Oriental Trader

Macro
Oriental Trader
Macro
Contributor since: 2008
Re-entering short AUDJPY at 93.8. It appears AUDUSD did not rally much before reversing despite strong Chinese data, SP500 new highs and even markedly lower US Treasury yields.
I conducted an in-depth study of the Australian economy over the weekend. Though it's always difficult to say when's the "right" time to go short, it appears unlikely Australia can deliver economic performance anywhere closer near what it has been doing over the last two decades. Of course, tomorrow's capex and Friday's credit growth data may or may not be good, but the long term downward pressure is significant. I'll publish that piece later.
Covering short at 0.9250 for now. Big beat in Chinese pmi data last week and overall lack of downside catalysts make it a dangerous short with SP500 at new highs.
I cite that the Fed has mostly exhausted its dovish language as the reason. They can't get much more dovish that indefinitely zero rates with their equally emphatic insistence on tapering.
Netflix, tesla, amazon, these all take huge sums of money to build, operate and grow. Yelp has a moat in that early reviews are valuable. Most FB users are not going to spend most of their time on FB reading 2 yr old wall posts.
Whatsapp has shown us the dirty secret that SNS can be great for almost free and at this stage takes almost nothing to build.
If users are expecting great experience and only $1/yr price. There will be two scenarios:
WA gets maybe 3 billion users for $1/ yr, earnings topping out at $3 bn a year. The tail wags the dog and that $3 bn is all Fb is going to earn. ( assuming everyone starts expecting SNS for $1/yr and FB's ad business fades into irrelevance)
Or
FB starts charging more for WA and people leave for the next free thing.
No one is still really close to challenging google on search. ( except baidu, who won because, well, google wasn't able to be in that market) And search is arguably different from FB wall posts.
Some app pops out of nowhere and with a few million dollars, gains enough traction to pose a real threat to FB. I think there's a distinction there ;).
The blogosphere could argue for years but WhatsApp's astronomical price at such low startup cost made it clear.
Be cautious and please don't appear on my door step if FB doubles first. :)
Well, AMZN spent $3.4 bn on capex alone in 2013. My point in contrasting FB and AMZN here is that the costs of creating, maintaining and even marketing an almost free SNS app can be near zero. Even NFLX spent $100 mn on house of cards. A big expense that made it into Forbes' coverage of the story is SMS verification texts at $500k a month. You can imagine how low the other costs must be if SMS verification costs are that mention worthy.http://onforb.es/1moc9cj
I don't doubt FB will be huge for years to come. The question is At the price of how many more dilutive acquisitions?
Correct, whatsapp first raised $250k, then raised $8m, then after reaching 200 million users in 2013, it raised another $50 million.
It appears to me that raising the money in 2013 was mostly for "just in case" purposes(source: http://onforb.es/1moc9cj ), it had $8.2 million in cash at that time, was turning a profit, had essentially built the business already with 200m users, and didn't substantially expand its size after receiving the $50 million.
short.nzdjpy tryjpy at mkt
FWIW, I am long EURCHF at 1.222. Just a personal opinion and bet, not a suggestion in any manner!
Covered right now 101.51, fears over EM are easing and US data has been normal except for a few glitches. BoJ officials clamouring to hint at more easing if needed. USDJPY could go either way for a while, looking to short again later.
Thanks for the detailed response, from a native nonetheless!
With almost zero expectations for devaluation by the snb, the eurchf has become a low risk trade to get into. 1.222 now, 1.2 lower boundary. I have no idea what's going to happen next, but any increase in franc devaluation expectations would likely see the rate soar.
Two tapers in a row, anyone want to continue the debate?
Just went short USDJPY(long yen )at 103. Putting my money where my mouth is.
Well, one can hold a long term unleveraged core position and make adjustments accordingly. If you look at all the big moves this year after April, most were ranging, not trending. These 5-10% swings happened at least three times while optimism flowed or ebbed. So might be worthwhile trying to capture some of these. At the very least, anyone with a leveraged exposure to usdjpy should be cautious. 3:1 at 105 is -45% at 90.
While I agree with the credit cycle theory, I think radical expansionist policies are unrealistic because:
1) Though they will restore economic balance, they also create deep uncertainties over the value of the currency. You never really know when you've crossed the Rubicon and the currency's esteem falls below a tipping point.
Of course, you could promise that monetary stability will be the focus once things get back to normal, but how would anyone know what to believe with such drastic changes in policy? (2% inflation target in one year, radical expansion in another, 2% inflation target after things get back to normal... err what???) It's just really hard to do in practice.
2) Creditor's interests are being harmed and they'll punch back. The guy or institution who owns the loans don't want his interests redistributed to the debtors until the general economy has hit rock bottom and he figures he has little to lose anyway. These are people who are "doing well" and their opposition to what is effectively redistribution will be very stiff in the beginning.
Very nice! I've tried to dissect the components of profit margins sometime ago but only walked away with a rough estimate.
Perhaps your next piece could delve further into this subject,I'd look forward to it very much!
I agree, I think it's leveraged players selling because they're afraid panic selling could send it down further.
Long term bearish on yen but short term I'm bullish. Look at all the yen bears built up over the last few months. They'll forget the longer term once they see USDJPY 101, 99, 97, 96, 94, 93 in just a few days.
Thanks for your response. I might as well venture further and ask, why have I heard many bankers claim a low interest rate environment hurts not helps them (Brian Monihyan would be one example, Chris Whalen another) , other than the nondeposit thing you just mentioned
Re: the point whether short term rates would rise fast enough to severely impact banks' net interest margin...
Good point user 418621, I really don't know, my bankers dilemma hypothesis is more on the asset side than on the liability side.
You guys argue quite persuasively that overall risk can be managed. But to me, the question is, why even take that risk at all? It's big, it's uncalculable and getting the Fed to Qexit can help contain it.
Unbelievable how?
Perhaps he has a fascination with Eurodollars.
Seems like my article attracted a big debate hehehe.
Perhaps he has a fascination with Eurodollars.
Seems like my article attracted a big debate hehehe.
You have a point there about how the past few (benign) decades are hardly normal.
But that's the environment in which we've become accustomed to. What happens when trillions of dollars of credit accumulated in a zero rate environment meets up with a strengthening economic recovery and rates going up 3 or 4 percent in a year or two? I'm not saying the current economic recovery is necessarily that strong, but such a scenario is not improbable.
There is no good way to manage such a risk: what if you keep too much dry powder on hand and QE persists for another 5 years? The best way is to lobby for normalization to start happening before economic circumstances force it. Then you can adjust gradually through the ways you mention above.
Solvency is dependent on asset prices which is at least somewhat dependent on liquidity infused by the central bank. It's hard to clearly separate the two when so much relies on asset prices.
On Dec 31. 2008, banks had $7.8 trillion on balance sheet loans, $4.7 trn of which were real estate and $1 trn to individuals. (FDIC SDI database) By that point, a seriously underwater defaulted mortgage was probably only worth as much as the collateral, whose price at least partly depended on the expectations of future liquidity provided by the Fed.
Under a normal interest rate environment, I would concur with your statement. Look at mortgage rates in the 1990s. They hovered between 7 and 8% for a decade. The gains and losses from the movement in these prices would not pose any systemic risk.
But it's different this time in that we could face a sharp rise in interest rates if the economy gets better. The mere hint of an eventual Qexit sent 10 year yields from 1.6% to 2.8%. Changes of such magnitude in such a short time period have been rare. If this is normalization of interest rates, and you're running an institution with large holdings in fixed rate long-term debt, do you want this to happen now or later (assuming this is viewed as inevitable)?
"Because of that income threat, others were reluctant to extend further credit to them, and they were not liquid enough to be indifferent to that market reluctance."
I don't see why there has to be a dichotomy between liquidity and solvency that makes the financial crisis fundamentally one of "liquidity". If concerns about solvency drive lack of liquidity, and lack of liqudity fuels solvency worries, it could be a chicken-egg question.
There are some good points in your very detailed comment and some I don't agree with.
"Any lender who can afford to hold his loans to maturity, therefore, does not need to care about the path of interest rates, and if anything has a mild incentive that they go up." Contrast that with the experience of the S&Ls in the early 80s. Though I doubt we'll see a repeat on that magnitude anytime soon, lenders can be adversely impacted by large upward interest rate movements.
"If you do anticipate higher rates, you can keep a dry powder reserve to invest as those become available, of course. " Hard to do in an environment where you can't predict how long interest rates will remain low. The only option is to keep dancing until the music stops, especially if you have to fulfill performance indicators.
"The total pie to all creditors grows when interest rates rise, it does not shrink." There are $9 trillion in deposits (not to mention other short term funding sources). An large increase in the rates paid to those depositors is really a net loss for banks who hold fixed-rate longer term debt.
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Even if we accept that interest rate risk is manageable even in this scenario (which we can discuss further), why not forgo the risk altogether? If (1) the Fed is the key factor in depressing the risk-free rate, (2) it is unpredictable how long this will remain the case, and (3) removing that factor can allow the risk-free rate (and by effect, other rates) to more accurately reflect what rates would be under normalization, why not lobby for it?
If you are using the FDIC Statistics on Depositary Institutions (http://1.usa.gov/19plnk4) database as I presume you are, note that there are several definitions of bank capital.
9.3% on 1/1/2008 probably includes goodwill, a $400 billion mushy sum that is not included in a more stringent definition of bank capital. Remove that and TCE % is only about 6.2% for 12/31/2008.
Keep in mind that by 2008, Level 3 assets alone were over $600 bn. (http://sloanm.it/19plnk7)
It is not inconceivable that bank capital was perilously low.