Tuesday, March 11, 2008
Well well well, yesterday was just another run-of-the-mill day in financial markets wasn't it? The S&P dropped a cheeky 20 points, taking it within a few bps of the "Kerviel low" and a five-wave downmove. Bear Stearns was on the receiving end of a few rather salacious rumours with sent its credit default swap pricing to the moon and its share price to the bottom of the ocean. Now, Macro Man has no idea about the state of Bear's liquidity and solvency; frighteningly, he doubts that Bear does, either. Given that the current situation was ushered in by the failure of two Bear hedge funds last July, perhaps the gods of market karma will demand the collapse of Bear as a whole before it can end?
However, kudos for story of the day must surely rest with the State of New York, whose crusading governor Eliot Sptizer yesterday admitted to an involvement with a prostitution ring. As readers will no doubt recall, it was Spitzer's hammering of the securities industry early in the current decade that closed the door on the go-go Wall Street business model of the late 90's and usheered in, among other things, the Chuck Prince era at Citigroup.
It really boggles the mind as to what Spitzer was thinking when he put hookers on his speed dial (though it is less of a mystery as to what he was thinking with); the utter erosion of Spitzer's erstwhile idealism reminds Macro Man of nothing so much as the character of Willie Stark in Robert Penn Warren's superb All The King's Men. Perhaps, though, Spitzer was merely attempting to identify with the victims in the securities industry cases that he brought as New York Attorney General: you know, all those people who paid good money to the pros and ended up getting f****d.
Elsewhere, Macro Man has a couple of more observations as he eases his attention back towards financial markets. Who says de-coupling doesn't live? Not global equity markets, that's for sure. If you had told Macro Man a year ago that the S&P 500 would be down 13% year-to-date, that we'd have two consecutive negative payroll readings, and that Ben Bernanke would be slashing rates like some sort of horror movie villain, he would have been pretty confident that two of the three best performing global stock indices this year would not be the USA's NAFTA neighbours, Canada and Mexico. He'd have been pretty surprised that Brazil was the third, as well. The obvious unifying theme there is energy production, of course. Still...if the collapse of the credit market and an apparent US recession cannot put a meaningful dent in Canadian or Mexican equities....what's it supposed to do to China? Not to say that China is immune, of course. The Shanghai Comp is down a cheeky 21% year-to-date, though in volatility-adjusted terms that's peanuts. But it is clear that the US slowdown is impacting China. While the February trade numbers are pretty useless taken in isolation, given the seasonal adjustment issues surrounding Lunar New Year, the trend in Chinese trade with the US is pretty clear. Smoothed Chinese export growth to the US is now nearly flat y/y, while import growth is at its highest level in several years.
Remind me again why the exchange rate doesn't matter?