Eye on Macro – Obviously Obvious


"Things always become obvious after the fact.”


- Nassim Taleb


Cygnus Atratus, or the Black Swan, hit us three times in the past week with the combination of an earthquake, tsunami, and nuclear disaster in Japan.  Nassim Taleb popularized this term after writing a book titled “The Black Swan,” which analyzed the misconception of investment risk.  His conclusion was that the highly improbable is much more probable than standard measures of risk suggest. 


Alongside the disaster in Japan, Obviously Obvious continues to prevail globally as tensions accelerate in the Middle East with the recently imposed no-fly zone in Libya; deficits increase and consumer confidence wanes in the United States; and sovereign debt issues continue to rear their ugly heads in Europe.



With the SP500 down for 3 of the last 4 weeks and the peak-to-trough correction being -6.5%, the call-out this week is more of a question. Was that it, or is volatility in US Equities signaling that there is more downside to come? With Global Growth Slowing and the VIX in what we call a Bullish Formation (bullish TRADE, TREND, and TAIL), we definitely need to see a re-test of the SP500’s 1256 close for an answer.



Bullish on Chinese Equities and/or US Treasuries? We’ve been bearish on Chinese Equities for well over a year now and have been working our Q1 Global Macro Theme of “Trashing Treasuries” since Q4, so we get the bear cases in both. But can we be mentally flexible enough to make the turn on either? Early signals in our quantitative setups are telling us that it’s time to focus our work on the long side of both.




Longs – China (via CAF); Healthcare (via XLV); CORN (via CORN); GOLD (via GLD); Canadian Loonie (via FXC); Energy Producers (via XLE); Chinese Yuan (via CYB); Yield Curve Flattener (via FLAT)


Shorts – Spain (via EWP); Italy (via EWI); Industrials (via XLI); Homebuilders (via XLB); Treasuries (via SHY); Transports (via IYT)



  • US Deficit – Expenses ran up +5% year-over-year in February to their highest level ever.


  • US Home Prices – Corelogic’s reading on US Home Prices fell -5.7% for the month of January (y/y) and are now running at a -18% annualized pace.


  • US Consumer Confidence – despite the US stock market rallying +98% in the last 2 years, the Michigan Consumer Confidence reading had its 8th largest drop since the data started getting tabulated in 1978 (falling -12% in March to 68.2 versus 77.5 in February).


  • The Japanese stock market lost -17% of its value in 2 trading days (biggest drop since 1987). If you go back to Feb. 14th, the week that fund flows into “Developed” Equity Markets peaked, the Nikkei is down -20.7%.


  • In 18 years of Keynesian experimentation, from 1992 to 2010, Japan had on average +0.85% year-over-year GDP growth.  Over the same period, the Nikkei 225 returned -55%.


  • After the January 17, 1995 Kobe earthquake, Japanese equities lost (-24.7%) before bottoming out nearly six months later on July 3. The Nikkei 225 did not break even until nearly 11 months later on December 7 of that year.


  • For 2011 YTD, the average and median percentage change in the 65 global equity markets and nine S&P sectors we track has been (-1.3%) and (-1.1%), respectively. Only 38% of countries currently register a positive gain.


  • The EU Summit on Competitiveness agreed that the temporary European Financial Stability Facility (EFSF) will be able to access its full funding (from the member states) of €440 Billion, versus the approximately €250 Billion previously available; funding for the permanent bailout fund, the European Stability Mechanism, starting mid-2013, is pegged at €500 Billion.


  • Eurozone leaders agreed to lower Greece’s bailout interest rates of about 5% by 100bps, and extend the repayment period of the loans to 7 1/2 years from 3 years.  Greek PM George Papandreou estimates the moves would save about €6 billion over the life of the loans.


  • Currently, according to the Real Clear Politics Presidential Approval poll aggregate, 47.4% of respondents approve of President Obama and 48.0% disapprove.  While this rating has gone the wrong way over the last few weeks in conjunction with accelerating gasoline costs and a U.S. equity market selloff, it is still well improved from the 51% disapproval rating on September 27, 2010, which was the worst reading of the Obama Presidency.


  • According to the Real Clear Politics poll aggregates, President Obama leads a generic Republican by 2 points, but leads Huckabee by 5.5 points, Romney by 5.2 points, Ron Paul by 9 points, Gingrich by 14 points, and Palin by 15.2 points.


  • The ZEW reported a month-over-month decline in its German Economic Sentiment survey, a 6-month forward-looking assessment, registering 14.1 in March versus 15.7 in February.


  • Chancellor Angela Merkel’s has decided to shut-down 7 of the country’s aging nuclear reactors for 3 months pending a safety review in light of the events in Japan. The Swiss followed the Germans saying they will suspend the regulatory process for 3 nuclear power stations because safety remained the first priority.


  • Portugal faces a hefty schedule of debt (principal + interest) that comes due in the months of March, April, and June (or ~ €16.1 Billion), accounting for nearly two thirds of its debt obligations for 2011 (or ~ €25.4 Billion).  So far the country has sold ~ €7 Billion in bonds of its €20 Billion target this year.


  • Last year, during the peak of the Sovereign debt crisis, the VIX traded at 45.79.  The average of the peak VIX levels during the past 6 major crises that impacted global financial markets comes to approximately 50, which would represent 48% upside from here.


  • Both the Swiss National Bank (SNB) and Norway’s Central Bank (Norges Bank) kept their main interest rates on hold, at 0.25% and 2.00% respectively. Both decisions are represented of the recent pause in global economic sentiment. Trichet may well elect to push out a rate hike decision, despite his latest hawkish stance.


  • Oil has a long term inverse correlation to the U.S. dollar, which for WTI is (-0.78) over the past three years. This has become more pronounced in the last six weeks.  In the prior six weeks, WTI’s correlation is (-0.88) and Brent’s correlation is (-0.86) to the U.S. dollar.

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