Macro Man

Strange But Untrue and Other Facts That Don't Matter

noreply@blogger.com (Polemic) — Mon, 20 May 2013 21:17:00 +0000

Like good sports commentators with slow runs of play to fill, finance turns to statistics to fill the time. To many of us, data is data and the more reliable data you have the more chance you have of being able to to sift the odd gram of gold out of the muck. But there comes a point where the noise exceeds the signal and, as Theodore Roszak said, there is "Data data everywhere and not a thought to think"

But slow days and newsless days (today being a pretty good example) has everyone turning to lower grade soothsayer techniques in the absence of others. Was there a power failure at the Financial Meteorological station supercomputers leading the weather forecasters to turn to slicing up small animals and spreading out their entrails instead? For TMM's inboxes are filling up with statistics which instead of being valued for their ability to forecast are being offered just for for their bizarre interestingness. That Met Man would say "Oh I don't even care if it will rain, just look at that squishy red bit, I didn't know it would be connected to that moving wormy thing". The financial equivalent of which is -

"Of the four negative weeks just two of them included losses over 1%".
"Tuesdays have been up days for the last x weeks"
"The S&P 500 trades at 12.8% or higher from its 200 DMA just 8.3% of the time".

How riveting yet absolutely devoid of predictive powers. This is the financial equivalent of the football commentator explaining how many times the letter "e" appears in the away team captains' grandmother's names over the past 40 seasons. Markets have to say something. There can be no silence. Audiences don't expect silences and the suppliers of information abhor a silence, be they media or sell side information providers. We are pattern recognising beings but there is a point where data mining crosses over into the astrological. Finance's version of "Thats Amazing"

However we are reminded of a very apt interview question for would be traders that does rely on Bayesian probability - "If I was to flip a coin 99 times and it was to come up heads each time, what would you call for the next flip and why?" Of course the 50/50 rule is the one that "Jim Smug" fresh out of Uni would answer, but we are looking for the cynical old salt who announces. "Heads because the coin is obviously bent". But in the cases above, the twist of fit and assumption to derive the next move is just far too far away to be useful.

TMM have long been wanting to write a book to counter the books you find in your friends' lavatories entitled "Strange but True", the ones to be found next to the 1986 Guinness Book of Records and the odd "White Company" catalogue that proves that men aren't the only ones to dawdle on the pan. But TMM's book would be called "Strange but Untrue" - A compendium of strange facts and figures all of which are amazingly untrue.

Originally it was to contain Strange but Untruths such as
"Most shark attacks occur in less that 1/2 an inch of water"
"17% of the air you breathe on the subway is human skin"
"If you spread the surface area of your lungs over the area of a tennis court you will die" Actually that one is true.

But we have realised today that the world of finance is so full of data from which absurd sound bites can be fashioned we thought we would add our own, so if you are in the business of peddling information to clients or just bored and want to confuse a 12yr old quant analyst please feel free to pick one of the following and present it with a serious face and "knowing" eyebrows .

"The 4th friday sees a reversal of a percentage equal to all the rises on the Wednesdays divided by those of the Tuesdays"
"The PE ratio of the leading 20 Estoxx is equal to the fibonacci retracement of their Market caps".
"Just 26.78% of the best performing days are in the week before Lent (conditional upon Easter being in April)"
"If you read the first initial of the DOW components in reverse market cap order they spell CRASH COMING"
"19.87% is the average PE of firms with PEs between 19.75% and 20% and is also the year of the great crash."
"The last time the SPX went up a bit, up a bit more, down a bit, left a bit .. FIRE. .. They missed earnings by 12%".
"Currency codes have only 3 letters against most nasdaq stocks having 4 because spot dealers attention span isn't as long."
"The introduction of the Euro was a really good idea".

All of which may be completely untrue. But the market loves a statistic or a truism and TMM often spend their day wincing at some of the old catch phrases that are wheeled out as simple justification for not knowing. We aren't just talking the nonsense that comes out in annual reports, analyst or Investment Manager reports such as -

"Your board continues to implement the new multi-polar strategy, though current headwinds offer significant challenges"
"The current unfolding barbell perfectly describes the arc of investor indecision as the underlying market shifts to the paradigm we descibed in last months bulletin"
"The Investment managers after careful consideration have adjusted the benchmark – investors will be pleased to see that the latest quarter has substantially out performed this new threshold"

We mean the ones that are considered gospel and if muttered knowingly are meant to end debate, such as -

"More people have bought than sold". - Or "Everybody's buying". - For a trade to be complete every sell has to match a buy.
"Whatever goes up will come back down" - Voyager 1 is a good case "not" in point. As are UK rail fares.
"You can’t go broke taking a profit" - Unless you spend more on your vices than the amount you take as profit.
"Prices always move for a reason" - Rarely for the reason most people believe.
"New new things always make money" - Unless they involve trains ( railroad stock dumps / Eurotunnel) or Vanadium Redox Batteries as TMM found out to their cost. .
"Charts tell the future" - Do they? Can you tell us the future from this one please?

Have you got it? Many things are not as clear as they would seem yet somethings are clearer than you think.

Disinflation.

noreply@blogger.com (Polemic) — Wed, 15 May 2013 21:12:00 +0000

Well we had better mention the Aud before we kick off. Macro great, bounce none. So we reinstated the shorts through 0.9950. But anyway, onwards..

Much has been made recently of the disinflationary trends globally together with the apparent end of the commodities super cycle which is now evident in global price indices. Please note we are using the term "disinflation" (a decrease in the rate of inflation) which should not be confused with "deflation". Now, this has been reasonably well noted by market participants, but TMM thinks that the effects are not yet well explored. Specifically, TMM thinks the decline in inflation volatility has subtle but strongly positive effects on financial asset prices and a negative effect on commodities. To that end, history may serve as a guide. The last time the US went through a period of stable inflation, whereby both headline and core (i.e. headline ex energy & food) inflation were closely coupled, was in the 1990’s:

TMM recognizes that given the backdrop today, the 90’s may seem quite different. But it’s worth noting that for this exercise, we are not comparing absolute levels. Instead, we are concerned with relative changes. In other words we are more concerned with the direction rather than the size of the move.

The Effect on Bonds is a bit tricky to measure, since Fed policy is such a big driver. But in this respect, we can use the yield curve as a very rough proxy for the yield premium on long term treasuries. And the story there seems to be one of a declining yield premium. From 1995 to 1999, the 5s30s yield curve actually flattened, even though the Fed cut rates by over 100bps. It’s quite possible that the improving budget deficit at the time may have had an effect , but the budget deficit is also improving now. All in all, this makes sense – with decreasing inflation volatility, (and by extension central bank activity) investors are likely to demand a lower premium for long dated bonds.

The Effect on Stocks is also quite positive, as they are also a long dated financial instruments. With declining inflation volatility, nominal earnings volatility can also be expected to decline, which should reduce the risk premium. There is an old 20-CPI estimate for the S&P PE ratio which has had some reasonable success over the long run. This is now suggesting that PE should be in the very high teens:

The disinflation impact on gold, however, appears to be quite bearish. The chart below shows gold in white, Fed Funds rate in Orange, CPI in Yellow, and the price of WTI crude oil in purple. Note that from the mid 90’s, the price of gold fell ~60%, even though during this period the Fed cut rates, we got a series of systemic events (LTCM, Asia crisis) AND oil prices rose. Again, the improving federal budget deficit may have also contributed back then – but that is also happening now.

In addition, there are some unique instances that are worth mentioning. Obviously disinflation gives DM central banks more room to pursue QE. But ironically, the disinflationary impact probably also makes QE less effective at generating inflation. Case in point: Headline Inflation in Japan has averaged 40bps above core inflation over the past decade. This suggests that once the inflationary impacts of the weak Yen runs its course, it will be even harder for the BoJ to achieve its 2% inflation target. The small caveat here is that the Nipponese CPI basket can actually be changed or rebased to give the appearance of higher inflation, at least temporarily. TMM expects such a change within 2 years and remember the basket being manipulated in 2006 to, believe it or not, print inflation lower (smoke and mirrors and government payments).

For Europe, current austerity targets look even more difficult to achieve, given that EMU inflation has averaged 56bps over core inflation the past decade:

So where does this leave us? Last to the party with yet another reason as to why equities will keep on going to the moon and gold through the floor? We would actually like to think we were one of the first to arrive at this current party but popped out at the end of January to get some cigarettes only to find that everyone is high by the time we return. But this is a longer term trend and as we are calling for the party to go on into the night we might as well wade in.

But how? We actually think that the chances of a melt up are still pretty high. Some of us were there in 1997-2000 and can smell exhuberance and fear. That darkest of fears, the one of missing a profit. As we have said many a time, it ain't over til 25yr olds are driving around in 3 series BMWs bragging about their portfolios. We are adding to low delta SPX calls. Gold? Well we are already short and happy to ride that into a golden sunset.

Friday Ramblings

noreply@blogger.com (Polemic) — Fri, 10 May 2013 09:33:00 +0000

Continued good jobless data has reset USD and US mood in general and there has been a proliferation of US Jobs analysis resulting in line-drawing that extends to 6% unemployment levels after further +200k NFPs. The USD/JPY break was perhaps the sound of the market cracking as this weight was added to that of Abe and EU policy moves and clues. Whilst everything US is indeed looking better than a lot of everything else, it may be getting a bit short term extended.

AUD appears to be on the receiving end of Soros / CB de-diversification / pick your bogeyman. Either way we are pleased, but note the sensitivity of Aussie inflation to imported goods prices. You can only make money on bills and AUD up to a point. We will add that the USD/JPY break has pulled many USD crosses through short term targets and though we expect AUD to underperform we are lightening our AUD/USD shorts at this level looking for a bounce to resell on.

Schauble's talk of loosening his garrotte of austerity around the throats of periphery pre-G7 (why are they holding at a public hotel rather than at "Chequers"?) may just be pre-talk camaraderie, but there is a theme. Despite weak Italian data we see the Eur/Usd down move abating as growth prospects balance the -ve rate fears and instant USD effect. It's still actually in a range.

Equities in general - Towel chucking from perma-bears, yield calcs on zero cost funding and much much more continue to fuel the boom. We have a piece prepared on background "why buy equities long-term" but its such a common call we are caught behind the curve. We are dip buyers like the rest of the planet. Meanwhile, make us a price on how long it will be before regular daytime TV features stock trading programs again.

TMM note the mad rush into "safe" assets like XLP, XLU, and the like. TMM have more to say on this at a later point but suffice to say all low volatility dividend payers are not created equal - we will revisit this soon.

Tesla has proven that there's bad investment advice, then there's the advice you get from Sarah Palin. TMM think ultimately better battery technology is a great leveller in EVs much like cheap polysilicon was for solar. TMM think the Suntech chart from 2007 may be instructive here. Some of us were long but are no longer. Tesla worth more than Fiat? Short term that price action has got "dotcom" written all over it.

On general asset price rises - QE is fuelling asset price rises but doing little for income. In fact income ratios are falling as asset prices rise. Great for holders of capital but until they withdraw it to spend, the gap of wealth between poor and rich continues. QE has to reach income before it works. TMM have been wondering if just bypassing all the links and handing £5000 to every head of population would be quicker and benefit the poor over the rich.

Commodities:- TMM note that while equities are now trading on concerns of QE, zero financing etc much as commodities did in 2009, commodities are now trading on FUNDAMENTALS. Fancy that. Note crosses like Palladium / Silver - the former will stop being produced at these prices as every South African mine goes under, the latter falling due to structurally declining demand trends ex hoarding which also happens to be going backwards. Its a pity all those commodity funds are getting redeemed just at the time having any expertise has value but that's life with hedge fund allocators we suppose.

TMM are also wondering if speculation can hold inflation lower than it where it naturally should be. As the speculative drive into commodities, especially oil, seven years ago drove up actual inflation, perhaps the expectation of no/low inflation drives speculative positions into short commodity trades that feed through into real low inflation. If so, they are winding up a coil for a sharper snap back in inflation when the time comes.

Finally for all those long Nikkei / yen hedged - Been a good ride hasn't it? But crowing demands beer buying for the house

Central Bank Alchemy and more Negativity

noreply@blogger.com (Polemic) — Thu, 02 May 2013 22:56:00 +0000

It's been a week or so since our last post and May is lining up to be another case of capitulation. Capitulation on the inflation trade, capitulation on the growth trade and capitulation of the "world is normal" trade. And throughout this equities march onwards. Buy buy buy buy.

There's plenty being said at the moment about what other people think, to the point that TMM are getting quotosensitive (much like "photosensitive", but this brings us out in hives when we hear other people's opinions repeated as religious portents). If we want opinions from people who have just as little clue as everyone else then we will talk to ourselves thank you. We don't care what Bill or Warren or Paul or Roggoff or Rienhart or any pundit thinks. We should stop reading what other people think and start thinking for ourselves.

Is this part of the Twitter problem? Recycling of thoughts diminishes the ratio of originality to quote to such a point it's not worth thinking for yourself? Or is it something to do with education? One of TMM's offspring was writing an essay last week and had an original thought to add but felt they couldn't because they had to reference all thoughts and ideas. "Reference yourself" we suggested. But no, a rare original thought bit the dust because someone else HADN'T said it first.

The Roggoff Rienhart witch hunt appears to us to be more of a blame game in a world of desperation rather than anything important. Are people really not thinking things through enough for themselves, that a spreadsheet error can cause global policy error (this isn't rocket science). Oh actually scrub that, we've just remembered how the Buba work.

But, wow, imagine this ...

WEIDMANN: " Hey Wolfie, you won't guess what, I've just found a +/- error in cell A3, you know all zat shit about ze periphery and all zat austerity stuff, guess what? We should be giving them MORE not less HAHAHAHA",
SCHAUBLE:- "No shit! That's hilarious! Do we tell Cyprus?"
WEIDMANN:- "Nah, fuck 'em. Let's tell zem we want a special haircut on ze depos, you know a "cyprus special", its like a normal haircut but twice the price and rubbish "
BOTH:- "MWUAHAHAHAHA"

Policy is not swung on spreadsheet corrections and if it is then it's time to change the policy makers.

TMM have been doing lots of pondering recently, mulling their own thoughts around and it's pretty hard not to just come out with a rehash of many themes we have posted here already over the past couple of years. So excuse the a number of back links. But one over-riding trend is the growing push against austerity. Populations get impatient and the data is still looking dire. Money multipliers are not working and the machine is grinding to a halt. Well that's the concern. Desperation is kicking in and any money that is being printed doesn't appear to be ending up where the printers would like it to. So today was another of those days when the world looks to the central bank wizards for results, but at this rate the great book of Central Bank Policy will one day be filed in libraries under "alchemy".

Dr Aghi, Abe and Bendrick hard at work -

So what did Dr Aghi come up with? On the face of it not a lot. A predicted 25bp cut and no special methods other than the special method of saying thalt he is prepared to use special methods. One of which is the much talked about possibility of negative rates -

"On the deposit facility rate, we said it in the past: we are technically ready. There are several unintended consequences that may stem from this measure. We will address and cope with these consequences if we decide to act. We will look at this with an open mind and we stand ready to act if needed"

Looking at negative deposit rates “with an open mind”? This has prompted TMM to go back to thinking about the if/how/why/whether they will be implemented. In this respect, a speech by Benoît Cœuré in February 2012 seems especially applicable and we wonder if Dr Aghi is paying direct reference to it - here is the link, along with some select sentences:

• From a technical point of view, there is in fact nothing that prevents central banks from paying negative rates for the security they offer to depositors, at least temporarily
• Given the costs associated with holding large amounts of banknotes, it is likely that significantly negative interest rates would be required to trigger a switch from money holding to investment in banknotes.
• And there is a degree of hysteresis: a temporary situation of zero or negative interest rates can have long-lasting implications for banks and their trading incentives… The Japanese experience is of course relevant here. [9] Within three months of the introduction of the zero interest rate policy, the volume of transactions declined by around one-half and low turnover persisted until end-2006 when the zero interest rate policy was discontinued.
• Important market intermediaries, such as money market funds, could be driven out of business, as their business model loses profitability, for both domestic and foreign investors with excess liquidity may shift their investments to alternative, more profitable market segments.
• zero or negative interest rates may produce adverse effects on the profitability of commercial banks and financial intermediaries more broadly. In a financial crisis this can result in a credit contraction. All in all, the impact of zero rates on the profitability of banks remains uncertain and highly dependent, among other determinants, on parallel regulatory response.
• Overall, a switch to zero or negative interest rates bears some risks – mainly of a microeconomic nature – which would have to be weighed against potential benefits in terms of additional macroeconomic stimuli. It also has to be noted that such steps would be warranted only in the face of clear downward risks to price stability, which today are not present in the euro area. In particular, the discussion about deflation risks remains largely speculative.

For comparison, here are the ECB staff forecasts then and now:

Now, TMM recognizes that Euro area HICP inflation has been especially subdued recently. But even with these considerations, the ECB would have to sharply change the definition of ‘downward risks to price stability’ for negative rates to be justified given current forecasts, assuming it is still using the above prerequisites. Of course, it is possible that the ECB council has internally relaxed its criteria for negative rates – but that does not yet appear evident based on ECB member speeches.

But all this has led us back to looking at the effects of negative interest rates and some of the possible consequences, however we have discussed most of those HERE (Was that nearly a year ago already? Don't crises drag on?). But we were particularly reminded of this post by Cœuré's line "Given the costs associated with holding large amounts of banknotes, it is likely that significantly negative interest rates would be required to trigger a switch from money holding to investment in banknotes" which prompted us to think of ways of making holding cash even less attractive.

Other than those listed in the previous post we suddenly had a Eureka moment that unifies an old anthropological conundrum of the small Micronesian Island of Yap with todays ECB policy dilemma. If you really want to make cash unattractive as a handy medium of exchange then you can't do much better than the Rai Stones of Yap . It is therefore obvious that the origin of these stones was a case of runaway deflation caused by a tribesman incentivised by large bonuses, leveraging his balance sheet by using complex derivatives to the point of creating a credit bubble resulting in a deflationary economic collapse and the implementation of negative rates on cash deposits by the Yapese central bank followed by the logical introduction of the most useless form of cash on the planet.

So TMM would like to introduce you to the new 1 Euro coin.

And how it will be used:-

The ECB committee popping out for a box of matches.

Is the Aussie Safe to Short?

noreply@blogger.com (Nemo Incognito) — Thu, 18 Apr 2013 09:32:00 +0000

TMM thought it would be time to review their old friend, the Aussie. A couple of interesting research pieces have come out from the sellside at the same time as one member of TMM has been travelling downunder so we thought we would try to find some sense between the 10,000 ft world of the big picture and capital flows and slightly more granular information on capital expenditures from corporates.

Lets start with the big picture of Aussie capital flows and what is holding up the currency. Shorting AUD has been about as much fun as being in the octogon with George St Pierre - just when you think you've got the terms of trade flow right you get slugged with flight to quality flows and just when you think they are receding with normalization of the volatility regime you find mining majors rushing into the market to build mines and gas plants as fast as they can. Its about as much fun as being hit in the face, then kicked, then thrown on the ground and strangled until you ~~tap~~ stop out. Ie not fun at all. So, where are we now with respect to these key drivers of flows and where are we going?

First, it appears that portfolio flows have slowed down somewhat. There are some tentative signs of a slowing of reserve accumulation ex Japan and Australia has not seen material net inflows for a couple of quarters.

TMM are big believers in normalization of current account balances as being a sign of the world getting better and this does appear to be happening. So, if reserve assets are generally going down and the eurogroup does not do anything insane for a while, perhaps having had their false idol of Reinhardt and Rogoff smashed by a bit of basic spreadsheet math then there should be less net flows and much less flows to Australia. TMM won't bet the farm on this one but having been blindsided by these flows despite having got the commodities picture largely correct we have stopped whimpering and gotten out of the fetal position on this one.

Second, what about European bank deleveraging? This provided a substantial tailwind to shorts in 2011 but has also tapered off as of late. BIS data seems to indicate that Eurobank exposures to Australia are now low enough that it is unlikely to be a key driver and anecdotal evidence from our trip down here indicates that most eurobanks that are leaving the market are down to their last couple of hundred million dollars of loans. The loan auction-palooza of 2011 appears to be a long way away now.

Third - what about all that mining investment? This is a bit more contentious and frankly much more important of a driver of flows in the last year and going forward. Investment continues to be torrid and while the coal sector is desperately looking to cut capacity after an apparent step function change in Chinese thermal power growth and iron ore projects get cancelled the gas sector rolls on. Or does it? Here is ANZ's pipeline of future projects as of Jan 2013:

The problem here is that Browse has been cancelled and Arrow is being doubted by the market. While this does not do anything to change the peak in investment (2013) the rolloff of projects appears to be very steep indeed after 2014 with not much in the pipeline. Now, TMM know there is more to life than gas, coal and iron so we thought we'd look at the contractors sector of the AS51 for clues as to what their development pipeline looked like:

Ohh er. Not pretty. Worst hit are coal and iron ore oriented names but the rest are not exactly in great health - maybe that has something to do with public sector sources of revenue being closely tied to resources like Queensland which tends to curtail public sector projects like rail and roads:

One partner of a insolvency advisory in Australia described what was happening in the Hunter Valley and Bowen Basin, both major coal mining areas as "a nuclear winter setting in". Not a lot of room for interpretation there. Word is that if you want to finance "yellow goods" - ie, things like bulldozers and massive trucks then you generally will not get much love from Australian banks who have seen this show before.

TMM have been wrong before on AUD but we are finding it hard to see what keeps it higher from here given the collapse in investment we are likely to see over the coming years. Even if the

investment flows do not do it then rate cuts cannot be that far behind.

Putting that lot together TMM feel that Aus$ is vulnerable to an old fashioned sharp move lower in a "thatshouldnthavehappened" style that is pure "Gold".

Observations from Camp TMM

noreply@blogger.com (Polemic) — Tue, 16 Apr 2013 09:38:00 +0000

- Nikkei did not fall despite Usd/Jpy pull back and the US falls.

- Asian Markets did not really fall despite US and European actions.

- So this is not a global relinked "risk off" move and still sits within "positional" explanations.

- Gold has bounced though the bounce is still ex-feline.

- Some of TMM have been doing some company visits downunder and keep hearing that "winter is coming" from mining guys. We aren't sure if this something to do with "Game of Thrones" or just a southern hemisphere reverse seasons thing or whether this is just a reflection of mining contractors' order books.

- Aud is looking as sick as a dawwg (our cross hairs are back on it).

- Not much real news, with Price is News starting to dominate.

- Boston - really terrible and hopefully an isolated event.

- China is slowing but not crashing.

- Jim Reid has devoted 50 odd pages to showing that historical returns to high yield at these spreads are really bad. Thanks Jim, we know. Now what is the catalyst?

- Soft ZEW result is already in the price.

- John Sweeney's BBC Panorama program about North Korea didn't tell us anything new or actionable and in TMM's eyes was a journalistic self-indulgence that, having used LSE students as cover, puts future acedemic research in dangerous lands at risk. TMM wonder if, like they do with dodgy banks, it's time to split the BBC into a "Good BBC " and a "Bad BBC".

- A recent dreadful dining experience has spawned a new entry for the TMM glossary:-

Aqua Nueva - A distillation of pure arrogance and appalling service containing no spirit whatsoever served in a glitzy shallow vessel to the detriment of the recipient. As in "The Eurogroup served Aqua Nueva to Cyprus". Like the London restaurant with the same name and dreadful attributes, to be avoided at all costs.

- John Sweeney = Aqua Nueva

Price = Theory + Reality

noreply@blogger.com (Polemic) — Mon, 15 Apr 2013 14:45:00 +0000

TMM are finally emerging from their Gold bear bunker, having decided two years ago that there was never ever any point in discussing the value of gold as it verged on religious resulting in a torrent of abuse from the spamchuckers that made it just not worth the bother. But this morning we have got to the point where it can't be ignored any longer as some are blaming it for moves in other assets.

Gold is back to 2011 levels and Silver has just broken through a support at 26.00 that, if you like horizontal support lines, has been the road over a sinkhole.

Anyone who has ever studied supply and demand Econ 1.0.1 will now be scratching their heads and looking for a conspiracy theory to explain away something that "shouldn't have happened" (just go and have a look at the Hero Zedger comments in any gold piece they have posted recently). At this rate the tin-foil beanie wearers will be able to afford silver ones But isn't it the biggest no brainer that if you print money then the value an asset of limited supply against that money has to rally?

Let's pose a question to our Econ 1.0.1 class in the style of "A Question of Sport's" "what happens next" round.

Presenter - "Japan, running out of options and seeing the success of US actions, opens the taps and announces it will print an incredible amount of money, vowing never to stop until it encounters inflation. So what happens next?"

Ex sports star - "Well Jpy takes in on the chin and hits the deck and gold goes to the moon and his shorts fall off"

Presenter - "Anyone else?"

Other ex Sports star - "Gold catches fire and runs up the pitch screaming whilst the yen crashes into the posts"

Presenter "No. Run the film and lets see what happens to gold in yen terms.."

So what's all that about then? TMM sees it as a lovely example of how theory disconnects from price via reality, in other words - TMM's price equation of Price = Theory + Reality (P = T + R) where reality is everything that isn't in the theory. Theory is all well and good as long as you have enough people believing in the theory, or more rightly willing to back the theory with their own money. Its all very "Bitcoin". It will go up whilst everyone believes it will go up, whether that is based in economic theory, technical analysis, or just straight forward herd mentality. But TMM like to think that the world is more complicated that Econ 1.0.1 and just as Econ 192.168.0.1 is doing for Bitcoin so Econ 79.197.1 is doing for gold. No matter how much of a fixed asset it may be it is reliant on a) everyone agreeing that it is a store of value and b) being better to hold than any other store of value, whether that is stocks, bonds, fiat cash or lumps or gallons of any other commodity.

But isn't gold an alternative currency? One of the requirements for a useable currency or money is that its value is predictable and has a low volatility. Pricing eggs in a currency that is wanging around in 10s of percents per day, whilst exciting for traders, is not conducive to reducing risk for shopkeepers or customers. The argument that a complete transition to the newer money would eliminate the volatility relies on 2 assumptions. First that things would settle down after transmission as currency supply steadies and second that a transition would be possible whilst high volatility exists. The European transition to the Euro was accompanied with a volatility that tailed to zero in the run up. Jumping straight to a Bitcoin or gold function with the current levels of volatility would be impossible. So obtusely, the very reason that Bitcoin (or Gold during its run up and collapse) could not replace existing currency is because of the very volatility that is responsible for its heightened visibility.

Isn't it a hedge against inflation? Well let's look at the chart below which is the US price of gold inflation adjusted.

We would imagine that a perfect hedge against inflation would see a flat line with the odd wobble as expectations get ahead of price. The chart above shows that they are hardly small wobbles and at current levels we would need to see 100% inflation or the price drop from these levels by a half to get back to the sort of eyeballed averages of $350 inflation adjusted. If the above chart implies expectations for inflation are already to be 100% over current price then there is an awful lot of room for inflation expectations to take off before the price has to budge.
+
Which leads us on to think about inflation expectations again and to wonder if we are seeing something that should worry the BoJ. Just when they have unveiled their nuclear bazooka, designed to spark the living fear of inflation into its populace, are we instead seeing a general market capitulation in the inflation trade? Commodities are off everywhere. Oil is down another 2.5% on the day and linkers are doing the same. Even the ultimate measure of usd/jpy is off 2.5% from its highs. Or is it the growth trade being unwound? The growth and inflation trades are to TMM (and obviously the BoJ) much as the interaction of magnetism and electricity are to each other. They are probably bound by a single Maxwellian equation combining the two, resulting in some Fleming hand gestures. In this case, the resultant force on gold is represented by an extended middle digit.

Where is this leading us? Corrective moves or a new phase? We have to say that our short term trading antennae are concerned that Asian time saw the biggest wash down in gold prices and Asian time zone rarely sets new direction and often sees blow off peaks or troughs. which causes us to pause before jumping in, but with Econ 1.0.1 having been taught a lesson in P=T+R we think it less likely for such trades to be as reloaded. In a way if this is either the US growth trade being lightened or the global inflation trade being lifted it is still very interesting as it is indicative of some sizable perception changes.

Our debate extends to where this leaves equities. On one hand we should have sectoral suffering as commodity producers fall but on the other hand the feedback loop of lower input prices is great for everyone elses' margins, which once again leads us back to preferring equities to much else. Having been left behind by the equity train since the start of Feb we are still hoping for a drop to buy on, hopefully that will be on a continued growth/inflation trade unwind. We do believe that ultimately policy WILL stimulate to the tipping point that will provide inflation. How do we know? Well they've told us haven't they? But that could be a long time off.

In the meantime there are a lot of 5 minute macro managers trying to reconcile money management issues with long term theory.

Post BoJ New World Quiz

noreply@blogger.com (Polemic) — Thu, 11 Apr 2013 11:47:00 +0000

Sorry to stick to a Japanese theme but the 2013 Japanese money tsunami is engulfing everything financial to the extent that many new questions are now being asked. Here are some of them.

If you are a Japanese central banker do you -

a) Retire to the mountains having done your job.
b) Read the story of "Pandora's Box" that someone has just handed you.
c) Wonder if leaving out the "capital controls" part of the Japanese 1932 Great Depression rescue plan policy you are trying to reuse, might be causing all your fresh money to fund other people's recoveries rather than your own.
d) Resume normal policy - Do nothing and say nothing.

If you are the FED do you -

a) Give praise that BoJ policy provides you with an exit route to QE via Japanese UST purchases.
b) Suggest the BoJ also looks at buying US Munis.
c) Wonder how long it will be before someone realises that Abe is a CIA asset orchestrating (a) and hopefully (b)
d) Write your CV and try and get out on a high to the private sector before you have to fire-hose real inflation and get engulfed in the flames.

If you are US Congress do you -

a) Vigorously support Japanese actions by signing new trade and defence agreements (but ask not to be paid in Jpy).
b) Kick up a rumpus over Japanese currency manipulation and introduce trade sanctions.
c) Blame the other side and praise yourself ( business as usual).
d) Ask where Japan is and ask why they ain't speaking English.

If you are a French politician do you -

a) Point to the rally in OATs and say it reflects confidence in French policy.
b) Point to the rally in OATs and say it reflects confidence in French policy and so raise taxes.
c) Blame Gerard Depardieu for eur/usd's rally which is solely responsible for the demise of your oh so competitive export industries.
d) Go back to lunch as it's the Germans running Europe not you so why bother.

If you are a Swiss central banker do you -

a) Welcome continued large inflows of private money which you can use to fund local industry.
b) Worry like hell about why anyone in their right mind still wants to buy the Chf.
c) Get ready to cut rates and protect the eur/chf floor
d) Wonder if you intervened by selling chf/jpy there would be some sort of financial logic loop explosion.
e) Make all foreign deposits in Swiss institutions junior to locals.

If you are a Eurogroup member do you -

a) Send a large hamper of Italian luxury goods to Abe with a bouquet and thank-you note.
b) Slap yourself on the back and issue press statements linking periphery rallies to confidence in your policies.
c) Say the rally is a template to recovery, but Japan is not a template, neither is Cyprus (but bank reforms are) HOWEVER - you may use any of these as templates as mercilessly as hip hop artists use 70s funk bass lines.
d) Ask the Troika for a report on Japan and eye their haircuttable deposit base with envy.
e) Ask Germany.

If you are the Bundeathstar do you -

a) Follow the master plan ignoring all other external influences.
b) There is no plan b.

If you are a European Utility with structural demand decline but with a sudden source of cheap Japanese funding do you -

a) Delever, take it like a mensch and show some regard for shareholder returns.
b) Go bananas building wind farms and other renewables on the cheap.
c) Help the Saudis build nuclear facilities. I mean, what possibly could go wrong?

If you are a Japanese REIT now valued at a 3.5% cap rate do you -

a) Build more condos and sell them to..err..... your declining population.
b) Build more condos and lobby for immigration in order to have customers.
c) Screw it, buy a bunch of assets in Brazil, Australia and anywhere else with vaguely positive carry.

If you are an Australian miner staring at what Japan has done to AUD/USD do you -

a) Cry to the RBA and make a fuss.
b) Lie on your back while your creditors have their way with you and think of England which long ago gave up inflation targeting.
c) Try not think about the topical debate about Thatcher and the history of the UK mining industry.
d). Mortgage your jet skis and V8s.

If you were a struggling Greek Region facing all the grim reality of uber-austerity do you -

a) Knuckle down and get the olive presses going again, Japan and its effects are just too far away from the daily struggle.
b) Pray for a miracle involving finding a huge deposit of Gold under your feet which will transform your lives.
c) Have all your prayers answered and find a huge deposit of Gold under your feet but then argue with your neighbours to the extent that no one ever digs it up and you lose all your friends. (for clue click here)

UK Model for Japanese Inflation.

noreply@blogger.com (Polemic) — Wed, 10 Apr 2013 11:18:00 +0000

If Japan is serious about wanting inflation then instead of flooding money into the global pool they should just turn to the UK and announce that they will soon -

Have UK energy companies running their utilities.
Have UK insurers insuring their cars.
Have UK government price tobacco.
Have any UK train company running their public transport.
Have UK's "PC World" fix their computers.
Have UK main dealers fix their cars.
Have UK local authorities run their car parks.
Have UK motorway service stations provide all fuel.
Have their children educated at English private schools.
Have all online billing done by Ryanair.
Have UK "payday loans" run their bank lending.
Have EasyJet supply all preprepared foods
Have UK Farmers' Markets supply all fresh food.
And then make everything organic.

That should scare the hell out of the population with respect to inflation expectations. It's worked wonders in the UK. Just a shame about no growth.

If they do need to go further then perhaps-

Have USA run their fighter jet programs.
Have France run fiscal policy.
Have Singapore tax their cars and price the beer.
Have Norway provide their holidays
Have Switzerland run their McDonalds.
Have Courchevel run their ski resorts.

Japanese Laughing Gas

noreply@blogger.com (Polemic) — Tue, 09 Apr 2013 11:03:00 +0000

Wandering into the Accident and Emergency department of Financial Hospital, Globesville, US data took a seat next to European Growth, who shuffled up closer to European Politics to make room. Australian mining looked on mournfully from the other side of the room nursing a broken bid. The room was full and the staff looked worried.

The US had been on QE antibiotics for years and the doctors were worried it might have caught a resistant strain of slowdown. It looked as though its Seasonal Affected Disorder was coming back too.

European Growth had looked like it was recovering from its savage mugging but, despite the countless sticking plasters its brother Politics had applied, it was bleeding again.

European Politics had been in counselling for 3 years for its multi-personality disorder, yet was still trying to kill itself at every opportunity. Its job as a party balloon twister (take a straight Maastricht treaty and with a few twists .. like this and...Voila!! It's a pig's ear!) had also left it with chronic arthritic joints.

Australia had been at its own party and was intoxicated when it slipped on its own hubris and broke its main export market.

UK, having blown its inheritance on an addiction to foreign imports and lavish spending, sat shivering in the corner. The methadone of low rates and QE was doing little to return it to health.

Germany was suffering from "Munchausen by Proxy", convinced that everyone else was ill and in need of a dose of their German cure. It was having to be restrained by the guards, but its protests were upsetting the Peripheral family huddled in the corner waiting for their repeat prescriptions.

The relatives did their best to soothe the patients but there was only so much the Far East could do.

Dr Ben was exhausted after a full night on call and his drug cabinet was seriously depleted. Dr Aghi had taken over and tried to order more pharmaceuticals but had been blocked as they weren't yet approved for European use. Things were looking dire and the markets were fearing the worst.

But then the doors burst open and in flew Dr Abe, dressed in a magnificent golden coat! "I have a plan!" he screamed maniacally. "What's your plan doc?" cried the others. "THIS .." and with that he opened all the taps to all the Nitrous Oxide cylinders in the department. The intoxicating vapours of the laughing gas swiftly filled the whole building and were soon working a wonderful magic. The Peripheral family were the first to giggle and were back on their feet. Seeing this and realising what was happing, European Politics started to relax and burst into laughter and even made friends with its alter egos. European growth was soon to follow and was on its feet cranking up the volume of "Remember Me" on the Tannoy.

Abe's laughing gas and the beat soon had everyone up and partying. The US had a big smile on its face and was dancing with the Far East relatives who themselves were so happy they were opening their wallets and throwing money around instead of saving. Australia had found the surgical spirit in the cupboard and was glugging it down telling everyone who would listen how great it was and even the UK had a grin on its face as it swigged on a bottle of secondary effects.

Only Germany sat miserably in the corner behind the gas mask it had swiftly donned to prevent it from inhaling the narcotics it so abhorred.

The staff watched in awe as Dr Abe led the party like the Pied Piper out of the hospital and into the night. But as the doors swung closed and the sound of revelry diminished into the distance, Dr Aghi shook his head and let out a resigned sigh to Dr Ben...

"They'll be back"

TMM Translate the Euro Commission Statement on Portugal

noreply@blogger.com (Polemic) — Sun, 07 Apr 2013 23:48:00 +0000

Team Macro Man translate the Statement by the European Commission on Portugal
As usual the original is in italics.

Brussels, 7th April 2013

The European Commission welcomes that, following the decision of the Portuguese Constitutional Court on the 2013 state budget, the Portuguese Government has confirmed its commitment to the adjustment programme, including its fiscal targets and timeline. Any departure from the programme's objectives, or their re-negotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens, namely the growing investor confidence in Portugal, and prolong the difficulties from the adjustment.

We are totally stunned. Are they mad? Haven't they seen what we have done to Cyprus? At least their Government realise what it means. This is like stopping the antibiotics early, the infection is going to come back even stronger and kill them - and probably us.

The Commission therefore trusts that the Portuguese Government will swiftly identify the measures necessary to adapt the 2013 budget in a way that respects the revised fiscal target as requested by the Portuguese Government and supported by the Troika in the 7th review of the programme.

The Commission therefore make's it abundantly clear. Identify what went wrong, eliminate the problem and continue taking the foul medicine in the doses prescribed by Dr. Troika.

Continued and determined implementation of the programme offers the best way to restore sustainable economic growth and to improve employment opportunities in Portugal. At the same time, it is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal, which would facilitate Portugal's return to the financial markets and the attainment of the programme's objectives. The Commission supports that such a decision be taken soon.

Continued and determined implementation of the programme is your only choice as the only other people willing to lend to you will have names like "Big Joe" and interest rates that make payday loans look like Japanese monetary policy. You have twenty seconds to comply. (See annex 1)

The Commission will continue to work constructively with the Portuguese authorities within the parameters agreed to alleviate the social consequences of the crisis.

The Commission will continue to work constructively with the Portuguese authorities and if things get tougher we will be sending aid. Namely 17,000 portions of Ikea Moose Lasagne we found going cheap (or rather "oink"). After that, any alleviation of social consequences will probably involve water-cannon.

The Commission reiterates that a strong consensus around the programme will contribute to its successful implementation. In this respect, it is essential that Portugal's key political institutions are united in their support.

If you all agree to this it will be easy. If you don't then, well, you remember "Robocop"? We once again suggest that you comply within twenty seconds.

Annex 1 - Eurogroup Plan for necessary adjustments to indebted European countries threatening to disrupt the success of the Eurozone as implemented with ~~Mr Kinney~~ Cyprus.

The Japanese Grand National.

noreply@blogger.com (Polemic) — Fri, 05 Apr 2013 13:21:00 +0000

The BoJ delivered, and then some. TMM has been fairly positive on the reflation story for Yen-denominated assets all along, but even TMM is pleasantly surprised. With a unanimous vote behind an ambitious act of policy, Kuroda has at the very least pushed back any scepticism that BoJ policy will be timid.

TMM feel that there are two questions here and it may be helpful to clarify that ahead of time:

A) How will the BoJ policies affect the actual economy?
B) How will the BoJ policies affect investor perceptions, and through that, asset prices?

For A) TMM think the question could be framed as the battle between expectations and declining real demand with the expectations channel being the main channel by which the BoJ hopes to succeed. Creating base money, even lots of it, hasn't worked, as we know and a 50bp decline in 10y rates is arguably not SUCH a big deal. And now it can't fall much further.

As it's the weekend of the UK "Grand National", the most gruelling of horse races noted for its number of fatalities, perhaps we should consider the policy as the course, the Japanese economy as the horse and growth as the finish. The BoJ has chosen a course to growth that goes via "Inflation" so let's have a look at the course and fences -

1) Force inflation to rise through a decrease cost of money relative to goods which compounded by (2) an FX driven rise in imported goods costs should create within the populace (3) an expectation of inflation to continue rising and therefore (4) a propensity to spend now rather than later. Combined with a (5) negative real interest rate this will push a move from (6) saving to spending and should drive local demand and (7) increase investment domestically and so lift growth.

As per our Non-prediction number 1 at the start of the year we see this policy ultimately working and the expectations of it working yielding profits for long inflation trades this year. However the true measures of success are going to be a long way down the line and probably only visible once 5 minute macro has moved on to fight other wars.

The processes laid out in our yearly non-predictions are clear, however and here we invoke that classic Japanese "however" clause. TMM know that Japan occupies a part of the financial universe that is far enough away from the normal universe not to share the same rules of economics. Before you cry out in horror perhaps we should apply a caveat. Japan does share the same rules of economics but the cultural and demographic overlay applied to those same rules means that the paths to predicted outcomes are not as straightforward and definitely not as efficient as others we know. So where as we may expect some obvious results to occur when an inordinate amount of freshly printed money is thrown at an economy, things are different in the land of ZIRP where the culture is to save, particularly offshore, and not to spend (c.f. Western culture and media programming of today's young). If normal economics are Newtonian physics, then Japanese economics is what happens at the event horizon of a black hole.

So let's have a look at the fences.

1) The cash injections are indeed huge and as a proportion of GDP, dwarf the US actions. On this basis alone decrease in the cost of money through the huge cash injection will dilute the money/goods ratio. But global connectivity spreads the flood increasing liquidity everywhere just as the US actions did. The melting of the Greenland ice sheets means sea levels in New Zealand rise a bit. Japanese banks may be queuing outside the study of the BoJ ready to have their orders to lend spelled out to them, but TMM wonder how much of it will ultimately remain domestic as the real demand for credit is in the West "Roll up, get your cheap funding here", rather than within a domestic culture that saves rather than borrows. The flow out of yen to achieve this moves the affect to FX (2). We are already seeing the liquidity tsunami with Japanese lifers hoovering European bonds at the expense of JGBs. Check France / Japan 10 year spreads today. (Note - remind Eurogroup to write thank you letter)

2) FX driven inflation tends to be a one off shock, unless you can get your currency to crawl lower but then the incremental moves are just smaller. It's all good, but do it too much and things start getting bad quickly, either due to a lack of investor confidence or trade partners setting up tariffs. FX driven inflation can be seen as the wrong type of inflation if it doesn't drive wage demands higher but locally stifles purchasing power.

3) Expectations of inflation rising will most probably first be seen through the FX function, which as we said could be transitory (unless this goes Weimar). So once the FX starter motor of inflation expectation is done a continued domestically driven inflation has to take over. As with the west this will have to be associated with wage inflation which we know can be extremely stubborn and culturally even more difficult to kick off in Japan.

4) Propensity to spend now rather than later. If, as we gather, the BoJ is hoping to increase inflation in the service sector we wonder how increases in inflation expectations will increase demand, as most services are not hoardable. A consumer who anticipates the cost of haircuts going up cannot go and get his hair cut 20 times now in order not to have any later. The same applies for most of the service industries that we can think of. Entertainment, accountants, lawyers, medical services, transport, maintenance - it's all time spaced. So what do you do if you are a consumer who thinks inflation is going to go up. You don't buy tech as that depreciates faster than jpy can. Once you have bought a car a year early, and the furniture you were putting off, maybe had a holiday, there is little else apart from putting on financial hedges. Property? Japan considers property as a depreciating asset and "An unusual feature of Japanese housing is that houses are presumed to have a limited lifespan, and are generally torn down and rebuilt after a few decades, generally twenty years for wooden buildings and thirty years for concrete buildings" and is taxed as such. However this could imply that the price of the land that they are built on rises.

5) Real rates are very important to the investor as a measure against returns, but TMM would suggest that to the man on the street the cost of a loan on something he isn't going to sell again (so won't consider for asset growth - see furniture, household stuff) is the cost of loan against how much more he thinks he will earn in the future. Wage inflation rather than CPI. So if wage inflation stays flat (as it has in the UK) then his real interest rate will not be negative. This is where the investor, who is always looking at resale value is very different to the consumer, who as a "consumer" by definition won't have anything left to sell on.

6) And where do they save? Overseas where the yields are and you are hedged against the expected FX driven inflation. BoJ policy change does not remove the incentive for Mrs Watanabe to borrow locally and buy Aussie bonds. It may even increase it.

7) Domestic investment will react to FX moves as wage costs become more competitive. We see no problems with this last fence. In fact once this occurs the finish line of growth is clearly insight. We just have to hope that all the other fences have already been cleared.

We will not know the result of this race for a few years but market punters are piling in to the bookies backing their horses .

So where is the money is going? Or our question B)

Looking ahead, TMM reckons that the BoJ is probably done for a few months, as it watches to see the results of its announcement today. The next step for the markets is likely to be dependent on the evolution of retail inflation expectations. This will all take time to properly assess, but in the meantime, there is little (at least domestically) that stands in the way of a continuation of recent trends.

With respect to the Nikkei, it's a bit like 1999 internet stocks, to the point that we could say that stock prices are showing stronger inflation expectations that anything else. But this is from the investment community, not the man on the street. TMM also have their money on Nikkei but not at these prices. We would like to see the 5 minute macro crowd get bored, get washed out and then join for wave two. We are acutely aware that were it not for the BoJ action equity markets would be on an even clearer downward move.

FX - We are also of the opinion that jpy has to depreciate. Either through first round liquidity transfers (as seen above) or second round inflation rallies (if they get them) moving faster than growth pushing real yields even lower.

JGBs - "The Battle of Kyle Bass". The huge JGB purchase program from the BoJ will see leakage as domestic JGB holders diversify for yield and currency fears. But this probably leaves a curve trade in play, short the short end for rate differentials (European spreads) against long the longer end for continued government QE purchases and as it becomes more apparent that this is a long race and that policy will not have the swift response that some are trading on.

In summary, the BoJ may have muddled causality and correlation and mistakenly picked inflation as the waypoint on its GPS route to growth. Its problems are demographic and a shorter route to growth, rather than the monetary response, may be the UK "Gordon Brown" response. Encourage immigration to rebalance both the demographic imbalances and maybe even some cultural ones.

However the monetary race has begun and it is a tough course.

One over Zero and Decoupling

noreply@blogger.com (Polemic) — Wed, 03 Apr 2013 16:45:00 +0000

Europe woes have not gone away and though it feels as though the market's ADHD has already confined Cyprus to the toy box, TMM still see it as a jack-in-the-box. Lid down for the moment but there is a nasty clown about to bounce out again. S"EU"prise!!!

Yesterday's Euro PMIs weren't a great shock but are confirmation that Europe is suffering from both of its perennial problems at once, politics and economics. In the past when we have seen economic crises the political will has held firm. Perceived breaks in the unity of policy have only tended to shine through when the economics were supportive enough to allow luxurious room for "debate". But now we appear to have greater policy split than ever occurring as the economic outlook is getting worse. TMM still vote with their P/L on Europe and call the zone lower.

Meanwhile the US markets are doing OK leading to calls that US has DECOUPLED from Europe, but the US is playing a two speed game. We note that US earnings are diverging depending upon their US vs ex US exposures. CAT and Fedex in the naughty corner, homebuilders, telcos and other domestic names are leading the charge. However the general tone is that US recovery, spurred on by its new found cheap energy and free money, is the story of the decade and to be long anything US vs the rest of the world, especially Europe, is the best trade in town. So local has DECOUPLED from international.

Cheap money is changing many equations as one divided by zero gives an answer that is hard to use. Though we have long understood that if you fund at zero then any dividend paying equity can be attractive, the price can be anything you like for div/price to still be greater than zero. We have heard this quoted today re P/E "should be at 30". but why stop there? It could be anywhere, pick a number.

This has seen an argument flourish that equities can go up based on them having a yield and be damned with the price risk. Which is interesting, because it is another example of DECOUPLING. This time from the bond markets where the reverse logic is being applied. You can't possibly buy bonds because despite their yield, the price is "obviously" going to dump.

This leads on to another current belief, that Emerging Market Debt is a great buy as the only risk is if US treasury yields rise and you believe in the link. But EMD investors are being told that the asset class has DECOUPLED from Treasuries and are a buy on their own merits of better debt dynamics, growth and inflation.

We hear the cry of decoupling everywhere. The usually steady path of AUS$ tracking the Aud mining index has DECOUPLED, Cyprus is assumed to have effectively DECOUPLED from Europe (Scotland could soon be DECOUPLING from the UK) and we could say that Bitcoin has DECOUPLED from the USD. US data is even DECOUPLING with itself with this week seeing a sudden slew of softer numbers, but that's ok, it's only decoupled. It's getting to the point where decoupling arguments are being used to sell any old rubbish.

Whilst we understand the effect zero has on some investment equations and whilst we also understand that the Japanese may be about do an "Exxon Valdez" with global liquidity, TMM have a simple decoupling rule-

"Decoupling works really well right up until the point it doesn't, which is just after the point everyone says it does".

And that would appear to be right now.

Eurogroup English Dictionary (EED)

noreply@blogger.com (Polemic) — Wed, 27 Mar 2013 15:21:00 +0000

Trying to decode what the Eurogroup is saying into English is getting harder as policy becomes less distinct. However we have uncovered a small segment of the equivilent of the Rosetta stone. Plain English on the left and Eurogroup English on the right. We hope this helps.

Irish (adj) - Not Greek

Portuguese (adj) - Not Irish

Spanish (adj) - Not Portuguese

Italian (adj) - Not Cypriot

Cypriot (adj) - Unique

Ubiquitous (adj) - Unique

Systemic (adj) - Unique

Endemic (adj) - Unique

Theft (n) - 1) Tax 2) contribution 3) Fair share.

Deposit (n) - Bank share holding.

Depositor (n) - Money Launderer

Uninsured Deposit Loss (n) - Insured Deposit Protection

Capital Control (n) - Cautionary measures.

Economic Collapse (n) - Difficult times.

Discord (n) - Unity

Compromise (n) - Strong Agreement

Retard (n) - Dutch Finance Minister

Own Goal (n) - Mr Dijesselbloem's statement

Vague Idea (n) - A Commitment.

Hope (n) - Commitment to the commitment

Inappropriate (adj) - Template

Unsuitable (adj) - Template

Master Plan (n) - Template

Template (n) - Not a template

Dead Cat Bounce (n) - Encouraging signs

Dysfunctional Family (n) - Europe

German Foreign Policy (n) - European rescue program.

Economic Repression (n) - Prudent policy.

Vengeance (n) - Necessary adjustments.

Free Market (n) - Moral hazard

Haphazard Moral Hazard (n) - Flexible policy.

U-turn (v) - Clarification of earlier statements.

Implicit Guarantee (n) - Will do what is necessary

Panic (v) - Urgently striving to do what is necessary

Failed to do what was necessary (n) - Rapidly changing environment.

Pommel Horse (n) - Cyprus Parliament

Whipping Boys (n) - Cypriot Government

Outrageous Assumption (n) - Realistic target

Last Hope (n) - Mr Draghi

Fourth Reich (n) - The Eurogroup

The Eurogroup Statement on Cyprus Translated.

noreply@blogger.com (Polemic) — Mon, 25 Mar 2013 13:27:00 +0000

Team Macro Man offer their translation of the Eurogroup Statement on Cyprus. The original is in italics.

The Eurogroup has reached an agreement with the Cypriot authorities on the key elements necessary for a future macroeconomic adjustment programme. This agreement is supported by all euro area Member States as well as the three institutions. The Eurogroup fully supports the Cypriot people in these difficult circumstances.

We the ~~4th Reich~~ Eurogroup have finally pulled a moth eaten 3 legged rabbit out of the hat. The Eurogroup agrees with itself even if Cyprus is not at all happy with it. We fully support the Cypriot people through the difficult circumstances we have foisted on them (but not that much because it was their fault).

The programme will address the exceptional challenges that Cyprus is facing and restore the viability of the financial sector, with the view of restoring sustainable growth and sound public finances over the coming years.

We will restore the financial sector from being a multibillion Euro earner for Cyprus into a neutered annex of the Bundeathstar (sorry Bundesbank) over the coming years (coming years = 0 to infinity).

The Eurogroup welcomes the plans for restructuring the financial sector as specified in the annex. These measures will form the basis for restoring the viability of the financial sector. In particular, they safeguard all deposits below EUR 100.000 in accordance with EU principles.

We welcome our own plans. Please note or even praise us for standing by the deposit guarantee of E100k. As it is part of EU wide law, there is no way would we have ever suggested otherwise.

The programme will contain a decisive approach to addressing financial sector imbalances. There will be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the EU average by 2018. In addition, the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatisation.

We will downsize any EU economic sectors we don't like to EU averages (excepting the German Industrial sector or anything else German). As, by definition, half the sample must be over the average, if we insist on all those over the average downsizing to the average we should be able drive the average to our ultimate target of zero.

The Eurogroup welcomes the Terms of Reference for an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions, involving Moneyval alongside a private international audit firm, and is reassured that the launch of the audit is imminent. In the event of problems in the implementation of the framework, problems will be corrected as part of the programme conditionality.

We will plug the competitive advantage that Cyprus had in the banking sector by introducing online Anti Money Laudering training for all bank staff . Problems will be corrected by insisting on an 80% pass mark over three attempts.

The Eurogroup further welcomes the Cypriot authorities' commitment to take further measures. These measures include the increase of the withholding tax on capital income and of the statutory corporate income tax rate. The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution.

We are glad that Cyprus is at last doing what we tell them and look forward to them doing what Russia tells them too. As long as it involves Russia bunging in some money too.

The Eurogroup urges the immediate implementation of the agreement between Cyprus and Greece on the Greek branches of the Cypriot banks, which protects the stability of both the Greek and Cypriot banking systems.

Can you please make sure this doesn't screw up Greece again? If it does it will be Cyprus's fault. Or Greece's. But not ours.

The Eurogroup requests the Cypriot authorities and the Commission, in liaison with the ECB, and the IMF to finalise the MoU at staff level in early April.

And can Cyprus actually sign the agreement this time, preferably by April, rather than wriggling out of it at a later date as they usually do?

The Eurogroup notes the intention of the Cypriot authorities to compensate potential individual victims of fraudulent practices, in line with established legal and judicial procedures, outside the programme.

If you are mugged at the ATM trying to get your E100 out call the police, not us.

The Eurogroup takes note of the authorities' decision to introduce administrative measures, appropriate in view of the present unique and exceptional situation of Cyprus' financial sector and to allow for a swift reopening of the banks. The Eurogroup stresses that these administrative measures will be temporary, proportionate and non-discriminatory, and subject to strict monitoring in terms of scope and duration in line with the Treaty.

Once again this is a unique situation. Like Greece, Ireland, Portugal, Italy and Spain were all unique. Financial problems in the EU are like fingerprints - They are all unique but everyone has at least one but more likely ten. Administrative measures are temporary and in no way should be considered "temporary" as in the administration of Vichy France.

Against this background, the Eurogroup reconfirms, as stated already on 16 March, that – in principle - financial assistance to Cyprus is warranted to safeguard financial stability in Cyprus and the euro area as a whole by providing financial assistance for an amount of up to EUR 10bn. The Eurogroup would welcome a contribution by the IMF to the financing of the programme. Together with the decisions taken by Cyprus, this results in a fully financed programme which will allow Cyprus’ public debt to remain on a sustainable path.

We would rather not have had to donate anything but have been forced to hand over E10bil. Having done all the leg work its only fair that the IMF bung in their lump too. And Russia but that's a long shot so we won't mention it again.

The Eurogroup expects that the ESM Board of Governors will be in a position to formally approve the proposal for a financial assistance facility agreement by the third week of April 2013 subject to the completion of national procedures.

We want this tied down asap before someone changes their mind.

Annex

Following the presentation by the Cyprus authorities of their policy plans, which were broadly welcomed by the Eurogroup, the following was agreed:

1. Laiki will be resolved immediately - with full contribution of equity shareholders, bond holders and uninsured depositors - based on a decision by the Central Bank of Cyprus, using the newly adopted Bank Resolution Framework.

Laiki to the Abattoir

2. Laiki will be split into a good bank and a bad bank. The bad bank will be run down over time.

The three tons of entrails will be left to rot in the corner and the one gram of edible meat will be put in the freezer.

3. The good bank will be folded into Bank of Cyprus (BoC), using the Bank Resolution Framework, after having heard the Boards of Directors of BoC and Laiki. It will take 9 bn Euros of ELA with it. Only uninsured deposits in BoC will remain frozen until recapitalisation has been effected, and may subsequently be subject to appropriate conditions.

A small part of the good meat will be seasoned with E9bil and served at the table of BoC, the rest will be left in the freezer.

4. The Governing Council of the ECB will provide liquidity to the BoC in line with applicable rules.

The ECB will provide liquidity under the usual conditions (like those applied by most payday loan companies) and of course default will mean the bailiffs popping round again.

5. BoC will be recapitalised through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders.

We will make the BoC look stronger by switching real money for monopoly money.

6. The conversion will be such that a capital ratio of 9 % is secured by the end of the programme.

We will back engineer everything to fit our own rules.

7. All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation.

All insured depositors in all banks will be fully protected in accordance with the relevant EU legislation unless we change our minds.

8. The programme money (up to 10bn Euros) will not be used to recapitalise Laiki and Bank of Cyprus.

Because there won't be much left over after we have paid all our admin and implementation teams we will sending over to run this scheme.

The Eurogroup is convinced that this solution is the best way forward for ensuring the overall viability and stability of the Cyprus financial system and its capability to finance the Cyprus economy.

We think this is a really good idea of ours and is in fact so good we should consider using it as a template for all banks in the EU. But no-one is to mention that. Mr Dijsselbloem included. Oh shit he hasn't has he?

"Draghi Where's your Euros"

noreply@blogger.com (Polemic) — Sat, 23 Mar 2013 20:23:00 +0000

Whilst we wait for the outcome of the current round of Cypriot negotiations, let's have a jolly song, or shanty, to cheer things up. With no apologies whatsoever to Andy Stewart, TMM give you their version of the Scottish classic "Donald Where's your Troosers"

"Draghi Where's Your Euros"

I'm back for a while from the Cyprus Isle
Where if you want your cash you'll need some guile
And all the locals shout with bile,
"Draghi, Where's your Euros?"

Let the debt blow high and the growth blow low
We'll levy a tax on your depo
Russia won't pay so the the Cyp's all go,
"Draghi, Where's your Euros?"

I sat in on a conference call
There was slippery talk between them all
And I was afeared that Europe would fall
'Cause they wouldn't give them Euros

Let the debt blow high and the growth blow low
We'll levy a tax on your depo
Russia won't pay so the the Cyp's all go,
"Draghi, Where's your Euros?"

I went for a loan to a German town
But all I got was a Schaeuble frown
And a scream from the Lady who won't turn around,
"Draghi, there not your Euros!"

Let the debt blow high and the growth blow low
We'll levy a tax on your depo
Russia won't pay so the the Cyp's all go,
"Draghi, Where's your Euros?"

The Germans have bound this Superman,
And the Troika want another billion
I've done everything that I possibly can
So don't ask me for Euros.

Let the debt blow high and the growth blow low
We'll levy a tax on your depo
Russia won't pay so the the Cyp's all go,
"Draghi, Where's your Euros?"

Let Cyprus leave or let them stay
It doesn't matter either way
We can't arrange a piss-up in a breweray
We've buggered up the Euro!

TMM thoughts on Cyprotoxins

noreply@blogger.com (cpmppi) — Fri, 22 Mar 2013 10:27:00 +0000

- The EU group is suffering from the weak leadership of the Dutch Finance Minister. The pasting he received in the EU Parliament yesterday was fully justified. He even apologised for not getting it right & said it was for us to decide if they were incompetent! TMM answer with a firm "YES!".

- This lack of leadership within EU policymaking has led to an impasse: The recent Eurogroup statements barely disguise the complete lack of agreement as "German Economics" espoused by an election driven Schaeuble, with its determination to force internal devaluations on the periphery, going unopposed.

- German Pressure is compromising ECB freedoms to do its job. The ECB has announced that it will not provide ELA to insolvent banks and will turn off the tap on Monday without a bailout. First, the ECB/ELA *can* lend to insolvent banks and has done so in the past (Anglo Irish). Second, and more importantly, the ECB is shirking its core responsibility of lender of last resort.

- Is Draghi happy with having his mandate hamstrung? TMM severely doubt it and wonder if his silence hides deeper ire that is too dangerous to publicise.

- Precedent-setting, no matter what they claim - calls into question whether the OMT can be employed in large enough scale to prevent EUR exit risk premia arising in peripheral market.

- Imposing depositor haircuts across the board (again, let's not kid ourselves: Barclays Nicosia is hardly a bankrupt bank) has de facto devalued the Euro in Nicosia. It is now worth just 0.92 Berlin Euros. This, in TMM's view, is a catastrophic policy error for Europe.

- Cyprus solution has broken THE MOST IMPORTANT FUNDAMENTAL PILLAR that supports EMU: A Euro in Berlin is both worth the *SAME* as a Euro in Nicosia, and entirely fungible. This reminds us of the similar breakdown the Federal Reserve System in the 1930s where Bills of the NY Fed were discounted elsewhere.

- Similarly, the ECB's attempt to force Cyprus to adopt capital controls is a hugely misguided endeavour, for it *too* violates this fundamental premise

- The Target 2 system was designed to prevent Balance of Payments crises between member states, not for the purpose of economic war. ECB threats to cut the Cypriot Central Bank off from its window (don't buy the ECB/German rhetoric: it's the Cypriot Central Bank that is being cut off here, not the domestic banks, given it intermediates the Target 2 balance & ELA facility to the domestic banks), & similarly the possibility of Cyprus defaulting on its Target 2 balances have turned a payments system designed to prevent crisis into the economic equivalent of a Nuclear strike. Political interference (and TMM would include the German contingent of the ECB here) should never have been allowed to interfere with this system.

- By just announcing that deposits could be haircut, the Troika have unleashed very powerful forces that will inevitably result in the deposit base of Cyprus' banks evaporating via capital flight. This, by definition, will cause a collapse in the money supply & a deep recession.

- TMM's men on the ground in Cyprus report that today, the economy has, unsurprisingly, primarily become a "cash only" economy.

- Imposing limits on cash withdrawals, online payments etc simply results in *a collapse of the velocity of money*. The economic effect is likely to be the same as if the money supply collapsed via deposit flight. MV = PQ = GDP. Cyprus's economy is being hit by an unforced policy error of the type usually seen in chaotic EM crises.

- The policy of limiting cash withdrawals was tried in December 2001 in Argentina - known as the Corralito. It failed spectacularly - within a couple of weeks. Riots eventually forced the President to flee as economic transactions became virtually impossible. Default & devaluation quickly followed.

- Cyprus is thus in the early stages of experiencing what it would do were it to leave the Euro: (i) a household liquidity crisis, (ii) a paralysed financial system, (iii) a collapse in monetary velocity, (iv) a large loss of national wealth, (v) capital controls, (vi) shortages of imported basic goods [trade credit for Cyprus now non-existent], and (vii) an exceptionally deep recession.

- The "Alternative" that the Cypriot government (with the encouragement of the ECB) is to impose Capital Controls & deposit withdrawal limits. Under Article 63 of the Treaty, these are illegal. There is, of course, a clause that allows governments to do this with a "macro prudential" remit. However, TMM totally call "horse sh1t" on the idea that such measures are "prudential", and given that they have been made up in a very short amount of time before properly thinking them through, imagine that a Court may well agree that an injunction be imposed until policy has been properly considered, instead of rushing into potentially damaging actions.

- TMM are opinion that imposing capital controls drastically increases the probability of Cyprus exiting the Euro.

- This state of affairs, TMM believe, is entirely unsustainable. Given the drastic recession that is about to occur, government debt will blow out again, requiring a further bailout in 6months. Germany has declared that there will be no more money. Cyprus would then have to leave the Euro *anyway*.

- TMM used to have a German boss many years ago who once described German foreign policy as such : "You throw in a hand grenade, wait for the dust to settle and walk straight through. Don't even bother counting the bodies". They appear to be sticking to their rule book. But then, what else would you expect from Germany?

- TMM think that the Rest of World is numbed to Euroblx and is happy using the "just muddle through" model to trade on, having been severely roasted last year expecting the opposite.

- TMM think this creates a more dangerous environment for markets as complacency levels with respect to Europe are at levels not seen for some time.

TMM's Radical Plan for Cyprus

noreply@blogger.com (cpmppi) — Tue, 19 Mar 2013 11:06:00 +0000

TMM continue to be staggered by just how confused the Eurogroup policy response has been, with the Germans et al running away from the deposit levy on small depositors at an Usain Bolt-like pace. Last night's statement in particular smacked of the imperialist European leadership tampering with the evidence. TMM still cannot fathom how the Troika could not see that such a policy move would go down so badly both in Cyprus and internationally - even the German press utterly slated the deal. Another case of the Germans refusing to listen to anyone - TMM have personal experience in dealing with German Finance Ministry officials, to whom the term "arrogant" simply cannot do justice to their intransigence nor their complete inability to understand that there is no magic source of exogenous demand that will fill the gaps left by their nuclear winter-like economic prescriptions.

If the newly-elected Cypriot government were not clearly so inexperienced & naive, TMM could almost imagine that they have played the politics of this blindingly, by supposedly applying the tax to small savers, the Germans have been saddled with the blame. It is hard to imagine the political outrage being so vehement had the tax only applied to uninsured depositors, and no amount of finger pointing or insisting "it wasn't us" is likely to undo this.

But whatever. We are here now, and given the cries from both the Troika & various commentators pointing out that you can't solve a debt crisis without hitting creditors, TMM thought they'd have their own go at formulating a crisis resolution plan for Cyprus.

In the light of the EU using the explicit threat of Euro exit, and seemingly this threat not being a bluff - indeed threatening to cut off ELA access is akin to forcing Cyprus out of the Euro - TMM are going to invoke a strategy that they believe would be advocated by the great Paul Nitze who helped formulate Cold War policy. And this is to respond in a similar radical way, gradually increasing the stakes. So here goes:

Cyprus needs EUR 17.5bn - 10bn for the banks, 6bn for debt rollovers & 1bn for deficit financing. The EU/IMF will supply 10bn, but for the moment, we are going to assume they will supply nothing, as TMM believe that their plan will go down like a cup of cold sick in Brussels & Frankfurt. But hey, shit happens, and they went nuclear on Cyprus - you reap what you sow...

TMM are going to draw on a two bank restructurings that have taken place since 2008: the first, Wachovia, where creditors of the holding company were hung out to dry as Wachovia Bank was seized & given to JPM. The second, Bradford & Bingley, where the deposits of the bank were sold to Santander & the "bad" part of the bank nationalised by the British government. The reason TMM bring these two restructurings up, is that we believe that Cyprus can do something similar. And before you say "Ah... but the only creditors are depositors", this isn't entirely so: Cypriot banks have accessed the ECB's ELA to the tune of about EUR 9.2bn.

So TMM propose the Cypriot Government do the following - they'll have to do it very quickly to avoid the ECB panicking and pulling back the ELA cash lent against dodgy collateral. Once done, the ECB will not be able to do anything about it.

Transfer all bank deposits & unencumbered assets from the existing Cypriot banks to new bank holding companies: e.g. Cyprus Phoenix Bank. This should include the transfer of IT infrastructure, the branch network & any tangible assets like real estate (e.g. the banks' HQs).
Let the old banks go bankrupt, leaving the ECB with EUR 9bn of losses and wiping out both the subordinated & senior bondholders (EUR 1.75bn).
These new banks are now adequately capitalised & under EU law, the ECB will not be able to prevent their participation in Target 2 via the Central Bank of Cyprus. The ECB may well kick & scream, but there will be nothing they can do about it.
Domestic Bills/Bonds haircut by 80% for non-Cypriot banks. Although their non-bank ownership is small, every little helps, & using JPM's ownership estimates, this would produce ~EUR 820m.
The international bonds under UK (with a 75% CAC hurdle) are certainly tough to PSI, but let's all be realistic, there's no money left & government debt is at astronomically large amounts of GDP. TMM believe that Cyprus will be more successful than market punters reckon in restructuring this debt. And of course, they can also just unilaterally default on the debt. Again, an 80% haircut here sounds realistic, producing EUR 3.04bn.
Adding the Gas reserve privatisation (which JPM estimate at EUR 4.2bn), TMM have found EUR 18.9bn.
Cyprus could also, of course negotiate with the Russians to restructure the EUR 2.5bn loan, and if they are able to get say 20% NPV reduction on this, they could make the terms on the international bond restructuring less-onerous.

So there you have it: EUR 18.9bn without recourse to the Troika.

This approach also reduces the extremely negative economic effect that an upfront wealth shock imposes upon consumption, and also will to some degree reduce the ballcrenching tightening of monetary conditions as Cyprus' deposit base flees the country. Many have pointed out that inflation (e.g. in the UK) has the same net effect in terms of imposing costs on creditors, but this is not entirely true: moderate inflation & negative real rates as seen in the UK smooth the deleveraging process so that monetary conditions remain loose and the negative wealth effect is more gradual. The Troika's proposal for Cyprus does the complete opposite as it will ensure extremely tight monetary policy as the money supply evaporates, and provide a large one of hit to consumption via the wealth effect. In TMM's view this will merely result in Cyprus' recession becoming much deeper and its debt level blowing out once more to the point of needing a second bail out programme. Once again, this is the result of the Germans' inability to understand that there is no magical source of exogenous demand.

Cyprus Again

noreply@blogger.com (Nemo Incognito) — Mon, 18 Mar 2013 11:38:00 +0000

TMM continue to be staggered by the ineptitude of the Eurocrats' response to the Cyprus issue. Haircutting deposits is not something to be done lightly and making a mockery of deposit insurance is really, really dumb . I mean, that's what central banks are meant to do, amongst other things, right? TMM understand the tempation to give a "number three back and sides" to a lot of fairly iffy Russian cash but, once again it has to be impressed on Germany that crises are a lot more "Run Lola Run" or "The Great Escape" than "Faust": the point is to get out with minimum collateral damage first and mete out punishments and lessons in morality second and hope you can regulate them out of existence afterwards.

There has been a lot of ink, bits and bytes spent on this already so TMM are going to comfort themselves with some online shopping and hope that the Cypriots at the bare minimum manage to not make deposit insurance worthless.

We have recently discovered one can make custom dart boards at Zazzle, what do you think?

The Cyprus Conspiracy II

noreply@blogger.com (cpmppi) — Sat, 16 Mar 2013 18:53:00 +0000

The title of this post comes from an excellent book TMM would recommend to anyone interested in the rather large historical geopolitical importance of the tiny island of Cyprus. And in TMM's minds, this morning's announcement from the Troika merits a new chapter for this book. For once again, the people of Cyprus have been truly stitched up by foreign powers. TMM issue a passionate plea to the government & peoples of Cyprus to "JUST SAY NO" to this utterly idiotic, stupid idea of haircutting depositors between 6.75% & 9.9% of their money.

TMM believe that this is the worst policy action that European policymakers have come up with to date in this crisis. It simply must be stopped before the upfront wealth hit exacerbates Cyprus' already severe recession as households slash spending in order to repair the hit to their balance sheets (colloquially known as "theft") from this action.

Whenever this policy has been attempted (in Asia in 1997/8, and in Germany in 1919-25) is has failed, either by eventually not being implemented (in the former case), or in total economic catastrophe (in the latter). TMM do not believe the example of the early/mid-1990s in Italy counts here, as it was both negligible (at just 0.6%) and also accompanied by a large devaluation which cushioned the blow and restored competiveness. This is clearly not the case for Cyprus: it is taking the upfront wealth hit that a devaluation would incur, but not gaining any competitiveness as exports become cheaper. This is a clear economic failing in this plan, and will merely result in more of the same as the recession deepens, forcing government debt higher. Reportedly, the Cypriot team were forced into this as the IMF & Germany threatened a haircut of 40%, as would occur in a Euro exit. TMM don't believe this threat: the Troika know just as well as the rest of us that a Euro exit of ANY country brings the Euro down through contagion.

This also fails to consider that many Cypriots have external assets as well, which would provide some cushion in a Euro exit (though TMM are not advocating such a drastic action). TMM believe that Cyprus is about to experience capital flight of a degree not seen by a country since the Emerging Markets crises of the 1990s. The confiscated portion of deposits is being frozen, but now there is no reason why households would wish to hold very much capital in the country - if they can steal from you once, they can steal from you again. And one thing TMM has learned over the years is that you *cannot stop domestic currency outflows*. The Troika have just shouted "FIRE!" in a crowded room: money held in Eurozone banks is not safe, even if it is below the insured limit (more on this below).

Now, onto the implications of this policy action, which TMM believe are far reaching. The Europeans are obviously using the old "this is a one off" line, and a precedent is not being set, but the market, media and population are getting more used to this now. The general approach is to make the borrowers pay in order that French & German banks don't have to take losses. In this respect, TMM cannot understand why bank bondholders have not been restructured. This position is not sustainable, and TMM believe the Cypriot parliament will force this (again, more below). This is a clear repudiation of the legal precedent for creditor hierarchy: *insured deposits sit at the top of the creditor structure* (with only employee salaries & a couple of other minor things higher). The Troika have unilaterally torn up the rule book on this. While attempting to label this as a "tax", it is a clear manipulation of the law, and TMM expect lawsuits both against the banks & government, as well as in the European Court of Human Rights.

More importantly, *de facto, there is no longer a deposit protection scheme in the Eurozone*. This, in TMM's view, will lead the capital flight out of Cyprus to spill-over as contagion to the rest of the iPIGS, with nervous households seeing the news from Cyprus that their money is *NOT* safe in a Eurozone bank. The Troikia & government are trying to put a spin on the move that the money will be exchanged for bank equity, but this just seems to us like smoke & mirrors to try and make this look less like theft- Cypriot bank equity is worthless given its deposit base is about to leave the country.

One idea TMM have had is whether the depositors (as senior creditors of Cyprus' banks) can form a creditor committee to seize the banks (which are demonstrably insolvent) and put them into administration. Such a move would provide protection under bankruptcy law for the banks' assets (including from the tax authorities), and may well result in a greater return to depositors than under the haircut scenario.

TMM strongly urge Cyprus to say "NO!" to the Troika. This is a truly awful deal that will merely serve to seriously exacerbate the recession, spark massive capital flight from Cyprus & probably spark contagion elsewhere in the Eurozone. Of course there are losses that have to be taken, and a tab to be paid. But this is NOT the way to do it.

TMM believe Cyprus instead should default on its external debt, place its banks in administration (and threaten to restructure their repurchase agreements with the ECB unless the Troika ease off), negotiate a loan extension/reduction with the Russian. Or at least go back to the Troika and threaten to the above. The solution the Troika have imposed entails a good portion of the pain that a Euro exit would involve, but without the positive impact a devaluation would provide in terms of competitiveness gains. Given the circumstances, radical actions are required. Cyprus should not allow the Troika to impose a reparation-like punishment on its citizens for the crime of its banks (with the reported encouragement of the Central Bank of Cyprus [i.e. - the ECB]) in buying Greek Government Bonds. Given depositors in Cyprus have not exactly been able to move their deposits to foreign banks over the past 8 years (lack of banking competition), it is hardly fair to argue that depositors, as lenders to Cyprus' banks, should have known better. So much for consumer protection and in particular the insured deposit limit. The fact that this is occuring without bank bondholders being hit is a complete affront to the rule of creditor preference in law and a CLEAR example of the Germans & French applying one law for themselves and another one for everyone else.

The clear conclusions to TMM are that the Troika have gone too far, and Eurozone deposit insurance is now worthless. The Troika have let the cat out of the bag, and TMM do not think it likely that this will eventually be implemented as it is likely to result in protests, serious rioting, and possible assassinations (given the alleged involvement of the Russian mafia). The market reaction to this is likely to be rather bad.
[TMM apologise for ranting.]

A Beer on Merve

noreply@blogger.com (Polemic) — Fri, 15 Mar 2013 13:09:00 +0000

Merve the Swerve says something and the market decides to listen - this time. As we know, the market should have given up listening to Merve months ago and so really should ignore his last pompous departure monologues. But his comments appear to have landed on a market as short as GBP as they are confident that Jpy will fall. Which is quite a lot.

The resultant move in GBP has therefore solicited cries of "squeeze" rather than a volte-face. But considering that the original move down is based on expectation of a volte-face on BoE policy then any volte-face on the volte-face should be considered as a double volte-face which, like a double negative, is a nothing. Dales comments this morning are hardly supportive of a new regime

BANK OF ENGLAND'S DALE SAYS TALK THAT CENTRAL BANKS SHOULD FOCUS MORE ON GROWTH IS "DANGEROUS"

BOE'S DALE SEES "CONSIDERABLE FLEXIBILITY" IN CURRENT INFLATION TARGETING REGIME TO SUPPORT OUTPUT, JOBS

BOE'S DALE - UNCLEAR THAT BOE COULD SIGNIFICANTLY BOOST ECONOMIC GROWTH WITHOUT GENERATING INFLATION

So perhaps the original premise of GBP going yennish, so beloved by 5 minute macro, is indeed seeing a classic squeeze. Playing cable on long term arguments is fine if you have deep pockets, but to paraphrase a "bearish website", "In a long enough time frame volatility on Cable moves to zero". Ok that isn't quite right but some members of TMM have been around for a while and mentally map cable as "1.70 plus or minus a bit". Considering all the momentous events that have occurred globally and selectively to the US and UK over the past 25 years cable really is a mean reversion specialist.

So much for "trending to the outright forward" so beloved by various FX models.

The real widow maker in the short GBP basket has been Eur/GBP which has gone nowhere since the start of Feb when the mood of GBP bearishness really got underway. Which just highlights how messy Euro is in its own quiet way.

In general FX is in squeeze mode within a pretty dull background (if you strip out gbp and jpy) and we remain short of AUD/USD and AUD/ZAR re. the post of couple of days ago. Though we have been accused of complicating the AUD trade by using ZAR as a counter, considering the whiplash in USD over the past few days, we suggest that using ZAR instead of USD in this environment may have actually have simplified it. And added some carry. ,

We are going to be away for a few days sliding down Alpine hills so will probably not be back until the end of next week. But this reminds us:- The TMM holiday FX indicator. "GBP will always base the moment we make our last purchase on a foreign holiday". For once we may have to thank Merve for something. A free beer.

The Fat Cat and the Mousewife

noreply@blogger.com (Polemic) — Thu, 14 Mar 2013 15:07:00 +0000

There is a great interrelationship of dependence in the markets that can see supposedly opposing interests living contently together in forms of symbiotic relationship. US debt and who owns it comes to mind. We can also see this symbiosis between politicians and business, the Fed and financial markets and even the interrelationship between the rich and the poor. This cold war detente can also be seen closer to home in personal relationships. So we have written a little allegorical poem and leave you to decide who the cat and the mouse are in real life as we think there are too many to pick from.

The Fat Cat and the Mousewife

Cat leaves at dawn to earn the crust,
Mouse stays behind to clean the dust
And cook the food and mend what's bust
A life of toil but, hey, needs must.

But once Cat leaves this mouse will play
Cat's out at work for all the day
So that's the time for making hay
But once Cat's back this mouse will say

"I toiled so hard, today was tough,
Look, nails broke and palms so rough
Yet I can never do enough
To clean and mend and all that stuff."

But once he's out, she'll say "lets see.
Tour the shops, take café tea?
Or lunch with friends down by the sea?"
But once Cat's home her tale will be

"Oh my life you would not choose.
Left alone to clean the loos
Who'd want to wear my weary shoes"
(Even if they're Jimmy Choos)

Yet unbeknownst to Mouse, Cat knows
He has to pay the bills she owes.
But 'tis small price for all her woes
And hide the places that HE goes

For Cat's not fat without a reason
Wines "clients" late, dines dams in season.
All adds to life a certain frisson.
But if found out he'd hang for treason.

But here's the twist, Mouse also knows
The texts, the lipstick on his clothes
The scents on shirts, the pantyhose
But Cat and Mouse are old, old pros.

Neither dare upset the cart.
And wreck the lives they know by heart
Easier that than brand new start.
So Cat and Mouse will NEVER part.

Today's the Day the Pandas ate the Picnic.

noreply@blogger.com (Polemic) — Wed, 13 Mar 2013 09:29:00 +0000

TMM have noted the markedly weak performance of HSCEI and HSI recently ( HSI threatening the 100 day moving average which has been pretty good support/resistance over the last 2 years) following fairly indifferent macro data showing that not a lot has changed - retail sales are soft, CPI is trending higher and as usual it seems to all be funded by a very large expansion of wealth management products. The market is not impressed and not without good reason.

TMM have also noted that more high frequency data on power production from www.serc.gov.cn has also shown very weak power demand growth which is generally associated with weaker steel, cement and metals output. TMM don't expect the situation to improve and while betting on iron falling is pricey given the curve, it has not stopped people selling down metals and miners.

Now, while much of this is more the concerns of Australia, China and mining companies, it should be remembered that a lot of S+P earnings come out of China - enough so that comments like this from the March Beige Book gave us pause: "A contact that supplies material for filtration says the global picture is difficult to pin down because Chinese New Year and the seasonal Christmas shutdowns in Europe made year-on-year comparison particularly difficult in recent months. Finally, several respondents expressed uncertainty regarding China, with one saying that some of his Chinese customers reported dramatic reductions in sales, inconsistent with government statistics."

To that end, TMM are not that shocked at how certain parts of the S+P with large shares of non-domestic sales are having a tough time in a torrid rally - look at autos or caterpillar for example. TMM think that when putting on the "USA OK!" trade, a little more thought should be done before filling your boots with E-minis.

Going back to China, TMM think that China's seeming preference for controlling inflation is going to make this year a tough one for equity investors as liquidity gets scaled back to avoid another inflationary pulse. The more interesting trades are likely to be in markets where relative input price stability may make it possible to conduct deregulation and much needed reforms, most notably in petroleum products and energy, and ultimately more financial liberalization.

Back to liquid macro however, TMM think the recent strength in AUD in the face of this says a great deal about how much faith the market has in US activity's ability carry the world with it. We aren't so sure and especially not in Australia. TMM think that given the slew of rubbish earnings and outlooks from engineering companies and mining services companies in Australia that capex is coming off fast and that the RBA is unlikely to be a long way behind the curve.

So TMM are looking to short AUD on this bounce, but are very aware that short AUS has been a back pocket trade for the macro world for a while now. Whilst "long term investors" and rate differential players are squeezing some of those positions out in the short term, short Aud/usd spec positions still persist. So we may expand our Aud short thoughts beyond just usd and look for a counter that has great technicals - so why not ZAR? TMM are still of their "Township of the Damned" opinion on the country (and may we say - we nailed it) with its expanding current account and worsening terms of trade but, it has become a consensus now to the point of yennishness and is very crowded. The technical picture is also supportive with a very nice soothsayer signal in aud/zar suggesting now is a good time to counter the trend. We do, however, understand the risk of getting our comeuppance (Egyptian Pound longs style) for being contrary for the sake of being contrary but we think there is enough macro behind the China story to trigger a return to stronger old fashioned correlations in the markets and a wash out of some complacent positions.

Or in basic English .. "YOURS"

Finally, is it just our behavioural biases that are making us think that this week in March is particularly sensitive to turns or is there really something to it?

Rate Traps and Mortgage Twists.

noreply@blogger.com (Polemic) — Thu, 07 Mar 2013 22:51:00 +0000

After a day of no BoEase and a lot of ECBlah, TMM are distracting themselves from a market creep they are not aboard by thinking about the "QE-forever" talk that has never been that far away and about some of its longer term implications.

Now, obviously QE should affect everything denominated in fiat currency and TMM can wax lyrical about how if you define the word ‘help’ in a certain way, QE was the best invention since keyrings. But for brevity’s sake, today TMM will focus on the asset that has the largest impact on consumer behavior – housing. Due to data availability, we will just be look at housing in the US, although arguably the conclusions can be generalised.

Clearly, by driving down mortgage rates, QE has been enormously helpful for consumer spending. But just how helpful? Well, as of December, the US national average interest rate for existing mortgages was 4.87%, 10% lower than only 2 years ago and a full 17% lower than 2008 levels. If we take the same weightings as the BLS, who apply a 24% weight on primary residence costs in its CPI basket, we could deduce that the 17% drop in effective rates is an implied 4% bump in disposable income, or roughly 1% per year, before wealth effects are taken into account.

The impact on apparent housing affordability has been no less dramatic. The median US household income as of 2011 was ~$50,000, a level which has been broadly stable for the past 5 years. At the end of 2010, with mortgage rates at 5%, the average US household was able to afford a $301,000 house based on debt to income limitations on conventional mortgages. At the end of 2012, with mortgage rates at 3.5% and with income unchanged, the average family is able to afford a $360,000 house, a 20% increase. In other words, the decrease in mortgage rates has increased the maximum allowable home price to income ratio from 6.0 to 7.2. What’s not to like?

This, of course, is all part of the central bank master plan. By lowering real interest rates, the private sector will take on more debt, spend more, and prosperity can reign. Indeed this seems to be happening and with declining debt payments, US households appear to be re-levering and after a sharp drop, US house prices have started to tick up again relative to incomes:

But wait, there is more good news. Given that rates for new mortgages are still more than 25% below the average for existing mortgages, there is still a substantial easing in store. A continuation of recent trends would result in a further 50bp decline in existing mortgage rates over the next 2 years, (about 10% cheaper).

Now you may ask why TMM is concerned with all this good news (not that we don't like good news). The answer is embedded in the chart above. Note that the US has never survived an instance in the last 14 years where new mortgage rates exceed existing mortgage rates without the economy tipping into a recession. And that makes sense. Without increases in real income, mortgage rates which are no longer supportive to house prices ultimately result in declining expenditures. In other words, and this is the worrying implication, without income growth there is an interest rate at which the US will tip into a recession. And that rate is declining, even as the private sector re-leverages. In 2 year’s time, that rate will probably be ~4.5% for fixed rate mortgages. If mortgage to treasury spreads stay constant at ~150bps, that would imply a 3% recessionary ceiling for 10y treasury yields.

However, going further back in history we can see that there is one clear exception to this crossover rule. The 1994 bond collapse, where the swift and severe bond market fall had to be swiftly countered by Fed policy response to successfully contain economic fallout.

However today's proximity to the zero bound in both Fed rates and mortgage rates themselves sees there being no room to manoeuvre with either input other than with more QE. QE has been described by various prognosticators as a drug. On this basis TMM find it hard to disagree.

Now here is another little twist we have spotted. In addition to the fact that declining interest rates encourage leverage, they also act as a price for intergenerational wealth transfer. Huh? Well, new home buyers tend to be predominantly young families, while sellers tend to be retirees. As lower interest rates increase the present value of housing prices, new buyers increase leverage to purchase homes, and they take on a larger debts to do so.

Lower interest rates have helped delay the need to restructure social security and medicare, thereby allowing their funded status to worsen. As those programs are essentially inter-generational transfer vehicles, their worsening financials have been described as akin to the elderly stealing from the young. TMM would like to point out that artificially low mortgage rates do the same thing.

"One might argue that letting future generations bear the burden of population aging is appropriate, as they will likely be richer than we are even taking that burden into account." - Benjamin Bernanke, 2006

Grumpy Old Git Footnote- TMM can't really see what the problem is with the older generation having the wealth anyway. All the young have to do is wait a couple of years and they'll just inherit it, which is not an option if it were the other way around. And anyway, wealth is hardly something that hasn't been poured by the bucketload down the intergenerational divide at chez TMM to sustain the next generation's media hyped beliefs of normality. TMM have found that most things they have given their kids have either been broken or lost, so best we only let them have our possessions once we have finished with them!

It's How You Tell 'Em

noreply@blogger.com (Polemic) — Wed, 27 Feb 2013 23:24:00 +0000

TMM had another bout of road rage this morning. Fortunately the cause and target of the rage wasn't another road user, rather the quality of news reportage emanating from their car radio on the way to work. Don't worry, TMM are calm level headed rational beings who are not inclined to go "Falling Down" on you, but the last 36 hours exposure to mainstream reporting got us pretty close. TMM's poor car radio is beginning to resemble an old dog toy having been bombarded and cratered with any loose object to be found in the door pocket.

We weren't in the best of moods to start with, having endured a day of "Europe is Doomed" being boomed at us from every Orwellian speaker lodged in our hi-tech lives. This was followed on return home by a Channel 4 News story of 17 year olds falling down a legal loophole in UK police stations. A very valid subject and one that needs to be discussed, but preferably discussed by experts. We say experts, because radio and TV news programs have developed the appalling habit of interviewing victims (or the relatives of victims if the victims are deceased) as if they were the experts.

Whilst we understand that victims have certainly experienced the consequences of whatever they have suffered they are rarely expert into the causes (just as if TMM wander into the road after a beer and get hit by a bus it doesn't make us experts in bus mechanics, rubber friction coefficients, traffic law or alcohol/neurone transmission mechanisms). Unsurprisingly such an interview results in an emotion laden, one sided tragedy with little true insight to the issues. But then it gets worse, having used psychological anchoring to pin the listener or viewer to this base norm of expertise, the journalist will then most likely swing to a higher authority on the issue, normally with great gravitas. However, far from being an expert, this is just another journalist, introduced as "our legal/business/foreign correspondent" or some such.

TMM are opined that journalists are there to report, not give opinion as their opinion on non-journalistic issues is of as much or little importance as any other non-expert.

Financial punditry has been full of it too. The BBC have elevated (up their own elevator of self-promotion) the likes of journalist Robert Peston to "financial guru" and their economics editor, journalist Stephanie Flanders, to "Keansian" level. CNBC is also clearly full of anchors quizzing sub reporters and interviewing their own anchors to pad out the usual faces of punditry.

This evening we got around to searching to see if anyone else has remarked on this annoying trend and unsurprisingly found we aren't alone, and found much better analysis of what we are talking about. Interestingly we found this post by blogger George Snell makes the point very well, after he originally commented on the issue here, where he mentions the dangers of the Echo Chamber, "where journalists simply rely on each other for perspectives on the news. The insular mentality of “It must be true because I heard it from another journalist.”"

David Donovan, goes further here citing cases in Australia and points to the high frequency of journalists appearing on Q+A sessions and even analyses journalist's twitter profiles concluding that "Australia’s haughty "hackus majesticus" (with a few exceptions) typically only follow other members of the same, or similar, species."

So why is TMM veering away from markets into the state of journalism? Well because we feel that this style of reporting not only annoys us immensely, it is undermining information quality not only of main stream press but also in markets. We all know how fast a piece of information can go around a market (especially in todays "cut and paste" world) and we also know that each participant in the market, certainly on the sell side, will look for any form of corroboration of a news item, idea or interpretation of a news item before sending it on, reinforced, down the next wire.

Bloomberg and Reuters headlines are never challenged and whilst they stay just facts or quotes all well and good. But the problem creeps in when a market moves and a reason is required. As any journalist, analyst or sell side sales jockey knows, when asked why something has happened a reason has to be found, even if the most apt answer is "I dunno". Of course most market moves are basically down to "some one/people sold/bought a large amount of it" from there on it's normally a guess as to why they did that. Any sensible player in the market that has just sold or bought a large amount will actually be wanting both his actions and his motives kept as quiet as possible so will be reluctant to shed light on the issue. But the game of hunt is on and correlation is the usual weapon employed.

This example of journo-escalation is of course completely fictitious and bears no resemblance to reality or real characters.

Harry Hedge-Fund - "Close my gold short out, I'm off skiing and cant be bothered to watch it".

Soon on US Financial TV -

Rick Spleen - "Gold has seen a big rally today, let's hear from our correspondent Jeff on the floor (note being on the floor implies he works on the floor - wrong) - Hi Jeff I see that gold has gone up today. What's moved it?"

Jeff Epiglotis - Hi Rick yes, stocks fell in europe as the dollar fell as NFP printed low as the sun rose in the east and gold is up. But let's hear more from our economics correspondent, Scott?

Scott Tibia - Hi yes I agree with Jeff, European stocks fell and so gold went up. Here is a graph.

Rick Spleen - So there you have it. Everyone we have spoken to tells us that gold went up because of European concerns.

Next morning on UK's BBC Radio 4 Today program -
John H - Gold has risen overnight, a traditional measure of confidence in governments. Does this reflect on the UK government's economic policy? Lets hear from our own Robert P.

Robert P - Weeeell, It looks as though gold, a traditional indicator of financial stress, has risen overnight in the US and our contacts there tell us it's due to concerns over Europe where the Italian elections are in turmoil with a rise in the popularity of anti-government parties. Which could be considered similar to the rise of UKIP in the UK. But let's hear from our economics editor Stephanie

Stephanie - Yes it's true that UKIP has garnered a greater share of the vote in the UK implying government policy is receiving a resounding vote of no confidence. Gold prices traditionally reflect confidence in both governments and the value of their money, which of course is currently being devalued in the UK through QE. The rally in the gold price is therefore consistent with markets losing faith in Osborne's policies and in the government's current economic policy of cuts and austerity.

And from there on the self-feeding frenzy of speculation/fact conversion picks up with the press quoting the BBC and then sell side cut and pasting these press links on to buy side. "Facts" have grown to fit any particular view without one "expert" being involved.

It is at this point that TMM's car radio receives another packet of mints in the tuner.

* Foot note , they've just done it again - Radio 4 - Rocket launcher found in Northern ireland - Interview with random folk in street "its terrible", followed by an expert - the Sunday Times Security correspondent.