STPLT Indicator

So much for the renewed attack on the weak EM. Despite wobbles in the morning in DM equities they never really succumbed to any supposed correlations. Serves us right for not trusting our own beliefs that the market is getting these correlations wrong and thinking they would do so again, even temporarily. So no pull back and we had to put back on the longs we had taken off.

We are left this morning hearing the siren call of one of or favourite indicators - The STPLTI. Standing for "Short Term Pushed Long Term Indicator", this indicator is usually a precursor to shallow pocketed investors being removed from the field on stretchers. We have seen it work perfectly in Europe, where speculative positions on the imminent demise of the Euro were bundled up into old suitcases, put in the attic and reclassified as "long term". Which is all well and good if you can afford to have your positions slowly dry and decay whilst you wait for Godot, but in the real world you normally need that cash for something else so harsh truths of cash management ultimately force you to retrieve the remnants, count the cost and start again.

The same has occurred in the gold market (just read Zero Hedge comments) and we would posit is happening right now in the Bitcoin market. But this morning it's the EM market that looks like Downton Abbey on Boxing day, huge trunks being stuffed with all the short term positional Christmas joy of EM demise to be shipped either home or up to the attics because it's over in the short term but will happen again.. Sometime.

TMM aren't immune to STPLT themselves and their own portfolios contain the dusty remnants of stocks that having once been sure fire things have basically become free options with pico-deltas (all that battery technology that didn't make it). But we are all too aware that in this world of short term return measures you need very deep pockets to ride out the "one day" trade. Which of course most people haven't got. So when we hear, as we are this morning, those folks short EM (who two weeks ago were looking for imminent collapse) saying that it's now a "long term trade 'innit", we look for things to start motoring higher and we go long stretcher bearers.

Do we detect a bit of this in Europe too? OMT legality has raised its head again in a big way. Wolfy in the FT and Euro permabear Evans-Pritchard are touting it as disaster but TMM think that OMT is much like a fire extinguisher. Even if they are ruled illegal it doesn't mean that your house will catch fire in the first place nor that you wouldn't use them anyway rather than burn to death (even if the German lodger does prefer self-immolation). Others would suggest though that if it were known that the fire extinguishers may not be used then it's open house for the arsonists.

So if that were the case, the most sensible thing to do would have been for the Germans to collude quietly with Euro central command and agree not to voice any of their debate. So even if they did decide that OMT is illegal, they just wouldn't tell anyone. Just like Reagan's Star Wars, it isn't the reality, it's the possibility that breaks the back of the aggressor.

So why are the Germans being so German about it? Perhaps it's just constitutional process that has a course to take and isn't designed to upset anyone, but like that giraffe being cut up in Copenhagen Zoo in front of the kids, it's a fact of life that has shocked those that don't like to see the messy bits of reality.

Maybe it's time to just go with the flow, rather than booking a lot of space at your local storage company and hoping all those now long term positions don't end up on "Storage Wars".



"Hey Barry, I've found a long DEM/ITL from 1998!"

Today's stuff.

Europe:

Last week's ECB press conference was notable for how hawkish it was relative to expectations. Which has TMM wondering if this is actually a glimpse of a deeper policy that would go a long way toward explaining the ECB’s inactivity. That is that the ECB recognizes that one of the key misalignments in the Euro area is productivity-adjusted labor cost differentials. Even after the recent crisis, Germany labor costs remain very competitive vs those of other Eurozone countries. As long as that persists, Germany will have a high trade balance and negative capital balance with its EU neighbours. In other words, German capital will continue to finance Germany exports.

Now, within a currency union, the smoothest way to normalise this gap is over time via differing inflation levels within the EU over time. In particular, if German labor cost inflation exceeds that for rest of EU for sufficient time, real labor cost differentials will shrink. To us, this appears to be the path the ECB is taking.

If this is the case then it is worth noting that since Germany is much smaller than half of the EU, this policy stance by definition would mean very low inflation in EU ex-Germany, and as a result low inflation prints for the Eurozone as a whole. In other words, the ECB WANTS low inflation prints for the Eurozone as a whole because it signifies that the labor cost differentials are narrowing. The ECB’s implicit acceptance of a long period of below target inflation (via its staff forecasts) is reflective of that. As a result, as long as inflation expectations remain anchored, TMM thinks the ECB is likely to continue its current policy of non-action. Whether inflation expectations will remain anchored, however, is a whole other story altogether. But the lack of action was the removal of one risk support.


US: The ISM print last week was obviously the big shocker, but TMM thinks that it overstated the drop, just as the previous prints near 57 probably overstated the real improvement. Weather remains a large factor clouding many recent data point and TMM thinks it will be some time before that is cleared up. On the bright side, barring a more severe mid-cycle slowdown, there isn’t a great deal of room for the ISM print to fall further from here. But it was the NFP that was the main headline. There was something in there for everyone. Poor headline for the bears and yet stunning households for the bulls. As usual the one that is touted most is the one that supports the following price action. As stocks shot up it was classed "Boomshakalaka"!

Momentum - This week has started though with a dramatic fade in momentum. The rate of rally in US markets into their close had us looking for a reasonable follow through in Asia, but overall it was pretty unimpressive and we were interested to see USD/TRY, USD/ZAR and gold all moving higher. The gold component particularly noticeable. So whilst we remain fundamental bulls for equities and EM the speed of the return of TRY and ZAR moves, as HF bullies give them another beating, combined with the rapid decline in DM equity market momentum has us trimming our longs and playing a turn down for the next couple of days giving us another dip to buy on, but whilst folks love to correlate everything (usually wrongly) in market slides we won't stand in the way today.

TMM also have a friendly bet that if mrkets do indeed start falling today the NFP corpse will be rewrapped in its "bad news" clothes and wheeled out as evidence.

Talking about dips to buy on, here is our favorite chart du jour. -



How exciting for all those lucky bitcoiners! Yet another dip to buy on! We've said it before. Railroads of the late 19C. The ideas are good but that doesn't mean you will make money owning the first iteration. One aside, with gold rallying and bitcoin dumping could we be seeing the "log cabin" switch taking place where large swathes of Montana are switching out of surefire Bitcoin back to surefire Gold? Of course not, but someone is bound to seriously suggest it (buy shares in gold coin retailers in mountainous States).

Oh and finally we just have to give credit to the genius "Gigawipf" who gave us the floppy disc orchestral version of Soft Cell's "Tainted Love" which we make today's "playing out" music.

NFP Number Generator

Team Macro Man proudly present their NFP number generator





Just input your min and max and the result will be as valid as anyone else's. Don't like the result? Just press the "gonna be" button again and it will give you another!

NekNominate Germany

Central banks are like a group of mothy wallets at the bar. Their drinks are running low and they are trying not to be the first to finish so as to avoid getting in the next round. The Fed has already said that as they got the last round, and the one before, they ain't stepping up again. Abe's out too having bought the 1.5 litres of 100 Proof sake which has turned out to be weaker than everyone had hoped. The moaning skinflints of the emerging markets, lecturing socialist drinking equality, can't afford a pot to piss in (let alone to buy the substance to fill it) and the rich Emerging Markets are doing alligator arm impressions and trying to hide their rolexes. So it would be rather honourable for Draghi to push his way to the front and declare that this round is on him.

But as ever it's the teetotal German, who everyone would rather wasn't in the bar at all, holding things up through a combination of moral lecturing and downright threats. But there has been talk from "sources" that the Germans may be willing to get off the wagon and share a sip of sweet sherry.

But TMM would like to go one step further. You may have heard of, or even participated in the Facebook craze of NekNomination which has seen young adults around the world formally participate and publish a form of self abuse that in the past we did quietly in private, namely mixing up the remnants of the cocktail cabinet (or worse) in a pint glass and drinking it.

TMM hereby "NekNominate" Germany to neck a pint unsterilised liquidity, film it and put it on youtube.

It's all EM is it? You sure?

It's all EM is it? Taking the two favourite stress indicators of ZAR and TRY as barometers of EM deficit country woes we can see how they linked to the fall in S+P500 futures. But once their job was done in tipping over DM equities they have delinked.

Here we have a cluttered chart of the last 20 days in S+P500 futures, ZAR/USD and TRY/USD.



And a clearer one with just the ZAR showing



If you think it's all EM there is an obvious trade there for you.

But perhaps this isn't all EM and once again a correlation makes a nice story while it fits, until it doesn't, at which point you need to go and find a new one.

Keep Calm and Carry On.

RBA leave rates on hold. Ok this was as expected but the hawkish swing within the statement with the suggestion of "stability" in rates was a big enough surprise to give AUD a rare lift. There must be some wag out there other than us wondering if the RBA is praying that the odd over-excited EM speculator doesn't decide that as AUS is an EM currency and push it further south than even the RBA would like. But in a way that trade has been done. AUD shorts were well and truly on the 2014 consensus shopping list and it was probably only a matter of time until that trade too took its turn around the back of the woodshed.

That US data was not a nice surprise for TMM and the resultant precipitous move down in US equities was not the most pleasant of rides. But, on a technical basis with S+P500 1775 pierced the technical move lower would have needed some pretty decent bounce elsewhere to counter it. Flag breaks and measured moves should have seen us near the highs of September.





Instead we had the ISM from Hell. Not only hell in the number it produced but also its reliance. Weather weather weather Etc. We never anticipated climate change having the added distortionary function of casting a veil of opacity over all our data. The outlook for this month's data is ... foggy.

UK data however continues to be encouraging with construction PMI topping estimates. We expect the normal barrage of "wrong type of good data" to come from some quarters, no doubt dragging up housing bubbles. Housing is such an emotive debate as in simple terms half the population want prices to go up as they own it, whilst the half that don't, don't so that they can. All arguments seem unwinnable so why bother.

If we hark back to our first post of the year, where we mentioning a wash-out needed to bring the bears back out of their caves, then we have been rewarded in spades. But we are the first to admit that we caught the knife far too early. Remarkably, our dalliance into EM has actually been the least of our pains (with sub-sahara Africa actually showing a profit). It's the DM sector that has hurt us most and so we should step back and have a look at how the land lies today.

A quick check on the EM barometers -




Stabilisation and even recovery with TRY and HUF up 1.5% each.

So the day starts calmly after momentum and fear gauges were running high yesterday (highest volume of stocks traded on NYSE yesterday since the Flash Crash). Now one of the products of fast moves in markets is to see short term players applying long term arguments to support their short term positions and the preponderance of EM tourists is interesting. As we know tourists need momentum as their attention spans are limited and carry is a killer in slow EM markets (don't be short a quiet market).

TMM imagine that their is bemusement in the camp of the goldbugs. Here we have EMs going to pot, US markets tanking and yet, their trusty crutch of Gold has done pretty much zip. (below is gold vs SPX)







Which leads us to believe that Gold is more concerned with continued tapering rather than asset meltdown. So this might suggest that markets are pricing slowdown in US markets and no slow down in tapering. But isn't that not what Yellen is about? Surely if growth turns then the Fed will respond (as we have said before). So in a bizarre twist perhaps the EM's are praying for a US slowdown!

Meanwhile debate over the responsibility of the Fed to act responsibly continues with a call for actions to be coordinated. Which To TMM appears pretty rich as you have a large group of countries calling for coordinated action from one of the very few countries that is willing to take any action, whilst they themselves do nothing. Echoes of "Benefits Street".

We are keeping calm and putting some carry on, but we are also fully prepared for another trip to the proctologist.

TMM Stop Loss Management

TMM stop-loss order management - Hi-tech stuff.



The sudden halt to the tanking of the markets has left us lucky to be alive.

The Case of the Missing Bodies - A Sherlock Holmes Story

OUTSIDE SCREAMING "Murder! There's been a murder! Mr Holmes! Come quick!"

[Holmes stirs from the obituaries column in The Times, walks over to the fire where, after warming himself, secures the guard and places his Meerschaum pipe on its rest on the mantlepiece]

HOLMES "Watson, bring me my coat, it appears that there is a disturbance".

[Outside in the street, A crowd throngs around Holmes]

HOLMES "Please, can you all calm down. what is the trouble?"

CROWD "There s been a MURDER well more than one murder, its terrible! It's down the Eeyems. Mrs Turkey. She's DEAD! And Mr Rand, And the Hungarian lass and the Russki kid.

HOLMES "Come Watson, best we pay a visit, if for no reason other than to calm this over-excitable lot."

[Arriving on scene - The Eeyems is a higgledy hotchpotch of narrow streets once populated by the poor but the arrival of an aspirational young has seen pretences of gentrification, however the underlying squalor is never far away. Holmes and Watson are let in to a dingy hovel by an attendent constable where an old woman is propped gasping against a table.]

HOLMES "Ah Mrs Turkey, I see that you are breathing. A good sign of a lack of death. Watson, would you be so kind?

Dr WATSON "Her PMI is slightly weaker than the last reading but apart from a bit of bruising to the FX causing some rate shock she's not in too bad a way".

HOLMES "Hmm .. so not DEAD then Watson".

Dr WATSON "No sir. Not Dead."

HOLMES "Not a murder then. No."

BYSTANDER  "But, but she WILL die though and THEN it will be a murder"

HOLMES "It will only be murder when I say it is a murder. What makes you so sure that she will be murdered"

BYSTANDER "Well look at her, she's weak and feeble, hasn't been able to defend herself against the last attackers so she's just bound to be murdered"

HOLMES " Hmm .. Looks to me like we have a simple case of GBH. Constable, move these gawkers away and let us proceed to Mr Rand's house. Come Watson."

[Arriving at Mr Rand's house]

HOLMES "Good evening. May I see the corpse please?"

CONSTABLE "Err, it's not quite a corpse sir."

HOLMES "In that case may I see the not quite a corpse? Where may I find it"?

CONSTABLE "Sitting at the table drinking a cup of tea with an ice compress on his eye"

HOLMES "Watson, what do you make of this?"

Dr WATSON " PMI A little lower but really nothing to worry about apart from that punch in his eye"

VOICE FROM CROWD - "No, no. He must be dead, we gave him such a kicki…."

[Crowd falls quiet]

HOLMES "Sorry? "

VOICE FROM CROWD " No nothing, but he looks really ill so if you come back later he will definitely be dead"

HOLMES "Hmm I see. Constable, make sure none of these people can get to Mr Rand and let's move on. Where's that Hungarian au pair? And is there any news on the Ruski Boy?

CONSTABLE "The Ruski Boy is fine, his PMI is pretty weak at 48 but he's a big strong lad and he'll pull through. As for the au pair, she's popped down to Miss Brazil's where they're talking about local rights. They're apparently planning some protest against EM cruelty and are demanding large donations from rich countries"

HOLMES "Not dead then? Neither she nor Miss Brazil are dead."

CONSTABLE "No, Hungary just had a bit of a scuffle with a debt collector down the ally but she looks ok. We had the Doc check her out. PMI was 57.2, fit as a fiddle"

HOLMES "Hmm... Despite what the crowds are saying it appears that there has NOT been a murder. But something odd is going on. Why are the crowds so convinced that murder is afoot when there is no body?

CONSTABLE "Well there have been reports that a man with a beard hasn't been seen around here"

Dr WATSON "HASN'T been seen around here? Since when has someone distinctly NOT being at the scene made him a suspect for murder?"

CONSTABLE "Well that's the thing sir. People are saying that if he ISN'T seen then people will die and it will be him that's murdered them"

HOLMES "I see, so let me understand this. If he isn't here then people will die, or more importantly, people THINK they will die. So that implies that he must be giving them something that either IS keeping them alive, or is just thought to keeping them alive. Hmmm".

WATSON "So you think that if he isn't seen then maybe the crowd think that a person is going to die, so they sort of, errr, help them on their way so to speak?"

HOLMES " Well Watson, I don't think this crowd is of the kind persuasion to buy them a first class all in luxury one way trip to Dignitas for a painless lifting of their mortal coil, no Watson. But I wouldn't put it past them to pop round and relieve them of a few possessions that they won't be needing in the afterlife and perhaps administer a little boot action to help them on their way. But first we had better track down this bearded mystery man"

CONSTABLE  "The Inspector's just called. He says he has something of interest"

[At the police station]

INSPECTOR "Sir, I think you'd better see this. Its a report from Traffic. They've been checking the CCTV and found something odd. Every month a large truck with United States number plates drives through the neighbourhood. And guess what, the driver has a beard"

HOLMES "The possesion of facial hair within the vehicular conveyancing industry is not exactly uncommon, so I presume you have further circumstantial evidence?"

INSPECTOR "Turns out that the truck is delivering cash from a company called Fedorama Enterprises to its customers in the USA, but .. here watch this . " [constable puts video on play]

HOLMES "Ah indeed. Would you look at that."

DR WATSON "The back doors aren't shut properly and money is leaking into the street and see! All the locals are coming out and grabbing it! Look there's Mr Rand and is that Mrs Turkey?"

HOLMES "Yes Watson, but they aren't alone, they are all at it. So I have two questions. What has happened to this truck? And, more importantly, why have the crowd specifically picked on the victims we saw today"

INSPECTOR "I can help with the truck question. It would appear that Fedorama Enterprises have decided to phase out production, so the truck is making fewer trips."

HOLMES "I see, now if I was in a position of depending on what came off that truck I'd start to worry about my future if it's visits started diminishing. A crowd suffering fear is a dangerous beast Inspector and is liable to be whipped up into making some rash choices in the heat of the moment."

DR WATSON "So what happened to the victims we saw today?"

HOLMES "Did they have any savings. Has anyone checked their bank accounts? "

INSPECTOR "We have Mr Holmes, Not a bean, well Hungary did but turns out she owes it to Mr Swiss"

HOLMES "Ah I see, so when times were good they didn't put anything away for rainy days."

HOLMES "Well it would look, Inspector, as though the crowd themselves, the ones crying murder, are not exactly without responsibility. They appear to have meted out their own punishment upon their brethren for the very fact that they are the weakest in the community. Of course the crowd can hardly cry "Murder" and have a murderer convicted and compensation sought if there is no murder. For a murder you need a body. Our victims, despite the best efforts of the crowd are, though bruised, very much alive and the expectation of someone to be dead in the future does not qualify as murder. But this does not mean that a crime has not been committed. Inspector, we need to talk to that truck driver.

[Later in the Interview room]

HOLMES "So Mr Bernanke, did you not know that money was blowing from your truck as you made your trip through the neighbourhood of Eeyems? You did but you didn't care? Did you not see how it was affecting people's lives? Ah, you are just a truck driver and it wasn't your business? Can I put it to you Mr Bernanke that you knew exactly what was happening and far from being concerned about the leaks of money from your truck you were happy to see the locals, who were picking up that money, using it to buy goods in your company's shops? As maybe? And no, you are right, there aren't any rules against that. Which may well be unfortunate as your actions have caused the community a lot of distress. However Mr Bernanke you are not leaving here a free man. You are guilty of one crime.

HOLMES "Inspector! Arrest this man for DRIVING WITHOUT DUE CARE AND ATTENTION!".

[Later in Sherlock's rooms with fire glowing and the distinctive aroma of pipe tobacco whisping in the lazy air]

HOLMES Well Watson, an interesting case. But one which proves how the rule of unintended consequences abuts so closely to that of the reality of intended consequences. And whilst we have no bodies, we have no murder. The crowd wanted Mr Bernanke's truck to keep rolling but in their eagerness for compensation for a crime committed against them, they fabricated their own evidence overlooking the fact that the victims they provided were not in fact dead. We must remember that whilst correlations in actions and reactions may exist, indeed even when causality and correlation are established, neither imply responsibility. And even if responsibility is established then we cannot prosecute if no Law has been broken. But, unfortunately Watson, we should now expect another reaction. For when the law is seen to be lacking by those who wish their will upon others, they will raise their flag of last resort. That of "Moral Responsibility". I look forward to tomorrow's newspapers with a hardly bated breath."

Emerging Market FX Questions

Having heard many questions being asked about EMFX (most of which have been answered by new Armchair EM Generals using their favourite  tools of rearview mirrors and extrapolationist rulers), we thought we would ask some more important ones.


If you had 200 USDs worth of Turkish Lira in your hand would you :-

- Look at them as if someone had placed a turd in your hand screaming "Arrgh!"
- Place them in a Turkish Bank and watch your savings grow by a newly exciting 12% p/a.
- Buy corporate bonds in Turkish company Arçelik (controlled by Koc Holding) and display them amusingly on your toilet wall.
- Convert them to USD and find you've now only got $100.
- Buy a small coffee in Bodrum and have to cover the difference in Euros.

If you had 200 USDs worth of Russian Rouble in your hand would you :-

- Look at them as if someone had placed a turd in your hand screaming "Arrgh!"
- Donate it to Mr Putin's retirement home for sick puppies.
- Check your wallet for receipts to work out where the hell you were last night.
- Convert them to USDs and find that you have only $20 and a menacing look from Yuri the money changer.
- Buy a small bottle of water in Moscow and pay the difference in Euro.

If you had 200 USDs worth of South African Rand in your hand would you :-

- Look at them as if someone had placed a turd in your hand screaming "Arrgh!"
- Call up Charlize Theron and tell her dinner is on you.
- Convert them into USDs and promptly get arrested by over zealous FBI for money laundering.
- Buy shares in a local gold mine and go back to writing comments on Zero Hedge.
- Buy half a gram of Biltong and pay the difference in Euro.

If you had 200 USDs worth of Brazilian Real in your hand would you :-

- Look at them as if someone had placed a turd in your hand screaming "Arrgh!"
- Hide them from your wife.
- Ask if they're like Bitcoin as you've never heard of them.
- Sell them and buy US bonds in nice Mr Gross's fund as he suggests.
- Buy a ticket to watch the World Cup on a TV in Joao's favela bar, paying the difference in drugs.

If you had 200 USDs worth of Indian Rupees in your hand would you :-

- Look at them as if someone had placed a turd in your hand screaming "Arrgh!"
- Have managed to sell insurance to 50 Sky customers in the UK from your cold-call center in Bangalore.
- Find your old rucksack and head off to relive your hippy days in Goa in a cloud of smoke.
- Trade the 3mth vs 6mth INR NDF as a rate hedge and find the spread cost you more than the face (due to market volatility sir, sorry).
- Buy a British car company and be given a sweetener by the UK government of £1m to go with it.

If you had 200 USDs worth of Hungarian Forint in your hand would you :-

- Not worry because it's a surplus country 'innit.
- Resurrect the trusty solvency issue and scream "Arrgh!"
- Give them to Boglárka the au pair to take home to her parents in the mountains.
- Arrange Dave's stag (batchelor) party in Budapest (when there is no Dave).
- Buy a quarter bottle of Tokaj 7 puttonyos and pay the difference in Swiss mortgage bonds.

If you had 200 USDs worth of Chinese Renminbi in your hand would you :-

- Celebrate as it’s going to be worth even more USDs.
- Offer it to a passing group of HF managers who politely decline it already owning 300bio of their own.
- Buy USDs then USTs, not because you listen to PIMCO but because you are SAFE and that's what you do anyway.
- Buy 50 LED lightbulbs off Alibaba and find they are rubbish.
- Buy a Louis Vetton bag from a Beijing street hawker and borrow the difference from a local official.

And finally -

If you had 200 USDs worth of USDs in your hand would you :-

- Use them as margin to go short of all the above.
- Buy any of the above as one day you'll need their country as a tax haven.
- Rejoice you got a bonus no matter how small.
- Call your friends and ask if you left the other $800 on the bar.
- Buy a Senator funding the difference by issuing subprime debt that is bought by the Fed.

Turkey - Are Trading Correlations to Global Risk Valid?

It's probably worth following up on the last post as there are a few linkages in the markets that we feel now need questioning.

TRY and ZAR and of course current account deficit EM in general, are easy meat to attack , even more so as they have a good story to back the trade. "QE USD outflow leads to falling currency as the inflows that have been needed to counter the current account deficits these countries have been building now have no inflows to counter them". Fair enough.

We then see rate hike responses in said countries. In a way you could think it ironic that these countries moaning directly about US inspired tightening global liquidity causing their problems only to have to respond by hiking their own rates to the moon.

There are a couple of purposes in raising rates. One is to make it more expensive to speculate against the currency but as per our last post we are not sure this works and used the analogy of the UK in 1992 with the GBP crisis. The other function is to actually fix some of the long term problems and as far as Turkey goes this is a sensible move.

The problem in 1992 was that the UK was in a straightjacket where they were 'forced' to import German monetary policy, which was totally inappropriate for the UK, whereas in Turkey, monetary policy is becoming more aligned i.e. real interest rates are going positive, and credit growth will be curbed. It's the right medicine. Whereas in 1992 it was the wrong policy for the UK.

But back to that sentiment function. We also mentioned this morning that a market loves to hang its hat on one price to act as the barometer of fear. Sentiment has so far indeed followed the price of USDTRY almost to the second. Below is USDTRY against inverted S+P futures.





But there comes a point when assumed connections have to be challenged as there is only so far a pack of lemmings can run before one of the pack asks themselves why they are all following each other and whose got the cliff map. So TMM would like to ask a couple of simple questions -

How much does it really matter to the global economy if the likes of Turkey and South Africa are FX torched back to becoming cheap holiday destinations? Can we really justify huge panicky swings in the US top 500 corporates because Erdogan and his mates are going to have to suffer a bit of austerity after years of dinning on cheap USDs?

And do the DM markets grind to a deflationary halt because deficit EM are suffering (and note its Deficit EM countries here we are talking about, the surplus ones are numerous and surpluss'ed enough to make a 1998 style crisis nigh impossible)?

We doubt it. So that leads us to ask if this shake down is DM is actually being caused by EM, or is it just being triggered by it?

DM has had its own reasons for needing a corrective pullback with a number of contributory factors. Such as people being overexposed to equities in general after 2013 and real money (corp pensions mostly) rebalancing from equities to FI en mass as 30yr neared 4% and their funding levels neared 100%. Interestingly there is also a self reinforcing function as the quickest hedge to EM positions is to sell the more liquid DM markets as a hedge on an assumed correlation. This hedging in itself reinforces the assumed correlation in EM and DM through price action, even if the underlying real link is small. This raises the interesting scenario that returning confidence in EM will be indicated by a rise in DM prices as hedges are lifted rather than a lift in EM prices.

TMM think this is a triggering rather than a cause.

Having seen the price action today we are beginning to think there was a spike blow off in in some of the extreme sentiment after EM stories had "gone Tabloid" today and we are now seeing assumed correlation without causality reinforcing itself until someone notices that in the big picture Turkey and South Africa don't matter.

So, despite casting ourselves in a spivvy light. We are back in the long DM side of the trade.

Turkey - Das Boot.

Turkey has shown decisive resolution and a strong firm hand in order to guide the market back to more sensible levels and punish the evil speculator. Well, that's what the statement would sound like if it came from the citadel of Brussels or Frankfurt. TMM praise the decisive action and look forward to similar action from Brazil, but the question is "Is it enough to turn the tide". We have seen this battle fought over history and the ghosts of Thailand, Argentina and all the other fatally pegged currencies still stalk the poppied plains of FX. TMM in particular remember their own experiences of the Sterling crisis of 1992 when interest rates were being cranked up in units of two in as many hours and we know what happened next.

The point then, as it is now, is if you have a full blown attack on your currency raising rates to the likes of 12% in the short term really doesn't deter a speculator who is having to fund at 1% a MONTH to play potential upsides of 3% or more per DAY. Of course the idea is that forward rates on FX move making it more expensive to sell currency forward.

But forwards are lower today on most periods as the idea of relief brings implied yields lower despite the actual hike in rates (1 month forward points below).



It's actually cheaper to speculate against TRY this morning than it was yesterday, not only as Spot is lower but the forwards are better too. So though rate rises have effectively kneejerked sentiment they have done nothing to actually make the trade more expensive.

This is worrying as it looks as though they have gone "all in" with the rates weapon hoping for shock and awe but so far today we see spot moving ominously back towards where it started and the forwards looking cheaper.



The speculator has just climbed out of the light scattering of rubble, is dusting himself off and probably thinking "Well if THAT'S all they can do then .."

Which to be honest is worrying for TMM as we played the Turnaround Tuesday idea and were feeling pretty happy. But we are back to sentiment. Long term the demise of the Turkish lira is probably a good thing (yes we are still bitter about prices charged in some Turkish beach resorts), adjustment in currencies is a hugely important tool and perhaps their effects should be worn as an inevitability that will only appear through other channels anyway if FX moves are attempted to be contained (growth reduction via higher rates counters c/ac improvements through FX falls).

But it's sentiment. The world was looking for Turkey to take action and the effectiveness of their actions is probably going to be seen as a bellwether. As the markets are so prone to do, for ease of trading, they tend to pick one stress price and use it as the barometer of fear. European crises saw PIGS 10yrs, basis spreads and a plethora of "charts du jour" to trade off. If anyone needs the same today then we suggest that the pressure gauge to watch will be the simple USDTRY and it's creeping its way ominously back to the 2.26 level it was at pre rate hike.

 Erdogan and Basci are currently living out the scene from "Das Boot" when it is under attack, waiting in a creaking hull with worried eyes on the pressure gauges.




Where does this leave us? On a global picture we aren't too fearful but the short term sentiment associated with selective EM is intense, so we have about-faced our confidence of yesterday, chopped bounce longs and are playing the short side in global risk today. Hardly long term Macro but you've got to swing with the info and try and make a buck!

Looking for a Turnaround Tuesday

Just a set of quick thoughts as TMM have been having a busy and exciting time over the last 10 days.

It took a while for the momentum to fade but the first US market open after the 19th of Jan was indeed a turning point and we aren't unhappy to have seen the pull back. But what speed. Pretty much 4% in 3 days. It is also interesting to see that it is the consensus trade of "EM to fall" that has ended up crippling the consensus trade of DM equities to rally.

4% in 3 days ... still thinking about that.

Q/E tapering - Knew that, as does the market judging by what they are discounting,
Q/E effect on EM credit - Knew that.
China Credit - Knew that (as much as we know anything in China) but ICBC partially protecting the Trust is better news than worse.
China Data - Yes it was soft, but enough to cause the melt?
South Africa and Turkey - Turkey is an old fashioned Market Turkey shoot. Looks weak , has little reserves and policy is indecisively reactive (are Ed Balls and Ed Milliband advising?). So Macro Jedi-knights are trying on their Soros-wan-kanobi robes thinking they can do a GBP 1992 on it. Which means they are probably loaded on the position already.

So 4% in 3 days .. still thinking about that.

Is there enough new in the last week to change everything? Or are we really just in the correction we were looking for and this move is based on positions? Be they Pension funds moving back to long bonds from equities (as they match liabilities as they get closer to being fuller funded) or is this just a sweep of panicky profit taking with a good story attached. We'll go for the later.

The story of the withdrawal of QE and its support for EM currencies is real but we are back to speed again, 4% in US stocks in three days does seem a lot. This pull back has taken much less time to do the sort of moves we were hoping for, so we have started (bravely or foolishly) buying back and are looking for a Turnaround Tuesday if Monday afternoon hasn't beaten us to it. To be more daring, if this is a correction in 2014 consensus trades with nearly all of them taking a beating EXCEPT for EM, then perhaps a healthy recovery bounce could do more dirty work in bouncing EM harder leaving that surviving consensus trade bleeding, just when it looked as though something was working on the books.

Following on from that, if we are thinking that 4% in 3 days is enough then it may be worth extending a Kevlar clad hand to catch the falling Turkish scimitar. Though we believe that Turkish coastal resorts have nowhere near devalued enough to see coffee and property prices return to below "HOW MUCH? Are you serious?"levels, this sell off has gone pretty tabloid. Even France's Hollande has gone over to talk to them. Can it get worse than that?

Back soon

___

Post Script
But didn't think this soon - A big thanks to AAPL for once again really annoying us. Note to AAPL "Yes, it's about time you fell off your high alter to yourself, but did you really have to do it right now? THANKS A PANT LOAD".

Hope - The Narcotic.

China is back at the top of the Financial Market's Pez dispenser of worries. But before we go any further it's probably worth explaining our Pez dispenser of worries theory.

It was the product of trying to work out why an aged parent would fret so much about the simple journey around the London orbital M25 every time they would be coming to visit, to the point that journeys would be delayed by days just to make sure that the traffic situation wasn't a threat (which was ironic as anyone who knows the M25 will know that they based Tuco's character in "Breaking Bad" upon it).

But the answer was simple. He was lucky enough to have nothing better in life to worry about. If you imagine that all your worries in life are piled up in order there is always one at the top getting maximum worry attention, the ones further down just don't seem as important, until, that is, the top one is removed at which point number two worry is promoted and is as worrying as number one was. In other words your worries are stacked like the PEZ sweets in that plastic clown headed dispenser and no matter how many you take off the top there is always a new one at the top and this one always gets maximum attention.



Why raise it? Well perhaps because we start today with China being top of the worry pile again and having had most other worries removed (temporarily at least) it is receiving maximum attention. But we are back to the old conundrum of China. What do we believe and what do we not believe. Chinese economics seems to work like the NDF market. There is the offshore market - what we think is going on, the onshore market, what is really going on punctuated with the odd Fix where the offshore market finds out how wrong it is.

Following on from the last post about consensus we really should have included China and the expectation of troubles ahead via credit. But without better clarity on what is going on there we feel you can't start applying analysis to the 1/nth degree of fineness when there is just so much mist swirling around it that crystal ball.

Which leads us on to another belief that the opacity of information on an investment is directly related to its volatility. Not because the rare reality checks of truth whip it back to normals, merely because without substance there is no proof of error in theory so the percentage of hope to reality in its performance rises dramatically. Or more concisely, in the words of Henri Frederic Amiel "Uncertainty is the refuge of hope". This can be seen with the likes of Bitcoin. Any prediction of true value is as valid as the next and so hope is never destroyed by reality. It's also seen in environmental arguments, health products, homeopathy and religion. The more obscure the reality the easier it is to peddle as a dream.

Equity analysts seem to completely miss this function of hope or expectation when they look at a stock. Their expectations are back modelled from past company performance rather than looking at the big world around it and fail to factor in a hope through opacity function. A dollar bill is worth a dollar (though some would argue that it isn't anymore) but a share in a biotech start up or a film investment is massively geared on hope. High P/Es isn't it?. Which then leads us to suggest that P/Es are the representation of hope but by heck where do you pin down what is normal because we tie ourselves up in a hope derivative of hope.

But hope is an important part of the psychology of markets and it should really be allocated a value as it is peddled mercilessly by those who want to enslave "I can't give you what you want but I can give you hope that I can" and those who want to avoid admission of failure. Why take a stop loss when you have hope? - Just ask the lot who just move the date of expectation after the non-appearance of an apocalypse.

Hope may be a wonderful narcotic and is perhaps comparable to the narcotic of debt that the world is now so dependant on. We are borrowing via hope to counter present unhappiness "hoping" that the future happiness will pay us back. In this respect printing hope is as relevant as printing money (a hope QE) to stimulating an economy. But just like QE and debt, in the wrong hands it can do as much damage as good and as soon as faith in the issuer is lost it's game over. Companies love issuing hope too. It's often cheaper to pay PR companies and HR depts to whip up hope than increase pay.

 "We must accept finite disappointment, but never lose infinite hope." Martin Luther King

Or perhaps it is better applied to the business model peddled out on X-factor and other talent shows because without the hope side being near infinite the average outcome of hope and disappointment would not achieve breakeven. We would suggest that MLK was very much on the management side of the game, because if you believe this yourself you will most likely end up in tears.

"Youth is easily deceived because it is quick to hope" Aristotle

The basis of internships in Investment banks, law firms or any other huge institution. Selling the dream lottery ticket of success for the price of 120 hour weeks on very little pay is in effect the new American slavery. At least slavery had the decency to own up to the reality of future years of unpaid servitude. Unfortunately we can also see this is in education policy where huge sums are borrowed to pay for educations that are hoped to lead to gainful employment.

"It is only hope which is real and reality is a bitterness and a deceit".William Makepeace Thackeray

An investment bank intern.

"I hope that I may always desire more than I can accomplish". Michelangelo

Investment banks are full of Michelangelos and that isn't necessarily a good thing.

"I simply can't build my hopes on a foundation of confusion, misery and death... I think... peace and tranquillity will return again."
Anne Frank

Zero Hedge - please read.

"Expecting something for nothing is the most popular form of hope". Arnold H. Glasow

So true for many investments and social policies we are lost as where to start.

———

But we would like to end with our own

"Hope is the overdraft on reality" Team Macro Man.

2014 - Consensus without Conviction.

2013 was the year that got away. Equities got away with leaving everyone behind. The Euro got away leaving bear blood on FX street. And The Fed did their best to make sure everyone ended up with losses in their short-end books despite getting the general move right. But the big trades of "Long nikkei, short yen","Long DM vs EM" and "long Euro things" have all gently been working their dividend magic. Unless you were in FX, where life as normal conspired towards the unexpected.

2013 was similar to 2012 in that it was another "no show" year for the disasternistas. Leaving fat tails, when illuminated by the light of outcome, looking positively anorexic. Still, as we know, disasternistas appear to have deep pockets and will no doubt be selling their grandmothers and mortgaging the kids (having already sold everything else to buy on the plethora of never ending dips) to buy more gold and of course, now bitcoins

The outlook for 2014 is not enthralling us with wild pizzazz as we stare out at it from the bow of January. Reading through the top trades for 2014 that are sent out by the big houses we are struck by the lack of excitement or conviction in many of them. Many could be photocopies of last year's (especially usd/jpy nikkei) but the overall urgency just doesn't seem to be there. Why? Our first question was - has the regulatory environment that has scared the bejezzus out of all forms of official communication led to houses having to couch their views in such a non-committal way that it shows up in non-committal research? Perhaps, but we still think that their really isn't that much conviction.

That doesn't mean that there isn't consensus, but consensus without conviction is as fragile as the gossamer of a French President's personal commitments.

So what is consensus? Perhaps -

The old favorite USDJPY and the Nikkei Abe trade.
Emerging Markets are going further down.
DM equities are going further up, but they are going to correct first.
US will continue to Taper (to the point that US curves are pricing in rate hikes ahead of guidance)
Inflation is dead.
Commodities will flatline.
France is a mess.

What's new? Well there isn't much new in there so with little new to get excited about and invoking our "consensus without conviction" clause we are tempted to look at a not so much rule as general observation about how trading years start. To generalise, December is the quiet month where folks read up and decide on the trades to start the year with. They start putting them on in small size over a glass of sherry between Christmas and New Year but then start to throw more at it as January gets underway. As prices start to move conviction builds and positions are added to (note that it is only price that is adding to conviction rather than new argument). Come the 19th Jan, (don't ask why we pick that) things start to wobble and prices reverse. Come mid Febraury and things are getting properly shaken down and a new set of rules are being drawn up for the trading year (normally more gloomy and involving a dump in something somewhere around mid March. Now we know this is completely unscientific and if you go and look at charts you probably won't see it in the recent years, but we posit that this is because this time is different as it's more like the old times when there isn't an obvious panic, there isn't an obvious tail risk and there really isn't, as we said, any conviction.

So in true TMM style the trades we are most willing to take are against what we see as consensus, starting next week.

DM equities - This is where we confuse ourselves because our core belief in them runs deep and we continue to see the great rotation provide a North Atlantic Drift style current propelling them gently North.

HFRI Macro Index vs SPX in % performance since start 2013 - Someone ain't got this trade on.




But having seen the run up we have had so far, married to weak conviction and our own sense of timing we are lightening up looking for a correction next week with the most likely catalyst being that forward valuations are back to 2007 levels and so traditionalists will take some profits. This is most notable in Eurostoxx

Orange line is 1 year forward P/E. Current Eurostoxx index is white.


 However TMM are scratching their heads and wondering why analysts are using valuations that seem to fail to apply changes to long term discount rates when calculating future earnings. Using current rates it should be 20% lower implying that stocks could be 20% higher.


Talking of timing perhaps we should have a look at the weirdly famous Bradley Siderograph ( courtesy of www.amanita.at) Nothing of note to support our January correction ideas, but look at that! What date is shining through as the turn of the year? If it isn't our old fave the 16th of July!




But back away from hocus-pocus and on to another consensus risk. This time inflation. There was much fanfare this week as UK inflation finally fell below the 2% target level. After TMM's constant ire directed at Merve the Swerve it is only fitting that the target is hit after he relinquishes the reins, but that isn't the point. More important is that inflation expectations continue to be low and this print may drive complacency. The UK has seen many types of inflation over the last 6 years, none of which have been the one that monetary policy should really be directed against.

First came commodity price inflation, which was effectively a tax on consumption. Then came taxation inflation with austerity seeing hikes in VAT, cuts in taxation allowances and hikes in top end rates.
Then came oligopoly inflation - hikes in prices of utilities and other services that couldn't be substituted such as Public transport costs, utilities, tolls, insurance premiums. All effectively taxes to subsidise deficits and to fund upgrades to failing infrastructure. OK, these were all countered by low interest rates which unfortunately never really impacted the public as higher bank margins or unwillingness to lend hampered any pass through.

The type of inflation that has remained benign through all of this has been wage inflation, no great surprise. But TMM are thinking that whilst the inflation types listed above may well remain dormant, it will be wage inflation that next rears its head. Nothing much suggests it's coming at the moment other than that the unemployment rate of short term unemployed (those who presumably have a better shot at getting another job quickly) is back to the long-term average, but we are hearing apocryphal tales of the supply of cheap semi-skilled labour becoming diminished and wages having to be hiked to retain staff, especially in construction, which really surprised us. We think wage inflation risk may be the greatest surprise of 2014.

Tapering - It looks fully priced to the point of the curve pricing in rate rises in the US ahead of their guidance. when something is fully proceed in it can only go one way. and thats the other way. Yellen is going to be ultra accommodative and any sign of weakness should see asymmetric rates responses in the market.

EM - India may be disaster waiting to happen and Turkey and Brazil may have had a shoeing but plenty of EM fear is hanging on credit and is in effect a derivative of the US tapering/tightening story. As equally as there is asymmetry in tapering risk the same should feed through to a bounce in EM, but to be honest we're willing to ride out the falling knife trade in EM and wait for something to actually happen. At the moment the list of obvious sells is longer than that of buys.

TMM on Abenomics and Usd/Jpy - "Never in the field of human trading has so much been expected by so many of so few"

Usd/jpy seems to be going through a goldilocks phase with everything lined up to go its way.

Abe policy commitment remains
Sightings of inflation corroborating policy success.
Waining confidence in EM sees DM Japan stock benefit.
Price justification (It's going our way)
Global "risk on" sees Mrs Watanabe happily run carry trades.
Tapering and US rate expectations.

But all of the above are vulnerable especially when the trade is so crowded ( Sep 2012 saw the start of the Abenomics yen run)

CFTC reports showing yen positions.



Even the trusty 2yr US/ JP yield spreads aren't calling for it higher in fact it's been a rubbish predictor for a long time.





Which makes Usd/Jpy particularly vulnerable to a pull back.

In summary, we aren't that bitten by the kick off to 2014 either but we are willing to play the pull back game for the next couple of weeks in order to bring the disasternists back out of their caves and then we can get on and buy the boring carry and risk trades again.

Words That Finance Has Changed The Meaning of Forever.

As TMM waits for the Fed's taper or non taper, it occurred to us that our careers in finance have seen our understanding of many words in the English dictionary mutate far from their original meanings. So in the cause of linguist conservation we feel it only right to remind ourselves of their original and, some would say, true definitions.

Taper – Something you ask the barber to do to the back of your hair.
Hike - To go on a walk in the countryside
Rally - An event with cars or campaigners
Crash - What a car does.
Bubble - A sphere blown from a soap solution.
Stops - What a car does when it confronts an octagonal sign
Yield - To submit, quantity of a crop.
ARM - Appendage.
Legs - See "ARM".
Leverage - A plank of wood placed over a fulcrum.
Seagull - A marine bird
Butterfly - A pretty insect
Future - As in flux capacitor
Condor - Endangered avian predator
Whale - Large seaborne mammal
Roll - Small round bread served with turkey dinners
Capital - Seat of government
Spot - Acne
Forward - A direction, opposite of backward
Spread - Something to put on bread and crackers - eg Philadelphia or Gentleman's Relish
Libor - A common Czech name.  Libor is a Czech masculine given name of Latin origin, derived from libare 'sacrifice' or from word liborius free. (see here)
Long, Short - adjectives describing length
Curve - a line that is not required to be straight, as in curve in the road
Depo - A storage yard or warehouse
Greenshoe - A green shoe
Option - A choice
Choice - An option.
Regress - To return to a less developed state
Call - A way to communicate telephonically
The Street - The road outside
Axe - A bladed implement used to chop wood or heads
Swap - To exchange something, perhaps football cards.
Exchange - To swap something
PE - Physical Education
Delta - A crap airline
Mark - A masculine name
Greeks - Bearers of gifts of dubious provenance
Hedge - A line of shrubs in your garden
Cross - Angry
Index - At the back of a book
Flow - Speed of a river
Rates - Council tax
Seat - A potentially valuable piece of furniture, or a Spanish car.
ECB - England and Wales Cricket Board
Fed - Nourished
Buba - A large gentleman you are warned will become your friend if you go to Prison.
Old Lady - Contemporary of your grandma
Threadneedle - Something your grandma does
Unched - Cockney description of Quasimodo
Flatten- A hedgehog meeting a steamroller
Tail - Something at the back of a dog, horse, cat etc
Put - Place something on a surface.
Curves - Rubensesque feature
Straddle - An equine implement
Risk - A game that takes forever to play
Survey - Source material for 'family feud/fortunes' questions
Cycle - Method of transport
TV - Something you watch
Front-runner - Usain Bolt
Black Scholes -  Ginger footballer in United away kit
Cover - A blanket
Ref - Bloke with a whistle at a sports game
Emu - A flightless bird
Bailout - What an Itatian captain did when he failed to do it fast enough on the Costa Concordia
Return - To go back, key on keyboard
Volatility - The speed at which a liquid evaporates.
Alternatives - Other options
Cliff - See white, Dover
DIs - Detective Inspectors
Bills - What you pay at the end of a meal
Bond - Covalent, Hydrogen and other ways to stick atoms together.
Coupon - Money off
Principal - Head teacher
Interest - A hobby.
SWF - Single Wealthy Female
Entertainment - Doing something you enjoy with people you like
Bonus - Something that is UNEXPECTEDLY received as an additional benefit.
Equity - To be completely equal.
Resistance - Electrical unit measured in ohms.
Support - A truss.
Compliance - Doing what you are told by others.
Compliant - Pretty drunk and happy to go along with anything.
Fix - To repair to proper state.
Head Hunter - A Cannibal
Margin - Blank bit on the left hand side of the page where the teacher makes comments.
Quant - British fashion designer who gave us the mini-skirt.
Techs - Higher education colleges teaching practical skills.
Misselling - A Roger Hargreaves character who ran a shop.
Wave Count - Activity performed by surfing judges.
Bobl - A pompom of wool on the top of a hat.
QE, QE2 - A series of Cunard liners.
Schatz - A number 2. Or a German expletive.
TP - A native north american's tent.
Var - A unit of reactive power of an alternating current.
Overdraft - The breeze above your head.
Overdrawn - A picture by Picasso
Fine - Just Dandy.
Fee - The word before Fi,Fo and Fum.
Banker - Upstanding and trustworthy pillar of the community
Garden Leave - To leave your garden to go to work.
Free Cash Dispenser - Something that gives you free cash.
Crack Spread - The diameter of a builder's derriere.
Convertible Bond - Timothy Dalton
Convexity - Feature of a good skateboard
Vega - Vegetarian from Nevada
OMO - A brand of detergent
Super Mario - A game character
Carry - Lift and move something from one place to another.
Liquid - A material that conforms to the shape of its container.
TARP - A large protective plastic sheet.
Google - Ten to the power of one hundred.
Apple - A tasty fruit.
Raider - A member of an American football team headquartered in Oakland.
Troika - The three omnipresent cups at most Russian table settings (all filled with vodka).
Small cap - Hat for a boy
Vampire Squid - Vampyroteuthis infernalis, a small, deep-sea cephalopod.
Stocks - Something you put criminals in and throw rotten vegetables
Dove - Stout bodied bird with a short short neck
Hawk - Predatory bird with a penchant for doves.
Rate - To judge a performance
Prime - Stage of life when you are in your finest form
Benchmark - A mark on a bench.
Spoos - eating utensil used for liquids
Whites, reds, greens, blues -  Denizens of a Crayola box
Decay - Characteristic of Detroit
Premium -  Good, better than usual; something that you don't expect to end up worthless
COP/RUB -  the goal of most teenaged males
Gilt - The feeling you get for doing something you shouldn't have
Fat tail - a mistake you wake up next to in the morning
Poison Pill - Mossad aspirin
VIX - cough medecine
Strip - to remove clothes
OIS - more than one oi, a British interjection
Book - something you read
Dollar Yen -  a desire to acquire US currency
Repo -  To forcibly take back, viz. Emilio Estevez in "Repo Man"
Swap Spreads - Exchange duvets
Aussie -  Ex-Sabbath frontman whose actions often defy explanation, indeed belief. reputed to have remained too high for years on end

Please feel free to add your own. Some have already been flagrantly stolen and added from the comments section below.

Is That Really a Reason To Be Bearish?

Calling asset prices a bubble explicitly, or implicitly as a function of the Fed’s large balance sheet, is fairly popular these days. Market commentary projecting a “melt-up” driven by “excess liquidity” seems to be common. So whilst TMM do believe this to be a factor we would like to go one stage further and posit that DM equities are not expensive relative to other asset classes.

Now we realize this is a pretty hairy topic, mainly because there are a lot of ways to look at this asset class and hence a lot of ways to claim that they are rich or cheap. So instead of then trying to ‘prove’ that they are cheap (when we have just said the diversity of cheap/rich measures makes results inconclusive), we will go over the more popularly cited reasons for why they are expensive and follow with some counter points as to why they are not.

Yields are excessively low. Hence the high Equity Risk Premium is a mirage.

The Fed, along with a majority of market economists, pegs LT nominal GDP growth at 4%. 30y Treasury yields are not far from that level at all.

Short Term yields are unlikely to move a great deal relative to the size of the ERP. Even if the Fed hikes a year earlier than anticipated, (let’s say Sept 2014, and then at the 100bps / year pace that it has projected) fair value for 5y yields would be ~2.10%, vs ~1.5% now, a difference of ~60bps. This compares to an ERP of 225bps, using 30y yields, or ~350bps using 10y yields, both of which are historically very high.

Size of Fed Balance Sheet is huge. By implication, the money the Fed has printed is finding its way into stocks.

For this theory to hold, the private sector will have needed take the cash it has received from the Fed from selling bonds and used the cash to purchase stocks. Now, a balance sheet of all major entities in financial markets is hard to come by, but this story does NOT hold water based on retail flows. 377bn has been taken OUT of equities since 2007: (This conclusion was also recently reached by a McKinsey study)





Earnings as a percentage of GDP are too high. They will revert back to the long term mean, which means substantially lower profits.

That is only true if you look at TOTAL earnings. DOMESTIC earnings are NOT excessively high as a percentage of GDP. Much of the recent earnings growth over the past decade has actually come from abroad:






CAPE10 (Cyclically Adjusted Price to Earnings average over the past 10 years) is too high. The chart looks something like this one. This metric has always mean reverted, so stocks are bound to come down.

This cyclical adjustment process basically deflates earnings over the past 10 years by the CPI, and then takes the average. This process means that the adjusted earnings measure assumes the surge in profits from overseas over the past decade will revert. It also assumes that the financial crisis that we’ve had will recur every 10 years. Neither assumption seems especially probable.

Here is an alternative way to look at this metric: The current CAPE10 is ~24.8. The inflation adjusted trailing 12m P/E (CAPE1) is ~16.7. The S&P price is the same in both calculations, so the difference is purely in the adjusted earnings measure. The 1y inflation adjusted EPS is 104.6. The 10y inflation adjusted EPS is 71.3 – a discount of 32%. So you have to ask yourself – do you believe that a third of S&P earnings unsustainable and will eventually disappear? Keep in mind that 25% of earnings are from foreign sources.


Commodities are not going up with stocks. Hence, the growth isn’t ‘real’.

Equity Bull markets in conjunction with commodity bear markets are not uncommon. The previous such instance lasted from 1980’s to the late 90’s.




What is more, we see the increase in supply of metals and the drive to gas, which are keeping prices low, as a benefit. This time around commodity prices damped by increases in supply won't be a tax on growth.

Consumer confidence and employment are not going up as quickly as stocks. Hence, the growth isn’t ‘real’.

Higher profitability seems to be one RESULT of the weak employment growth. The jury is still out, but one line of thinking is that technology has increasingly replaced humans in low value added roles, with the cost differential going to corporate owners. The chart below from Blackrock illustrates this, and highlights a trend that seems to be over a decade in the making. Furthermore, we have not heard of a good reason to believe that this trend will reverse.





It’s all PE expansion, not earnings growth. Hence it is not sustainable.

Historically, PE’s expand during growth periods. Growth = more earnings and more savings = higher equity prices. This tendency is pretty common, sustainable and usually only interrupted by a recession or sharp slowdown.


Equity market capitalization as a percent of GDP is too high. Hence, it has to mean revert.

A higher share of earnings from overseas should mean a higher market cap to domestic GDP ratio. Globalization means more foreign companies may list in the US. Publicly traded companies also have financing advantages, and fewer large companies are remaining private. Companies like Berkshire Hathaway buying up private businesses also increase the market cap to GDP ratio, but arguably does not destabilize anything.


Demographics imply lower PE. The rising number of baby boomer retirees implies strong demand for fixed income and weak demand for equities, which should lower equity valuations.

Arguably, this should only affect the valuation differential between fixed income and equities. In other words, perhaps the Equity Risk Premium could remain higher than average until this demographic effect fades. But as we noted above, with LT yields appearing reasonably fair, the ERP remains very high, and arguably would still be high if treasury yields were 100bps higher.





With those general points covered we can move on to a topical specific.

Hussman Funds recently published another piece on why stocks are too high and though we don’t want to single them out, we do want to address their piece because there are similar claims popping up all the time. (And hence our rebuttal would also apply)


HF Claim: Without reviewing every detail, recall that this model partitions market conditions based on whether the S&P 500 is above or below its 39-week smoothing (MA39) and whether the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) is above or below 18. When MA39 is positive and the Shiller P/E is above 18, conditions are further partitioned based on whether or not advisory sentiment (based on Investors Intelligence figures) has featured more than 47% bulls and fewer than 27% bears during the most recent 4-week period. Investment exposure is set in proportion to the average return/risk profile associated with a given set of conditions (technically we use the “Sharpe ratio” – the expected market return in excess of T-bill yields, divided by the standard deviation of returns). While a simple trend-following approach using MA39 alone (similar to following the 200-day moving average) has actually slightly underperformed the S&P 500 over time, that trend-following approach has had a fraction of the downside risk of a buy-and-hold strategy, with a maximum loss of about 25%, versus a maximum loss of 55% for a buy-and-hold. By contrast, the very simple Sharpe ratio strategy here has clearly outpaced a pure trend-following approach, with much smaller periodic drawdowns.

Let’s see… 39 week moving average, CAPE10 below 18, 47% bulls vs 27% bears over the past 4 weeks. Why pick those numbers, except that they make the results look good? If there isn’t much more of a reason, then ladies and gentlemen, please see this Wikipedia entry on overfitting. The point is that you can make the historical data say any you want. As a rule, we are skeptical of any claim using numbers alone.

HF Claim: I should also note that overvalued, overbought, overbullish conditions have been entirely ignored by the markets since late-2011… With no need for further stress-testing in future cycles, and every expectation that overvalued, overbought, overbullish syndromes will continue to bite as sharply as they have in every other complete market cycle, I continue to believe that the future belongs to disciplined investors who adhere to historically-informed strategies.

Ironically, this is a claim that is not backed by numbers, and furthermore, relies on very subjective assessments.

Overvalued? Most people think markets are fairly valued here, and TMM actually thinks they are cheap. Problems with the CAPE10 metric have already been noted.

Overbought? What does that even mean? If it means being above a moving average, then as they noted themselves, being long equities when equities are above a long term average has done pretty well. In that case, being overbought is a BULLISH indicator.

Over-bullish? Again what does that mean? Look again at the chart of mutual fund flows at the beginning of the post, that shows 377bn taken OUT of equities since 2007 – a trend that only stabilized at the beginning of the year. That suggests over-BEARISH to us.


We are pretty sure we haven’t covered all the ‘evidence’ that equities are overly rich, but hopefully this does at least cover most of the quantifiable ones. Claims that the stock market is in a bubble because of Twitter’s crazy IPO or other anecdotes are pretty hard to either prove or disprove, so they are not included here.

The Fed's Bubble Solution.

So I buy an apple for a buck from you but I sell it back to you for 2 bucks. I Have 2 bucks and you have a 2 buck apple. You sell that to me for 4 bucks and you have 4 bucks and I have a four buck apple. 8 bucks, 16 bucks... We do this a few times until you have just bought a million+ buck apple from me and I can't afford to buy it back for 2 million bucks. So you cut the price to 1.4m and sell me a 50% share in the apple for 700k. So we are now back flat on our cash positions but we both own a 700k share in the apple (example here). Wow. As we have that sort of wealth behind us we needn't be so tight about buying that new Tesla now or that new home cinema or that holiday. So we go and spend some of our cash savings on STUFF. And when we do, that real money will stimulate the real economy.

It would be very topical to suggest that the Twitter IPO pricing is today's apple but TMM's broader concern is that the Fed think the apple scenario is a viable solution for creating growth where the stock market (or more generally risk assets, as we should include housing) is the apple. The Fed isn't mandated to inflate asset prices but it would appear that this is exactly the effect that these academics with their models are prone to produce and those models tend to exclude the negative repercussions that have occured every other time a population ultimately had their quasi-wealth evaporate in front of their eyes (tech stock, property etc). It has been a disaster and more real money has had to be printed to replace its function.

Whereas a reduction in leverage is needed, the Fed is in effect encouraging it. Leveraging at the personal level was what got us into this mess in the first place and to create an environment that is doing nothing to quench credit demand whilst at the same time stifling credit supply through increased bank regulation and balance sheet restriction is similar (and probably as equally short sighted) as most government policies towards drug addiction. They do nothing to alleviate the reasons people crave the narcotic, instead they try to restrict supply. And the result? The addicts go underground and pay way over the odds for bad product and get into a worse predicament which causes yet another outcry. Underground dealers = payday loan companies. Wonga = Whoonga. It's all self inflicted.

There is a huge hypocrisy in the demand for careful lending from banks and a demand for the provision of "social" lending. Perhaps, if governments are really that concerned they should take on the burden themselves. How about raising Fed funds or base rates to 1.5% and allowing the consumer direct access? But that means that the taxpayer is taking risk. Much easier to utilise the bank scapegoat as middleman and fine away excess profits. (It is interesting to note the lack of media noise about malpractice and the huge fines levied on the pharmaceutical industry recently compared to the noise about banks)

But back to this rally. There appears to be a lot of grumbling annoyance that equities are still grinding higher as they "aren't supposed to". If this follows the psychology of grief, we obviously haven't reached the stage of "acceptance" yet which would imply there is a way to go yet.

We have read plenty of research talking about record longs in fund mangement positions together with minimum cash balances all presented with overlay price comparison charts of 1987 and 2000 crashes etc., but we are sceptical. It's a pretty easy game to find visual fits for Price/time overlay charts (especially when you stretch scales) and only the winners tend to be waved as survivor bias results of proof. As for the positional data, though the normal sectors of fund management are captured in much of this data we wonder if the true extent of the flows of reserve managers are showing up. These behomoths of investment only have to swing small fractions of their huge portfolios from bonds to equities to see large responses in price. The big difference this time is the message from the CB's (other than the Bundeathstar) is "go long, stay long". So we will.

We would like to also thank our great friends the Benchmarks for helping us out further. Nothing worse for a fund manager than to under-perform your peers however right you may be in the long term. And nothing worse than under-performing the main equity indices as for some strange reason many consider them the risk free benchmark that you have to be an idiot not to outperform. So, break from the herd and the jackals of fund consultants will snap at your heels, which leaves you with the choice of rejoining the pack and going over the cliff with your peers later or being eaten by the jackals now.

So despite the Central Banks tilling the ground and sowing the seeds for one, we are still a way off this being a bubble. We are invoking our DTTVI (Day Time TV indicator) along with a few other indicators and all suggest this has a good way to run yet as it's not a bubble until -

Daytime TV has shows for the masses dedicated to running portfolios in it.
People give up normal jobs to trade in it.
People mortgage their houses to buy it.
And finally our old favourite.. the 25year old BMW 3 series drivers are bragging about their portfolios in it

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P.S. and the ECB have just added their dose of detergent to the bubble solution.

TMM's Top Tips

Team Macro Man have been compiling their Market Top Tips in the style of UK's "Viz" magazine.

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Pit Traders - Why not show off the weight of your brain by displaying it on a neck fit for an elephant.

Pretend you have a highly paid job in finance by willingly paying the astronomical prices city bars demand.

Wealth Advisors. Why not cold call everyone on Bloomberg on the assumption that they all  have vast fortunes they don't know what to do with.

Head Hunters - Why not make the recipient of your call feel really special by immediately calling back on the same number and asking to speak to the person next to them.

Management - Surprise everyone by managing UP expectations at year end.

Analysts - Display your mastery of English by writing 16 pages of analysis when the single words "buy" or "sell" would do.

Shouting "F***ING SYSTEMS!" and smashing your keyboard into your desk makes an ideal alternative to apologising for your own input error.

HF CIOs: Telling PMs which trades would've made money after the fact is a great way to show your superiority

Sales - Why not show off your mastery of both sides of a price by shouting out the wrong one when the client deals.

Forwards dealer? Dealt on the wrong side? Just insist you were dealing futures conventions.

Emerging market traders - Learning the names of the capitals of the countries you trade in is an ideal way of showing a knowledge of your markets.

Emerging market traders - Once you have learnt the names of the capitals of the countries you trade in, pronouncing them in ridiculous accents is an ideal way of showing a knowledge of your markets.

Analysts - Using the word "exhibit" instead of "chart" or "table" in research is an ideal way of showing you are a failed lawyer.

TV Business Anchors - Starting a piece with "You know what? I know nothing about this" makes an ideal alternative to an over-confident pretence.

Fund managers - Suffering from huge negative returns? Benchmark to something that has done worse.

Want to offload your huge share of bank stock to a gullible buyer? Privatise the Royal Mail at a discount first.

A cumulative graph is an ideal way of ensuring a graph that goes up on the right.

99/01 makes an ideal price in anything that is fixed at par.

Pretend you are an options trader by randomly shouting "And I want it {insert 3 random greek letters} hedged".

Pretend you own your own e-trading platform by mentioning latency in every sentence.

Asked why a market is fast moving? "Stop losses" makes an ideal alternative reply to "I haven't a clue"

Back Office. Have an urgent settlement query? Make it un-urgent by addressing it to the trader involved by second class post.

Traders - Don't know what spread to make? Just make choice and shout at the sales guy for not spreading a gift.

Huge loss? Save face by justifying it "for tax reasons".

Been out with your friends drinking 'til 4am and are sick at your desk? Blame it on a client.

Relationship management - Pretend you are an Agatha Christie murderer by weaving a web of deceit about what you have or haven't done.

HR - Dress for the part! Wear a dark cloak and carry a scythe when creeping up behind someone to "tap them on the shoulder"

Traders -unsure of your position? - Buying 100x your limit is an ideal way to know you are now long.

Options dealers - If you wait long enough before making a price the client will most probably go away.

Metals traders - Why not show off your market acumen by remarking on huge demand for metals every time the dollar craps out.

Kicking the power off button on the PC under your desk makes an ideal way of avoiding complex pricing.

Fibonacci levels make an ideal alternative to knowledge.

Head Hunters - show off the depth of your rolodex by asking candidates to connect on linked in

Pretend you are senior management by confidently asking questions that betray your lack of knowledge of the basics.

Relationship management - Why not introduce your company's biggest competitor as a client as they obviously trade large amounts of your product.

Back office - Pretend you are a trader of 25 years ago by slicking back your hair and wearing Gordon Gekko braces.

Sales - Shouting "Nothing, Too Wide!" at the trader is an ideal way to cover up you forgot to get the price out.

Impress your dealing room colleagues by having a friend mail you large empty boxes embossed in top designer logos.

A slide presentation of illegibly dense spread sheets makes an ideal way of saying you have no social skills.

Clients. Calling all your banks asking for a complex derivative in 100x market size and telling each "nothing too wide" makes an ideal way of passing a dull day.

Traders - Asking "How much? For who(m)?" six times makes an ideal way of buying time to trade ahead of the client.

Sales - not answering the phone is an ideal way not to make a mistake.

Analysts - Making a forecast which involves price AND time is an ideal way to be wrong.

Technical Analysts- struggling with non performing trend lines? - try a log graph.

Elliot Wave analysts - the wave count doesn't fit? Easy .. just change it.

Hungover? A disabled toilet makes an ideal midday bedroom.

Junior on the lunch run? - When offered to "get something for yourself" buy a new suit.

A recently resigned/fired colleague makes an ideal scapegoat.

The matrix title background displayed full screen makes an ideal IT wind up.

Telling your boss that you were never told you had to book any of the trades you have done for the last 2 years is an ideal way to induce his cardiac arrest.

Having a glass corner office is an ideal way of not having to produce anything.

Traders - randomly standing up and screaming "YES , OH JESUS ,YES!!" is an ideal way of making people think you are a good trader.

Management - Introducing new protocols and systems every year is an ideal way to f*ck everyone off.

Regulator - Making it everyone else's responsibility is an ideal way to avoid responsibility

Compliance - Making it everyone else's responsibility is an ideal way to avoid responsibility.

Management - Making it everyone else's responsibility is an ideal way to avoid responsibility.

Compliance - Introducing online regulatory training is an ideal way of ensuring everyone has a reason to be fired.

Brokers - Telling witty football stories is an ideal way of best pleasing a client desperate to get out of a position.

A Sinclair ZX80 or Commodore 64 makes an ideal replacement for many banks' trading platforms.

HR - Randomly blocking 2% of the security entry cards each day is an ideal way to keep staff on their toes.

Fund Consultants - Charging fees for pointing out the past without any responsibility for the future makes an ideal way to earn a living.

Strategy - A set of dice make an ideal analysis tool.

Spot traders - Shouting loudest is an ideal way to win an argument.

Fix fixers - Using Bloomberg IB chat to communicate all your misdeeds is an ideal way to be caught.

Business analysts - Why not insist all lower desk heads provide irrelevant data and analysis which you know they don't have.

HR - Silently walk around the dealing room putting a sticker on each fourth desk.

Management - "Focusing on core strengths" makes an ideal mantra for buying yourself another year.

Management- Introducing tolls at the security stiles in reception. makes an ideal revenue earner.

Back office - Employ speakers of obscure tongues to add that extra level of excitement to urgent phone queries.

Cleaners - Stretching bin liners trampoline tight over the bins and setting up a dry cleaners is an ideal way to supplement your income.

Money Market dealers - hanging a wooden sign over your desk displaying "5/8, 1/2" is an ideal alternative to making prices all year.

Option dealers - offering a client 1mth EUR/USD makes an ideal alternative if he asks for 3mth SGD/JPY RKOs.

Suing someone for money you have lost makes an ideal alternative to facing up to your own stupidity.

Why not make your next year's targets seem less surreal by dropping acid.



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