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MacroUpdate[07/01/15]

Someitemstoconsider.

Eurozone
:

Asmuchasmarketparticipantsmaybetiredofarecurringheadlineissuesince2010,
thesuccessofholdingtogethertheEMUatitspeakparticipationhaverolledfurtherout
ofthemoney,withescalatingcomplicationsforthesinglecurrencyexperiment.Thus,
EZdebtimpasseissueshavenoplacetobetuckedawaybymarketparticipants,and
ultimatelydominatestheirtradingpsychologyintheinterim,asseenonceagainwiththe
myopiaonLondonsessionactivityincurrencyandfuturesmarkets.

Thepolicyeventsareoutthere,thedetailshavebeentoucheduponbymany,andthe
unknownsareattheforefront.Asparticipantssiftthroughdatafeedsandanalysis,its
importanttothinktwicebeforebelievingonwhatintuitivelyseemssensible,aswellas
adequatelyadjustingforpositioningbiasesthatoftenleadtopainfulcurvefitting
rationalization.

Duringcrisismanagement,theobjectivepolicymeasuresarenotalwaysironclad,and
theresultingsubjectivetrajectoryisheavilydeterminedbypsychologicalequilibria,and
notfromfundamentalconceptsorbreakfixprocedures.IfEurozoneisanuncontrolled
experiment,thenresolvingdownsiderisksmeansimplementingatemplatethatis
designedonthefly.Thisiswherethingsgetinterestingintermsofhandicappingpolicy
events,andtradingtheshiftingodds.

SimplystatingdoomandgloomcontagionfromaGrexitisafalseblanketstatement.
Thepolaroppositeyieldsequallyfalsepretenses,asitsnaivetothinkthataEuro
reconfigurationcanonlymeanalargerEMU.Justbecausethereisnoconcrete
procedureondecreasingthesizeoftheEMU,thatdoesntmeantemplatelegislation
(thatislikelyunderway)wonttakeaprecedenceinresolvingspecialcircumstances.
(Specialasinwedidntthinkthiswouldhappen)Itsthisnotionincrisismanagement,
thatmakesaGrexitpossible,though,timingthiswithobjectiveoddswillrequirealotof
luck.HasGreecesrecentfightwithitsofficialsectorcreditorsadvancedthedeltaofa
reductioninEZmemberstates?Yes.But,concludingtheendgameislikelytoinvolve
manysurprises,duetothenatureoftemplatelegislationduringcrisismanagement,
whichdiminishesthepayoutofgamingeventdrivenscenarios.

Duringnegotiations,harddeadlinescanbecomesoftdeadlines,andfinalvoting
quorumscanleadtosubsequentvotingquorums,whichputsdoubtintotimingwhat
finalorendgamereallymeans.Itisalsokeytoconsiderthehumannaturetendencyof
reappraisal(acognitiveone),giventheemotionalandsocialunresttheGreekimpasse
hasspewed,asnegativeconsequencesbecomereal,theygetrevisitedandthen
framedbypolicyleaderstoreconsideraconstructiveapproach,regardlessofhowfutile.

So,despiteGreeceinitiallydefaultingontheIMFrepayment,currentlywithnofurther
EZrescuefunds,acreditor/debtoragreementstillwaysapart,andaECBELAenigma
withGreekbanks,thebreakinthebendisnotjustpolicyaction,butamatterofhow
muchpainGreececantakeonasociallyunrestandfinancial&economicscale.

Unfortunately,stayingwiththeEuroontheirtermsisnotgoingtohappen,despitewhat
anytimeisbought.Aftereachroundoffailedrescuemeasures,thesocial,financial,
andeconomicconsequencespushtheGreekpeoplefurthertowardstheupperpain
threshold.Devaluinginternallyisprovingunsustainabledespitethefaultsofboth
creditorsanddebtorwhenassessingtheimpactofrescuemechanismliabilities.Human
naturetendstoavoidsuchnecessaryexternaldevaluationinthisspecificcase,thusit
wouldn'tbeasurprisethatpendulumofpainswingsagain,thoughultimatelyenough
willbeenough(likeclosingoutalosingposition).Thissequencecantakeaformofa
consistentcreditorrejectionofextensionproposals,anECBstalemateonELAfunding
toGreekbanksuntilfurtheraction,aninitialnoontheJuly5threferendumtoavoid
fearofpoliticalsuicide,andthenfurtheremergencypolicymeetingsastheGreek
bankingsystemdeteriorates,andacompromiseisbornoutofchaos,whichwillbreed
risetonew(ineffective)leadership.Thissequenceseemstofitthepsychological
tendencyofavoidingimmediatenecessarypaintoultimatelyfacealargerpainthe
future,thefurtherthedecisioncometoanagreement(orexternallydevalue)isputoff.

Inotherwords,anotheriterationoftheGreektragedybeforetheGrexitscenario
reachesfruitionisstillinthecards,despiteincreasedGrexitoddsnearterm.The
counterscenarioisthatgiventheGrexitballhasalreadybeeninmotionforyears,that
thisisthedawnofthedrachma(whichequallymanyseemtothink).Soonehastoask
themselves,howwouldaGrexitlooklike?Therecenteventscertainlyportraythelatter
scenario,buttheformerscenariocanstillhappen,justwithmoreintensityifso,asthe
endresultremainsthesame.SotimingthefinaliterationofthedownsizedEuro
reconfigurationdependsnotonthedetailsofsystemicGrexitcomplicationsandthe
scenariosthatwillresult,butthepainthresholdofaveryproudcountry.Withgreat
hubris,comesahightoleranceforpain.Sothesearesomethingstoconsiderbefore
placingorwhilemanagingGrexittrades.


MeanwhilefortherestofEurope,atleasttheECBhas,intentionallyandunintentionally,
createdacontagionfirewallthusfar,withitsvariousinterventionpoliciesoutsidethe
scopeoftraditionalmonetarypolicywhichbeganwiththetacticaluseoftheirbalance
sheet,andtherehasalsobeenalightattheendofthetunnelforsomeofthePIIGS.
Goingforward,markets(regardlessofhowvolatile)haveacceptedtherealityofaEuro
reconfiguration,andletsnotforget,thateveryyearofthefutilekickthecanisanother
yearofaglobalrecovery(thoughveryuneven),thuswouldhelpcushionanyripple
effectsoftheinevitable(wheneverthatmaybe).Itsimportanttoberemindedthat,as
usual,peopletendtomisconstrueanegativesituationtoadegreethatstretches
beyondreality,andeventuallycometotheirsenses,andtheiractions(whetherpolicyor
marketpositioning)reflectsthatovertime.

China:

Theresadifferencebetweenaneconomyoverheatingandanequitymarket
overheating.Sure,Asharesandredchipshaveseentheirlightofdaythisyear,as
GDPisnumberonegloballyonpaper,buttheresultingbearmarketcorrectionshouldnt
becoupledwiththeassignedstoriesofhardlandings,shadowbankingcollapse,
corruptionjustice,andanythingelsethatwouldspookriskparticipants,especiallyafter
therecentratecutstirredthosefears.Needlesstosay,economicrebalancingdoes
coincidewiththelongtermgrowthratesbeingpaireddown,butitistooeasy(and
wrong)formarketparticipantstoclingtothevariousnegativebiasestowardChina
whenassessingassetpricemovementswitheconomictrajectory,astheyacton
intuitivelycompellingreasoningatthemoment.Theeconomyandmarketsoften
diverge,andtheexcessivefinancialandeconomicblanketstatementsonChina
underminetherealityofpositionshakeouts,thusmarketsagainoverstatetheimpactof
revertingpricesonlongtermtrendstrength.

PuertoRico:

WhatabettertimetobringuplingeringdebtobligationswiththeGreekimpasseleading
theway.CitinghighdebttoGDPlevelsanddebtservicingagendasisratheramateur
consideringhowcrediteventshavebeendealtwithinrecentyears.Thelessonhereis
tonotoverreact,asweveseenthisinthemunicipalandlocalbondspaceinrecent
memory,andforthetimebeing.Thistimeisdifferentdoesn'tseemtocarrymuch
weightwhenassessingmarketpositioninginthenearfuture.

Japan:


ThebeautyofstabilizationappearanceandeffectivegoalsfortheBOJ/Abestilldrive
marketpsychologyinthelandoftherisingsun.Abriefreturnofinflation(thoughunder
target),FXdepreciation,andathreearrowmedicineforgrowthseemedpromising,but
realitypointstocontinuedchallengespeddlinguphill,despitetraderpsychology(ie.Yen
positioningonmoralsuasion).Therecentlighteconomicdatadampenstherunaway
USD/JPYpositioning,thoughthereareglobalinfluencestoconsider,theexperimentis
stillunderway,andwithouttoppledexpectations,theYencontinuestomovein
expressivelytighterrangesasitsquandersoffthehighs.Thenightowltradeofvolatility
seemsadistantpast,untilfurthernotice.But,wouldcertainlyignoretheflawedUSis
Japancrowds,whichalsoseemtobetheonesthatconfuse/ignoreexport%ofGDP
withservices%ofGDP.Andmeanwhile,reformstendtobemoretheoreticalthan
applicable,intermsofdesiredresolutions,thuswouldntcountonanypolicydriven
cultureshiftanytimesoon.

Russia:

ExhaustionofRussiangeopoliticshasagedconsiderablyfromthestateofmarket
emotionslastyear.Energyseemstohavefoundanequilibriumafterthewheelsfalloff
momooflatelastyearscreechedtoagrindinghalt.Tyinginfundamentalandderivative
storiesrelatedtothepriceofoilandthemanybiasesthatensue,mayhavecomforted
positiontraders,butultimately,onecannotstrayawayfromthefactthat,causation
biasesaside,collateralizationandfinalizationofcrudecontractsexacerbatesapremium
thatsuccumbstoexcessivespeculationandvolatility.Thus,wouldtradepositioning
frameworkscoupledwithpsychologicalawareness(forrightandwrongreasons),and
notsomuchtheenergyderivatives,geopolitics,andsupply/demanddata.

EmergingMarkets:

PunttotheUS.(Followtheleader,absorbmarketheadwinds,andrevisit).

UnitedStates:

ThepositioningvolleybasedonFedrecalibrationsattheturnofeverydatareleaseand
everyFOMCmeetingcontinuestodominatespeculation.Themaincrowdsseemtobe
polaropposites,asintoomuchfaithintheFedvs.notenoughfaithintheFed.Its
apparentthatpolicybearsmovegoalpostsintermsofdisagreeingwitheveryFed
indicationofpolicyadjustmentsagainsttheirbeliefs,andthesystemicbetshaveproven

(andwillcontinuetobe)thewrongmove,regardlessofinitialreaction,asprofitingoffa
correctiondoesntjustifyconsistentlyshortingnewhighsonariskadjustedbasis.Upon
recoveryrecognition,manypeoplewerequicktounderminetheCBpolicyefforts,and
uponeconomictraction,crowdstendtoovershoottherecovery.But,ifarecoveryisa
recovery,regardlessofhowslow(psychologicalfactorshavethemostpotenteffecton
pace,regardlessofwhatisdeemedstructural),thenthedovesslowlygettakenbythe
hawksdespitehowUSTshaveconsistentlysupportedthem.Thetimingremainsan
enigma,andthebondliquiditydoeswondersonsustainablepricing,buttheUSstill
remainsonapathintheright(butslow)recoverytrajectory.However,theeconomic
cycleisstillwaysawayfromtheexcessivegreedittakestochasemutipleratehikesto
ultimatelyriskasubstantialdownturn,astherearemanydevelopmentsthatneedto
happenfirstbeforeworriesofoverheatedcreditcyclesandtheresultingrisksfromthat,
cancometofruition.Bettingontheblowoutinspreadsrequirespatience,andthe
rewardshavebeenbrief.Itstillseemscurvepricesareneveratalevelmostmarket
participantsarecontentwith,astherealwayshastobeapendingdisaster,thusthis
skewedperceptionoftheFedstillexists,andwilllikelypassthroughwithstrongerdata,
amoreconfident/aggressiveFed,andanaccelerateddemiseofgoldbugs.Untilthese
eventshappen,theebbandflowofmuddlethroughrecovery(postdisastermyopia
psychology)keepsalidonlongtermexpectations.

ThesmallwindowofEMliquidityonUSaccommodativeexitsaresomethingtoconsider
whensustainablecurvebuyingensues,butthedegreeisnotasextremeduringthe
tapertantrumdays,duetomarketsbeingmorepsychologicallypreparedfromevery
yearofrecoveryandsubsequentpolicychanges.Positioningshiftscannotbeignored,
butshouldntbeoverratedtoo.

IntermsofFX,theUSDisstillthelongtermwinner,regardlessofsubsequent
positioningshakeoutsfromthegloballiquidityrushbecomingoverzealousfromtimeto
time,andthemostlycompletedunwindofpolicybeardollarshorts.LongtermEuro
reconfigurationuncertaintyisaddsaUSDtailwind,despiteanyneartermEurotailwinds
ifaGrexit(wheneverthathappens)isalignedwiththoughtsofastrongerEurope,thus
strongerEuropsychology.Therestillexistsupwardforcestothegreenbackinthe
longtermbeforetraditionalcorrelationscomeback,andglobalizationwithfinalization
amidstcontagiousCBpolicyideasgiverisetothestrengthofabroadmarketforces,
thusimpactingtraderpsychologyandtheirappreciation/depreciationtradingdecisions.

FinalNote:

Policymakersmakemistakes,anddebtrestructuringsaretoooftenskewedtoonegative.
Politicaltheaterandtheunfortunateculturaluprisingoverseaswillmakeaninterestingstagefor
pricingthismonth,butnonetheless,chaosbreedsmomo,andmomoisgoodfortrading.