Signs of the Apocalypse in Markets? 13 comments
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Macro Man is back in the saddle this morning and somewhat bemused to see that the world has gone China-recovery mad. Both the comment section of yesterday's post and his email inbox this morning are crammed full of observations about the bottoming of Chinese equities and the manufacturing PMI.
While it is factually true that both have bounced, Macro Man is withholding judgment. After all, the Shanghai composite is closer to its recent lows than the US homebuilders index, and he doesn't see anyone falling over themselves to call a recovery in that industry. More importantly, we should all remember that things don't move in a straight line forever, and China has cranked up a large infrastructure stimulus. Indeed, there will be a period of improved growth in the US this year...just as there was last year.
Looking elsewhere, Macro Man sees little else but doom and gloom. Indeed, if he were the religious type, he might be worried about the impending approach of the Apocalypse.
Yet another emerging market currency has been splattered today, as the Kazakh tenge has finally been devalued by 20% after months of pressure. The KZT was in vogue a couple of years ago as a sexy long....but another one of Macro Man's rules of thumb is never to trade a currency named after a movie character (the KZT is known as the 'Borat'). The pressure on the KZT has been mirrored in "real" markets, where the CEE currencies such as HUF and PLN have been obliterated in the past few days, with market liquidity collapsing. So the Great Unwind has further to go.
Indeed, somewhat ominously, LIBOR rates have started to tick up, with three month dollar cash fixing some 14 bps higher over the past couple of weeks. Perhaps this is an innocuous development...but treating previous upticks as such has been a very dangerous (and costly) proposition.
At the same time, US sovereign 5 year CDS surged 15 bps yesterday to 86 bps. To put that in perspective.....it's where Citigroup CDS was trading exactly one year ago. Remarkably, Macro Man could only find three other countries with double-digit CDS ratings: Japan (58), Germany (59), and France (69). Was it really only a decade or so ago that Japan's loss of a AAA rating amidst massive borrowing made waves? Now markets are essentially saying that the Japanese government (facing a massive demographic challenge) is the best creditor in the world.
Rumours that the devil is shopping for a mink winter parka are as yet unconfirmed.
More troubling is the prospect of a populist political backlash to the crisis. Populism is generally the enemy of sensible policymaking; in that vein, developments in Switzerland are troubling. We've had suggestions from the SNB that they might contemplate FX intervention as a tool in their policy arsenal; as currencies are a zero-sum game, that merely shifts pressure from the Swiss economy to someone else. But this weekend, the Swiss are voting on a proposed "economic freedom of movement" treaty with the EU. A certain cohort in Switzerland opposes allowing workers from some new "undesirable" EU countries into Der Schwiez. The imagery used in their campaign is truly scary, as to Macro Man's eye it is not dissimilar to that used in early '30s Germany.
Finally, there is a literally Biblical sign of the Apocalypse in Australia, as Queensland has been beset by floods of such magnitude that crocodiles are swimming in the streets. In typically Aussie fashion, however, afflicted citizens have homed in on the really apocalyptic aspect of the flooding: they're running out of beer.
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Equilibrium is Utopian but the probabilities look to over shooting on the downside which well be cause by political intervention. Does anyone believe the government bureaucrats and politicians can run anything better than the private sector, which doesn't have that good of a record going to manias and panics? Especially, when our Treasury is hiring the losers who created our policies and the Administration and Congress is controlled by Socialists.
The last manias traders are today's losers because its a losers game. You can't beat the House when even the house is losing its butt. To have a big winner you have to have exponentially more losers which should be obvious to anyone except those who are chronic deniers.
All the imbalances that have been allowed to accumulate, rather than being periodically purged, both domestically and globally, are now surfacing. It will likely take several years to find a new and sustainable economic paradigm.
I think we should take some of the TARP money and use it to send beer to Queensland.
Macro Man wrote:
More troubling is the prospect of a populist political backlash to the crisis. Populism is generally the enemy of sensible policymaking
On Feb 04 10:27 AM Larrysyr wrote:
> Great article and comments.
>
> I think we should take some of the TARP money and use it to send
> beer to Queensland.
The supression of populism is exactly what led to the nonsensical policies which led to this crisis. We (the people) have been led to beleive that our heath as a society is somehow tied to the health of the stock market, or we have allowed this to be so. Piddling 401K accounts have led us to beleive that our interests are somehow aligned with those of the plutocrats and their patrons who run the markets and the government. Well, we are all investors now, willing or not.
Before this is over we will root out the plutocrats and they will be justly and severely punished. I will be surprised if we don't have some Marie Antoinette action. Surprised and disappointed. We know where you live.
That Swiss cartoon is truly disturbing. What context was it in?
"At the same time, US sovereign 5 year CDS surged 15 bps yesterday to 86 bps. To put that in perspective.....it's where Citigroup CDS was trading exactly one year ago. Remarkably, Macro Man could only find three other countries with double-digit CDS ratings: Japan (58), Germany (59), and France (69). Was it really only a decade or so ago that Japan's loss of a AAA rating amidst massive borrowing made waves? Now markets are essentially saying that the Japanese government (facing a massive demographic challenge) is the best creditor in the world."
Nobody knows what's around the corner, so they certainly don't know what's coming 3, 5, 10 years down the line. All this certainty in the shadow of the craziest 14 months, maybe of all time. Its hilarious. Responsible journalists or bloggers would preface everything they say in these times with "Maybe", "Perhaps" or "This is a crapshoot"...
The AG complex gets a pop.