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March 30, 2015

The state of the financial labour market

Filed under: Forex Strategies — Tags: , , , — admin @ 4:43 pm

As many risk takers are likely to be concerned with locking down positions and profits into month and quarter end, Macro Man thought he would address an issue that’s near and dear to his heart, the state of the labour market for market professionals.

He spent a few minutes sifting through efinancialcareers, an online job portal that pretty much does what it says on the tin.  First, he looked at openings for portfolio managers:

As you can see, the query generated 290 results, globally.   OK, what about looking for traders?

Hmmm…507 results, but as you can see, a lot of the results are for quant traders because hey, HFT front-running is perfectly legal and what could ever go wrong?  If you sometimes feel like trading these days is like living in The Matrix, you just might be on to something.   A search for C++ yields a whopping 1434 results.

If you apply for one of these roles and are contacted by an “Agent Smith”, watch out!  On a slightly more serious note, perhaps the best piece of advice that Macro Man can give young readers interested in a financial career can be summed up in 3 words.  Learn.  To.  Code.

Even more than coding, however, there is one area of finance that is in a roaring, runaway bull market with no end in sight.  Some may call it a bubble, but as you know the authorities always feel uncomfortable identifying bubbles in real time.   Indeed, listen to Yellen’s Congressional testimony and you can see certain members cheering lustily for the trend to continue, nay accelerate.

Step forward Compliance officers, for whom there are a stunning 3093 vacancies!

There you have it folks, financial markets in 2015- where demand for compliance folk outnumbers that for portfolio managers by more than 10-to-1.  The irony, of course, is that in their zeal against too-big-to-fail on the banking side, the authorities have significantly raised the AUM bar for what constitutes a viable business proposition on the fund side.  As a result, in some sectors at least assets have concentrated in huge funds with the built-in compliance infrastructure to satisfy the rampant bull market.

One can only hope that come the next market crisis, they do not prove to be too big to fail.

March 26, 2015

Running in place

Filed under: Forex Strategies — Tags: , — admin @ 4:43 pm

A 1.5% downday, and the SPX is basically unchanged on the year.   There’s a reason that Macro Man hasn’t written too much about equities recently, and that’s it in a nutshell.  For the first three months of the year, US equities have been a bloke on a treadmill, running at a brisk pace simply to stay in place.

Not that this has come as any great surprise.  In October, Macro Man noted that liquidity factors were the primary explanatory variable for the S&P’s stellar run of performance over the past few years, and with the tap being turned off (in the US at least) there was naturally some reason for concern over future returns.

Indeed, more than a year ago Macro Man performed an analysis of the SPX’s return and vol by Fed policy regime; he thought that he had published it here at some point over the summer, but he’s deuced if he can find it.  Regardless, the analysis suggested a very bullish outlook for US equities as long as the Fed was a net purchaser of assets, and a dim prognosis whilst the Fed did nothing.   He’s taken the liberty of updating the study for the full body of the Fed’s QE Era (Dec 2008- Oct 2014); a summary of the results are below.

As you can see, based on this study, the right question for US equities is not “why aren’t they going anywhere?”, but “why are they doing so well?”  Since the end of October, the SPX has generated an annualized price return of 5.4%, with a vol of just over 13%.  Of course, a number of ancillary factors have also impacted the price- ECB QE, the collapse in energy prices (bad for producers, good for energy consumers), and of course, the shifting sands of Fed policy expectations.

There are, of course, limits to this type of analysis, given the paucity of truly independent samples.  Even going back several decades delivers little more than a handful of policy cycles, which is really an insufficient number from which to draw strong statistical inferences.  For what it’s worth, a year ago Macro Man also performed a study on SPX performance by orthodox Fed policy regime, splitting the cohort into the first 6 months of tightening/easing, subsequent tightening/easing, and on hold (defined as no policy moves for the last 6 months.)  The results are set out below.

On the face of it, this might suggest that a rate hike might be the best thing to ever happen to the US equity market, but correlation does not of course imply causality.  One might posit, for example, that early-stage and subsequent tightening cycles are driven by robust economic activity, which would naturally prove supportive of stock prices.  The lower returns from on hold and easing, meanwhile, would reflect the weak underlying economic conditions justifying those policy stances.

In the current environment, the expansion is already somewhat long in the tooth when measured by the calendar (though not by the credit cycle), and earnings have had a lot of “unnatural” support baked into the cake thanks to uber-accommodative policy over the last six years.  This is unlike any of the scenarios captured in the data set above.

Current and future financial conditions in the US look set to be tighter than those of the past several years, so it seems natural to expect equity performance to be worse (and, cough cough, macro performance to be better.)  That being said, Macro Man’s model is still somewhat bullish of the SPX, which informs a moderately long strategic position even as he is agnostic tactically.  He is following developments in the model and the market from afar, however, and is ready to change his stance when and if circumstances warrant.

In the meantime, there’s always the DAX, though it certainly looks like at least a good chunk of the easy money’s been made in that one for the time being….

March 19, 2015

Dot-dot-dot, dash-dash-dash, dot-dot-dot

Filed under: Forex Strategies — Tags: , — admin @ 4:43 pm

Well, that was….intense.

The Fed dropped the word “patient” and explicitly left the door ajar for a move in June should circumstances warrant.   However, the real sting in the tail was in the SEP, where the infamous dot-plot ratcheted lower in response to downgrades to the growth and inflation forecasts.

The end-2015 median is now at its lowest level since before the Taper Tantrum.

Market reaction was swift, and Yellen’s press conference did little to dissuade the participants from buying securities and selling the dollar.  For today at least, score this one in favour of the monetary heroin addicts.

Probably unsurprisingly, the most vicious price action took place in the most-positioned market, EUR/USD.  Pre-Fed short covering evolved into post-Fed stop-lossing, which itself became a full-blown rout in the gray zone after 4 pm NY time.  Not since Bernanke pulled a volte-face in July 2013 have dollar longs been punished so swiftly, with so little liquidity.

From Macro Man’s perch, price action in eurodollars was disappointing but not altogether surprising given the magnitude of the dot-plot downgrades.   They key question here is whether the market chooses to maintain a 10-20 bp “easing risk premium” in the ED market versus the dot-plot, or whether it’s now happy to let the market price converge now that the Fed has apparently capitulated.

Macro Man has to confess that the dot-plot forecasts moved a bit lower than he had envisaged; such is life when ruled by a central bank that forecasts with a rearview mirror.  It’s just as well that he had a last-minute bout of jitters and sold a few dollars and cut a little bit of rates risk before the announcement.

From his perch, he still expects a handsome snap-back in the data for April and March; while he doesn’t think that will generate a hike in June, it could well be enough to swing the dot-plot pendulum the other way for 2016 and beyond.  Although he is tempted to add to some of his ED bets given this sharp rally, prudence suggests that it’s better to be a day late than a day early, particularly if the market decides that it wants to price perma-ZIRP to feed the jones of all the asset-market junkies.

As for the euro, meanwhile, let’s not forget that even at the peak of the gray zone squeeze, it was still down some 1.5% from February’s close.   Scant consolation if you were the poor bugger selling in the low 1.04’s last week, but less of a worry for more strategically-inclined investors such as your author.

Thus, from Macro Man’s perspective, the SOS that you heard after Wednesday’s trading was not a plea of “save our shorts” from underwater euro bears, but rather a weary, resigned “same old sh–” that we’ve had from the Fed (and BOE) over the last couple of years.

(As an aside, did anyone else find irony in Yellen’s response to the chap from American Banker magazine?   Y’know, the bit about getting rid of incentives for excessive risk-taking….)

March 18, 2015

Banishing the ghost of 1937

Filed under: Forex Strategies — Tags: , , — admin @ 4:45 pm

So the big day is finally here.   Will patience be a virtue, or won’t it?   Macro Man’s hunch is that the Fed will keep the door ajar for a midyear rate increase, but maintain a pretty high bar for doing so.  Judging by yesterday’s survey results, he has plenty of company.  Fully half of you opted for answer C, “Indicate that a June hike is possible but unlikely.”   Only a third of you thought that the market’s perceived probability of a rate hike in three months’ time will increase as a result of today’s Fedapalooza.

In terms of his portfolio, Macro Man has decided to more or less sit tight.  As discussed yesterday, he has a bit of a barbell on, with positions in those assets most and least priced for a hawkish outcome. Judging by both the poll result and yesterday’s little short-covering flurry in EUR/USD, a bit of a damp squib today would not come as any real surprise.  Macro Man’s positions are pretty modest at the moment, so he’s willing to wear a little bit of short term pain if it means getting better entry levels to reload.

Your author was intrigued to see the flurry of press attention paid to Ray Dalio’s warning on a 1937 repeat from the Fed.   Only a few miles separate Macro Man’s office from Mr. Dalio’s, though the distance between their respective places in the financial universe is obviously substantially greater.  Still, Mr. Dalio is a famous adherent of brutal honesty, so Macro Man can’t help but observe that he thinks Mr. Bridgewater, a man who’s been known to hold the odd bond or ten billion, is talking his book a bit.

Although Macro Man has not read the verbatim text of Dalio’s missive, based on press reports it seems to him that Dalio is falling prey to the fallacy of the false dichotomy discussed last week.   The Fed can raise rates modestly and still maintain easy financial conditions, even if the feedback loop between the policy rate and overall financial conditions is swifter and stronger than it was in the past.

Moreover, “we can’t raise rates because it might precipitate another crisis” is a counterfactual that can neither be proven or disproven  unless someone’s willing to give rate hikes a go.   What we can say, however, is that there is no room for orthodox policy easing should the need arise from current policy settings.   And of course, if unorthodox measures were all that effective, Mr. Dalio wouldn’t be sitting here in 2015 fretting about the economy’s ability to withstand any tightening whatsoever!

To be sure, some emerging markets with an excess of dollar funding may be vulnerable.   Of course, many of the countries moaning about potential Fed tightening since the taper tantrum were the very same ones that whinged when the Fed was doing QE!   There’s just no pleasing some people….

As for the state of the economy, summoning the ghost of 1937 really misrepresents where we are and where we have been.  It’s true that industrial production is roughly 5% above its pre-crisis peak, the same level as it was when the Fed started tightening in 1937.  However, the paths to that level were very different indeed….

While growth in the rest of the world has clearly been anemic since the onset of the crisis, it’s worth reminding ourselves that anemic is a damned far way from catastrophic.   In 1937, US exports of goods and services were only 2/3 of their pre crisis peak.  Last year they exceeded 2008’s levels by 26%.

Finally, let us note that the Fed tightened policy in 1937 as the unemployment rate tumbled from a Depression high….all the way down to 11%!    Lest you have forgotten, the peak unemployment rate during the Great Recession was 10%.   It’s true that U6 was as high as 17% a few years ago….but we also don’t know what the equivalent would have been in the 1930’s.  Regardless, in 1937 the unemployment rate had only retraced slightly more than 50% of its rise from the pre-crisis trough, substantially less than it has done over the past five years.

None of this is to say that tightening won’t have some negative repercussions- after all, you can’t make an omelet without breaking a few eggs.  On the other hand, Japan offers a salutary lesson that perma-ZIRP is no buffer against economic downturn or financial crisis.  Unlike Japan, the United States has returned to solidly positive nominal GDP growth (albeit lower than pre-crisis trends.)  Perhaps the question that Mr. Dalio really should be asking is what he’d like the Fed to do when the next downturn comes (and come it will, ZIRP or no ZIRP): cut rates from  2.50%, or push on a string?

March 14, 2015

Four thoughts after payrolls

Filed under: Forex Strategies — Tags: , , , — admin @ 4:44 pm

* It’s getting increasingly difficult for anyone to say that the US labour market (with the exception of that for friendly macro punters) is anything but robust.   Year on year growth in nonfarm payrolls is now 2.4%, the highest since Internet bubble was just past its zenith- and looks to be accelerating.  True, wage growth remains fairly tepid, but as Macro Man noted nearly a year ago, that looks to be as much of a global issue as a domestic one.

*  Macro Man believes that there is something of a false dichotomy being drawn in some of the will they/won’t they debates on Fed tightening.   By any reasonable measure, financial conditions are very, very easy in the United States and throughout much of the world.  It seems to your author that many of the arguments as to why the Fed shouldn’t or will not raise interest rates this year seem to involve hand-waving prophecies of doom about the fragility of the recovery, undesirably low inflation, etc.   Macro Man has covered inflation previously and has nothing to add on that front.

However, how fragile is the economy, really?  Economic growth is not being driven by the classic interest rate sensitive sectors, for the simple reason that non-security credit is not being allocated or demanded on the basis of price.  Rather, regulatory and balance sheet concerns are informing many of the lending and borrowing decisions of would-be creditors and debtors.  It stands to reason, therefore, that the deleterious impact of higher rates on the economy should be more modest than normal, insofar as the economy has not relied upon borrowing for growth.   (Yes, corporates have been borrowing in the bond market, and not always for good reasons.  But as observed previously, that appears to be less of a concern than previously thought.)

The only way that some of the hand-waving can reasonably be justified is if the hand-wavers believe that rates will go to neutral quite swiftly, taking financial conditions with them.  Frankly, Macro Man doesn’t know anyone who believes that.

Therein lies the false dichotomy: monetary policy is not a choice between stupid ZIRP-world and neutrality; it’s a choice between stupid ZIRP-world and still-accommodative policy for quite some time.  Given the state of the equity, bond, and labour markets, that looks like an easy choice from Macro Man’s perch.

* The DXY is the gift that keeps on giving.   Macro Man noted that the current policy settings in Europe represent the perfect mix for euro weakness, and the single currency duly obliged by falling out of bed on the strong NFP figure.  Amidst the popping of champagne corks (French, of course- these days it’s cheaper than California!) , your author thought it would be interesting to put the current dollar rally into context.   He took monthly data from the Fed’s broad TWI, which goes back to 1973, and plotted each winning or losing streak as a cumulative columns chart.  Imagine his surprise when he found that the current 8-month winning streak (including March) is the longest in history!

Obviously, there have been four different 8-month losing streaks, so we are not quite in uncharted territory here.  Macro Man had two reactions to seeing this result.   The first, visceral reaction was to conclude that we are indeed probably overdue for a little correction to take some of the steam out of the market.

His second reaction, on the other hand, was to observe that there looks to be quite a bit of clustering and serial correlation of streaks.  Long losing streaks seem to group together, as do long winning streaks.  The secular dollar rally from 1995 to 2002, for example, had 8 different streaks lasting at least 4 months.   If, as seems likely, we are embarking on a new secular dollar bull, then even the most ardent longs should hope for a pullback.    There’s a phrase that describes a correction after the onset of a strong rally.   That phrase is “buying opportunity.”

* It was great to see daylight savings roll around again.  The sunshine seemed to last forever today, and the weather even obliged by rising comfortably above freezing for the first time in recent memory.   The sun was shining, the kids were gamboling in the back garden, and you could almost taste the onset of spring:

OK, maybe not quite yet.  But with temperatures slated to rise further this week, perhaps our long national nightmare is finally over….

March 13, 2015

Why the DAX is outperforming

Filed under: Forex Strategies — Tags: — admin @ 4:43 pm

Macro Man was going to write a thousand-word post on the matter, but why bother when he can just show a picture (lifted from BAML’s excellent Flow Show missive) instead?

March 12, 2015

A case of big-figureitis

Filed under: Forex Strategies — Tags: , — admin @ 4:42 pm

Oh dear, looks like the DXY has a case of big-figureitis….

One can only imagine the thoughts of the guy who paid 100.  Must be something like this…

A cold winter night; Greece still in debt
The euro’s at its lowest yet
A rush of the blood to the head
Buy some dollars from my bed

Dollar, dollar, give me the news
I got a bad case of lovin’ you
No squeeze, please I’m on my knees
I got a bad case of lovin’ you

A pretty chart sends flutters to my heart
I learned that buddy from the start
Buying dollars is all I can do
‘Cause the ECB’s doin’ QE, too

Dollar, dollar, tell me the news
I got a bad case of lovin’ you
No squeeze, please I’m on my knees
I got a bad case of lovin’ you

I know you like it, the dollar’s on top
Tell me, Dixie, are you gonna stop?

Pay 100 on a tasty clip
Then I see Judas hangin’ on my tip
Shake my fist as it starts to fall
My stop’s been done, hear the broker call

Dollar, dollar, tell me the news
I got a bad case of lovin’ you
No squeeze, please I’m on my knees
I got a bad case of lovin’ you

With apologies to Robert Palmer.   Anyone too young to remember the original (released in 1978) has never seen a proper dollar bull move…..



 

March 11, 2015

Panic

Filed under: Forex Strategies — Tags: — admin @ 4:43 pm

With apologies to the Smiths…

Panic on the streets of London
Panic on the streets of Amsterdam
I wonder to myself
Could I ever be long again
The Bund rallies as yields slip down
I wonder to myself
Hopes may rise in the blogosphere
But Honey Pie, longs aren’t safe here
So you abort
To the safety of a short
But there’s panic on the streets of Moscow
Dublin, Beijing, Dusseldorf
I wonder to myself

Buy up the dollar
Sell the blessed euro
Because the QE they constantly play
It does nothing for me to shrink bond yields
Sell the blessed euro
Because the QE they constantly play

The Bund rallies as yields slip down
Voldemort nowhere to be found
Sell the euro, sell the euro, sell the euro
Sell the euro, sell the euro, sell the euro
SELL THE EURO, SELL THE EURO, SELL THE EURO
SELL THE EURO

Actually, Macro Man has covered a third of his short today, because it’s come a long way and prudence dictates banking a little.    If form holds, he’ll be selling it back out at lower prices.  It probably bears repeating that unless you’re in your mid-30’s or older, you have:

a) never seen a proper dollar bull market
b) never seen a free-floating EUR/USD  (i.e., absent the impact of FX reserve managers, who are currently dealing with their own issues instead of fannying about with other people’s currencies.)

Believe it or not, this is what markets used to be like.

March 10, 2015

Shhh! Don’t look now….

Filed under: Forex Strategies — Tags: , , , — admin @ 4:43 pm

….but USD/CHF is pretty much back to flat on the year and has almost entirely wiped out the SNB move…..

March 9, 2015

Four thoughts after payrools

Filed under: Forex Strategies — Tags: , , , — admin @ 4:44 pm

* It’s getting increasingly difficult for anyone to say that the US labour market (with the exception of that for friendly macro punters) is anything but robust.   Year on year growth in nonfarm payrolls is now 2.4%, the highest since Internet bubble was just past its zenith- and looks to be accelerating.  True, wage growth remains fairly tepid, but as Macro Man noted nearly a year ago, that looks to be as much of a global issue as a domestic one.

*  Macro Man believes that there is something of a false dichotomy being drawn in some of the will they/won’t they debates on Fed tightening.   By any reasonable measure, financial conditions are very, very easy in the United States and throughout much of the world.  It seems to your author that many of the arguments as to why the Fed shouldn’t or will not raise interest rates this year seem to involve hand-waving prophecies of doom about the fragility of the recovery, undesirably low inflation, etc.   Macro Man has covered inflation previously and has nothing to add on that front.

However, how fragile is the economy, really?  Economic growth is not being driven by the classic interest rate sensitive sectors, for the simple reason that non-security credit is not being allocated or demanded on the basis of price.  Rather, regulatory and balance sheet concerns are informing many of the lending and borrowing decisions of would-be creditors and debtors.  It stands to reason, therefore, that the deleterious impact of higher rates on the economy should be more modest than normal, insofar as the economy has not relied upon borrowing for growth.   (Yes, corporates have been borrowing in the bond market, and not always for good reasons.  But as observed previously, that appears to be less of a concern than previously thought.)

The only way that some of the hand-waving can reasonably be justified is if the hand-wavers believe that rates will go to neutral quite swiftly, taking financial conditions with them.  Frankly, Macro Man doesn’t know anyone who believes that.

Therein lies the false dichotomy: monetary policy is not a choice between stupid ZIRP-world and neutrality; it’s a choice between stupid ZIRP-world and still-accommodative policy for quite some time.  Given the state of the equity, bond, and labour markets, that looks like an easy choice from Macro Man’s perch.

* The DXY is the gift that keeps on giving.   Macro Man noted that the current policy settings in Europe represent the perfect mix for euro weakness, and the single currency duly obliged by falling out of bed on the strong NFP figure.  Amidst the popping of champagne corks (French, of course- these days it’s cheaper than California!) , your author thought it would be interesting to put the current dollar rally into context.   He took monthly data from the Fed’s broad TWI, which goes back to 1973, and plotted each winning or losing streak as a cumulative columns chart.  Imagine his surprise when he found that the current 8-month winning streak (including March) is the longest in history!

Obviously, there have been four different 8-month losing streaks, so we are not quite in uncharted territory here.  Macro Man had two reactions to seeing this result.   The first, visceral reaction was to conclude that we are indeed probably overdue for a little correction to take some of the steam out of the market.

His second reaction, on the other hand, was to observe that there looks to be quite a bit of clustering and serial correlation of streaks.  Long losing streaks seem to group together, as do long winning streaks.  The secular dollar rally from 1995 to 2002, for example, had 8 different streaks lasting at least 4 months.   If, as seems likely, we are embarking on a new secular dollar bull, then even the most ardent longs should hope for a pullback.    There’s a phrase that describes a correction after the onset of a strong rally.   That phrase is “buying opportunity.”

* It was great to see daylight savings roll around again.  The sunshine seemed to last forever today, and the weather even obliged by rising comfortably above freezing for the first time in recent memory.   The sun was shining, the kids were gamboling in the back garden, and you could almost taste the onset of spring:

OK, maybe not quite yet.  But with temperatures slated to rise further this week, perhaps our long national nightmare is finally over….

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