Macro Man

Non-Predictions for 2012 -Random

noreply@blogger.com (Polemic) — Wed, 25 Jan 2012 11:52:00 +0000

But first the markets - Someone threw an Apple into the works last night that delayed our expected roll over, but it looks as though it is underway and having had that failed test higher we are more confident of our call. As for Apple (So THAT's where all the QE ended up) TMM are still amazed at the awe within which its results are held. Imagine the outcry if that was a bank, BP or your local utility company - Vince Cable and his baying mob would explode in a cloud of hyperbole.

But as nothing else has changed. We are still pretty bored but will fill in with some more non-predictions for 2012 . Here are the random ones

Ed Miliband will NOT be leader of the UK Labour party by the end of the year. A rollover bet. the theme of him being pretty useless has not changed but Blair's changes to leader selection during his term has made it pretty hard to push incumbents but we think the pressure will increase for him to go.. Interestingly it was the BBC and Guardian who were the ones earlier this week shouting most about the increasing Tory lead. TMM might be over suspicious but perhaps they are embarking upon a push for change.

And talking of the BBC, they will NOT stop linking any injustice anywhere in the world to UK Government spending cuts and they will NOT stop generalising anyone working in a bank as evil but will manage NOT to generalise all journalists as phone tapping, family destroying, moral bankrupts.

Consultants will NOT find life easy. Shareholder backlash to senior management pay will NOT leave middle management untouched. A crackdown in inefficiency will lead to more focus on the production of the final product and less spent on the luxuries of "corporate awareness" and all the associated "consultants". And as for financial Head Hunters ..

However IT and HR departments will NOT lose any of the control they have over the business lines they are meant to serve. Their cancer is too far progressed to cure.

Obama will NOT lose the US elections. Whilst massive amounts of airtime are being poured into the upcoming US elections TMM really aren't that bothered. OK, if the Republicans get in they will most probably tighten fiscal policy and so growth would be lower but with Romney's tax rate at 15% and Gingrich's general divisiveness we think it very unlikely that either make it the whole way. In general TMM feel that politicians globally are losing their grip as opinion formers and are having to scrabble more and more to catch up with populous opinions forming and swelling through social media rather than main stream press. Whoever gets in as US president will be subject to the same under-pressures and unlikely to be able to drive their own agendas much further than out of the garage.

The Olympics in London will NOT be the disaster many expect yet during them manned flight to Mars will NOT be harder than getting to Canary Wharf. However the Olympic tradition of the host nation losing money on the whole event will NOT be broken.

Greece will NOT stop taking the piss with pricing in tourist restaurants. As shown by their inability to change their macro economy there is little chance of micro Greek economic theory changing.

Kate Middleton, Duchess of Cambridge will NOT announce that she is expecting a baby. Sentiment indices are far too high on this.

The Mayan predicated end of the world will NOT occur in 2012. - TMM are offering believers immediate delivery of ayuverdic tea and Himalayan pink salt lamps against Dec 22nd delivery of all their worldly goods (excepting their tea, lamps, wind chimes, tin foil beanies and Peruvian woolly hats)

Technical Turn Tuesday

noreply@blogger.com (Polemic) — Tue, 24 Jan 2012 11:47:00 +0000

We have that nagging gut feeling again. Ok, the data continues its trend of "better than expected" surprises with the Euro PMIs but there are factors appearing that leave our post of yesterday of a generalist "it drifts higher" ramble in need of a tweak. Our concerns aren't linked to news flow or the usual developments in Greece, Iran or whatever bad twist the blogosphere has dug up about imminent disaster (we see Barclays has started looking at Skyscraper building as the next portent of doom, especially for China), but the butterflies we feel in the stomach are as follows:

1) The last few days have seen a rush of more spivvy "get me in" euphoria. Nice start to our bigger-bullish view, but nothing goes in a straight line and this phase may be over.

2) The technicals. Soothsayer signals (see glossary) abound with turn signals in the Dow, EuroStoxx and various European index components (DAX, MIB, CAC) and noticeably in a raft of AUD crosses with their normal equity correlations. The shape of most risk asset climbs have been getting thinner in sharp wedge like manners. Dojis spotted?

3) Recent highs in many equity indices means stops have been driven. Leading back to point 1).

4) It's Tuesday. We like Tuesdays for turns. As the run has been up then the turn should be down.

5) Momentum change leads to model driven accounts changing direction and we still think that January has seen the models dominate market moves more than usual as "real" players have mostly sat on their hands and core beliefs unless been forced otherwise. Spivs excepted.

Now the above are hardly Macro and it's not easy when the Heart says buy yet the Gut says sell, but the above are worrying enough to make us want to get out of shorter term longs and take a breather. So despite us remaining general bulls we are going to tune positions and prepare for a shorter term down swing to allow us to re-accumulate longs before (we hope) resuming the grind higher.

Can you feel it?

noreply@blogger.com (Polemic) — Mon, 23 Jan 2012 15:29:00 +0000

TMM have been away last week skiing in the Italian Alps. Wow, what a surprise re prices! A coffee up the mountain is cheaper than in a provincial UK town. Yes, cheaper. The snow was great, the sun was shining, the resort was pretty, deserted and delightful, the locals were friendly and accomodating leaving us feeling that it's time to leave the French and Swiss mega-resorts to the Russians. Austria, however, will always have a place in our hearts due to its apres-ski madness. (By the way, US readers, which is the best US resort for apres-Ski? We have struggled to find any in the few resorts we have tried)

Returning to the markets, the last week hasn't really seen any game changing news, just the continued ingress of "better than expected" data dripping on to the fire of bearishness. It appears to be working in extinguishing some of the flames and we have returned to find some of our favorite permabears now wondering what new news they are missing to explain prices being higher. We'd like to suggest,- "What you were missing in the first place". Prices don't have to keep falling on old news. Change is what counts and the change is in the background data vs expectations.

In the immortal words of the Jackson Five -

If you look around
The whole world's coming together now
yeah..
Can you feel it, can you feel it, can you feel it? (da daa daa dada)

Well maybe the whole world isn't coming together quite like that but the bears are finding it hard to extract value out of their well chewed bear food, unlike the bulls who, as ruminants, find it easier to extract value from regurgitated low quality good news.

Our problem is that we are find it pretty difficult to get excited by anything at the moment. Our long term views remain intact ( as per our slowly apperaing non-predictions for 2012) but short term influences still leave us pretty unexcited. So we are happy to play the upward drift of all things risk, hopefully accelerating thru old highs, until the next tape bomb. But to be honest immunity to tape bombs feels pretty high and it will have to be something pretty nuclear to knock things lower again.

So we hope the "risk on" grind will continue, even if it is doing more damage to some of our hedges than Edward Scissor-Hands on speed.

Knowing what to write apart from "s'goin up innit" is pretty hard, so we'll leave it at that.

Non-Predictions 2012 - Commodities

noreply@blogger.com (cpmppi) — Thu, 19 Jan 2012 09:55:00 +0000

TMM note that with the rapidly changing policy mix in Europe from “suicidal” to “Die Hard”, making calls on commodities is first and foremost a question of how much QE there is: if the deflationary environment and crisis risk is kept at bay in Europe it isn’t as if things are going to be peachy in Europe but risk assets will run, not least of all because last time we saw this much of a policy response from November 2008 to March 2009 commodities ripped.

Now, TMM would note that if the US continues to recover with Europe at least stabilized and housing in particular continues to recover we could get to year end and be talking *gasp* rate rises and not just fiscal drag which just might turn the USD from a legally acceptable form of toilet paper to legally acceptable tender. So folks lets be honest: there’s commodity fundamentals and then there’s central banks that can do a lot to make fundamentals not matter in the slightest. So with that caveat (“all non predictions subject to global M3”) we present our Commodity Non-Predictions:

1) Platinum will NOT under-perform Silver.

TMM have covered platinum before – the macro context of the world’s largest producer here and the threat of electric vehicles to Platinum Group Metals seems to be handily suppressed which can mean only one thing – cost push inflation plus a demand recovery = this should go up. Now TMM can’t rule out Eurostupidity so we are going to offset this with Silver which is sitting at ~300%+ of cash costs unlike Platinum which is only about 50% above cash costs and which as previously discussed seems oversupplied if one discounts the tinfoil beanie brigade. Oh, and it’s a really pretty chart from the long term:

The shorter term:

And realises high teens vol versus the hi-ho silver 45% whipsaw show.

2) Copper Is NOT Going Anywhere.

TMM think that copper is in no man’s land. To wit:

expanding supply coming online end of 2012 and 2013 (-).
China committed to property controls (-).
While also loosening credit (+).
US building recovery being priced into equities (+).
But little follow through in OECD demand yet (-).

To that end we think copper is not going anywhere exciting this year, so buying OTM anything in copper seems rather unappealing to TMM.

3) Oil Vol Will NOT Disappoint.

TMM think Oil is the complete opposite of copper this year. In TMM's minds, there are three things that could happen this year, all of which mean Oil will move a lot:

Iran blows up, Oil goes to $150, global growth collapses.
ECB-driven reflation, more growth, demand sends Brent back to $120+.
ECB-driven deflation, double dip, $90 oil.

To that end while crude vols have ticket up somewhat they still look appealing at ~23% to TMM, right in the historical complacency zone.

And with that, TMM will try and motivate themselves to come up with some Equities & FX Non-Predictions.

TMM Asks You: The Future of Employment

noreply@blogger.com (Nemo Incognito) — Mon, 16 Jan 2012 15:15:00 +0000

Where are the jobs going to come from? TMM aren't sure Rifkin's idea of a new mittelstand of craftspeople makes sense particularly, but then they have to come from somewhere - the secular decline of jobs in Race Against the Machine makes it seem pretty dire for a lot of jobs and we aren't just talking bond traders and FX dealers. Jobs where you can collect a steady and consistent rent for doing the same thing are on the outer it seems:

For instance, creative writing, arts instruction, and other “soft skills” are not always as amenable to rule-based software or distance learning. We concur with Rhode Island School of Design president John Maeda’s vision that a move from STEM (Science, Technology, Engineering, and Mathematics) to STEAM (adding Arts to the mix) is the right vision for boosting innovation. The technology and systems for education have to be compatible with that vision. In particular, softer skills like leadership, team building, and creativity will be increasingly important. They are the areas least likely to be automated and most in demand in a dynamic, entrepreneurial economy. Conversely, college graduates who seek the traditional type of job, where someone else tells them what to do each day, will find themselves increasingly in competition with machines, which excel at following detailed instructions." - Race Against the Machine

This is a great idea but would kill a lot of sacred cows - like company specific defined benefit pensions and the home mortgage subsidy. TMM like this idea a lot, but getting it done won't be easy and in the interim people can fall through cracks. It also runs counter to the life of anyone except an itinerant investor / hacker / engineer who lives out of a messenger bag with a laptop. So..... if it seems a stretch to us its a BIG stretch for everyone else.

Decouple benefits from jobs to increase flexibility and dynamism. Tying health care and other mandated benefits to jobs makes it harder for people to move to new jobs or to quit and start new businesses. For instance, many a potential entrepreneur has been blocked by the need to maintain health insurance. Denmark and the Netherlands have led the way here. - Race Against the Machine

Eliminate or reduce the massive home mortgage subsidy. This costs over $130 billion per year, which would do much more for growth if allocated to research or education. While home ownership has many laudable benefits, it likely reduces labor mobility and economic flexibility, which conflicts with the economy’s increased need for flexibility. - Race Against the Machine

TMM are coming to the conclusion that the stable outcome here is centralized savings like Australian superannuation, portable healthcare and insurance policies and a fairly healthy degree of redistribution and consumption / sin taxes, much along the lines of Rick Bookstaber here and here. Quoting some of Bookstaber's piece below, just what do you invest in when the world is like this?

Take these two trends (Diminishing Consumption, Diminishing Labor in Production) to their extreme. We are in the year 2025. Because of advances in production technology, much of the path from extracting the required renewable resources through to the production and distribution of most of the items we demand can be accomplished with automated methods overseen by a small cadre of engineers.... The main items we demand, beyond food, clothing and shelter, are the nth generation game systems.... The entertainment industry has disappeared; it is all free, operated with the same open-source ethos that spelled doom for most commercial software enterprises over the past decade. Which also means no more advertising. We pretty much know what we want to buy, and depend on those in our FriendWeb™ (version 4.6) to guide us....If you look hour by hour at what anyone is doing, it is hard to differentiate the super rich from those a few rungs above subsistence level....If you look hour by hour at what anyone is doing, it is hard to differentiate the super rich from those a few rungs above subsistence level....

Perhaps more importantly from a fundamental economic perspective, what does this mean for the Phillips Curve? If labor drops out of COGS or becomes ~5% or less and/or has no pricing power then does the Phillips Curve become a random scatterplot as wages are no longer a key driver of inflation? What does this mean for monetary policy? Is loose policy just about redistribution from fixed to inflation linked receivers and "financial suppression" with ~0 redistribution to those who derive most income from wages? Is Ron Paul vs Paul Krugman really just a pissing contest between two guys on different sides of a vanilla rate swap? TMM don't have the answer but would be fascinated to know what you think.

The Book of Eurorevelation Part II

noreply@blogger.com (Polemic) — Fri, 13 Jan 2012 20:30:00 +0000

Chapter Seventeen verses 1-18

17:1 And there came France, one of the seven nations which had the seven debts, and talked with me, saying unto me, Come hither; I will shew unto thee the judgment of the great whore ratings agency that sitteth upon many waters:
17:2 With whom the banks of the earth have committed fornication, and the investors of the earth have been made drunk with the deals of its fornication.
17:3 So he carried me away in the spirit into the wilderness: and I saw it sit upon scarlet coloured bonds, full of names of blasphemy, having seven heads and ten horns.
17:4 And the agency was arrayed in purple and scarlet colour, and decked with gold and precious stones and pearls, having a golden cup in its hand full of abominations and filthy deals of its fornication:
17:5 And upon its forehead was a name written, "MYSTERY, STANDARD AND POOR'S, THE MOTHER OF DEFAULT AND THE ABOMINATIONS OF FINANCE”
17:6 And I saw it drunken with the blood of the indebted ones, and with the blood of the martyrs of the Euro: and when I saw it, I wondered with great admiration.
17:7 And France said unto me, Wherefore didst thou marvel? I will tell thee the mystery of the agency, and of the bonds it rides upon, which hath the seven heads and ten horns.
17:8 The bonds that thou sawest were, and were not; and shall ascend out of the bottomless pit, and go into perdition: and they that dwell on the earth shall wonder, whose names were not written in the book of issuance from the foundation of the Euro, when they behold the bonds that were, and are not, and yet are.
17:9 And here is the mind which hath wisdom. The seven heads are seven mountains of debt, on which the agency sitteth
17:10 And there are seven sovereigns: five are fallen, and one is, and the other is not yet come; and when he cometh, he must continue a short space.
17:11 And the bonds that were, and are not, even he is the eighth, and is of the seven, and goeth into perdition.
17:12 And the ten horns which thou sawest are ten nations, which have received no bailout as yet; but receive power as sovereigns with ratings from the agency.
17:13 These have one mind, and shall give their power and strength unto the bonds.
17:14 These shall make war with the IMF, and the IMF shall overcome them: for he is Lord of funds, and lender of lenders: and they that are with him are called, and chosen, and faithful.
17:15 And he saith unto me, The waters which thou sawest, where the agency sitteth, are peoples, and multitudes, and nations, and tongues.
17:16 And the ten horns which thou sawest upon the beast these shall hate the agency, and shall make it desolate and naked, and shall eat its flesh, and burn it with fire.
17:17 For the Euro hath put in their hearts to fulfil its will, and to agree, and give their kingdom unto the bonds, until the words of the Euro shall be fulfilled.
17:18 And the agency which thou sawest are those ratings, which reigneth over the sovereigns of the earth.

Blessed be the name of the Euro

2012 Non-Predictions - Rates

noreply@blogger.com (cpmppi) — Fri, 13 Jan 2012 13:38:00 +0000

First, TMM must apologise for the lack of posts in recent days, a function of a lack of enthusiasm to start the new year coupled with significant head-scratching with respect to their 2012 Non-Predictions. As readers know, TMM don't do predictions, but they *do* try to make "Non-Predictions" however, this year they have found them particularly difficult to make given that the investment backdrop hinges almost entirely upon the European situation.

While intellectualising about what could happen, how it might play out, which politician will do what, which country might leave (if any) and the potential for a global depression is an exercise that all traders and investors must carry out, TMM believe that forming views and positions *only* as a function of such an analysis is misguided. The reason for this is that this catastrophic outcome is still a tail risk. It is a very large tail risk, and undoubtedly, would result in significant damage to asset prices and the social fabric within Europe. Having thought particularly hard about how policymakers might come to implement an exit of one or more countries from the Eurozone, TMM have come to the conclusion that it is just not possible to do without political, social & economic consequences that are both domestically and internationally unpalatable. There is no conceivable firewall to a country leaving the Euro that does not include troops at the border, capital controls across Europe and the closing of world financial markets. One nightmare TMM once had went along the lines of the following course of events:

Day 1: Financial markets sell off sharply, the NeuDrachma plummets 20% on world markets.
Day 2: Financial markets sell off sharply, the NeuDrachma plummets 25% on world markets.
Day 3: Rioting and food shortages in Greece. TV pictures across the world of Spanish, Italian, Portuguese and Irish citizens queuing outside banks and driving to the borders.
Day 4: Bank runs in foreign countries of EMU bank branches.
Day 5: Stock markets crash 15% in the absence of a policy response.
Day 6: Military coup in Greece.
Day 7: Italy and Spain announce they are closing their borders.
Day 8: After the weekend, stock markets fall another 20% as borders close and riots erupt across Europe.
Day 9: EM stock, bond & currency markets collapse as the Eastern European & Asian central banks confirm rumours that they have exhausted their FX reserves.
Day 10: Germany announces that it will not roll over ECB Target 2 balances with the Bundesbank.
Day 11: After yesterday's 40% fall in the Euro, World financial leaders meet and agree to shut markets for a week.
Day 12: Rioting erupts across the world as banks are shut and food shortages arise.
Day 13: Israel launches a pre-emptive strike on Iran.
Day 14: EU dissolves.

Policymakers are well aware of the consequences - TMM believe eventually the ECB will blink to prevent a country exit should the possibility of such an outcome materialise - but if one does occur, then the last thing TMM will be doing is attempting to trade Macro. They will be in those queues at banks and supermarkets. This reminds TMM of the 1983 film War Games... the only option is not to play. And like Mutually Assured Destruction, TMM strongly believe that markets will simply learn to live with the large tail risk, and the risk premia priced into various assets probably reflect this to some extent. That said, the usual trades like Schatz calls (which would likely be Deutschemark denominated), and EUR/DKK forwards/puts are certainly worth sticking in their books as tail hedges...

But TMM want to put the above behind them and move into 2012 on the assumption that the Euro continues to exist, and below present the first of their 2012 Non-Predictions... Rates:

1) 10yr Gilt yields will NOT finish 2012 below 3%.

As regular readers will know, TMM were wrong-footed by the Bank of England last year with respect to their (lack of) response to inflation surprises but more importantly to the lack of pass through to wages. However, TMM reckon the BoE have been very lucky in that the Eurozone shock has depressed activity and prevented rates markets from testing the BoE's credibility. Tesco's Christmas earnings shock notwithstanding, TMM remain of the view that the UK still has an inflation problem, and certainly relative to many parts of the developed world, it is the least likely to experience deflation (that particular baton is being passed from Japan to Europe).

Undoubtedly, in the face of the Eurozone crisis reducing the pool of available AAA assets (and ensuring the media is focused on economic woes, providing businesses with a convenient argument to resist wage demands), the front-loaded UK fiscal consolidation and continued Gilt purchases by the BoE have kept yields low. Indeed, over the past six months in particular - beginning when Italy came under market pressure - Gilt yields have fallen dramatically as foreign investors (in particular the Japanese) have switched out of core European bonds and into Gilts. Now, TMM completely appreciate that the reasons behind this all make a lot of sense. Having an independent currency and active central bank on the canvas of weak aggregate demand and large balance sheet adjustment is a significant advantage. Inflation risk is much easier for investors to understand than credit risk, especially when the latter is governed by the often arbitrary whims of politicians in a multitude of jurisdictions. That argument has clearly been won, and when compared to TMM's macro-based model of Gilt yields, appears responsible for something like 130bps in negative risk premium (see below chart). While any sort of rigorous estimate of this risk premium is inherently difficult to do, a back of the envelope comparison with French OAT spreads to EONIA (~125bps), a country with not massively different aggregate fiscal metrics to the UK, but which should reflect this risk premium would appear to be of similar magnitude.

TMM digress. In spite of all the above, we reckon that markets price significant risk premium in Gilts (and non-Eurozone DM bonds in general), and that the risk reward sits with expecting some decrease in this as Europe gets on with its structural reforms and drift towards fiscal union. Should this occur, TMM believe that markets will begin to test to the Bank of England at some point, and selling Gilts at 2% yield is just too juicy for us to resist.

2) 3yr CNY Shibor swaps will NOT close 2012 lower on the year.

TMM were heartened to see the China bull mafia come to grips with some of the issues China faces last year. While TMM doesn’t think China is universally a fraud, it has structural issues of which the largest is the implicit tax on savings and subsidy to capital expenditures via consistently negative real rates. 2011 was a watershed for China because it became abundantly clear to investors and some more outspoken policy officials that China had a serious over-investment problem that could not be justified by being a developing countries. Empty cities, ridiculous skyscrapers in the middle of nowhere, freshly built highways with no traffic – there was no shortage of stuff to point out indicating over-investment and it has been extensively here and elsewhere. This subsidy has led to really silly credit growth and inflation, as covered elsewhere and generally an asset bubble or two (see below chart of real rates, A Shares and Hong Kong property).

As China’s capital account has become more porous China’s inappropriate monetary policy has moved from strictly local stuff (stocks) to offshore stuff that Chinese people like to hoard as inflation hedges (silver - see below chart of Chinese net silver flows) or which are intermediate goods hoarded in supply channels like copper.

None of this is particularly new, however, but what *is* new are financial outflows from China, anecdotally related to wealthy Chinese people taking money offshore to invest in stuff with a real yield now that property measures are restricting them from hoarding apartments. TMM are reminded of Winston Churchill’s line about Americans…"Americans can always be counted on to do the right thing...after they have exhausted all other possibilities". And think it may equally well apply to Chinese central bankers. If China wants to reform incrementally without crashing the bus for every property developer and steel mill then rates need to go up, but at a manageable pace. The solution to avoid widespread bankruptcies is to reduce the Reserve Ratio Requirement to free up lending, but similarly charge higher rates to ensure the weak get winnowed out and investment is disciplined. To keep CPI down, better deposit rates should pressure property and a steady rise in CNY with higher rates should reverse financial outflows and keep food price pressures at bay.

All of this requires higher long term SHIBOR expectations and to avoid a hard landing likely requires some credit & fiscal easing which we are already seeing. As such TMM, reckon SHIBOR and the Yuan move higher, while credit incrementally loosens and is supported by demand-stimulus from the fiscal coffers.

3) 5y5y forward UST will NOT finish the year below 4%.

TMM reckon that the past two years provide ample evidence to the resilience of the US economy which, in the face of a multitude of shocks - from the Arab Spring-driven oil shock to the Eurozone crisis - has manifestly refused to fall into recession. Indeed, the rebound in consumer confidence, credit aggregates and the consistent upside economic surprises have convinced TMM that the US has exit velocity. TMM's models reckon ISM is likely to move back towards 55 over the coming months, and this will likely solicit upgrades to GDP forecasts over the coming year which, according to TMM's analysis (see chart below) are largely a lagged-function of the current ISM print.

With a ZIRP policy from the Fed, traditional links between growth expectations and real rates in recent years have broken down to some extent, with longer dated forwards now exhibiting a high degree of co-movement with near-term GDP expectations. The usual theories of "New Normal", Fed activism and Financial Repression can certainly explain a structural lowering of real rates post-crisis (t least in the near term) and, like in Non-Prediction #1 above, there has been an additional premium priced in reflecting "Europe" risk. It now seems that rather than pricing long-run growth expectations, longer-dated forwards are more strongly a function of short term growth prospects (see below chart).

While TMM are certainly sympathetic to all of the above, the evidence in the US is that while the recovery has been slow to get going (as a result of multiple shocks), it seems to be picking up steam. The recent noise about Fed QE3 in MBS should only serve to raise both long-term real rates and inflation break-evens as easier policy spurs future growth. Simply put, at 3%, USTs arguably price a Japanese-scenario to a significant degree: back of the envelope, 5y5y JGBs are 1.6%, while the years of the "Bond Conundrum" (2004-2007, arguably a conservative upside estimate) had the 5y5y UST at an average of about 4.75% (i.e. - something like long run expectations of about 2% inflation plus 2.75% real growth), implying a 52% probability of being in the Japanese state. In TMM's view, the pendulum has swung too far toward the deflationistas in this respect and reckon paying this part of the bond market in the context of very large CTA & Real Money longs is not a bad punt.

4) The RBA will NOT cut more than 25bps and the Cash Rate will also NOT finish 2012 below its current level of 4.25%.

TMM recognise that this is a very punchy Non-Prediction given both market pricing of just shy of about 100bps of cuts over the year, and also for (probably) trying to be too clever for our own good in expecting the RBA to hike rates later this year should it cut them to 4% earlier on. But we thought, "what the heck", it wouldn't be the first time we've been wrong on a punchy call. TMM digress... 2011 saw a very large rally in the front-end of Australia as expectations of multiple RBA rate hikes reversed with the risk aversion of the summer into a cutting cycle. As far as TMM can tell, much of this move was driven by tail-risk hedgers looking to protect themselves against a global recession and deepening of the Eurocrisis. The trouble is, that the Aussie front end now prices the bulk of such an event, and without multiple RBA cuts, there is a lot of risk premia to be taken out.

TMM believe that the stickiness of the curve is related to the very bad experience many punters had here in August, when 10 sigma moves were seen alongside a complete evaporation of liquidity in the bill future market. Scars take a long time to heal, and TMM share those scars. But looking at the fundamentals, inflation is not showing any signs of collapsing (see below chart) and the turn in the policy cycle in China, coupled with an accelerating US argue that pricing in global recession is just wrong.

And TMM's forward-looking Taylor-type rule (see chart below) reckons that - even assuming global growth does not rebound from current levels implied by PMIs (something TMM believe is an overly pessimistic position) - that even though near term the base effect-driven slowdown in inflation might argue for a modest easing to 4%, that by the end of the year, policy will need be tightened once more. Of course, this will not do wonders for domestic demand and is something TMM will look at once more when they come onto their Equity Non-Predictions. But in the meantime, they are dipping their toes back into shorts in the Aussie front-end.

TMM will now get back to their homework and try and come up with some more Non-Predictions. In the meantime, we wish our readers a good weekend.

Ten All New Management Terms for 2012

noreply@blogger.com (Polemic) — Tue, 10 Jan 2012 16:41:00 +0000

Ten All New Management Terms for 2012

First, it was good to see the Belgian CB data supporting our views on the Dexia unwind being the cause of the spike in the ECB MLF in mid December. Though we remain on the bullish side of the fence in general, we continue to struggle with 2012 non-predictions (it's worse than homework) so we will be taking another day off from commenting on markets that are in general (apart from eur/sek) going where we want them too.

Following our critical view of what we saw as the worst management terms of 2011, we were delighted by the general response and to find such common concern over the diabolical increase in management jargon. But why, if we know it is so dreadful, do we let it persist? We have decided that it's most definately a power game - an arms race. The holders of the newest and most convoluted terms deemed to be the more superior.

As programs to eradicate plague pests, such as the Tetse fly, involve introducing sterile bred alternatives into the system to compete, so TMM are releasing their own batch of genetically modified 2012 Management Terms into the vocabulary. Hopefully, if adopted widely enough , they will help to show how silly most existing terms are, leading to their demise. We give you -

1) "Omegal" - from the Greek letter Omega, the last letter in their alphabet. Can be used negatively "Jeff, ok, nice idea - but pretty omegal" as in "the last thing we would do". Or positively , "Ok folks, lets omegalise this thing" - Finalise or close the matter.

2) "Charge the trees" - Eco-reference together with moving forward rapidly. Bound to work. Suggested uses - "Hey we aren't going to charge the trees on that one" - "Are you suggesting we charge the trees?" - "He's the type of guy who'd charge the trees" Do feel free to make up any conotation you like whether it is references to Rhino's charging against trees to shake down ideas or to billing folks who really deserve a free service due to the morality of their work.

3) "Diodal" - Once you head off in a direction there is no turning back. "You realise that this is diodal ? You with me?" "Market research has suggested that diodal uptake is presumptuous upon addiction".

4) "Deep Sea Ten" - "I want you all to go Deep Sea Ten on this" or "Scott, 11th floor said "deep sea ten" this by Friday". Basically an idea or thought process that only the "Deep Sea Ten" global rescue vehicle from a 1960s puppet show could pull off. Of course there never really was a "Deep Sea Ten" but as proven by people who use the malapropism "no holes barred" few people challenge the origin of phrases anyway.

5) "Superstring" - Knowing the liking for misappropriating complex science into management sound bites, this one is off to a head start. It evokes joining more things together than anyone else has with normal strings. Very de-rigour in sales, management , system analysis, social networking, the lot. This one should easily catch on. "We are superstringing the network to optimise conjacent synergies". "This will superstring all your strengths and client needs". "Multidimensionalising superstrings is only one of the many applications that we can run on Data-Yuanque CRMs. "

6) "Euronation" - To have your top idea go so wrong even the ECB, IMF and world superpowers are incapable of rescuing it. "The sales budgets for 2012 are looking subject to euronation in the current time frame". Also see "euronate" - To cause cataclysmic failure . "Guys we need to euronate on XYZ's competitive offering".

7) "Lolhor" - Low on Left, High on Right. Every presentation always has to have as many of these graphs as possible. What is the use of a graph showing achievement, targets or dreams if it doesn't start "low on the left" and go "high on the right" ? "Jess, I've got some investors coming in in 30 mins could you run me off some Lolhor charts for them please?" ( Tip - If you are struggling, use cumulative returns). Of course costs should be Hollor, but psychologically no one likes a graph that goes to zero as once there, where's your job?

8) "Three Buck Whistle" - Many management terms are derived from sporting, military, parliamentary , or transport terms where the original meaning has been lost in time. "The whole nine yards" is a classic example where there is no agreed source. We suggest that "three buck whistle" could be launched on similar lines. It will never be agreed as to whether it is derived from the length of steamboat's hoot, a referee's whistle, a musician's tin whistle, or the volume of a workman's wolf-whistle (none, of course, as we just made it up) but we suggest it could easily slip into management parlance. "The Board gave that idea the three buck whistle" - "It wasn't worth a three buck whistle" - "this deal is THE three buck whistle .. {pause for effect}"

9) "Weidmann" - The opposite of reaching out. Not giving a damn and doing what you wanted to all along. "We have weidmanned the stakeholder community and pressed ahead with our original intentions". "Hi Greg, I'd just like to weidmann you on the proposal you sent over". "You wanted it in green? Can we remind you of the weidmann clause (page 87)? You are getting it in red". {Any references to current leaders of the Bundesbank are entirely intentional}

10) "Yaldistic" - Insert it as an adjective in front of a noun of importance and see if anyone ever challenges it. If they do, explain that it is a reference to a school of thought developed by Marshall and Petigrew in 1955 which has recently been further developed by the Yalding School of Management to describe a product of bandwidth ideation through out-reach. However as the latter terms have recently been discredited with the arrival of the YSM Grand Unification of Management Phraseology hypothesis. "Yaldism, yaldistic, yaldistically" are now preferred.

Please feel free to start using any of the above, see how many you can use without challenge (we would guess most) and report back as soon as you spot any of them roaming free in the wild. As ever the comments column is there for your own suggestions. Remember- "Make it up, make it work" (there's another one).

Been there, done that, do it again?

noreply@blogger.com (Polemic) — Fri, 06 Jan 2012 11:32:00 +0000

We have been somewhat tied up with start of year work things, but are trying to put together our non-predictions for 2012, which isn't easy. We are sure we are not alone in finding that it is well-nigh impossible to come up with 2012 trade ideas without acknowledging the world is pretty binary due to European dynamics. Anyone who can't see that is probably wearing these (this picture taken this very morning by a friend of TMM at Xiamen airport in China):

Helen Keller sunglasses? ARE YOU SERIOUS? At some point, Chinese third string brands need to give up on trying to export and learn to use spell-check, and at least wiki some of their brand names. If they'd read this, it may have saved some ensuing embarrassment. Or at least get some decent advertising folks because this is so bad it's, err,... really bad. If this is the future of Chinese consumer brands, TMM think the better trades in the China consumer sector are food (NOT milk powder) and WPP.

Now back to markets - In our eyes we are in phase one of the WWF (Wrong Way First) move for the year. We went into this last year with paragraphs that are as apt now as they were then.

"Now of course we have the normal year-change housekeeping. It's that time of year that really highlights the flaws in the "efficient market hypothesis", as prices are about to start to move as everyone writes, reads and establishes their favourite trades for 2011, despite the information they are based on having been around for some time. It's those pesky benchmarks again. If you are personally judged Jan 1st - Dec 31st then your behaviour will treat those dates as important watersheds. (original here)"

and

"this time of year is full of trading peculiarities, as themes and trades for the year are discussed and executed, alongside the micro news-following tunings. As a result, we usually end up with a "wrong way first" move turning around the start of the third week. With the US on holiday for Martin Luther King day next Monday, TMM think this is lining itself up as a suitable turn date to target. We have always had a background belief that US holidays make good general turn dates. But if we are looking for turns against consensus we need to have a think about what that consensus is. Europe - As far as we can make out the trade coming out of December was to position for another major attack on Europe kicking off in January. (original here)"

Sound familiar?

So far this week has been "silly week" in our eyes, volumes have been micro in many markets and the ease on the roads into London this week are testament to folks not having fully returned after the Christmas holidays. A classic time to chase stops and test extremes.

The hole left by a lack of directly Euro negative news has been filled with the wedding of Hungary, Italian debt refunding needs, UniCredit performance and ... errr .. anything that fits. Hungary is wobbly, but though some may think it is the first candidate to rejoin the Warsaw Pact, this morning's statements of intent appear to have calmed things a bit, EURHUF looks like a short term top at least (fatal last words), so though this may just be a correction in the bigger HUF theme, we expect it to slip from the top of the worry list. The European Debt refunding story is interestingly presented - always the amount of new issuance and no regard to all that money being returned. So where is a large chunk of that refinancing money coming from? Well there is and will be, a lot of money sloshing around looking for a home.

One thing doing the rounds this morning is the bull/bear indicator with its recent high being highlighted as a potential turn signal. We last saw one this high in Dec 2010, but even then the next 2 months saw some pretty sizable rallies. Of course if you are bullish and you have little risk on, you are likely to buy; if you are bullish and have a lot of risk on, then you won't; so the starting point matters, especially in EM. Another key issue may be what the redemptions will be like at Real Money funds this month, and especially EM funds. The instructions to redeem or subscribe tend to occur in January after the investor letters go out. Following two consecutive quarters of cross-border repatriation flows only seen before in 2008, it looks as though they are prepared for similar this month with relatively large cash balances in hand (TMM have heard whispers of 7% cash). If the redemptions don't come, then our friend the benchmark is going to induce some rushed buying.

Finally we would like to thank all our readers for their support to our Xmas Charity appeal this year. A stunning effort from you all that has impressed the charity involved. We will be downgrading the appeal to the background and removing the widget, but a link will remain just in case.

We wish you all the best with your lottery ticket for today's NFP draw as we carry on dragging entrails from rabbits trying to predict 2012.

Mark to Market - 2011 Edition

noreply@blogger.com (cpmppi) — Wed, 04 Jan 2012 10:30:00 +0000

Well, another year is upon us and TMM are back in the saddle. We cannot say that we bid farewell to 2011 with nostalgia, a year whose effort/reward ratio was very high for TMM. And while quite a few of our macro calls went wrong, in the event, managing to catch a few big market turns helped rescue our years, leaving us sitting in modestly up for the year and above the average performance of the Macro peers. While nothing to shout about, TMM will take that as a win, giving the drubbing taken by global asset markets & hedge funds in general.

Now, time to mark TMM's 2011 Non-Predictions...

First, Commodities:

1. Iron ore will NOT be trading higher on Dec 31st than it is on Jan 1st.

HIT. Both equities involved in the space and physical traded off heavily. A Chinese tightening cycle plus capped upside on supply kept iron under pressure for most of the year and it collapsed with all things risk in August & September as Chinese property measures began to bite and steel traders were caught long inventory.

2. Rare earth metals will NOT come down to earth anytime soon and Tungsten won’t either.

HIT. TMM count this as a win, but it would have been a much bigger win in July. Rare earth export restrictions have been weakening, though spot Neodymium & Dysprosium are still up big on the year. Fundamental scarcity now has to be weighed against substitutes like induction motors replacing direct drive.

3. Copper is NOT Coming Down Anytime Soon.

MISS. TMM did cut their copper position in February, but feel it is appropriate to judge by the letter of their Non-Prediction rules, and will thus mark this as a MISS. A structurally very tight market that loosens 5% can fall a long way very fast, much as did other top metals picks of January 2011, including Platinum & Palladium.

4. WTI NOT going to be under $100 for Long.

HIT. WTI had a huge run into the Arab Spring, collapsed but finished the year handsomely up. Tough trading, but for strong of stomach and margin this one paid. As of today, it feels like groundhog day in the Middle East and in crude.

So TMM score 3/4 in their Commodities Non-Predictions.

Moving onto Equities:

5. SPX will NOT trade below 1150.

MISS. While this Non-Prediction looked good for the first half of the year, the debt ceiling shenanigans & US double dip scare (for the second year running) sent the S&P500 to an intraday low of 1076.8 in early October.

6. The DAX will NOT outperform the IBEX.

HIT. A trade that worked well for TMM early in year, with the DAX underperforming the IBEX by 11% in Q1, before further oscillations & consolidation throughout the year.

7. Emerging Markets (MSCI EM) will NOT Outperform Developed Markets.

HIT. A deteriorating growth/inflation mix - particularly in Asia - combined with spiking risk aversion in the Summer led EM equities to underperform their DM counterparts by a whooping 20%.Which give TMM a respectable 2/3 in their Equities Non-Predictions.

Next, Rates:

8. The Bank of England will NOT continue to ignore upside inflation surprises.

MISS. TMM have already issued a mea culpa here.

9. 10yr US Treasuries will NOT beach their 2010 yield lows, but will also NOT rise above 4%.

MISS. While the latter part of this Non-Prediction proved correct, as with 5), the debt ceiling drama torpedoed this one.

10. Spanish 10yr yields will NOT hold below their 2010 highs, but Spain will NOT need a bailout.

HIT. The meltdown in BTPs in mid/late-July dragged SGB yields higher and through their late-2010 highs, but Spain's consistent implementation of its fiscal plan (the "shock" announcement that the 2011 deficit will be worse than expected looks a bit like a new government "kitchen sinking" the bad news to TMM), banking system clean up and attention focused elsewhere (i.e. upon Italy), and the SMP buying have all meant that a formal bailout has not yet been requested.

Disappointingly, TMM only managed to get one of their Rates Non-Predictions right.On to FX:

18. USDJPY will NOT be easy.

HIT. Of all TMM's Non-Predictions, this was the "most" correct, screwing all and sundry who tried to go long or short constantly, ending up effectively trading pretty flat and effectively trading places with EUR/CHF in the volatility league. USDJPY was NOT easy at all.

19. The Equity/DXY correlation will NOT break down, meaning that the DXY will NOT finish the year higher than it entered it.

MISS. While the S&P 500 and the DXY correlation remained strong, with both essentially finishing flat on the year after swings in both directions, the late sell-off in the DXY in the final days of 2010 and late rally in those of 2011 conspired to push the DXY up just shy of 2% on the year. As with 3), while this Non-Prediction was broadly correct, TMM will mark it down as a technical MISS, in accordance with the rules.

20. EURCHF will NOT close the year below 1.30.

MISS. Well... what can we say...? We suppose at least we weren't the biggest losers from this one... TMM wonder whether the Hildebrands end up in jail.

21. Voldemort will NOT stop taking the piss.

HIT. While the Yuan has appreciated this year, it was still in the managed fashion and China continues to run a gigantic Current Account surplus. Additionally, Voldemort continued to push around the EUR/USD FX market, defining ranges and frustrating most macro punters. Some things never change.

And finally, onto their random Non-Predictions:

11. The UK's Alternative Vote referendum will NOT pass, but the coalition will NOT break-up before the end of 2011.

HIT. The UK electorate overwhelmingly voted for simplicity and seemed uninterested in constitutional tweaking while the economic environment has been so bleak. The Liberal Democrat polling numbers coupled with the Cameroon desire to balance the right wing of the Tory party have indeed held the coalition together.

12. Ed Miliband will NOT be leader of the UK Labour Party by end-2011.

MISS. While Ed Miliband's polling figures and general performance continued to be horrific, despite the context of a weak economic environment, and with even Labour supporters rather unimpressed, the lack of suitable alternatives and an easy mechanism for unseating Miliband the Younger have left him intact. TMM remain resolute in their belief, however, that he will NOT be UK Prime Minister (the time horizon of this particular Non-Prediction precludes its inclusion in TMM's soon-to-be-announced 2012 Non-Predictions).

13. Belgium will NOT break-up by end-2011.

HIT. One of the "popular" topics to discuss as we entered 2011, and despite Belgium's political situation deteriorating as several attempts to form a government failed, this never really became a "market issue", and in the end, a government was formed.

14. Darth Weber will NOT replace Baron Von Trichet as the new ECB President.

HIT. The dark lord Weber and his apprentice Darth Stark both threw hissy fits and resigned from the ECB, protesting its purchases of peripheral government bonds as risking the stability of the Euro. TMM think it is pretty ironic that the consensus (ex-Germany) is that doing precisely this is the only way to prevent the Euro breaking up.

15. At least 1 member of TMM will NOT have the same employer by year end.

MISS. The musical chairs in 2011 consisted primarily of chairs being removed with people sitting on them as both banks & funds reduced headcount. TMM thankfully are still in their seats.

16. The UK 2011 X-Factor winner will NOT make UK No. 1 for Christmas.

HIT. To TMM's delight, the Military Wives beat Simon Cowell's latest to the No. 1 spot in the UK Christmas chart.

17. Australia's cricket team is NOT.

HIT. 'Nuff said.

Giving TMM, on random matters, a score of 5/7.

So, the final scorecard gives TMM 13 out of 21. For market-only related Non-Predictions they managed 8 out of 12, which is down slightly on last year's 6 out of 8, partially offset by TMM proffering a larger number of Non-Predictions on quite a few outsider bets.TMM are busy compiling their 2012 Non-Predictions and hope to present these over the coming days. In the meantime, we wish all our readers a very happy and profitable 2012.

Management Talk Awareness Week

noreply@blogger.com (Polemic) — Wed, 28 Dec 2011 19:18:00 +0000

We are nearly at the end of 2011 and another year of mayhem behind. We will be judging our 2011 Non-Predictions and trying to dream up some new ones for 2012 in the next fortnight or so but this week we have been able to get some long needed admin done. With it came a realisation that even if the financial industry is suffering the creative management community has been in full swing dreaming up new terms and phrases to camouflage the blindingly obvious. The evolution of ‘management speak’ means some phrases die and some survive and flourish. TMM really don't know what determines the success of one term or phrase over another other than, as with the arts, adoption and patronage by the most respected in the field. TMM hope that this year’s rash of newcomers all die off naturally but we would like to help with a shove into their deserved obscurity.

TMM have noticed that every cause nowadays needs an "Awareness" campaign and though we feel that "doing" is of much greater importance than "awaring", we will go along with the fashion and launch a Management Talk Awareness Week with the list of phrases and terms we have found most irksome this year.

So here are TMM's top ten annoying phrases of 2011 (even if some are older) that we would like to see the back of.

10 - Internalise - As in "What you have all failed to internalise is that there has been a paradigm shift. As a result you are all now behind the curve when it comes to the multi-lateral interoperability needed to realise the supra-organisational mission statement”. Even though there is an awful lot to detest in that statement "Internalise" is the word we most object to. It appears to just mean learn or remember but as telling someone to learn or remember something appears instructive, suggesting they internalise it will sound more empathetic, but at the severe cost of sounding like a clone-monkey.

9 - Hi, I hope all is well - With the birth of the email there came an awkward period when the formality of letters, with their "Dear Sir / Yours sincerely" had to be detuned to fit in with the new immediacy and informality. After a stuttering start the world passed through an embarrassed joint squirm and settled on "Hi" for anything other than legal representations. But 2011 has seen a pernicious ingress of a new form of insincerity with the addition of "I hope all is well" to the "Hi". Rather than questioning either the validity or sincerity of that statement, we would just ask that the bulk senders of such missives consider where they are sent to, as for many recipients things are blindingly obviously not well. We suggest the only time this greeting is appropriate is when addressed to bore-hole companies.

8 - Weaponise price opacity - As the scarcity of new Himalayan Pink Salt in the financial market takes its toll on the bottom lines of financial institutions it is becoming more important for them to make sure that they maximise the profitability of existing basic products. Opacity of price is critical in this process but weaponising it? Wow.

7 - Ideation - What happened to good old "have a think" or "come up with some ideas"? Even running things up flag poles is less irksome than "ideation" which sounds as though it should involve radioactive iodine.

6 - Stakeholder Community - Not a Transylvanian village but the new plural of stakeholder. Theoretically a stakeholder is anyone who can affect or is affected by your decisions and so could be a lowly minion in your company, but deference only ever seems to be made to "stakeholders" when they are either your bosses, investors or regulators. Please let's call them who they really are.

5 - Socialise - When issues got out of hand in the old days you would normally either just tell the boss or perhaps "take it upstairs". But now a cunning adaptation of the old mantra of "My profit, our loss" has invoked a caring sharing attitude to screw-ups by "socialising" them. As in "I think we should socialise this issue with senior management and the stakeholder community".

4 - Complementary - Odd one this, and it's really down to our own stupidity, but we have regularly opened emails this year expecting some nice free service only to re-read it and find it's not "complimentary" but something expensive and homeopathic. We expect the marketing world to soon be jumping on this and emailing multitudes of complementary not-at-all-free offers. Such as Ryan-Air offering "Complementary Flights" which sound as though they are free but are actually expensive and just "complement" what a decent service should be by being dreadful. Or have they done that already? "Complementary" should be banned from subject lines so that the vaguely dyslexic amongst us shouldn't be taken advantage of.

3 - Bandwidth - The adoption of IT geeky words into mainstream fashion is nothing new but the latest over-usage of "Bandwidth" by management is particularly grating. Just as "spending more time with my family" has become the acceptable expression of "Just been fired/stiffed/shafted/backstabbed/found out but have photos" so has "I'm sorry I can't action that, I don't have the bandwidth” become the generic replacement for "I don't have the time/resources/authority or inclination". But the saddest part is the way it's used under the false allusion that "bandwidth" is new and fashionable. Our grandmothers, thanks to broadband adverts and home routers, know what bandwidth is so please, unless you are the type of person who still uses "groovy" in the boardroom, please drop "bandwidth".

2 - Geosourcing - Why you lose your job to someone in a different part of the world. "The support function has been geosourced" or "How's the front office geosourcing project going?” It's the sharp end of a simple belief of ours that if there is someone able and willing to do your job for less than you, you are toast. But the use of "geo", which has connotations of environmental friendliness married to "source", which conjures images of babbling fresh springs in the mountains, results in a super-eco word which actually means "You're fired".

1 - Reaching out - TMM first came across 2011's winning term in July and since then it has spread like wildfire, which has us looking like Irish Riverdancers as we try to stamp it out as fast as we can. The origins and epidemiology of this disease has us suspecting it's the product of some Class of 2011 Management School somewhere. It really is complete and utter rubbish. If you are about to call an investor for some documents you don't "reach out to the client", you phone or mail them. If you want to know why a trade hasn't settled you don't "Reach out to Bangalore" you "call back-office". So let's just kill that one right now before someone gets accused of molestation.

And with that we open up "Management Talk Awareness Week". We are sure you all have your own experiences to share and we look forward to the comments column acting as a joint cognitive pan-cohesual empathy forum leading to textualisation of common goal and achievement recognition programs.

Happy New Year

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TMM's Christmas TV Guide

noreply@blogger.com (Polemic) — Tue, 20 Dec 2011 11:28:00 +0000

As markets are so quiet, TMM have been leafing through their copy of the latest Radio Times to see what's on TV this Christmas. Hmmm... let's see...

Sunday, 25th December

07:00 - Prayer for today. With George Osborne.

07:10 - The One Show. Start your Christmas morning on the couch as Matt and Alex discuss what will next trade through parity. Live from Brussels, a class of 12 yr olds who are short EUR/USD for their school, are setting up a street party for the big day. Rolf Harris will be in the studio with a collection of his paintings depicting each time the Aussie Dollar has been through parity. There are the sad stories too, as we join the Beeteepee family who have little chance of ever trading at par again.

09:30 - The Poseidon Adventure. The Reverend Draghi leads nine survivors; an elderly couple, Nic and Angela who are trying to head to the Promised Land. An Italian ex-president detective and his ex-pro wife trying to have a second honeymoon in Italy; A young couple of auditors on their way to meet Papa in Greece; A builder from Spain, a pop singer from Finland, and a waiter from the ECB. They travel from the grand ballroom struggling through, steam, fire and rising water in the up-side-down ship to reach the bottom which they are convinced is actually the top. Unfortunately, as usual, they are mistaken and it ends in disaster.

10:30 - Low rents of Arabia. Kirsty Alsop follows a couple she encouraged to borrow to invest in 10 buy-to-let properties in 2007. Now looking to run away from their huge debts, Kirsty advises the distressed couple on where they can find affordable housing. Kirsty's expertise leads them to low rent properties in Syria, Baghdad and Kabul.

11:00 - Wonderful Life. An Angel helps a compassionate but despairingly frustrated banker by showing him what life would have been like if he never existed. Fred Goodwin finds the vision so compelling he vows never to exist. A moving tale with a very happy ending.

12:30 - Deal or No Deal. US politicians present a multitude of boxes, each containing a different debt level. Can the Democrat pick out the largest one and outwit the Republican negotiating on the end of the phone?

13:00 - Who wants to be a Millionaire. J Corzine, a salesman from New York, fails to answer the simplest of questions but still walks off with the millions.

14:00 - Countdown. S+P and Moodys battle it out in the final as they have 30 seconds to make up numbers and rearrange letters into ratings in the most disorderly fashion possible.

15:00 - Only Fools and Horses. Del and Rodney come up with a scheme to make a quick buck in the lofty financial markets that they can see from their tenement blocks in Peckham. Del swiftly realises that all he has to do is cut and paste bad news onto chat services and he not only will be paid large sums as a financial salesperson but can also earn money on the side from what Rodney calls "sure'd" positions as they always make money. Of course it all comes unstuck when Bensy reveals a load of strong data he had been keeping in a lock-up with hilarious results.

15:30 - The Merkel and Wisemen Christmas Special. Merkel and Wisemen lead us through a show of festive comedy japes. This year's promises to be the funniest yet with guest appearances from Mario Monti and his Jazz Men (playing Suwannee River), the Mommas and Papas from Greece, and Sarko their performing monkey.

16:00 - Family Fortunes. The Gaddafi family are up aganst the West family as they try to pick the most popular answers selected by their peoples in order to protect their fortunes, Three XXX in a row and it's curtains.

16:30 - The Nativity. Dramatisation of the Biblical story. King Howard of Funds orders all Europeans to register to pay their Sovereign CDS dues. Upon reaching Brussethlehem, Merky & Sarkoseph ask for help, but are turned away by each of the G20 nations. As all hope seems lost they manage to find shelter in yet another broken down summit where the baby Eltiaro is born. European banks come to pay their respects, leaving gifts of billions of worthlesss periphery debt, whilst leaving with piles of freshly printed cash to take home to their balance sheets. 12 Days later, the Three German Wisemen arrive, bringing Bundesbank Gold, Frankfurters & Myrrhobonds.

17:00 - Songs of Praise. Join us in the Cathedral of Gold where the choirs of the church to the end of fiat money, the church of inflation and the church of Apocalypse join together in praise of our God Au.

17:30 - X-factor finals. The auditions started last year in Tunisia. The judges have auditioned hundreds of acts in Cairo, Bahrain, Tripoli and throughout the major cities of the Arab world. But now we are back in Cairo for the finals. Live from Tahrir Sq the public will be voting for the last time. Have the bookies' favourites "Total Democracy" got what it takes to pip "Military Rule" and "Benign Dictatorship" to the title this year and release their own version of "I did it my way" to make it to Xmas No 1.

18:30 - Inflating with the Stars Christmas Special. Mervyn King, Mario Draghi, Ben Bernanke & Zhou Xiaochuan battle it out for the Glitter Ball Trophy. This week they will be dancing the competitive devaluation. Head Judge Moody Essenpi breaks precedent by awarding Mervyn King the highest ever score of 40000000000000.

19:30 - A Euromas Carol. Emerkozy Scroodraghi, a mean-spirited miserly old Eurocrat sitting in the Bundesbank is visited on Christmas Eve by Kohldelors, the ghost of Euro past, Jens Weidmann, the ghost of Euro present, and ISDA, the ghost of Euro future. The spirits try to make him mend his sadomasochistic ways and help poor Tiny Timonti by printing money. Starring Morgan Freeman as Kohldelors, Alan Alder as Jens Weidmann, Ronald Reagan as ISDA and Alan Rickman as Scroodraghi.

20:30 - Mr Bean goes on Holiday. So there is no rate decision from the MPC today. Instead, we will be broadcasting "The King and I" a musical about a population who accept the job of living with Mervynflation.

21:00 - Agatha Christie's Poirot. When Bundesbank President Jens Weidmann is found murdered in a Frankfurt backstreet, the sleuth is led through a web of intrigue that stretches from Rome to Paris. Poirot's toughest assignment yet when he identifies 350million suspects but no witnesses.

22:00 - The BBC Ten O'Clock News. Robert Peston explains why bankers were responsible for the death of the dinosaurs 65 million years ago whilst John Humphrys justifies his salary.

23:00 - Close Down. All the banks are closed down.

Christmas t.t.t.timing

noreply@blogger.com (Polemic) — Fri, 16 Dec 2011 11:30:00 +0000

We guess that Christmas officially starts now. Most of the City will be nursing headaches after the most popular work party night of the year leaves its mark on the general consciousness. TMM however are mostly untouched having decided that a soft duvet, cool crisp sheets and an early night for ONCE was more attractive than ribald banter, bonding and bacchanalian pleasures. Must be getting old.

Momentum in the markets seems to have vanished in a puff of excitement and the tug of war between bull and bear may see more comfortable non-resolution if both sides just put down the rope and have a rest. We cannot really see ourselves writing anything of consequence until the new year as we wander off to various lunches, family events, or just doze in the traditional way at our desks trying to do as little as possible. Instead it may be time for a little introspection as TMM wind down for the year.

TMM, as you may have detected, is more positive on the outcome for Europe than many others in the market. Especially in the short term as we feel the issue with how to play Europe is really in the timing. To be fair TMM's long term view on Europe is pretty bleak, with most scenarios ending up with brick chucking and social unrest. But, much as one has to with one's own mortality, we have to look not at what the end game is but how we get there. We would like think there is time to enjoy what we have before our worlds end. That is why we don't just yet buy gold for the apocalypse trade or coffins because one day we will die and so it is we really cant play the Euro-cataclysm trade just yet. The timing isn't right. This is why we keep bleating on about the short term LTRO Euro fix. It may be an opiate for a cancer sufferer but in a high enough dose it could even produce a smile on the face of the patient.

If we consider that Europe's immediate issue is the funding of Italy an Spain then the LTRO goes a long way to plugging that gap in the short term. Draghi's comments couldn't get much more pointed towards their intentions and yesterdays comments that these special operations could be considered as QE were particularly pertinent in our eyes. Now if price is marginal then any solution to solve just part of the problem should see price recover and today the opiate appears to be working:

The argument against this is that the problem isn't actually solved and is rather just being stored up for the future. but we feel that the more that reasons to be short euro are hung on longer and longer term arguments, as the short term concerns are defused, then the more likely we get a relief rally. Whether the LTRO can successfully compost the toxic waste it takes in into nice fresh loam in the long term is yet to be seen.

Gold suffers the same fate, the more that short term reasons to hold it are unwound, the more the "hold" rests on the end of fiat money/coming of a gold barter system trade. For shorter term positions, longs either have to bail or push out the positional time frames. Haven't we all known/ done that where short term positions become long term ones as the price doesn't perform? TMM have therefore wondered what happens when the life of the position finally gets extended beyond the life of the holder. Well we actually have first hand experience of this. Back in the 1970s one of TMM's grandparents predicted that the UK Labour party, combined with the cold war and oil crisis would mean that gold was the only thing to hold to secure survival and so he bought gold sovereigns which were secreted, together with pallets of spam, sugar and curry powder (for when straight spam got boring), in the attics of his rambling house. His example to we grandkids has stuck and though we may appear anti-spamchucker, to this day our spouses are frustrated by our tendencies to procure for the future. But, despite this, when dear old Grandpa finally died in the early 90's having outlived the disaster he was preparing for, did we or the rest of the family re-secrete our share of sovereigns under our own floor boards? Like hell we did! That gold was instantly sold and used for more pressing deposits on apartments, new cars or school fees.

So we wonder, as the divide in attitude and wealth between old and young widens, can the inheritors of the last generation's positions really afford or want to run them? So just as with Grandpa's gold, Europe can push the problem as far forward as they like, but when the position outlives those that instigated it we should expect sudden change. Now then .. When are the next European elections?

De-xia Vu

noreply@blogger.com (cpmppi) — Wed, 14 Dec 2011 09:46:00 +0000

Something has been bugging TMM for a couple of weeks. Various bits of the market have been behaving in odd ways, that could have many different explanations in isolation. But when seen together, TMM reckon they have figured out what is going on.

First, as readers will know, the recent explosion of CVA desks, one-way CSAs and the like have resulted in large, relatively price-insensitve flows in many markets - but particularly in Euro 10s30s (see below chart). At first, TMM thought the recent sharp flattening was merely more of the same. But yesterday an unwind of a large and old asset swap drove 10s30s to the flattest it has been since 2008. This is very unusual behaviour for December when liquidity is not great.

Second, despite the very large take-up in the now very cheap Fed/ECB 3m $ Swap Facility last week, the 3m EURUSD Basis has rewidened (see below chart). As readers will know, TMM are of the opinion that the USD funding crisis is overhyped, but the new attractive terms have encouraged substitution from French banks (who issue their own USD CP in the US). As TMM's mates in the FX Forward market point out, there are still many smaller banks that are unable to access the Swap Facility due to a lack of collateral. Additionally, TMM remember from their old days working at investment banks that at year end, European real money - in particular Dutch pension funds - tend to do quite a lot of funding of their foreign assets via the FX Forward market. Again, at a time when liquidity in the FX Forward market is diminished due to most banks now either funding directly in the US or via the Swap line, this has not helped things, and when dealers have put on basis tighteners post the $ auction (catching them out). But it still does not completely explain why there has been pressure across the FX Forward curve. It seems that at least one bank has been somewhat price insensitive.

Third, even funding markets in places with relatively strong banking systems like Japan and Sweden have seen FRA-OIS basis widening (see chart below of Swedish FRA-OIS basis).

Fourth, usage of the ECB's Marginal Lending Facilty (see chart below) has spiked over the past few weeks. In the absense of other information, markets would not be incorrect in concluding that "something is very wrong"/"a bank is in trouble".

Now, TMM have scratched their collective heads, and suggest the following as an explanation...

TMM would ask readers to cast their minds back to February. Usage of the ECB's Marginal Lending Facility spiked (see the above chart), and it soon became clear that this was related to the winding down of the Irish banks and their transition to ELA funding. With the restructuring imminent, the usage of the ECB's lending facility turned out merely to be a stop gap until everything was in place for the transition.

The reason TMM bring this up, is that the splitting and wind down of Dexia - announced a couple of months ago - is of a completely different magnitude to that of the Irish banks. Dexia's balance sheet only recently still sat at over EUR 400bn (see below chart), and has quite large international exposures. It doesn't take too much to make the intellectual leap that a bank that is in the process of being split in two and wound down, that is quite big internationally, might have quite a large amount of international hedging/cleaning to do (which would explain a good chunk of both the cross-currency and FRA-OIS basis move). Dexia was also the rumoured counterparty unwinding the above mentioned asset swap at not-particularly-price sensitive levels. And given the bank was well-known to be having funding problems, but whose restructuring is imminent, it would not be a surprise to TMM if that ECB lending facility usage was in fact Dexia, as a stop-gap until its restructuring is completed. It is worth noting that when Depfa was wound down, Dexia's "sister" institution never had to go through this process, as it's a bad bank wholly owned by the Germans (FMS Wertmanagement now), who don't really have their own funding issues.

This is all speculation, but TMM reckon the latest market basis/funding worries could very well merely be part of Dexia's pre-restructuring clean up of the books ready for split-up and wind down. In which case, the deposit facility usage should soon come down, and perceived funding stresses roll-off.

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TMM announce the late running of The End of The World

noreply@blogger.com (cpmppi) — Mon, 12 Dec 2011 12:55:00 +0000

TMM have lost track of which particular version of the Europlan this is, but would guess it is probably something like Plan K (plus or minus a letter or three). Having now digested the events of last week, TMM will attempt below to decipher what it all means.

But first, we cannot resist commenting upon the UK veto and the press reaction in the UK to it. As we have often noted before, the UK press are prone to covering geopolitical events in a self-doubting way, as if the country were losing influence, power and prestige. Well, tell us something new - it is not 1904. However, the uniform broadsheet reaction was one of UK isolation within Europe given that supposedly the other 26 nations are likely to sign up to the new agreement. Well, maybe they will, maybe they won't - there are plenty of reasons to suggest the Finns, Irish & Swedes will not. But does it really matter? This was a treaty that was, essentially, a power grab by the Germans. Clearly, it is not in the interests of the UK to sign up to something that goes further with transferring financial regulation to Brussels & imposes a financial transaction tax EU wide. Let's be honest, and call it the "UK Tax" and before you label us as Tea Party-ers, TMM are not against taxes full stop. If France & Germany were not willing to remove the FTT and provide assurances on financial regulation, then in TMM's view, it was quite right to use the veto. The reality of the situation is that, despite annoying a few civil service types & journos (who will have less jaunts to Brussels) and some disgruntled Eurocrats in Brussels, the EU still needs the very large contribution the UK provides to its budget. Rumours of the UK's demise have been greatly exaggerated for at least the twentieth time in TMM's careers.

But what TMM found exceptionally amusing was that the left-wing press in the UK (the BBC, Guardian & Independent etc), along with the Labour Party - a function of having to argue against the Tories - have been forced into arguing for more European integration (not a position an opposition party in the UK ever wants to be in, seeing the post-veto polls painting broad-based support for the use of the veto). But not only that. They have also found themselves arguing in favour of a treaty that would have capped the structural deficit at 0.5% of GDP and also triggered automatic sanctions for breaching a 3% budget deficit and a debt brake requiring fiscal consolidation. In essence, they have found themselves arguing for a fiscal policy going forward that is far tighter than the current government's and one that would tie Labour's hands permanently going forward. If that is not irony, TMM do not know what is.

But we digress. Back to Europlan K...

Over the weekend the press, blogosphere and emails that TMM received were uniformly critical of last week's summit and the ECB's actions, with the word "failure" bandied about in many places. And certainly, relative to even the lowered expectations it seems to be something of a disappointment given the ECB dugs its heels in further with respect to government bond purchases. TMM were also disappointed, but must admit that this has been somewhat an emotional response. After digesting both the ECB's actions and the result of the EU summit they cast their minds back to February 2009, and it all seems very familiar... in recession, markets and policymakers searching for "the bazooka", and the frequent refrain that TARP was not big enough etc...

And that got us thinking. Because it wasn't a single silver bullet that led to the rebound in the US and final acceptance that the policy response had been enough. It was a combination of a multitude of policy actions, ranging from TARP to the TALF, to ARRA, to liquidity guarantees for bank funding and eventually to Ben Bernanke's "Greenshoots" fireside chat. Note that these all occurred and the stock market had bottomed well before the FOMC began buying USTs under QE1. Readers may recall TMM have thought along these lines before, but it turned out that the numbers were not big enough.

So, in place of the standard "Mickey Mouse" analysis TMM found in their mail boxes from most places, we are actually going to have a go at seeing if the measures in place are big enough to cover the conditions necessary to end the crisis, which TMM believe are:

(i) A large enough amount of cash to cover Spain & Italy's financing needs for the next two years,

(ii) Incentives to longer term investors to buy Eurozone government bonds,

(iii) Structural reform measures aimed at rebalancing within the Eurozone and, lastly,

(iv) Clarity on the growth outlook.

In TMM's view, clarity on the first three of these conditions is enough of a firewall for the rest of the world to chug along, and the last of these would be enough to unwind at least some of the under-performance of European assets and loosen financial conditions significantly.

First let's get the bad news about growth [condition (iv)] out of the way. While the Composite Eurozone PMI has bounced from its November low and economic surprises have turned less-negative, it is too late to avoid a recession in Europe. Should financial conditions stabilise, TMM's view is that the current US reacceleration should result in a new global inventory cycle which will aid Europe's stabilisation. Q1 thus seems a reasonable expectation for the cycle low though, of course, this is a difficult view to have any confidence in but should the next batch of PMIs confirm last month's base, TMM would be encouraged.

Now, onto the other three conditions.

(i) The funding of Spain & Italy. This has been, in particular, the problem that has to be fixed "Now" in the view of markets, not unreasonably. But in demanding a bazooka - similar to early-2009 - TMM reckon both commentators & markets have missed the wood for the trees. To see this, consider the following European battalions:

- EFSF: About EUR 250bn left in its unleveraged form (and call it 750bn if they can leverage it 3x).
- ESM: Now to be operational from July 2012, size EUR 500bn.
- ECB: Currently purchasing around EUR 5bn/week which adds up to about 250bn/year.- EU/IMF Bilateral loans: The Summit-announced EUR 200bn of bilateral loans to the IMF to increase its firepower.
- IMF: Current space capacity sits at about EUR 300bn.

Totalling that up gives EUR 1.75trn over the next two years. Include the EFSF leveraging and that number starts with a EUR 2trn-handle. Even stripping out the ECB and not leveraging the EFSF in this case would proved EUR 1.25trn, an amount TMM believe sufficient to finance Spain & Italy and more. And even if the IMF is not able to lend its full capacity to Europe for political reasons, there is still well over EUR 1trn of firepower.

Now before anyone starts pointing out that core Europe is about to lose its AAA rating, and thus the lending capacity of the EFSF etc is diminished, TMM would say that this is not new news. What is important to medium/long term investors is a clear institutional framework, not necessarily the presence of a AAA-rating (after all, there aren't many places sporting such a rating these days...). In short, TMM do not think that it really matters that much.

(ii) Incentives to purchase Eurozone bonds. One of the most difficult problems to balance in any crisis is moral hazard - something discussed at length in many places. With respect to the Eurozone, the Greek PSI undoubtedly spooked many long term holders of Eurozone government bonds, with the subordination to the ECB resulting in larger losses upon banks than would otherwise have been necessary to return Greek to solvency. Additionally, the way Eurocrats went out of their way in order to avoid triggering Sovereign CDS (and one of the key reasons TMM reckon it is an ex-product), further reduced confidence both in policymakers and the rights of bondholders within Europe. TMM thus think it is particularly interesting the lengths the A-Team have now gone to in order to reverse from the PSI stance in ESM to that more of the IMF. Now, cynics would obviously point out that the IMF has often been in favour of PSI in the past, but the softening of the position to being on a "case by case" basis, is certainly one that will lessen the view from the bondholder perspective that they are subordinated. This is key to restoring long term confidence in Spain & Italy, nations that appear to TMM to be illiquid but still solvent.

Related to incentives to purchase Eurozone bonds, TMM move to the ECB's exceptionally generous liquidity facilities that were dramatically loosened on Thursday. Banks can now post collateral on LTRO for 3yrs, and hedge their duration risk vs. EONIA for just 0.73%. As Sarko pointed out:

"Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6-7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate."

Given the ECB cut its reserve ratio, freeing up capital, posting short-medium term BTPs yielding 6-7% to the LTRO (with just a 1.5% haircut) with funding locked up for the entirety looks like a particularly good trade for Italian banks that are essentially screwed if Italy goes bust anyway. This not only takes a good chunk of Italian funding, but also results in building capital at Italian banks (reducing the need for the State to inject equity). This is the Bank/Sovereign feedback loop working in a positive way.

Note also that EU banks in general are now likely a large buyer of EFSF paper which can be used as collateral at the ECB. TMM would also note that banks can help achieve their new capital targets by purchasing these types of assets and taking the RWA improvement. TMM note that insolvent but liquid banks do not go "bang".

(iii) Structural measures. The EU Summit clearly went a long way to addressing the problems with EMU in terms of aligning fiscal policy, implementing national debt brakes and structural deficit constraints. Additionally, Italy is enacting more broad-based structural reforms. These types of things take years to have an effect, but eventually they will. And it seems that Super Mario is pretty happy with them. That doesn't necessarily mean the ECB will step up, but it is certainly a necessary condition to preventing these problems from arising in the future. The agreement is now like a pre-nuptial, and it is certainly vulnerable to difficulties in being passed. But TMM would view the only countries that matter here as Germany, France & Italy. Monti's package that is being voted upon on Wednesday already contains the debt brake legislation, leaving only France to pass it. No doubt this will be difficult, given that the Socialists are against the package and an election is shortly coming. But there is now a convenient guy to give the blame to - David Cameron & the UK. TMM are optimistic on this front as it also furthers Sarko's wish for Eurozone-17 integration at the (supposed) expense of the UK.

To sum up, TMM reckon markets have misread the events of the past week. Sufficient firepower does actually appear to exist, with many of the other perquisites for the end of the crisis. TMM reckon looking for a bazooka is the wrong approach, and have just noticed the infantry columns marching from several directions. The above is probably just about sufficient to remove the systemic effects of the crisis globally, making TMM more optimistic broadly on global growth. But at the end of the day, it will be clarity on Europe's growth outlook that finally puts the issue in Europe to bed.

Simply said, the World isn't ending just yet, friends.

Europe and the Bomb

noreply@blogger.com (Polemic) — Wed, 07 Dec 2011 15:48:00 +0000

European Commision (EC) - What is this? It looks like a bomb!

ECB - But it cannot be a bomb! Our analysts tell us that it cannot be! The data does not support it! It is clearly a figment of all of our collective imaginations or more likely a bowl of roses.

Markets - [in diminishing voices as they leave the scene] "RUUUuunn...".

France - OK, well say it IS a bomb then what do we do? Is there a protocol for this?

All - [Reading from the Holy Book of EU policy] We tell the world it is not a bomb and then it will not be a bomb!!!

France - It's still ticking! And the numbers are getting smaller on the display.

Italy - (faints).

EC - Well stop the display!!!

[EU bans short selling and covers the display with a towel]

EC - Do you think the bomb knows that it has to stop its countdown now that the display is invisible?

France - I'll have a peek... Oh Zut! The numbers! They are getting smaller they are at 00.01.10 now!

ECB - Well, if, and only if it is a bomb and if and only if we had to stop it. how would we do it?

EC - Well, we should have a meeting to discuss the options. Can I suggest we hold one in, say, one minute's time?

All - Good idea!

[1 minute and 1 second later.]

EC - So that is agreed then. We will all work together showing commitment and a single-minded determination to defuse this bomb that we now agree may indeed exist.

EC - As we have told the bomb that we are going to defuse it, it should therefore have realised that its purpose no longer exists and defused itself. But just check...

ECB - WHAT?!?! It is still counting down! And it is now at 00.00.01!!!

EC- Argghh... Quick! Do something! And probably best for transparency, broadcast our thoughts and suggestions live to the world so they can witness our resolute decisive oneness and be in awe of the way we deftly solve this problem.

[Global media linked up live to proceedings]

France - OK, stand back, I am going to cut the red wire, pass me the wire cutters.

ECB - I'm not allowed to.

France - Come on!

ECB - Yes, it clearly says in my mandate that I cannot pass you the wire cutters as wire-cutters will never be needed.

Germany -Yes, he is right, he cannot pass you the wire-cutters. We specifically made sure that he never could.

France - Oh, Sacre Bleu...! Come onnn! I'll do it myself then.

Germany - I'm sorry we cannot allow you to do that , it is against our principles. But we could talk about alternatives - Like the blue wire.

France - If I let you cut the blue wire will you let me cut the red wire at the same time?

Germany - No, the red wire is non-negotiable.

EC - What about that wire down at the bottom? The yellow wire?

ECB - There may be a way I could do it using the green wire as long as no-one sees that I am involved.

IMF - Don't look at me!

Germany - You can forget the green wire too. I can see what you are trying to do behind my back! Enough! I don't care what you all want, I am going to cut the Blue wire and if any of you try to stop me I will cut ALL the wires.

EC - I can see we have made some real progress here, folks, but perhaps we should see if we can reclassify the bomb under a new agreement? Maybe as an Apple? Perhaps we could have a meeting to decide....

[Ka ...............................BOOOOOM!!!!]

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Rates, Energy, SOEs: Chinese Trilemma

noreply@blogger.com (cpmppi) — Wed, 07 Dec 2011 10:27:00 +0000

First up, the ECB's 3m USD tender today produced a take up of $50bn, not an insignificant sum. The Fundingeristas are already arguing that this indicates that the stresses were even worse than we thought. But TMM take a less pessimistic interpretation: the stigma for using this facility has been removed as it becomes a more "normal" part of central bank liquidity operations and that it is significantly cheaper than market-based options. For example, the basis in the FX Forward market is still quite large, but many French banks in particular issue USD paper directly. And to compare Natixis (as a typical French bank issuing in the US) 3 month USD CP at 0.74% (see chart below), it is clear that 0.59% from the Fed/ECB was attractive. This was a cheap auction, so we should not be surprised at the take up.

With little else to talk about ahead of the meetings tomorrow and Friday, TMM decided to do some of their homework ready for 2012...

Chinese inflation is trending down and that has allowed H-shares to rip much to the chagrin of China bears and to the benefit of TMM’s performance. This has largely been driven by food as seen below and some of the China cheer squad are getting pretty bulled up at the moment as the talk of interest rate liberalization heats up.

TMM are definitely of the view that China needs rates liberalization and that an awful lot of China’s problems can be attributed to having negative real rates for too long – overinvestment, people using apartments as term deposits and the like. Michael Pettis and most other sand individuals have argued that for a country with an overinvestment problem negative real rates are a bad idea. However, TMM think that while this is the biggest distortion in the Chinese economy it is not the only one – energy prices are almost as important.

TMM have a snapshot below of the typical cost structure for a 400MW coal fired power station in Australia and China. China imports a lot of its coal so pays a higher coal price but otherwise they are pretty similar except in how power is priced.

Firstly, retail power prices in China are roughly a third of those in Australia despite facing higher fuel costs and fairly similar capital charges. That is odd enough, it is when you take the margins of IPPs and pool level data in Australia and back out the grid services and system operator charges that things look really nutty. Retail power consumers in Australia pay about 19c of their power bill in, say, Victoria to pay for the grid whereas in China that is closer to 1.6c.

Colour TMM sceptical but while wiring up China should be cheaper due to higher population density it can’t be that cheap – the ex-fuel charges for Hong Kong retail power are about 7c and there they really cram them in. That is how TMM get a very rough “fair” price for power in China of 17c per kWh and an implicit subsidy of 54.7%. Despite the IPPs having atrocious mid single digit ROEs most of the cost here is borne by State Grid and China Southern Grid, both of which are wholly state owned and are clearly a long way away from anything that looks like profitability.

This has been a long time building and is best shown by comparing power prices to coal prices as can be seen below. All three series are rebased to July 2003 in RMB...

...which has had a pretty clear impact on IPPs which are languishing with their Return on Assets below best lending rates and their cost of debt which is around 4% as of LTM 2011 numbers.

All this leads TMM to the conclusion to the China macro dilemma of energy and monetary reform:

TMM think that given the lack of any easy options here politicians will do what they tend to do when faced with two bad choices: pretend it is not there. To that end, the credit tap will gradually come on and none of these issues will be resolved with steel bumbling along and hopefully delivering and IPPs getting just enough in price hikes to stay in business. While some of the HSCEI might have a real growth story (consumer, banks at a price) heavy industry and IPPs do not.

There is however one sector that is an unequivocal short in all this and that is Chinese solar companies. According to the latest and greatest from Solarbuzz commercial sized solar installations now have a cost per kWh of 17c or so – plenty appealing for, say, an Ikea in Arizona. That would be a great business were it not for the fact that much like the state owned sector solar companies in China get el cheapo loans as discussed by John Hempton and could quite readily be locked out of the US market before too long. This would not be a huge issue if the solar glut was in, say, Australia because 17c is cheaper than retail – in theory, everyone should put them on their warehouse / depot / office block etc. The problem for China is that is going to produce 4 GW of cells and gets locked out of the international market that is a lot of supply to soak up. 4000 MW x 365 days x 24 hrs x 20% capacity factor = 7 TWh of power. Multiply that by the feed in tariff you’d need to get that capacity competitive – say, 10c per kWh or $100 per MWh and you get $3.5bn per annum for this year’s capacity alone or 1/3 of Chalco’s debt. Without major electricity price reform, China’s solar sector is not too big to fail but too big to save.

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S&P. The ratings agency that likes to say...

noreply@blogger.com (Polemic) — Tue, 06 Dec 2011 11:37:00 +0000

There used to be an advert in UK for the TSB (a nice old-fashioned bank, pre short-term money days, now part of Lloyds) which went: "The bank that likes to say... YES".

My how times have changed. Now every time S&P open their mouths TMM think their advert should be "S&P, the ratings agency that likes to say... Fuck you".

This morning we woke to the Econo-lovvies (media folk with pretence to financial reportage) on the Radio and TV wetting themselves over the latest S&P downgrades. We were expecting to see flames on the horizon as we approached the City. Not surprisingly the world is still alive despite some quanto-suits stating the obvious. TMM, however would like to look at it through rose tinted specs as a S+P negative watch on core Europe serves to (i) force Germany/Netherlands/Finland off their high ground, (ii) exerts more pressure on policymakers into Thursday/Friday - which can only be a good thing, and (iii) irritatingly, means that UK economic policy is yet again validated, remaining the only "large" country with a AAA not on negative watch. Whowuddathoughtit. Finally (iv) We've seen this movie before in August and the World did not end - there is no shock value now.

But if a AAA rating is going to be as rare as a bull in a zero hedge shop, then as Alphaville point out, its going to make Basle III a touch difficult for the banks as they rush into the small amount that is left. TMM find it most ironic that the UK deficit ends up being funded by European bank capital at ludicrously low rates all because of Global regulation.

With everything resting on the outcome of this week's meetings there is really little else left to say. TMM, as noted in yesterdays comments, threw some VaR behind their "no-commentometer" and bought some risk correlators on the London open.

TMM vote Technocrat

noreply@blogger.com (Polemic) — Mon, 05 Dec 2011 15:22:00 +0000

Friday's US data seemed, like a well balanced budget, to have a little bit for everyone in it. A generally poor set of dissectible underlying components that can keep the bears happy and a stunning headline unemployment rate for the bulls. Not much surprise then that the result was muted with a gentle drift lower.

To TMM, looking at things through cleared heads. it feels as though it's the rest of the market that has the hangover this morning rather than them. Asia traded a dull session and Europe has failed to do much better. News flow is light, scare stories sparce and it's all pretty quiet. Apart from that naughty little beast that got us into the this mess in the first place, the Italian BTPs, which whilst the bears are studiously ignoring it, have put in a stellar performance today with the 10yr yield now lower than those peaks back in August, pre the latest "this is it" meltdown.

TMM know that the BTP market is effectively bust and dead but a ghostly resurrection to the current levels does at least warrant a bit of "Price is News". But No. Chat wires have studiously avoided it. The market appears to still be in a large African river. Overall it still feels as though model accounts are behind last weeks moves and will be playing catch up in an environment of no news, so we are happy to stay pat in our "up creep" til Dec 9th play. Askoxy and Merkels little show of ssolidarity hasnt really gioven uis antthing new apart from telling us that they are in agreement, but no solutionzzzzzz. It all sounds very like Brian Clough's method for dealing with players who disagree - "We talk about it for twenty minutes and then we decide I was right"

So what else is there? Well to TMM it would appear that if you want the world to take your country's finances seriously then you need one of the following to be in place. a) a massive surplus (the proof's in the numbers right?) - b) Bad numbers but a track record of at least owning up to the fact and trying to do something about it (UK) - or c) Bad numbers with a track record so bad that the only way to instil confidence is to kick out the incumbents and install a specialist government of people trained in the necessary fields to solve the problem. A Technocracy.

Now TMM have always been aware that the barrier to installing a technocracy is that it is "not democratic". Which is normally correct. But the debate surrounding the implementation of technocracies sounds similar to a debate TMM was recently having over patient care. If told by a doctor "Well you have been diagnosed with a "X" nasty disease/ cancer. How would you like us to progress?" TMM's natural answer would be "What are you asking me for? I'm not the one with years of experience and training in the field and I don't think my objectives are any different from anyone else's in my position (cure me or make sure it doesn't hurt) so perhaps I could hand the whole process to you?" Ah no. It doesn't work like that. We all have choices these days too many perhaps, as we have to train ourselves in new fields to be able to choose wisely (energy usage, phone contracts, transport connections, schools, nutrition, pension plans, you name it). The alternative is to stick our finger randomly on the choice menu and hope for the best. Either way, the provider has abdicated the responsibility through choice to us.

As such TMM are hugely FOR technocracies as a means of solving serious grown-up painful issues as we feel that a group of people who are the most qualified to solve them will do better than a group of people professionally trained solely for politics, elected from a tiny choice of main parties, by a population with practically zero collective clue themselves. But to make sure we aren't accused of destroying democracy, TMM have an idea. On the base of every voting form should be a box marked "The Technocracy". They don't canvas, they don't spout rhetoric, they don't rip expense accounts, they just DO. It hasn't done Belgium any harm, Greece is off the radar now they have one, Italy's hopes are with one and in TMM's eyes US and UK could really do with one.

HO so no go.

noreply@blogger.com (Polemic) — Fri, 02 Dec 2011 11:45:00 +0000

The only thing that has changed from yesterday in our minds is the brain cell count. Caused by C2H5OH poisoning.

HSCEI +C2H5OH = HO
and NFP + HO = Urrgh
hope HO + B + BB + T = Relief

have a good week end
TMM

Better to be lucky...

noreply@blogger.com (Polemic) — Thu, 01 Dec 2011 12:30:00 +0000

Well, TMM recently noted that they're gaining faith in "Luck" and that new faith was rewarded yesterday. Despite getting the China PMI call wrong, TMM really didn't care as the confluence of the PBoC's RRR cut, a globally coordinated policy response and strong US data resulted in their being greeted by a 7% up move in H-Shares. We might de-weight our PMI model yet increase that of our "no-commentometer" after another uncanny call from it. As the old trading adage goes, better lucky than smart and TMM are generally in better moods today.

So what happened? Well just read a screen to see what happened, perhaps we should ask WHY it happened. If you were to believe Forbes then it was to prevent the imminent meltdown of someone (or all) of the financial markets. Now TMM have indeed heard whispers that funding was going to the wire but for an article in Forbes based on nothing more than "The only explanation for the massive action is that central banks were concerned about a pending failure that is not publically known", to TMM is like saying that lightening proves the existence of Thor. So why did this story get such widespread press? Because it was in Forbes? Or because the author was well known for being inside the loop? TMM were left scratching their heads, as the author and his piece seem worthy of little more than "Seeking Alpha". Perhaps it was indicative of an afternoon full of denial as to the stickiness of the actions and the permanence of the market responses but this feeling that the captain on the bridge avoided an iceberg whilst we dined is the prevalent one this morning.

TMM for their part think that yesterday's actions firmly demonstrated to markets that global policymakers are nothing like as divided as they have appeared to be. Indeed, in our opinion, it seemed almost like G20 coordinated easing when adding in Brazilian Celic rate cuts. While one can certainly make the case that it may have been responsive to "something really bad about to happen", there is also an argument to be made that central banks would not fire such an important gun without knowing that a decision had been made upon the central policy problem (Europe) and was imminent. This view is supported both by Monti and Schaeuble's comments referring to Merkozy proposals being imminent and the expansion of IMF resources either via bilateral loans or the ECB.

We also saw the headline about the "FSA instructing UK banks to prepare for Euro break-up" as another reason to believe a break-up really will happen. TMM do not see this as a rare example of FSA foresight, but rather a class piece of arse covering such that SHOULD Europe break up (no probabilities attached) the FSA will been seen to have given warning and will be blameless. Exactly as your local rail company does in making announcements such as "Platforms can become slippery when wet". It doesn't mean you will slip, but if you do, it isn't their fault.

But this morning the mood appears to have carried through and despite the ballistic performance of European bonds (France most noticeably) the tone of chat is still firmly in the "sell this rally" camp. But to TMM it feels as though yesterdays moves were missed by many with the market still firmly positioned in the Eurobear camp which leaves plenty of squeeze room ahead.

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TMM have been wracking their brains as to what to do about the appeal target. First thoughts were we leave it at 2k despite such a stonking response from you all and let the out-performance be testament and target in itself. We also felt that moving it higher would be a typically underhand example of an analyst moving a target to match market. BUT, the fact that the widget on the main page refuses to show over 100% despite currently being at 140% has lead us to raise the target to £3500. Thank you all so much so far for your support. We have been stunned. A huge thanks to the 66 of you who have so far contributed for your support.

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Hang 10

noreply@blogger.com (cpmppi) — Wed, 30 Nov 2011 11:27:00 +0000

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

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

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

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

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

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

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

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

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

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

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

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Twenty Questions and a Box of Matches, Please

noreply@blogger.com (Polemic) — Tue, 29 Nov 2011 11:29:00 +0000

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

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

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

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

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

a) The Syrian leadership be toppled.

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

c) Egypt be boiling in blood.

d) Libya be teetering on Somalian warlord rule

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

a) over 8%.

b) under 6%.

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

5. In 2012 China's economy will be:

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

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

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

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

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

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

b) Chad, Romania, Afghanistan & Paraguay.

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

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

a) A great opportunity to Buy (Like).

b) Groupontastic.

c) Facebook? Wasn't that soooo 2011?

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

a) What it says on the tin.

b) 6M FIBOR in DEM.

c) 6M ATHIMID in GRD.

d) Some blended rate in ECU-2.

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

9. Where will DEM/ITL trade post breakup?

a) 1100

b) 1400

d) Down at the Mithras

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

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

10. Gilts are:

a) The new safe haven.

b) A great way to stuff the Japanese.

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

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

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

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

b) Solely down to his financial brilliance.

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

12. Silver is:

a) Money.

b) Metal.

c) Way to fleece clients through theta.

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

e) Tarnished.

13. The Sun is:

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

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

c) The first name of your next boss.

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

a) A friendly thing to have done.

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

c) Not a surprise.

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

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

15. How do you make a billion dollars?

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

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

c) GoldsheepleBer-nankfiatmoneyRonPaul.

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

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

a) Wife 1.

b) Kids.

c) 6 Czech models.

d) All of the above.

e) Client No. 9.

17. Today's BTP auction was:

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

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

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

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

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

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

b) The product of 3yrs of hard investigation.

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

d) Cost 40bn quid.

19. Wiedmann is:

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

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

c) The name of the man at the Bundeathstar.

d) Not on TMMs Xmas card list.

20. The current market moves:

a) Are great, we are loving them.

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

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

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

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Losing one's Religion(s)

noreply@blogger.com (Polemic) — Thu, 24 Nov 2011 11:09:00 +0000

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

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

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

Reviving Puffy

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

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

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

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

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

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

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

TMM - for having such a charitable readership.

Happy Thanksgiving!

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What's Going On

noreply@blogger.com (Nemo Incognito) — Tue, 22 Nov 2011 14:04:00 +0000

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

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

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

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

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

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

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

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