Conditions seem relatively benign, albeit noisy, and equities appear to be floating on the swells of a veritable sea of liquidity. Vols are near their post-Lehman lows, and it all seems to be pretty good.
It can’t last. For Macro Man has an indicator that presages market volatility that is so successful, so powerful, that it commands respect from all who behold it.
Today, he flies to South Carolina for his summer holiday.
Relative newcomers to this space may not be familiar with the predictive power of Macro Man’s warm-weather holidays, so a brief history lesson is in order.
In 2005, for example, he took a trip to the US in May and June…and while he was gone, France and the Netherlands voted down the EU Constitution and EUR/USD got taken to the woodshed.
In 2006, he went away in June, and the second leg of a global EM meltdown occurred- USD/TRY from 1.50 to 1.75, USD/MXN from 11.0 to 11.50, etc.
In 2007, he went away at the same time as this year- the first two weeks of August. Consider the following changes that happened during his absence:
- NZD/JPY was 89.78 when he left and 79.76 when he got back.
- The 3 month TED spread was 0.53% when he left and 1.75% when he got back.
And last year, with equities and EMFX grinding higher in late July and interbank spreads fairly calm, it looked like markets were finally ready to break the hoodoo, despite the ECB’s recent bone-headed rate hike.
Ahh, but that was before the Russian tanks rolled over the border into Georgia, destroying not only Macro Man’s tranquility but also the profits (and more!) of his long RUB basket position, kick-starting a sharp depreciation for the remainder of the year and into early ’09.
And the euro, which was only a couple of percent away from its all time high when he left on holiday last year, was nearly 10 big figures lower when he returned 2 weeks later.
And even his little trips seem to work; a long weekend in Madrid for his wedding anniversary last September happened to coincide with the first announcement of the TARP plan. Fortunately, Macro Man had learned from his past experience; he was long some SPX calls that were some 40 points out of the money when he left the office on Thursday, but were somehow settled nearly 70 points in the money on option expiry the next day.
You can rest assured that Macro Man respects the power of the holiday, and has left his portfolio stuffed full of option lottery tickets.
So, too, should you: consider yourself warned.