Postcard from Greece

Sorry for the lack of posts, but, hopefully, frequency will increase as TMM pack away their beach towels and knotted hankies for another year. But for now we would just like to say that if the rest of peripheral Europe are taking the crisis anywhere near as seriously as Greece is, then the whole place is f%"ked. We have just found local prices in Greece exceed high-end London supermarkets with even olives and olive oil more expensive. Greek super yachts happily ply the waters and the bars are still full of locals paying positively Alpine prices for food and beverages in establishments where the plumbing is still Third World. At current prices, they shouldn’t be surprised if tourists start to choose Antibes or the Maldives over Poros. But as far as the bars, restaurants and supermarkets are concerned its either "what crisis" or they are taking the "rip 'em while you can" policy. The number of bleak concrete quay wastelands with big blue signs proclaiming EU funding from unification/friendship funds is depressing and you can understand German concerns as to when the subsidies will stop.. if ever. (A good article in the FT on how German / Peripheral imbalances are not diminishing through the normal routes.)

All this adds weight to the feeling that September's seasonality sell offs are this year going to return to the Euro zone, just when all eyes are pinned on the US.

But for now we leave you with a postcard we were asked to pop in the post to Germany.

Line Ball Downunder

For those of you that have been following international politics lately, Australia has managed to follow the UK's lead in getting itself into the one big mess possible in a Westminster system: a hung parliament. There are 150 seats in the House of Representatives in what the locals commonly refer to as "God's Country" and in order to form government you need 76 of them. At this point in time the historically teamster-oriented Labor Party has about 72 and the paradoxically named conservative Liberal-National Coalition (a weird amalgam of libertarians, small l liberals, the religious right and agrarian socialists) is on 70 with the balance of the seats held by the "land rights and emissions trading for gay whales" Greens (1) and a bunch of other guys - yes, they are all guys. Let the horse trading begin......

TMM is not universally of the view that a hung parliament or coalition governments are a bad outcome - the UK appears to have got through a tough and credible budget with an odd coupling of Liberal Democrats and Conservatives and for all intensive purposes the UK is much less of a train wreck than any of the members of TMM would have thought. Australia, however, is a different kettle of fish. Having people like Bob Katter holding the balance of power does not bode for political stability of any kind, just look at this election ad - and no, this is not a joke:



That, combined with a predominantly Green and extreme left Senate does not bode for getting a whole lot done politically.

This might not be that much of an issue at all if it weren't for the unfortunate fact that a lot of what has made Australia a braindead trade for the last 18 months appears to be unwinding. Chinese commodity demand is coming off and all indications point to China being happy to cool off its property sector as much as it can without bankrupting the developers and the cement, steel and aluminum companies that rely on them - July bounce notwithstanding, the economics departments of most banks have been left waiting at the station for a China stimulus package that hasn't come. This does not bode well for a country whose core exports are iron ore, coal, and base metals. To add to the problem, Australia's bizarrely overvalued property markets are getting some attention again from the likes of Morgan Stanley who are calling a top in Australian real estate. Practices such as negative gearing are getting the attention of treasury officials as a good way to raise revenue and take the froth out of the market - pity the banks aren't even close to ready to take the kind of hit to their loan books an explosive real estate unwind would entail.

Which leads TMM to think that maybe the short AUD, short Aussie equities trade is an idea whose time has come. On almost any basis you care to mention - PPP, FEER, DEER, charts, you name it - the Aussie isn't exactly cheap and is easy to sell above 90 cents. On the equities side a cursory glance at the ASX will leave you with four banks leveraged to real estate and with pending offshore funding issues, a few insurers and a shedload of mining companies that are entirely leveraged to China. If we really are going all deflationary, why has this stuff held up? TMM could yet be proven wrong by global stimulus but it may not be long before Aussies are thinking of happier times.

Twenty Questions

Team Macro Man is sure they are not alone in struggling for inspiration in these summer markets, so it seems like a perfect time for another batch of questions.

1. Will the 10yr Treasury yield breach 2% this year?
2. When will the Japanese intervene?
3. Will the US finally get tough with China in the run up to the mid-terms?
4. When will the UK have a 4% CPI print?
5. What will US GDP be for 2H 2010?
6. Will SNB LLC resume macro punting (aka EURCHF interventions) this year?
7. Does the SPX trade 1040 or 1140 first?
8. Will Simon Hughes cause the ConDem coalition to collapse?
9. Who will win the Labour leadership contest?
10. Are we turning Japanese?
11. Who will be the first to hike? Fed, BoE or ECB?
12. Does Drukenmiller's departure herald the end of Macro trading?
13. When will the divergence between Eurozone and US growth surprises begin to close, and how? Eurozone weakness or US strength?
14. Will the Republicans capture the House?
15. Will Voldemort ever stop taking the piss?
16. Which will be the next Macro fund to call it quits?
17. Is the Bank of England losing control of inflation?
18. Is there a bond bubble?
19. When will the Fed move the Interest On Reserves (IOR) Rate negative?
20. What will happen to the GSEs?
    

The Fed giveth, the Chinese takeaway

It is now two months since Team Macro Man's arch nemesis, Voldemort, announced that it would increase the "flexibility" of the Yuan, a move many interpreted to mean the resumption of the gradual pre-Olympics pace of appreciation. But no, to TMM's and they are sure, many other punters' dismay, that is in fact *not* what it meant. It was just another worthless attempt to quell US calls for sanctions and to avoid being labelled a "currency manipulator" by the US Treasury, without actually changing anything. At the time, TMM was of the opinion that the timing had less to do with kowtowing to the US, and more to do with the fact that speculators had taken a hosing on their USDCNY NDFs and had stopped out of those positions (see chart below).

Because that's what they do. TMM is reminded of a time, many years ago when they were fresh-faced naive graduates doing a trading simulation where the guy running the training programme made the simulation do stupid things that make no sense and would never happen in real life just to throw us off. How mistaken we were... Perhaps the PBOC hired the guy?

A theme TMM are particularly swayed by at the moment is that competitive devaluations under the guise of "efforts to fight deflationary risks" are likely to result in trade frictions that have the potential to get nasty. As per yesterday's post, we think the Japanese have done their bit as far as being a good global citizen is concerned (the trade-weighted Yen has appreciated by 47% since it bottomed in 2007), and it is time for others to make a contribution. To be fair to the other big Current Account surplus country, Germany, their import growth has begun to outstrip their export growth, which means they are starting to do their bit, and the Eurozone as a whole essentially has a balanced Current Account. But the Chinese? They have done Nada.

It turns out "increased flexibility" just meant "we'll do a quick half-percent move so it looks like we're doing something and we'll just make it more volatile so we can screw the speculators". They must've learned that one from the French. In terms of cumulative appreciation since the announcement, we have pretty much flat-lined around 0.6% (chart below, purple line), looking not too different from the Hong Kong Dollar - a currency that is pegged (orange line). They say that they're targeting a Nominal Effective Exchange Rate-based policy, which is fair enough (Singapore do that too), but if they are, they clearly want their currency weaker because that's what it's done the past two months (green line).

Well, they certainly made it a bit more volatile, but it still looks a lot like the HKD:

But as far as TMM can see, they're just doing their usual currency piss-taking. TMM don't think it will be long before US politicians cotton on to this fact, especially if the Japanese do start to intervene, and the resulting noise could get very nasty.

BoJ LLC

As regular readers will know, Team Macro Man detest currency piss-taking, especially from the likes of Voldemort and the dark side of the force, but on certain occasions, agree it is useful as a policy tool, but only when the conditions are right. The $200bn Swiss hedge fund run by ex-Moore trader Philipp Hildebrand screwed up on this front, because the man himself forgot that there are circumstances under which intervention is successful, and if you forget them, no matter how big your ego is, you will lose. And that is why he is sat on $7bn (or thereabouts) of FX losses... maybe he should've done a stint at SAFE instead of Moore Capital.

But let's get to the point of this piece. There has been a lot of noise and jaw-boning about the Japan intervening in the Yen, with a very rare joint BoJ/Government statement about the risk it poses to Japan's economy, and the political debate around this appears to have reached a consensus that verbal intervention is no longer proving an effective deterrent against Yen strength. TMM is increasingly of the opinion that the bar to intervention in the Yen is now very low - not just because policymakers appear to have reached a consensus, but the key conditions that have been consistent with successful FX intervention in the past are now virtually all in place. The single remaining condition is a sharp upward move in the Yen of 2-3% which, given last week's low in USDJPY is very close, seems pretty likely to happen.

So what are the conditions? Looking back at past FX interventions, they have generally been successful if they have occurred when: (i) the FX market isn't pricing the relative economic outlooks of the two countries properly (whatever that means...), (ii) there has been a large "mis-valuation" of the real exchange rate, (iii) market positioning is large and viewing the trade as a one-way bet, and (iv) there has been increased momentum in the market moves.

As far as (i) is concerned, we can get a sense of the relative economic outlooks of the two countries by looking at a spread of real interest rates over the short to medium term (e.g. 5yr) because these will price in the relative policy paths of central banks, which themselves are a function of economic conditions. TMM wanted to use consensus economist forecasts historically, but getting that data has proved somewhat challenging - if they were wearing their tin foil beanies, they'd swear it was a cover up of their horrendous forecasting records! But on a serious note, the below chart shows the 5yr real rate spread between the US and Japan (brown line) vs. USDJPY (green line). [We used TIPS yields from 1997 for the US and Inflation Swaps from 2007 in Japan, prior to those periods, we used the 5yr bond yield minus CPI]. It's pretty clear that on this measure, USDJPY has diverged pretty significantly from the fixed income markets' views of the relative economic outlook, a condition that was not met particularly in early-2009, the last time the Japanese triggered a G7 statement on the Yen. That's a "tick" then.

Moving on to (ii), the Real Exchange Rate... the below chart shows the percentage deviation of the ratio of the Dollar to Yen Broad Real Exchange rates from its 5yr moving average. Looks to be about 15% undervalued. Another "tick"...

As FX punters will know, working out how players are positioned in the FX market is difficult, as we only have data for CTAs (via the CFTC - see below chart of Yen longs) and for Mrs Watanabe. Clearly CTAs are very long of Yen, as is Mrs Watanabe, and TMM gets the sense that traders more broadly are also long the Yen. While we can't be certain here (proxy measures of the OTC market positioning such as Risk Reversals are clouded by their risk-on/off correlation and Black Swan derivative hedging), TMM thinks (iii) is a "tick" too.

Finally, market momentum (iv)... for such an esoteric concept, it's possible to come up with many measures. For example, it's pretty obvious when there is a large 3day move, but in terms of the underlying momentum in the FX market, TMM particularly likes using the 3month, 5day skip momentum measure (see chart below). In recent days we have surpassed the "normal range" for this, but are not quite at the levels exhibited in March 2008 (as the PRDC crowd were being taught about gamma) or Q4 2008. The point here is that the bar is not particularly high for this to move higher to the point where policymakers would act. TMM is of the opinion that a relatively quick 2-3% move is all that is needed to trigger this condition... we'll call it a "half tick".

One of TMM's mates this morning suggested that a further condition is support from other nations' policymakers. It's a fair point, in that coordinated intervention has only failed on one occasion (the Louvre Accord), while single country intervention has failed on several. TMM cannot help but point to Voldemort et al who have successfully intervened for many years now...

We digress... TMM thinks the BoJ are getting pretty close to adding the letters "LLC" to their name.

Extreme sport FX-devaluation

The biggest loser from recent US monetary policy has been the Nikkei, which has seen a 6.2% top to bottom move since the FOMC announcement through the US/JP rate spreads driving USD/JPY and hence, the Nikkei. This, of course, is being exacerbated by the Yen being the new default counter currency as we are so keen to sell everything else (see below chart: USDJPY - white, Nikkei - orange, 2yr US/Japan yield spread - yellow, 10yr US/Japan yield spread - green).

So we are back to a good old fashioned FX theme of trying to guess if the BoJ will try and do something about it and how. If they come in and buy cart loads of USDs there is no way they then want to park them back in Treasuries, as it is the US/JP yield spread compression that is the original cause of the problems. In fact, probably the best way for them to intervene is to sell their holdings of treasuries and bring it back down the curve and hold it as cash and hope it starts spreads widening again. Does that mean that Joe Public is paying back his maturing mortgages to Japan via the Fed taking the cash off their MBS maturities and using it to buy their Treasuries back from Japan? But what happens to the cash? The Japanese put it on deposit where it finds its way back onto to bank balance sheets and they use it to buy Treasuries again. Hmmmm.

Perhaps they should take the USDs in cash, actual paper notes, and burn them, effectively destroying the problem of too many USDs. So they can effectively print their own money and get the double whammy of QE'ing themselves, while deQE'ing the US. The extreme sport version of competitive devaluations, where you actually try and destroy someone else's currency faster than they can print it. If this took off seriously it would make Mugabe mighty bid as Finance Minister. So much for Austrian Economics, how about following the Zimbabwe school? Is there any value in burning money? TMM once worked out the price of oil needed to make it cheaper to burn Dollar bills instead in terms of cost per Kj output. From what we can remember, it came out at about $360,000 per barrel. Some way off yet, but if Voldemort is going to join in and burn his USD reserves that’s about 7,000,000 barrels of oils worth.

Though that may sound absolutely ridiculous it appears the money multiplier has gone into parabolic hyperspace where nothing is impossible.

We are afraid that this is all still heading towards more and more blatant FX manipulation which just increases the chances of trade sanctions and tariffs. The gloves may not yet be off but their laces are undone, so for now the market is back in prodding mode and will keep it up on JPY until they get something more substantive than today's BoJ mumble which came straight out of their ancient book of obfuscation.

The general panic mood of yesterday seems to have faded and as the dust clears we see a new landscape revealed with Euro center stage and previously neglected Euro-negatives being pulled out of the draw and dusted off. But this is not feeling like a general panic and is sectoral now rather than general. In fact, we are only back to levels we were at a month ago in most things and "most things" charts all look the same these days. So we look at this, so far , being a positional and reality rebalancing back to middle of summer range rather than the start of the "next big thing". And though a complete guess, it wouldn't surprise us if the next big thing involved a PIIS poor bank catalyst. The "G" has gone already, and so we hereby copyright the use of the term "PIIS" and all such headlines derived therefrom, such as "PIIS poor" etc.

Hmm... Do I smell a Euro?

We started by beating up on USD 18 months ago, as we thought QE and the US printing press would devalue the dollar and raced into Euro as they were obviously less willing to print. Then this year has seen the Euromare surface and we started selling Euros and piling into USD because at least the US had taken action and Europe were behind the woe curve and about to go through the same. Then in mid-flight the Eurostriches suddenly stuck their heads in the sand and everyone said "Huh, where did they go?". So we charged off to sell USD again because the US starter motor hasn’t worked and they either need to bring out a new battery (that’s what today's FOMC is all about), or they are in a deflationary mess, apparently. Meanwhile, Europe is still hiding in the cellar waiting for the coast to be clear. Apart from Spain's Zapatero, that is, who today appears to be shouting "Ya boo sucks" at the market, announcing that he is considering relaunching certain public works contracts. We bet even Mangler is now telling him to S.T.F.U.

Have the markets turned and twitched their nostrils? If Zap's intentions are to stimulate the economy with no follow-up comments about offsetting the costs against savings elsewhere, then it does little to reassure a market that is complacently believing that all is now well with respect to peripheral Europe's budget proposals and executions thereof. Perhaps the Spanish could fund the new spending with trimming back the pay of some of their air traffic controllers by the odd €500,000? Another trace of scent is drifting off the peripheral European bond market which today saw a general sell off, led by Ireland as the EU agree to new aid for AIB. "The cost of rescuing the bank pushed the deficit up to 14 percent of GDP last year, the biggest in Europe and just a smidge over the EU ceiling of 3 percent. Analysts say the latest injection could push the budget shortfall above 20 percent this year".

Add to this Eur/usd breaking its up trend, the soothsayer USD cross calls of 3 days ago all looking as though they have indeed called turns (especially in cable), and a host of other tech signals. All suggest we are ripe for a turn.

Below is EURUSD (green line) Ireland 5y sov CDS (inverted, white line), Portugal 5y sov CDS (inverted, yellow line) and Spain 5y sov CDS (inverted, red line).


We haven't included Greece in the chart as we consider that one already "done", though one friend of ours has just received a price list for pre-ordered shopping for his upcoming Greek holiday. Unless they have already decided to price it in Greek drachma, rather than Euro, he can tell you that there is an awful long way to go before austerity kicks in. 3.90 for a small pat of local butter? That must be drachmas...

We have had the end of August in our minds as the boot-off to the real post-summer market moves, but perhaps after the FOMC we will be looking for new meat to chew and we really don’t mind if it involves chasing old prey.