What Does the Lack of Volatility Mean for Markets? 11 comments
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On the face of it, yesterday was a pretty quiet day. The Alcoa (AA) "earnings" were largely shrugged off (no thanks to Bloomberg, which singularly failed to report operating earnings per share in any headline or story that Macro Man could find), as were the decline in jobless claims (as continuing claims rose quite sharply). Equities farted around in a range, and ended up largely where they opened. Yawn.
Oh, sure, there was news from the Bank of England, which surprisingly failed to extend its QE program. This caused a bit of a rupture in sterling and a somewhat larger one in Gilts, though such developments may well have flown over the heads of the average equity-based punter.
And yeah, whichever Chinese flunkey was left holding the bag at the G8 summit made the obligatory comment whingeing about the dollar's hegemonic reserve currency role in the global exchange rate system. Once again, Macro Man feels compelled to offer a bit of friendly advice to his friends in Beijing: if you don't want so many dollars, then quit buying them!
Anyhow, with volumes modest the underlying market flavour appears to be one of lethargy. Just look at the Bollinger band chart of the SPX below; the index is at its lower Bollinger band, which means it's a low-risk buy here for a bounce. Right? Right?
Perhaps....but then again, perhaps not. As you can see in the middle section of the chart, the Bollinger band width is unusually narrow, indicating a lack of volatility during the observation period. Maybe this means that we have returned to a low-vol, pre-Lehman, post-green shoots world. Or maybe it's indicative of complacency in the market, and that narrow bandwidth is a coiled spring, ready to explode and unleash its potential energy unto unsuspecting punters.
For some reason, Macro Man favours the latter explanation. In fact, if you look carefully, you can find instances where the spring is already beginning to uncoil. Take European equities, for example (where Macro Man's shorts are concentrated); the Eurostoxx has traded poorly for several weeks now, and as you can see the Bolly bands are beginning to widen.
EUR/USD, has also been stuck in a tearfully dire range; similar to the SPX, the Bollinger bands are at their narrowest width of the year.
So, too, were the bands in USD/JPY...at least until a few days ago when the pair magically fell off the end of a table, raising volatility and widening the bands. Not exactly an endorsement for "risk on", is it?
It sort of begs the question of how long the NZD can remain with its narrowest bands of the year. The well-flagged uridashi redemptions and Fonterra payout announcement looms large on the market radar, and perhaps everyone's already short...thus precluding a move lower.
But if we look at the chart of another illiquid, uber-speculative asset price, that of silver, we can see that when stuff finally starts to move, it can explode lower. The silver chart looks pretty dreadful, which doesn't bode particularly well for either the "risk-on" or the DGDF crowd.
Macro Man is sensitive, however, to charges of bias. He always attempts to be impartial in his analysis, because he finds that doing so yields superior investment conclusions. And so the news isn't all bad. Chinese trade data for June, leaked as Macro Man is writing this, revealed a better than expected y/y decline in imports. We have no granularity yet, so we don't know if this is "real" domestic demand or the final spurt of uneconomic commodity stockpiling.
Of course, exports were slightly worse than expected, and the overall trade surplus (y'know, the number that actually goes into the growth figures) missed by quite a large margin. But hey...we should look for good news where we can get it.
And so, to provide a balanced analysis on this fine Friday, Macro Man is happy to share with you the latest upbeat webcast from China bulls ne plus ultra, Goldman Sachs:
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This article has 11 comments:
Mr. Hu has to buy U.S. dollars in the market to keep Yuan from appreciating! But this guy is smart. I suppose his advisers have already been doing something so as to buy fewer U.S. bucks.
One alternative is to buy up some mines in Australia, Canada, Africa, ...
Another alternative is to exchange its U.S. dollars for other currencies to buy stocks in their markets. I bet they have using their U.S. reserve to exchange for Hong Kong dollars to trade crazily in Hong Kong to push up the Hang Seng Index from 11xxx to 18xxx (a sharp 5x% increase from its Nov low)!
Still another alternative is to buy gold. I suppose that's what keep the bullion from adjusting downward despite its low production cost.
Still still another alternative is to use Euros as a second currency reserve.
To keep Yuan down, Mr. Hu is willing to do anything!
You cant continue to buy up assets (mining or real estate or whatever) if you continue to build up an unstable world. In spite of the fiscal and monetary stimulus in China, the benefits are not accruing to the rank-and-file. The money is being used for speculation by the noveau rich in China. (Auto sales are up? Hallelujah! But how is unemployment doing? Food prices? Wages? Exports? Are the factory workers buying up these autos? What about new and newly unemployed grads?)
Inevitably, as global appetite for all things Chinese falls (falling trade, falling credit and inability to accomodate a weak yuan subsidy), some of the speculative projects will fail. Bets on rising commodities based on "green shoots" of Chinese demand will fail. Bets placed with renewed enthusiasm in real estate markets will fail. In the foreseeable future of an aging, tapped out consumer, the world will not grow fast enough to accomodate such foolish investments.
(Idle speculation alert)
This is a recipe for great unrest in the future as unemployment rises. And this will not be a Tiannenmen Square composed of disgruntled students or elites. Any bets on what the powers that be in China will do then? Watch out Japan. Its not so much gold, but Raytheon and Lockheed that are in for bumper times.
On Jul 10 04:03 PM odin wrote:
> Dangerous game being played in China: They dont want a weaker dollar,
> yet dont want to concentrate further in the dollar (increase risk).
> What they want is a third stronger currency, so that they can both
> diversify away from the dollar and still keep the yuan weak (and
> continue to export capacity and build up surpluses against this third
> currency).
Exactly Odin, but they also want that third currency so that the US can weaken it's currency, thereby making US goods more competitive versus the Euro. China appears to banking on a "half a consumer market is better than no consumer market," approach. So long as the greenback remains the benchmark for so much of world trade there is very little the US can do to make domestic workers more competitive. Every developing economy eventually seeks to move away from the production of basic consumer goods with an eye toward manufacturing higher end products and luxury goods, but with the US economy as weak as it is, the Chinese don't have any market to facilitate that economic development-which is critical to maintaining standards of living and creation of a growing Chinese middle class. In the production of basic consumer goods points of production tend to be rotated quickly to the market with the lowest labor costs. ( I've even heard some speculate that the "Real," reason for humanitarian efforts in Africa has nothing at all to do with human interest and is really aimed at creating a continent-wide market of ultra-cheap labor. but that's another tangent) Many of the economies in Europe are in no better condition than the US right now, and Europeans-arguably-tend to be much more nationalistic and "continent-centric" in their purchase of consumer-goods, precluding strong growth for Chinese exports there.
On Jul 10 10:10 AM LilBob wrote:
> Personally I think lack of volatility is consistent with your prior
> prediction of an L-shaped recovery. At this point businesses are
> trying to dig out from their economic wreckage and salvage what they
> can of their assets and business models. With historic changes in
> the purchasing habits of the American consumer in the offing it's
> going to be some time before we see any dynamic movement based on
> hard numbers. Absent aggressive and concerted efforts at market
> speculation-like we saw with oil last summer-I believe markets will
> follow the "L minus ten degrees"-pattern for the foreseeable future.
Germany and Japan focused on advanced manufacturing industries so are still able to export a lot. The US foolishly focused on services, especially "financial services" which can only prosper at the expense of others. Other countries are wising up, leaving only the American people for our banks to prey on. I am talking mainly about the federal reserve banks, not state and regional banks.
But I do believe that if the status quo in China were to be threatened, an external conflict is one of the key levers that the government and the army can push to drum up nationalist fervor. Still, the US will hardly be the first target.
Japan, given its economic and demographic trajectory and the historical context between the two nations, lies square in those cross-hairs. (It is no coincidence that at no point in the long history of these two ancient civilizations have they _shared_ power at the top in Asia. One or the other has dominated).
It is hard to imagine wars starting openly between nation states in the future. However, there is a lot of potential for small conflicts to get out of hand and the pain thresholds to be heightened. (Austria-Hungary/Germany did not attack Britain and France to start WW I)
On Jul 10 05:17 PM LilBob wrote:
> Regarding the Raytheon and Lockheed comment. The US economy is so
> dependent on China right now, we could never go to war with them.
> We even get the majority of our pharmaceuticals and enormous quantities
> of pharmaceuticals from Japan. The US wouldn't even be able to keep
> our own Hospitals running without cheap Chinese medical supplies.
> With the way that this country has grown so incompetent at controlling
> costs in health-care, JUST a cast for a broken arm would cost $15,000
> without China supplying us. (Currently an arm cast in this country
> only runs around $5000, honestly couldn't believe that when I saw
> the bill a cousin of mine received.)
> The US economy is so
> dependent on China right now, we could never go to war with them.
> We even get the majority of our pharmaceuticals and enormous quantities
> of pharmaceuticals from Japan. The US wouldn't even be able to keep
> our own Hospitals running without cheap Chinese medical supplies.
References:
www.commerce.gov/s/gro.../@doc/@os/@opa/documen...
https://cia.gov/library/public...
For the U.S., Exports is only 11% of GDP. The U.S. can get any CHEAP commodities from anywhere all over the world. If China ever becomes expensive, other developing countries are more than happy to replace China. China does not have any technology that is not possessed by any other country in the world. What is so special about producing some CHEAP OEM commodities anyway?
Quite to the opposite, China replies exclusively on exports to keep its economy running. Exports amount to about 25% of China's GDP. Without its exports, the Chinese economy will go down the toilet. In additional, China depends heavily on FDI from Hong Kong, Taiwan, Korea, Japan, the U.S., ... If China goes into war with any nation, FDI will drop to zero and the communist government will be overthrown. Anyone here believe the communist dictatorship is stable in China?
Reference:
en.wikipedia.org/wiki/...
Main Destinations of exports (2007) US 19.1%, Hong Kong 15.1%, Japan 8.4%, South Korea 4.6%, Germany 4% scientific
Main origins of imports (2007) Japan 14%, South Korea 10.9%, Taiwan 10.5%, US 7.3%, Germany 4.7%
China replies mainly on the U.S. and Hong Kong to keep its economy from crashing. Anyone disagrees with this does not understand economics!
On Jul 10 04:03 PM odin wrote:
> Dangerous game being played in China: