterday afternoon saw TMM's view met with some scepticism... even suggesting things like FRA-OIS could go to zero (more on that below...), or that there is no point trying to buy 2yr Notes until Operation Twist is done, given that O/N General Collateral is 30-ish bps. The latter is certainly a reasonable view, but by the time Operation Twist is done, the market will likely have moved already. And TMM were always taught that when liquidity appears abundant everywhere, it's worth shipping some in as a hedge against a long risk portfolio... of course, the daily P&L bleed becomes frustrating and it's very easy to then stop out... only to see the thing rip back up straight away, leaving your book exposed. Lessons learned the hard way. But it does seem to TMM as though perhaps the market is so focused on EMU break up risk that it has forgotten everything else that can happen and is buying the wrong tails. It's also worth noting, that usually you only get *really* paid to own convexity when an idiosyncratic "unknown unknown" event hits.

Anyway, back to relative valuations.

Generalised risk events seem to arise about once a year... often twice, but let's be conservative. In days past, this has sometimes meant as much as a 20bps move in spreads. Of course, now, there is bucket loads of liquidity everywhere, supplied by the world's central banks. So it is probably fair to accept that such moves will be less than in the past, but again, liquidity often appears to be an illusion when the sh1t hits the fan. Anyway, this is only a back of the envelope exercise, so let's guess we only move 12bps which would be about 60% of prior moves (and would roughly corroborate with the move seen ahead of the Greek election). On the Schatz side, in a full break up we could imagine a price move of say 20%, which is roughly something like a 900bps move. TMM would argue that policymaker commitment has reduced the probability of such an event to something like 1% per year. So the expectations would be 12bps per year for the UST (100%*12bps) and 9bps/year for the Schatz (1%*900bps). TMM are perhaps being a bit naughty here given that Schatz would also rally in a generalised risk off, but then, in an EMU-break up event, UST would arguably rally significantly too, so it's not too much of a stretch to argue that the liquidity option priced into 2yr Notes looks like it is now too cheap relative to that priced into Schatz.

Onto the other part of swap spreads... Libor...

The Wheatley Review - amongst the general amount of liquidity everywhere - has driven Libor fixings down as banks crowd for fear of getting sued and given the fact that US Financial CP rates are around 15bps, there's certainly the argument that Libor should be lower given the concept of bearing some resemblance to "market-traded" rates. The trouble is, the Libor spikes of the past couple of years have never been about US banks: instead, by the marginal borrower from Europe, and the overall rate is going to be a blended average of all these borrowers. The chart below shows the US Financial CP rate (orange) as a proxy for US banks, Natixis 90d USD CP (red line) as a proxy for the higher-quality banks in core-Europe issuing directly in the US, the rate implied from borrowing at 3m Euribor domestically and swapping into USD (for those European banks that are able to borrow privately in Europe, but not directly in the US), the rate implied from borrowing at the ECB's MRO/LTRO and then swapping into USD (for those banks that are unable to borrow from anyone apart from the ECB). Obviously, since Draghi's game-changing speech, all of these measures have moved lower. The question is, how much lower can these now move, given the dramatic normalisation seen so far?

It's not easy to know how to weight the above measures, but given this is all a back-of-the-envelope exercise, a simple regression is probably the best way to get a sense of things (see chart below). And looking at that, it's possible to argue that the 3m Libor fixings have over-shot the actual funding market improvement.

Putting all of the above together, TMM reckon buying 2yr Swap Spreads in the US, buying 2yr Notes outright (assuming Ben keeps his promise) and buying 2yr Notes vs. Schatz all look like reasonable ways to get some tail hedges on the book.

All Talk and Missing the Action

We should do that more often. When we want markets to move we should write about them being dead because it's all a bit interesting again and debates have been raging in camp TMM. 

It all kicked off in the TMM camp this morning with a debate as to whether Krugman was a genius, or just a once genius who has now been swept up by political hackdom, accidentally wandered into the BBC anti-austerity camp, been given a cup of tea and if not careful will go all Niall Ferguson on us.  Let it be recorded that to allay further dispute an entante cordiale was signed amongst us agreeing that the BBC were so stuffed with their own economic sensationalist agenda that it was THEIR fault and we'd leave Mr K out of it. His genius (or not) should not be judged over a bleeding obvious "may or may not" statement as to the worth or failure of UK austerity plans. Maybe Krugman is to the BBC what Jack Welch is to conspiracy theorists.

Next came the discussion that QE operators may be considering ripping up the debt they bought. Not much of a debate, but where Gold would go on it was, mostly resting on the number of noughts on the end. 

Then there was  *GERMANY OPEN TO PRECAUTIONARY CREDIT FOR SPAIN, LAWMAKERS SAY, Leaving German debt asking the market-  "Do you expect me to Pay" and the response -  "No Mr Bund we expect you to die". It does smell as though the Spanish comments for no need for ESM may because they are actually arranging a "Bailout Lite". 

Then there was Canada - Carneys dovish comments have shoved CAD off its perch and even the stalwart last bastion of AUD shortness,  AUD/CAD has started motoring higher. (no bad thing for TMMs AUD positions)  but Carney's status led to further debate over the next Governor of the BoE and how, as with Soccer managers, it is no longer compulsory to have a CB governor of team nation origin. Soon followed a resurrection of TMM's game of Fantasy Central Bank, where we select our dream team of central bankers and policy makers for our ultimate "Policy Makers United" team. Judging by past England football performance perhaps we should leave Italians and Swedes out, but Draghi's heroic efforts at the ECB have him a firm favourite. The results will maybe make a later post.

Whilst all this was happening we were steadily missing the development of what now appears to be the strongest possibility we have had for a break higher in markets for a while as various earning continue to "surprise" to the updside. How many "surprises" make a "huh"?

  Finally TMM are getting a little bored of random indicators popping up and being lauded as heralds of either the next big crash or rally or Mayan end of the world. Coppock has cropped up again and we add it to Hindenbergs, Battledeathcrosstar Galacticas and all the other "no no really, it really works" indicators with silly names they have in their bottom drawer of indicators that don't work.

If it really is that easy then TMM wish to join in and launch their own TMMLTBI (Team Mystic Meg Load the Boat Indicator) 

TMMLTB Indicator - Team Macro Man have developed the TMMLTB Indicator with one sole purpose: to identify the commencement of bull markets. The indicator was devised for use on making shed loads of money but is suitable for use on any market index or average, pint of beer or bottle of wine.  

This indicator is currently sitting at BOLIVIAN.(see glossary)