This is Macro Man's least favourite kind of market. Volumes and interest are low, noise to signal ratios are high, and the last order is what drives the price. These are summery, trading markets....and for a "signal trader" like Macro Man, there is the inevitable frustration of losing money for no apparent reason. In this environment, most positions don't have a chance to grow into pink flamingos; they get taken out when they're still pink hummingbirds.
Sadly for Macro Man, there do appear to be a couple of flamingos out there...and at least one is lurking in his portfolio. The last couple of days have seen a pretty dramatic outperformance of small caps, as proxied by the Russell 2000, over large caps (measured any way you like.) This rally has come just after the Russell index appeared to be breaking through support last week. Macro Man's only consolation is that volume has been modest at best (indeed, yesterday's NYSE volume was the lowest for a non-holiday in more than a year), which is symptomatic of bear market rallies.
Another pink flamingo has been the short sterling strip, an accident that Macro Man has thankfully avoided. Today's CPI print in the UK, which (un)comfortably exceeded expectations, now means that Swervin' Mervyn will have to write a letter of apology to Alistair Darling...representative of the same government that recently said that the Bank could trim rates due to low inflation. D'oh! In any event, the selloff in the strip has been extraordinarily painful; at the timing of writing, neither short sterling nor SONIA is pricing in much chance of another rate cut this year. Such a development on a day when the RICS survey showed a record balance of surveyors expecting lower house prices is remarkable.
If anything, though, the UK's conundrum merely provides supporting evidence for the axioms of globalization
. Yesterday's PPI data was extremely interesting; input prices reached their highest rate of inflation since 1980, and appear to finally be feeding through into output prices. This, in a nutshell, is why Macro Man feels that the ultimate impact of globalization is inflationary.
Further evidence comes from British Petroleum, which publishes annual estimates for energy consumption. To illustrate how the US has moved from a quasi-price setter for energy to a price taker, he plotted the annual change in energy consumption (as measured by millions of tons of oil equivalent) for the world, the US, and China. The result was instructive; US energy consumption is broadly unchanged since the end of 2000, whereas that of the world has surged higher, powered by China.
Small wonder that the oil price has managed to surge despite the US slowdown...and small wonder that most macroeconomic models have underestimated inflation over the past few years. Ultimately, the signals from these trends should remain very powerful indeed, and Macro Man looks forward to markets where the noise recedes enough to trade them.