The latest rejoinder by yours truly, after my interlocutor presented some opinions from a demographic researcher (who came to the same conclusions as myself, albeit from different premises)
With regards to small/medium sized companies vs. large (index
components), the determining factor in my view is the pure yen/$
exchange (small and medium companies that sell to the JPN consumer vs.
the larger index components who are hedged to a certain extent by
revenue streams in multiple currencies. But your friend is
right...smaller countries are a purer play (with more concentrated
Delta risk on the Yen)
With regards to demographics in general, it is challenging to
extricate short-term causations (changes in immigration policy, etc.)
vs. long-term trends. Also, property rights and the rule of law serve
as the mechanism that unlocks favorable demographics. Luxembourg, for
example, has terrible demographics upon first glance...but it is the
"new" Switzerland (although not for long as the Swiss don't want to
ruin their franchise with ****'s oft-labelled "weaponization of the
dollar".
Monday, June 25, 2007
Saturday, June 23, 2007
A query from a money manager in St. Louis...
leads me to a brief and rather non-analytical "hand-waiving" discussion of the Yen:
anyone at the moment)
The carry trade piper will most certainly be paid, and in a way that
will blow away risk parameters. NZ's economy is the size of Michigan.
What happens when the carry trade into NZ's $ unravels and those
players are forced to re-purchase Yen?
So, for the time being, I think your Yen play is a good one...but I
personally am much more comfortable with JPY assets that are more
derivatives of the general economy rather than the blatant
manipulative practices of the MOF.
OK, lets talk Japan. (if you want my quick and dirty answers, go to
the "So, to SUM UP" section)
First off, I have reams of data as well as anecdotal evidence that
seems to support a general "Japanese Investors exhibit herd-like
behavior greater than most other developed countries".
Secondly, we have to delve into the "Boys from Todai" to understand
how the MOF thinks (and even more importantly, how they wantus to
think they are thinking). Soros has said many times that the MOF is
one of, if not THE most sophisticated participant in the market, they
don't get pushed around and have earned their "widowmaker" reputation.
Now, I met deputy minister Iwata (again, a guy from Tokyo University,
aka "Todai") and he claims the MOF follows a neoclassical inflationary
expectations model developed by Wiksell way back near the turn of the
century. Now, do they really believe in Wiksell's formulae? NO.
JPN, like every other macro scenario, is an exercise in timing and
cyclical response to economic stimuli. Deflation is still a problem
until domestic demand can be stimulated. Then the damn will finally
break (and your position is helped by declining US $ denominated
assets) and the rate of increase in the capital account (opposite side
of the current account, reflecting desire to net save US financial
assets) in Japan will decrease. The Yen goes up. Big.
However, since domestic demand has to be stimulated, the MOF will
intervene in the currency markets (as they have always done). This is
why me and my partner are long some JPN indexes, etc. Fiscal policy
is the lynchpin over there (as in ANY soft currency economy...and of
our friends, ###### is the one of the only ones to really
understand modern soft currency economics). And we watch fiscal
policy as a greater predictor of long-term price levels than the
short-term interest rates in distant JPY futures contracts.
SO, to SUM UP:
They will not raise interest rates soon. They are scared to death of
continued deflation. (and now there may be a good chance of deflation
here, which will not help them...but that opinion is not shared bythe "So, to SUM UP" section)
First off, I have reams of data as well as anecdotal evidence that
seems to support a general "Japanese Investors exhibit herd-like
behavior greater than most other developed countries".
Secondly, we have to delve into the "Boys from Todai" to understand
how the MOF thinks (and even more importantly, how they wantus to
think they are thinking). Soros has said many times that the MOF is
one of, if not THE most sophisticated participant in the market, they
don't get pushed around and have earned their "widowmaker" reputation.
Now, I met deputy minister Iwata (again, a guy from Tokyo University,
aka "Todai") and he claims the MOF follows a neoclassical inflationary
expectations model developed by Wiksell way back near the turn of the
century. Now, do they really believe in Wiksell's formulae? NO.
JPN, like every other macro scenario, is an exercise in timing and
cyclical response to economic stimuli. Deflation is still a problem
until domestic demand can be stimulated. Then the damn will finally
break (and your position is helped by declining US $ denominated
assets) and the rate of increase in the capital account (opposite side
of the current account, reflecting desire to net save US financial
assets) in Japan will decrease. The Yen goes up. Big.
However, since domestic demand has to be stimulated, the MOF will
intervene in the currency markets (as they have always done). This is
why me and my partner are long some JPN indexes, etc. Fiscal policy
is the lynchpin over there (as in ANY soft currency economy...and of
our friends, ###### is the one of the only ones to really
understand modern soft currency economics). And we watch fiscal
policy as a greater predictor of long-term price levels than the
short-term interest rates in distant JPY futures contracts.
SO, to SUM UP:
They will not raise interest rates soon. They are scared to death of
continued deflation. (and now there may be a good chance of deflation
anyone at the moment)
The carry trade piper will most certainly be paid, and in a way that
will blow away risk parameters. NZ's economy is the size of Michigan.
What happens when the carry trade into NZ's $ unravels and those
players are forced to re-purchase Yen?
So, for the time being, I think your Yen play is a good one...but I
personally am much more comfortable with JPY assets that are more
derivatives of the general economy rather than the blatant
manipulative practices of the MOF.
Friday, June 22, 2007
Subprime woes continue to light the way...
...for acute observers trying to deconstruct how all this risk is financed.
It seems clear to the REcapitulator that foreign owned subsidiaries of US investment banks are financing massive risk-taking here in the States. The current troubles with Bear illustrates this. Take a look at the relative repo rates of US/Euro area countries and you will see what I mean.
The VIX (which, for disclosure puposes, we have short interest in) and the implied vol. surface therein (although at the moment, the REcapitulator fails to remember all the consituent names in the VIX) is interesting. I thought that July would be the capitulation with regards to bond yields and FED action.
Cantor is another interesting story. The REcapitulator was unaware they traded exotic mortgages (they don't).
And yet, they had to auction off some 350m of securities posted
by Bear, for pennies on the dollar. How does one model that?
It seems clear to the REcapitulator that foreign owned subsidiaries of US investment banks are financing massive risk-taking here in the States. The current troubles with Bear illustrates this. Take a look at the relative repo rates of US/Euro area countries and you will see what I mean.
The VIX (which, for disclosure puposes, we have short interest in) and the implied vol. surface therein (although at the moment, the REcapitulator fails to remember all the consituent names in the VIX) is interesting. I thought that July would be the capitulation with regards to bond yields and FED action.
Cantor is another interesting story. The REcapitulator was unaware they traded exotic mortgages (they don't).
And yet, they had to auction off some 350m of securities posted
by Bear, for pennies on the dollar. How does one model that?
Thursday, June 21, 2007
LCDX
Credit spreads have widened by 45 basis points since the beginning of this month on this index that tracks credit protection prices on 100 names.
The REcapitulator knows very little about the Byzantine and wild-west frontier of the credit markets (and he suspects that it is very much a rigged game), but what he does know is that when a movement like this occurs, re-hedging and re-collateralization is a very painful experience for weak hands.
Could it be possible that people actually are starting to think there may be some RISK in levering up low-yielding assets, buying higher yielding ones, and pocketing the spread?
The REcapitulator knows very little about the Byzantine and wild-west frontier of the credit markets (and he suspects that it is very much a rigged game), but what he does know is that when a movement like this occurs, re-hedging and re-collateralization is a very painful experience for weak hands.
Could it be possible that people actually are starting to think there may be some RISK in levering up low-yielding assets, buying higher yielding ones, and pocketing the spread?
Wednesday, June 20, 2007
Real Estate has just started...
...its descent. The commerical RE indices have not budged very much, and the REcapitulator was speaking with a trader from a (very) large Hedge player here in Chicago yesterday...his thoughts were that this was one of the few low-risk shorts out there. The wall of liquidity raises all ships.
But there are holes forming (and once again, the REcapitulator cannot take his own "no metaphors" medicine). The Merill/Bear Stearns debacle continues to make the news, and traders are alight in rumours concerning some of the other large players selling inventory. This story illustrates the difficulty of massive and extremely quick redemptions in the face of what amounts to term financing (or using the spread between two instruments as the primary financing vehicle).
July. It may be earlier, but one would be foolish to short U.S. assets at the moment.
But there are holes forming (and once again, the REcapitulator cannot take his own "no metaphors" medicine). The Merill/Bear Stearns debacle continues to make the news, and traders are alight in rumours concerning some of the other large players selling inventory. This story illustrates the difficulty of massive and extremely quick redemptions in the face of what amounts to term financing (or using the spread between two instruments as the primary financing vehicle).
July. It may be earlier, but one would be foolish to short U.S. assets at the moment.
Monday, June 18, 2007
The Fed Model
The Recapitulator would like to take this opportunity to ask a simple little math problem:
What happens to a ratio when the denominator decreases
and the numerator increases?
The P/E ratio (the inverse of its forward-earnings manifestation being the basis for comparison to the 10-year bond yield, which is also known as the "Fed Model"), which has never been a very good metric for valuation of companies in the REcapitulators opinion, owing to the usual retrospective/prospective predictive problems, has a special reverence for the public and sophisticated operators alike.
As for the Fed model, it has had a pretty good fun for predictive value. The Recapitulator has long thought July expiry is a good month for short VIX puts (or hey, why not "Texas Hedge" and go long some calls or long some futures???) and he still thinks so. As bond yields rise, forcing players to choose between similar yielding assets with vastly different risk profiles, and as the inverse of the forward earnings yield looks decidedly less rosy, we should see some excellent toing and froing next month.
What happens to a ratio when the denominator decreases
and the numerator increases?
The P/E ratio (the inverse of its forward-earnings manifestation being the basis for comparison to the 10-year bond yield, which is also known as the "Fed Model"), which has never been a very good metric for valuation of companies in the REcapitulators opinion, owing to the usual retrospective/prospective predictive problems, has a special reverence for the public and sophisticated operators alike.
As for the Fed model, it has had a pretty good fun for predictive value. The Recapitulator has long thought July expiry is a good month for short VIX puts (or hey, why not "Texas Hedge" and go long some calls or long some futures???) and he still thinks so. As bond yields rise, forcing players to choose between similar yielding assets with vastly different risk profiles, and as the inverse of the forward earnings yield looks decidedly less rosy, we should see some excellent toing and froing next month.
Friday, June 15, 2007
Update
Updates will be more frequent now as yours truly has time to clear some idea backlogs...and now the post:
With all this talk about weather (and 4^15 cicadas here in Chicago), I
can't stop thinking about scale. We all know the importance of time intervals and sample periods when looking at the markets, and it is somewhat unfortunate we lack millions of years of data to strengthen our inferences or provide additional hypothesis generation.
the financial markets rife with feedback mechanisms, both on granular (individual stocks) and global (indexes) scales. Everything is connected and the thinking, human participants create another layer of complexity by adding 3rd (what do I think he thinks I am thinking??) order thinking into the mix.
Fortunately, the planet earth has a wonderful temperature regulation feedback system that serves to illuminate why global warming is a problem of scale – humans will have to actively engineer, on a massive scale (like blowing up the Rocky Mountains) carbon introduction into
the atmosphere in the future if we wish to live here.
The system can be characterized thusly: Plate tectonics produce carbon dioxide through volcanic emission, carbon dioxide warms the planet. Warming increasing weathering (surface water is a function of temperature, as temperature rises, water evaporates leading to clouds and subsequent erosion). Carbon dioxide then attaches chemically to silicate rocks experiencing weathering. This process removes the C02 from the atmosphere and cools the planet. Carbon Dioxide is introduced again by volcanic emission (and water is needed here as
well for subduction), and on and on.
This process that has kept the Planet at a relatively constant temperature (never below freezing and never above boiling) for around 4.5 Billion years. Planets need land, water, and plate tectonics to achieve this system that is very good for carrying life. An oceanic planet would not be a very nice place to live, and likely would not remain that way for long as the lack of temperature regulation would likely boil the planet. (in the spirit of good taste, I will withhold jokes regarding a certain movie starring Kevin Costner, as said movie has already experiences too much suffering)
This feedback loop is interesting to me because of its massive time scale. In the long run (geologic scale), we should be more worried about making more CO2. But on relatively short scales (hundreds of years), we may have a problem with increased temperatures due to our
own actions.
Looking at the markets, it is very clear what the "geologic" drift is, caused by an extremely complex feedback system of its own…but when you zoom in closer, it becomes apparent that too much on one side of the differential equation can kill 90% of "oxygen-dependent species".
Life does go on, but it takes a different scale of time for that to happen.
With all this talk about weather (and 4^15 cicadas here in Chicago), I
can't stop thinking about scale. We all know the importance of time intervals and sample periods when looking at the markets, and it is somewhat unfortunate we lack millions of years of data to strengthen our inferences or provide additional hypothesis generation.
the financial markets rife with feedback mechanisms, both on granular (individual stocks) and global (indexes) scales. Everything is connected and the thinking, human participants create another layer of complexity by adding 3rd (what do I think he thinks I am thinking??) order thinking into the mix.
Fortunately, the planet earth has a wonderful temperature regulation feedback system that serves to illuminate why global warming is a problem of scale – humans will have to actively engineer, on a massive scale (like blowing up the Rocky Mountains) carbon introduction into
the atmosphere in the future if we wish to live here.
The system can be characterized thusly: Plate tectonics produce carbon dioxide through volcanic emission, carbon dioxide warms the planet. Warming increasing weathering (surface water is a function of temperature, as temperature rises, water evaporates leading to clouds and subsequent erosion). Carbon dioxide then attaches chemically to silicate rocks experiencing weathering. This process removes the C02 from the atmosphere and cools the planet. Carbon Dioxide is introduced again by volcanic emission (and water is needed here as
well for subduction), and on and on.
This process that has kept the Planet at a relatively constant temperature (never below freezing and never above boiling) for around 4.5 Billion years. Planets need land, water, and plate tectonics to achieve this system that is very good for carrying life. An oceanic planet would not be a very nice place to live, and likely would not remain that way for long as the lack of temperature regulation would likely boil the planet. (in the spirit of good taste, I will withhold jokes regarding a certain movie starring Kevin Costner, as said movie has already experiences too much suffering)
This feedback loop is interesting to me because of its massive time scale. In the long run (geologic scale), we should be more worried about making more CO2. But on relatively short scales (hundreds of years), we may have a problem with increased temperatures due to our
own actions.
Looking at the markets, it is very clear what the "geologic" drift is, caused by an extremely complex feedback system of its own…but when you zoom in closer, it becomes apparent that too much on one side of the differential equation can kill 90% of "oxygen-dependent species".
Life does go on, but it takes a different scale of time for that to happen.
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