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FED, BOE, ECB, BOJ, SNB, BOC: Who Will Blink First?
Submitted by Nic Lenoir of ICAP
The recovery has been uneven around the globe. The US with heavy stimulus has returned rapidly to positive growth (whether we can sustain it is a completely different debate), Swiss real estate was never really affected by the quasi worldwide slide and GDP in Switzerland is expected to be between 1% and 1.5% for 2010, and Canada has not only returned to positive growth but it also has to consider slowing down a bubbly real estate market. Meanwhile Europe's leading rebounder Germany is not guarantied to post positive GDP for Q1, Greece is wondering whether debt refinancing and what it will take will lead to civil war, Spain's industrial output is still approximately 30% off of what it was in late 2007, and Japan is discussing extending QE. The least we can say is that the bottoming process is rather uneven based on where you live, and with rates at near 0% everywhere or almost, we look at what relative value opportunities may present themselves as central banks debate how to transition from QE to more "normalized" liquidity environment and finally towards higher rates.
The Fed has constrained itself by stressing the 4 to 6 months meaning of "extended period of time". Some in fact view it as a moral hazard because it takes away some flexibility in the Fed's ability to respond to the data should it surprise significantly to the upside. As liquidity is starting to be withdrawn the need for the language and the constraints that come with it are starting to balance each other. While we have not necessarily heard enough from the Fed to believe a change in the statement is coming up necessarily next week, should it happen the sell-off in reds and EDZ0 should be brutal. If this is not the case, I expect the Fed to be at least a lot more vocal in stressing liquidity withdrawal and give details about upcoming operations. The carry remains pretty steep (58bps rolling EDZ0 to EDH0) but policy risk to longs is starting to build up.
The BOC has historically rarely started hiking before the Fed. At the same time, the BAZ0/EDZ0 which was just under 20bps to start the year is now at 60bps. So if history repeats itself and the BOC waits for the Fed to draw first, the spread is probably a bit rich here. I am not sure whether the BOC has the luxury to wait for the Fed, but USDCAD in the lower end of the range between 1.02 and 1.03 is also certain to lead to caution as a strong CAD is not at the top of the BOC'c wishlist. So the Dec BED spread is slightly rich or at best fairly priced we feel.
The SNB has been at the center of many talks in the last few days and it is believed that in the current more risk prone environment the appreciation of the CHF against EUR and USD has been more controlled which may give Switzerland the room to maneuver it needed to consider hikes. Here again outright plays other than for June are carry-expensive and some worry that the overall poor environment in Europe will also make the SNB more hesitant. A relative value play could be to buy ESZ0/ESH1 as a spread against selling ERZ0/ERH1 as a spread. The liquidity normalization in Europe is keeping the Euribor curve relatively steep in the front-end, but at the same time hikes are completely out of the picture. Selling ERZ0/ERH1 rather than buying Euribors outright isolate the liquidity normalization risk while allowing to take a view on a stronger economic environment in Switzerland. (See ERES Z0H1 Chart)
The economic picture in Europe is so obviously bad that rates are completely out of the picture. The ECB is historically a solid year beinh the Fed anyways as the US economy enters faster in recession but also comes out of it a lot faster. However, if the carry to ERZ0 still seems attractive being north of 50bps, a lot of it stems from the expectation of liquidity normalization which would bring Eonia back in line with the 1% target rate. The fact that ERZ0/Z1 is in th mid 80s and EDZ0/Z1 above 140 is already factoring a more aggresive Fed. Still by historical standards more could easily be priced in. We looked at buying EDZ0/H1 against ERZ0/H1 and found that even tough the market could well price more, the box trades already +14bps, so it is a relatively consequent negative carry. Until policy starts physically changing, fighting carry can be a very expensive hobby, so we prefer the SNB/ECB play mentioned earlier when it comes to fading ECB hikes.
The Bank of England has a tough task ahead, but not as tough as fixing the budget gap is. England seems to have the will compared to other countries to balance the budget to avoid a refinancing crisis like what is happening in Greece (claims that the crisis is over today by the way or not only ludicrous but also moronic as there is a huge tranche of refinancing coming up in April and May, and only successful issuance will allow politicians to claim victory). As long as those issues aren't addressed, and the consequences of the austerity required on the economy are evaluated, an extension of QE could well be more likely than talks of hikes. This is why we view a relative value play between ED and short sterling as the best way to express the economic outperformance of North America over Europe. The chart shows that buying EDZ0/H1 against L Z0/H1 allows us to express the view without barely any carry, we would buy the spread around -2/-3 in order to play +10/+15. For those who prefer using options, this morning we priced that selling the EDZ0 99.50 calls to buy the L Z0 99.125 calls could be done receiving 3bps for the structure. If both markets sell-off a gain of 3bps is realized, and the only real downside scenario would be a case where the Fed is on hold through 2010 and the BOE hikes. We view this scenario as very unlikely.
The last central Bank we want to quickly mention is the Bank of Japan. Most market participants expect the BOJ to extend QE and continue to pump liquidity into the system in a desperate 20 year in the making attempt at creating inflation. Whether they succeed or not, it should undermine the vlaue of the JPY. As I have stressed out on many occasions I believe USDJPY is grossly mispriced. The trade is hard to keep on because of risk aversion flight to JPY which can be rather painful, but if one aligns market timing with fundamentals it is a good trade to play from the long side. Watch closely a break past the 91.50 and 92.80 resistances which would confirm an exit outside of the bearish channel and lead to a strong move upward.
Good luck trading,
Nic
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Who will blink first?
Couldn't help myself...
http://www.youtube.com/watch?v=D2jEM5aHHJc
Outstanding! LOL!
Cool.
Dream match: Pelosi v Marty Feldman
Easily the funniest thing on youtube.
Maybe this is crazy but I wonder if we'll see a global currency reset. Basically inflate everything all at once and blow this thing out once and for all.
+1...take it steps further (but can this really be done)....blow it out, everyone agree to trash their balance sheets, and start all over with all debts forgiven.
What would happen if this were done? Anyone?
I think what we're both saying is let's just go right to Hyperinflation.
easy....global currentseas financed by IMF and World Bank. Currentsea loans will be made at expense of reserve gold holdings. Existing debts to be paid at a percentage of World Bank/IMF loan.
Ahhhh, that great new world order they've been talking about.
Such a scenario presumesan ex anti outcome which is exactly why it will not happen, much to the chagrin of the developed debtors. The concessions required across the incumbant complex are simply to substantial to bear on their respective underlying economic and geopolitical positions. Any such concession without a guarantee of a return to an ex anti outcome is the equivilant of folding.
They are contemplating that, trust me.
But first the players all have to make sure that their assets are protected.
Debt is the no. 1 hot seller on Wall Street.
Watched "Maxed Out" yet?
1) Eliminate your own debt if you can.
2) Buy gold.
Is really the only thing that makes sense.
Fewer and fewer people put faith in government or fiat.
Back to basics.
Agreed. There just doesn't seem to be another way. Hard to play it since all assets are once again, "at risk".
Yes there is another way.
Look to Florida to see the immediate future. Hold underwater real estate and maintain it until 2025-2030? Or dump it?
Everywhere RE will get dumped because who wants to spend to keep it in proper repair. More cash thrown at a bad investment? Don't maintain it and it loses even more value.
A vast wave of real estate will get dumped on the market crushing prices for those who have been on the sidelines waiting to scoop it up. (Guess who?) After they scoop it up prices correct enough for the banks to finally lend at lower prices while they sell you what they just bought on the bottom when no one else could buy.
And then Ben will play the inflation game. Again. What does Robo call it. Lather rinse repeat.
If you don't have dollars then you can't play that game. This hair washing will be the Mother of All Washings to be sure. Deflation is everywhere. Don't let Ben hoodwink you into the inflation story just yet.
You're right. There's a good chance of that. I'm still on the fence as to what happens first. All I know is The FED holds all the cards (cash machine), so, I'd say it's 60/40 in favor of either inflation or Stagflation. 40% we deflate first. So, have money ready but be prepared for the odds.
My friend, if you think of inflation, than best way to make money is if you own some.
True but inflation means you need more money to buy the same thing you bought before. So, your money is worth less, sir.
If the expected end game is hyperinflation, why not get on the carry trade bandwagon, borrow at a low locked rate and buy piles of gold. No, that would be too easy. The kicker is that you don't know if/when TSHTF, otherwise everybody would be on that trade. But really, why eliminate debt unless you're expecting DEflation, that's when you get killed by debt if you're income is dropping and your liabilities are fixed.
HeliBen just will not tolerate another deflation scare, so Hyperinflation is more likely. Carry Trade, blah! Unless you're a HF choices are only to short bonds, USD & long commodities. If you really have balls, you short the shit out stocks!
So you think hyperinflation but then shorting stocks or bonds...that would take stones of iron because it's not like stepping in front of a train, it's like running headlong at one! If there is hyperinflation then you don't want to be short anything, now in deflation the situation would be different.
Not sure about that. Short bonds means falling prices w/higher yield 'cause rates go up. Short stocks 'cause w/stagflation there's no EPS growth and bond yields become more attractive. Although really it's an overweight in commodities and USD. Yes, cody's can go up w/USD. Good luck bro!
I don't think there will be much blinking for a while. The economy still sucks and is getting worse. Where's the hiring? Where's the increased bank lending?
Lending is there but only when you've declared bankruptcy.
Once you're bankrupt they own you.
Take that credit card, be late in your payments and pay, pay, pay!
Skipping town or country may be a good idea also.
If I was broke, had no money but room left on a credit card for a ticket to somewhere Asia.
I'd be gone. Off to a new start. There are ex pats communities around the globe.
The Chinese came here to establish themselves after years of quasi slave labor.
Now it's our turn to do that in their country.
I'll go open a laundry/dry cleaner.
"England seems to have the will compared to other countries to balance the budget to avoid a refinancing crisis like what is happening in Greece "
Ok two things, firstly, it's Britain, not England...don't do that again. Secondly, and with regards to the above claim, are you shitting me?
UK is done. The people have had the will to live washed out of them. Thats why most of them are drunks now. Drunks are easy to control.
The USA is next in line. We are halfway through the rinse cycle headed for the spin cycle.
Watch the news for the next 10 days and make a note of every time you hear the words terror or terrorist.
I still can't see the fnords, but I'm getting closer...
Nice Deficit should be good for a bond rally. Dept of labor and student aid lines "beating" expectations. Treasury interest also beating on lower price higher volume but mroe than offset by the negative $100B delta on TARP outlays. All in all a strong start to the year only $650B in the hole for a 10% y/y gain. One word: Weather
The Federal Reserve is a Den of Thieves. Filthy Fucking Thieves!
Great analysis.
Watch for doelarr wekaness.
WTF? We've "returned to growth"? The only growth that I've seen has been in the Stock Market and not the economy.
Did the growth happen while I blinked or something?
We might have stabilized the system enough to keep from crashing. But to say that we've "returned to growth" is a very far stretch. The businesses which are still around, and the people still with jobs, are pretty much just hanging on.
I want a video similar to that old Wendy's commercial, with an old lady shouting "Where's the Growth!".
If something is repeated often enough...
Did you miss "Newspeak" class?
"growth" = banks still doing god's work and paying bonuses even though their off balance-sheet stuff is fatal.
"tightening" = something we must talk endlessly about as if we can actually do it, even though it would bring an end to "growth".
"bubble" = something that is always obvious and easy to see in the precious metals markets and is happening right now, even though we can never see them anywhere else.
Here is a stock that has not had 1 down day in a month
It's in this hot new sector called bras... yep, it's the future. I think the women are going to fall all over themselves for this innovation.
http://www.fundmymutualfund.com/2010/03/some-stocks-have-not-gone-down-1-day-in.html
Unfortunately, I'm not in favor of bras.....
Looks like a good buy. Thanks to a combination of high fat diets of dairy, Wendy's, KFC and high hormone levels in foods, little girls are needing bras in 5th & 6th grade now.
Why couldn't I see that the bra guys were behind it all along???
"bra guys"... yeah, that's it, bras...guys. When you got moobs and nothing to hold them, there are three billion potential customers out there waiting to buy that product. I need an angel investor over here, this idea is going to the MOON.
It'll have down days once people realize that bras cause breast cancer.
http://www.all-natural.com/bras.html
As liquidity is starting to be withdrawn
Nic...you're kidding, right??
DH,
People really do (want to) believe the cover story, which is one of the reasons why the Fed will (eventually) make it appear they are withdrawing liquidity. Of course, while they have the 1/2 inch garden hose sucking water out of the public (cess) pool, eight 5 inch fire hoses will be pouring lighter fluid on the fire from various unseen and unacknowledged access points.
I wonder why the Fed doesn't want to be audited?
Yes Virginia, there is no collateral. (AM Rule #4)
BIG Balls required to speculate on higher volatilty moves in currencies et al.
Big bucks to make or lose.
You think like a criminal? Do you? Go for it!
volatility is the house card, ain't it?
40muleteam borax
returned to growth lol
wonders never stop,, add an additional 9% of GDP from the fed ..
couple of ever talking FTV propaganda MACHINES.
and mix it with the brain dead keynesian dialect,, and the zit faced harvard newbees debt is good mantra ,
except for the 20% out of work , 30 states near bankruptcy. top heavy taxes.. commercial about to go down the toilet . and coming to visit soon,,
a dash of reality . sure it figures growth is coming to the noses of the anxious mouths that roar.
burma shave
It is difficult for me to see how we are in a recovery when we are faced with stupendous debt and with the threat of either inflation or devaluation to attempt to alleviate it.
The banks are still "stuffed" with shit, and there has been NO financial reform at all to remediate the problem or keep things from getting worse.
Nic:
Canada's housing market is "bubbly" for sure, but only because lending standards have been thightened and the new laws for tighter lending take effect April 19. Every fool is jumping in under the gun to get that McMansion.... let's not mistake foolishness for a robust economy.
Businesses around me are shutting their doors, and others have told me sales are WAYYYYY down, to the point where layoffs are rampant.
To say the housing market is on fire without qualifying why is wrong. Last year the Cdn gov't withdrew the 40 year amortization option down to 35 years and gave a few months notice of doing so, only to have real estate take off in that time frame, just as it is now.
Sheeple are stupid. Don't act like one, Nic.
Who will blink first?
I don't know. Do zombies blink?
To paraphrase Art Cashin, with a recovery like this who needs a depression?
"Who Will Blink First?"
Like there is some kind of duel or challenge between these CBs. No, they cooperate fully with each other to try to manage this collapse, swap their currencies, buys each others debt et.c.
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