They say that it’s always darkest before the dawn. If that’s the case, then the bottom must be near*, because Macro Man feels like Corey Hart looking at a new-moon sky at 3 a.m….through tinted windows. It may be a new month, but the newsflow is as dismal as ever.
Where to begin? No doubt most readers of this comment will have seen St. Warren of Omaha’s latest missive to shareholders, wherein he details Berkshire’s worst performance year of his 44-year stewardship. While Mr. Buffett is clearly a spectacularly successful investor, his track record as a macro punter is less impressive. Following on the heels of his ill-fated bet against the dollar in 2005, his decision to short long-year index puts just before the market crashed was also less than prescient. While Mr. Buffett may indeed have exploited a credibility loophole by avoiding having to post margin on these positions, and thus, in his lingo, procuring a cheap “float” for the life of the puts (which are, incidentally, likely to exceed the life remaining to both Buffett and his sidekick Charlie Munger), this was likely a one-time only phenomenon. It will be itneresting to see if any of his acolytes at the meeting ask him to reconcile Berkshire’s “Gibraltar-like” financial standing with its “Turkey-like” CDS spread.
Whatever the losses on Berkshire’s investment portfolio, however, they are in all probability still superior to that of most other “actuarial investors” such as pension funds. Indeed, in running his naive domestic portfolio simulations for G3 pension funds, Macro Man reached the somewhat disturbing conclusion that pension funds in the US, Europe, and Japan have eached registered that worst one-year risk-adjusted return in at least a quarter century.
Meanwhile, Eurozone leaders have predictably pooh-poohed a blanket bailout for Eastern Europe, preferring to address support on an ad hoc basis. One need not be any sort of Eurosceptic to conclude that the European Union is facing the gravest crisis in its history, and how it proceeds will be critical in shaping the Continent’s long-term economic future. While talk of a new “iron curtain” may be scare-mongering, the fractured policy-making approach render intra-European economic and financial protectionism an uncomfortably high risk.
And so it is perhaps unsurprising that EUR/USD once again finds itself at the bottom of the range that has held for the last three years. The DXY already seems to have broken out to the topside, but experience has demonstrated that it takes more than a Monday morning’s worth of price action to signal an acceleration. However, if EUR/USD could ever sustain a break of 1.25 for more than a day or two, Macro Man cannot shake the feeling that it could go a long way in a hurry as the spring uncoils.
Interestingly, the BIS has penned a special report on one of Macro Man’s pet issues, the shortage of US dollars in the global financial system. To his mind, the dollar’s rally against all things non-yen since last August has borne all the hallmarks of forced position liquidation, a belief that appears to be validated by the BIS’ banking statistics analysis.
And the trend continues apace; the buck made new highs against a number of Asian currencies overnight, including the Indian rupee, the Malaysian ringgit, the Korean won, and the Taiwan and Singapore dollars. The latter gapped more than half a percent on the Asian open, perhaps spurred by weekend remarks from the PM suggesting that GDP could shrink 8% this year. Ouch.
Well, it was either that, or karmic price action. Macro Man isn’t totally concersant with feng shui, but he’s gotta believe it ain’t a good sign when your national symbol, the “mer-lion” gets damaged by lightning over the weekend.
To coin another popular phrase, sometimes art really does imitate life….
*Macro Man doesn’t actually believe this.