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10 августа, 16:20

Some quick chart porn

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Giving our regular contributor Shawn a little rest, I thought I would add a few different charts that have caught my eye recently1) Dax - French Election Gap Fill - looks like a good risk reward opportunity to me. Max 5% stop loss and can probably even do much less.and the longer term chart just for comparison.2) Euro Yields. Testing previous resistance. If you think EU taper is still in the cards and yields will steepen this could be a good time to get in. German 5 and 10 year yields below3) Hard Commodity Bull market. Take a look at Copper and Chinese Steel. Pretty impressive. I have been betting they would turn earlier in the year (see china credit growth below) but clearly the underlying fundamentals are strong (for now).4) Kospi perhaps setting up for a re-test of multi year range. As long as EPS are above prior range I think its a good trade, though estimates will always lag price5) Last but not least, lets remember that the Chinese economy is a big influence on EM and global demand and unlike the EU or US economies, its still a black box to most. Given that credit is a major driver of the Chinese economy, credit growth argues that you should be cautious on a 12-18M horizon. But for now, party on

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08 августа, 05:14

Really, What's to Like About Brazil?

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Last week I posted some thoughts on Brazil, which I concluded by mentioning that I am optimistic on the outlook there, without getting too deep into the weeds on what that meant, given the combination of a volatile political situation, a strong rally in asset prices, and fair to strong positive expectations already baked into the market. Frequent contributor Johno rightly posited a few questions--questions I should have dealt with in the initial post. Without further ado: I see Meirelles saying a pension bill would generate 75% of savings originally planned while a doubter like CSFB sees 30%. A big spread! Any view where in that range a bill passes?  I mentioned the pension reform as a potential game-changer. As Johno mentions, the problem is how watered down this thing gets.  The initial proposal would have been a good fix, but Temer administration already offered to water it down in May, and that was before he was caught on tape signing off on bribes, and subsequently accused of outright corruption. Looking back in my notes, JP Morgan expected a reform to be passed with 70% of the initial savings...in April. So go ahead and fade that number to anywhere between the bearish 30% CSFB figure and, let's say 50%. That said, to the extent the current congress can break this taboo would still be a positive--especially after the election. The DI curve sees about 125-130bps of cuts in the next year and then >100bps of hikes the following two years. You alluded to value in (fading) that steepness. Curious how you think about that. A call on prolonged slow growth, or structurally lower inflation and maybe lower real rates?The terminal rate is currently around 7.5%, with some steepness going into the election, and a return to double digit rates as we move into 2019. The forward curve shows a couple of interesting points--first is the steepness implying hikes throughout 2018. That aggressive in an election year without a bounce in inflation--while this is possible, I don’t think it is a certainty so long as taxes are going up, fiscal policy is tightening and BRL is strengthening. Certainly the latter could easily change by 2018, but who knows. The second point is the continued steepness to what appears to be a “neutral” level near 11%. If one were to assume a long-term inflation rate of 5%, which is 1% over the center of the central bank’s target mandate, that is a real rate that is still nearly 6%. I hear you thinking, “hold on there hombre, wasn’t it just last week you were talking about the central bank’s low credibility and lousy inflation targeting credentials?” Yes, that’s true, and certainly warrants a term premium. But you can see in the inflation history that CPI bounced around 6% in an era of unprecedented commodity prices, fiscal profligacy and monetary irresponsibility during the reign of the Lula/Dilma/Tombini axis (read this brilliant article by former MS Latam economist Gray Newman to learn more about this era in Brazilian economic history). With a center-right president, chastened congress, a more orthodox central bank board and governor, tighter fiscal policy, and lower commodity prices, medium term rates of  6% real on 5% breakeven is way too high if you buy into the reform story, which would clear the logjam of red tape and bureaucracy that has held down Brazilian productivity for generations. If structural reforms pass, long-term breakevens and real rates will fall.  Simple as that. And the Jan19/Jan21 flattener is a great risk reward if the central bank doesn’t cut quite as aggressively as the market thinks right now, but then leaves rates in the basement during 2018 which we can’t rule out quite yet. How worried should we be about Lula? This is really the fulcrum around which the rest of the long Brazil thesis rests. I think Lula has been strong in polling thus far because of a) name recognition, which goes a long way anywhere, but especially in Brazil, and b) he’s still the leftist flagbearer, despite his recent conviction and subsequent prison sentence due to corruption charges. But I don’t think he is going to win, in fact, he may not even get to the starting blocks. He will have to win an appeal to even run, which may or may not happen before the election. But as Johno mentioned, while he is polling in the high 20s-low 30s, this is a block of people that have supported him for the past thirty years and would continue to support him even if he showed up on TV wearing a sportsuit made of gold and holding a suitcase full of cash. The rejection rate is the key thing for Lula--there is probably a bare majority of the electorate that wouldn’t vote for him under any circumstances. In the end, it is indeed not unlike Le Pen in France--even if he is eligible to run, he will suck the oxygen out of the leftist movement, despite being unelectable. As such, his candidacy is if anything a positive--and would likely turn up a few buying opportunities along the way, just as we saw in France earlier this year. What does that mean for the rest of the field of presidential candidates? One “name” is Marina Silva, another leftist but more of the “green” variety. She doesn’t have the political machine or the money to make significant waves nationally. Same goes for other candidates from the left like Ciro Gomes, who will still struggle to get away from the legacy of the PT. On the right, there is Jair Bolsonaro. He has been rising in polls lately but is probably unelectable due to some views that are, erm...let’s just say “old school”. Bolsonaro's rise in popularity illustrates the strengthening hand of Brazil’s conservative movement. This will play into the hands of two center-right candidates from the PSDB, João Doria and Geraldo Alckmin. Unlike Aecio Neves, they have managed to steer clear of the Car Wash scandal, are center-right known quantities and will be cheered by investors, yet don’t have the baggage of a guy like Bolsonaro. Despite the filth of the political system at large, the PSDB money and machine will be of great importance--there just isn’t much breathing room for an insurgent candidate. If one of those candidates wins in 2018, he will have the mandate to push through stronger reforms and tighter fiscal policy. So while there are certainly landmines in the next 12 months, I don’t see a candidate that is likely to reverse or sandbag the reforms that are necessary to put the country back on a sustainable growth path--in fact it is quite the opposite--there is likely to be a supportive government, a more reform-minded congress, and an orthodox central bank. That is a combination that Brazil hasn’t seen since, well….forever. The market is still trying to wrap its hands around that.To sum it up--we could also spend some time drilling into the relative value between Brazil and similar credits, equity valuations, or recent performance of BRL relative to high beta EMFX. At the end of the day Brazilian assets have performed well over the past year, but not dramatically better than the rest of the asset class given the massive tailwind for EM. There is plenty more to go if the politicians can deliver.  

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04 августа, 08:09

Some Thoughts on Brazil--Your Keys to the 2017 Macro Alpha Supercar

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It’s been a long time since we’ve covered any ground in Brazil--but it is great macro territory. Brazil has so much that other markets don’t: Liquidity--a super tight, regulated futures market for swaps and FX, stocked with a delightful mix of domestic and foreign real money, hedge funds, and rank speculators. Carry--where else do we still talk about double digit interest rates?Stories--there’s no limit to the narrative you can build around a trade idea in Brazil.  Idiosyncratic, uncorrelated prices. Low correlation = alpha. What’s not to like? For starters, when the top management of one of the country’s biggest banks gets hauled off to prison for corruption, and it is the same bank, if I recall, that paid rates in massive size ahead of a surprise central bank hike because one of the executives had a “dream” they would hike….well, you have to be pretty careful who you are trading against. All that being said, Brazil has grabbed EM headlines this year as the “Car Wash” scandal drags on. Back in May, President Temer was implicated in a bribery/hush money scheme earlier this year, local markets gapped lower on the assumption that Temer would be impeached or crippled for the remainder of his term. If that were to happen, important structural and fiscal reforms would fall by the wayside, and the country would continue to stagnate and run up huge amounts of debt. Amazingly, despite Temer’s complete lack of scruples and the moral compass of a wolverine, he has persevered, winning a vote earlier this week to avoid being put on trial by the Supreme Court. Temer was also able to jam through an important labor reform bill. That has increased the market’s optimism about the passage of the big one--a pension reform bill that would plug a gaping hole in Brazil’s off balance sheet liabilities. In the past I’ve alluded to the EM metaphor that “energy reform only gets done in the dark”--well, in Brazil the lights went out last year. The country is in the third year of a depression...domestic demand has cratered...Rio is broke….crime is out of control...and pension costs are bankrupting the government. Even the crooked politicians know they have to act. But will they? That is literally the million dollar question. I tend to think Temer has some cards to play this year, despite a popularity rating of 5% (fill in your own “he’s less popular than” joke here). This is what makes Brazil idiosyncratic, and a great way to generate alpha….or lose money. I’m positive on the story--valuations aren’t particularly attractive here but if you believe the structural story will improve, there is still good money to be made here. With that, lets go to the charts.  Indigestion from years of misallocated capital (to put it delicately), corruption scandals and the end of the commodity super-cycle have rabbit-punched growth for the past three years. Yet the trend for growth is higher...domestic demand is recovering, and FDI never went away. As export growth has returned the flow picture has perked up quite nicely. A balanced current account and 3% FDI/GDP shows continued confidence in the country from abroad.Most foreigners, at least in the real money “community”, express views in Brazil via external debt.  This chart is a group of 5y CDS spreads on similar credits--with only Indonesia on the RHS. You can see here there is still some space between Brazil and Turkey and South Africa after the gap wider in May. Much better credit dynamics in those countries, but again--if you buy into the Brazil reform story, there is still some juice there. Indeed, the debt situation has gotten ugly fast...total net debt unwound ten years of progress in less than two. Keep in mind in 2002 there were fears that Brazil would be forced to default or restructure their debt! Another positive for the credit is that despite this huge acceleration in net debt, it has all been in local currency. Gross external debt/GDP hasn’t moved in three years. So a big deval in the currency doesn’t have the multiplier effect of making the debt more expensive to pay back. A related point is that local markets really haven’t outperformed all that much over the past year, when markets had recovered from the depths of hell brought on by the depression and impeachment of President Rousseff. This chart shows equity markets have done well, but roughly in line with global markets--only with a heckuva lot more vol. Looking to FX, BRL is in the middle of the pack for 1-year performance. Behind RUB, roughly in line with MXN, ZAR and COP (although WAY ahead of those currencies in total return, after you add in BRL’s tasty carry), and ahead of TRY and ARS. Again, good performance, but not disjointed from the EMFX rally theme of the past year. We had a little back and forth on inflation--the central bank’s target is 4.5% +/-1.5% (although it will purportedly be lower next year). If you draw lines through 3% and 6% on the chart below, you’ll see the dark blue line (IPCA = CPI) hasn’t spent much time in that interval since 2012, when a central banker by the name of Alexandre Tombini took over and slashed rates from 12.5% to 7.5%, despite no evidence of a structural decrease in inflation. The government and it’s state-run banks took this cheap money as a green light to open the credit floodgates….a phenomenon which probably isn’t too far disconnected from the massive, endemic government/corporate corruption that metastasized throughout the economy during that time. So yeah--while inflation has hit 3%, I don’t think this is the Volker trade. You can see in this chart that regulated prices have played a big role in sandbagging already high headline inflation in the past, and moderating it over the past two years. As the reform movement progresses there could be more hikes in regulated prices as subsidies get unwound--but on the other hand, a more competitive economy and stronger BRL would help keep the lid on inflation. Regardless...less vol in inflation, and thus overnight rates, would be massively supportive of asset prices. If a center-right reformist wins the presidency next year, that is a big possibility--similar to the renaissance in Argentina over the past year and a half since the Macri victory. Indeed, the lower inflation figures and positive momentum on the politics has given the central bank the space to cut rates aggressively. This has led to a big rally in interest rates. The chart below is the pre-cdi Jan21, essentially Brazil’s version of a eurodollar contract. I know, a 9-handle!! I can’t believe it either. Similar picture in the benchmark Jan25 contact--I think there could be some value in the steepness here if we get more progress on reforms and Lula fades to black. Putting it all together--I think there is still value in Brazil--I’ve been positive on rates there most of the year, but it is getting tenuous here with a 7.75% terminal rate by the end of the year. I’ll need more evidence of structural reform progress to buy into that--but as I mentioned I still see value in duration and real rates at these levels. BRL...I don’t think we’re done--lay off some risk against the EMFX dog of your choice if it helps you sleep at night. Credit--I think the first couple of charts are persuasive--while debt dynamics are still negative, and the country is likely to run a primary deficit for the third year in a row, significant reforms would fix problems other countries still have, and you have some margin for error relative to countries with problems of their own. It all comes back to reforms. Do you buy into the story? Reforms get done, economy perks up, a centrist wins the election….Brazil is off to the races. But….Temer weighs on the reform movement like a concrete anchor, the economy stagnates, Lula wins the presidency….then we start back at square one.  I continue to be optimistic--but it is an alpha game--there will be a winner and a loser.

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31 июля, 22:46

Venezuela, Chaos, and Oil Prices

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Usually I get a warm feeling when Latin America makes the cover of the Economist, like when the national news talks about your hometown. I know I won’t learn much but it is always fascinating to see how the media portrays your backyard. Mexico had a feature there back in 2012, which marked a nice top in MXN, right before growth ground to a halt and oil production took another leg lower. Argentina was there way back in the day during their financial crisis early in the century--although one had to wait for the restructuring in 2004 before there was light at the end of the tunnel. And of course there is Brazil, which graced the cover three times> Few covers can match this one as the famous “Economist Contrary Indicator”: January 2, 2016: “Brazil and the Disastrous Year Ahead”Go ahead and look at a chart of EWZ. I’ll wait. Ok, I can’t help myself. Here it is. Epic. So it is not without trepidation that I read this week’s cover story highlighting the humanitarian disaster in Venezuela, and yesterday’s vote for a constituent assembly that aims to rewrite the constitution and officially bury one of Latin America’s oldest democracies. After spending many years covering the region, this is the first story that genuinely makes me sad. Economies rise, economies fall--people get good jobs and advance, people get fired and suffer--this is basic material of capitalism. What is going on in Venezuela is so far from capitalism, it boggles the imagination. In addition to violent tactics to repress opposition protests, the government has implemented a policy to continue to service the country’s external debt at all costs. This means dollars that could be used to import food and medical supplies are being diverted to pay back loans and service bonds. Exports have fallen 70% from “non-peak” levels. An often quoted statistic is from a survey carried out by a group of universities earlier this year--they found 90% of people are living in conditions of poverty and can’t buy enough food, and 75% of people have lost significant weight in the last year. Give that a minute to sink in. This isn’t a backwater--it is a country of 21 million people that only ten years ago counted itself among the top of the heap in emerging markets. But reliance on oil revenues, socialist spending policies and corruption frittered this fortune away. What does a policy to prioritize debt service over food and medicine imports mean for investors? I wrote an article on that subject a few months ago, right before Goldman Sachs took down $3 billion worth of bonds from the central bank for roughly 31 cents on the dollar. As an owner of front-end debt you cash in on Maduro’s most damaging decisions. One of those decisions is whether or not the state-owned oil company will pay back their next bond, which matures in November. The performance of this bond historically correlated nicely with WTI, but this year that correlation broke down when it became clear that Maduro would do practically anything to stay in power--and keeping current on the debt is the cornerstone of that castle.  Earlier this year, at a time when oil prices were modestly falling back into the 40s, the Nov17s moved from 75 to 90. The “Pay at All Costs” Trade has unravelled over the past month--violence has gotten worse, the Trump Administration announced more sanctions, and yesterday’s Constituyente election was a bloody disaster for the government. Similarly, in the chart below, despite the destitute nature of the bonds, you can see there was a premium for the Venny 20s over the 34s, which indicates some probability that the government would find a way to muddle through and pay back this bond too. That premium has vaporized.Yet you can see in both charts that there is plenty of air between current prices and recovery value--most of these bonds traded in the 30s back in early 2016 when oil prices appeared to be going to zero. Amazingly, the current price of the Nov17s implies roughly a 58% probability the bond will be paid back at par. While that is down from 80% in early June, it is a testament to the power of the gun--the guy that wants to pay back the bonds at par is the one that controls the military. Where does that leave us as investors? As I mentioned in my article, and today’s update on Caracas Chronicles by Daniel Urdaneta discusses, there are serious moral reasons why investors should hesitate to lend more money to the government, and many reasons to doubt how much longer Maduro can keep up this deadly charade. My take is that as an investor this market is a complete, opaque, mess. The people that will know what’s going to happen politically are the same ones trading the bonds--and well...today they are whacking any bid they can find. I wouldn’t be caught dead owning the Pdvsa17s at a 43% default probability. And I’m not sure I could look at myself  in the mirror if I made a buck off it anyway. As much as I would like to say this Economist cover is yet another Latin Contrary Indicator, I think bond prices are bound to fall further. There will be many more investors looking to hit the exits and there are still further risks that, incredibly, the situation gets worse before it gets better.  With long end bonds still skulking around 40, and recovery values still too high given the complete clustercuss this restructuring will be, I see nothing but pain here. Not sure where the macro set’s philosophy stands on trafficking in this kind of stuff--do moral implications have any role in investing, or does fiduciary responsibility trump all? Feel free to chip in your two cents in the comment section. Moving on...the implications for oil prices are more interesting. One could be forgiven for thinking oil has been trading in a boring range for the last year, even if OPEC might be making progress on slowing the taps down. Despite all of the problems in Venezuela, production has been relatively stable around 2mm barrels per day, ranking them right up there with the big boys in OPEC. Perhaps the market is finally coming around to this idea, but those barrels are in serious jeopardy, especially after Trump opened Pandora’s box on implementing sanctions against PdVSA by restricting or banning US dollar transactions. That would likely cause a total destruction of a significant part of the oil supply chain. There is also the possibility that Venezuela descends into complete anarchy with widespread fighting. Beyond the humanitarian toll, oil installations would be a ripe target. You can see in the chart above what an additional 400,000 barrels per day did to oil prices in June--either of these factors could cause an even bigger swing the other way in the weeks ahead.I don’t think the supply response from US producers will be as quick this time as WTI peaks above 50---I’m looking for continued strength in oil prices in the weeks ahead, with Venezuela adding a combustible mix of upside optionality.

28 июля, 18:06

Asia FX, Waking Up from Summer Doldrums

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It’s been one of those kind of weeks. Whistling along through earnings season...analysts trying to look busy when their bosses walk by, and vainly trying to write something intelligent about the last company conference call when the CEO said only sentences containing words like “right-culture”, “game-change”, or, “leverage” (as a verb). Or maybe some war crime against the English language, like this: "As brands build out a world footprint, they look for the no-holds-barred global POV that's always been part of our wheelhouse."Easy there, Tex.  It’s like a consultant had his nickel batteries replaced with lithium. You can bill the client for the hours with only one or two of these words, no need to overdo it. The FOMC comes and goes, markets go back to sleep, and then someone comes back from lunch and punches tech in the gut. Even Mohamed says BTFD. I’m just going to keep my head down and keep doin’ what I’m doin’. With that let's turn our attention to Asia.  KRW has made a move stronger, in line with USD weakness and resilient demand in China, despite imminent fears about slowing credit growth later this year. But JPY hasn’t done much at all, owing to expectations that the BoJ is all too happy to just read the Cliff's Notes of the new #1 book in global monetary policy, “Hawkish Rhetoric for Dummies.” That move from 1160 to 1120 is no joke...there might be an opening for a long USD/KRW position, one that is easy to get away from on a break of the recent range below 1100. IP disappointed again yesterday, and isn’t showing the positive trend for the global growth theme: Yet some of that drag is the result of a dispute with China, which has hit auto exports hard: Yet overall, growth has checked up nicely from the slowdown in 2015-2016. Inflation is a bit tougher to gauge here--headline has bounced off the lows but core remains well below 2%.This chart argues the BoK might start to hike later this year if headline CPI remains at or above 2%.But I expect we’ll have to see core converge for that to happen, and that seems unlikely with continued strength in KRW, and little else beyond a mild fiscal stimulus program to push domestic demand. Moreover, on KRW valuation, it is getting rich vs. JPY, a key competitor in exports (and come to think of it, practically everything). REER is nearing the highs from earlier this year: A mean reversion trade would be consistent with a bounce off of 10 in the krw/jpy cross. Tough for me to believe we are again in the JPY weakness trend that took this cross to 9 in 2015 before the BoK finally started to act. Yet back in the US we see Trump-care a crash into the rocks, and over a cliff, back into the rocks again, before finally exploding in a fireball...sad! And Trump’s new communications director doesn’t even have the common sense to talk off the record before going on a curse-crazy rant to a New Yorker journalist. What does that have to do with KRW? The market has gotten very complacent about (among other things) trade policy, or more broadly, Trump’s propensity for craziness, ineptitude, or some combination of all three. Should China trade, the trade deficit, or even NAFTA become a big issue again, KRW will be in the crosshairs, just like it was late last year. That got me thinking about the long TWD idea in the comment section earlier this week--I like the theme of expressing an upswing in the tech cycle later this week via Asia FX, but at these levels I would like some protection against the unexpected:Sure, Korea’s monstrous current account surplus still needs to get recycled somehow...but history shows KRW is prone to get whacked much harder than TWD if rates go higher, USD strengthens, FTQ returns, or China rolls over….it carries flat, and as I mentioned, is setting up nicely to take the other side. Adding a short KRW position to long positions in TWD or elsewhere in the region looks like a good beta-weighted overlay...the correlations are high but that could be a positive, foreshadowing a spell of underperformance given the technicals and the rich valuation of KRW on a REER basis and vs. JPY.  A USD call/KRW put would lay off enough squirrelly risk to enable much larger core positioning.

24 июля, 07:33

The Economist on the Chinese Economy: I Wish I Was Taller

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I've been told the whole world grinds to a halt to watch the new season of Game of Thrones, but I've never given one thin dime to HBO so I've never watched it.   I still think one of the best shows of all time is Seinfeld. One of my favorite episodes was "The Cartoon." Elaine gets a cartoon published in the New Yorker. Elaine says the pig says, “I wish I was taller.”  She comes to realize that she subliminally plagiarized the caption from Ziggy. I’m sure it was the same phenomenon when The Economist published this article on the credit boom in China. The author discusses the BIS research on the history of credit booms, the speed of credit growth, and the gap between credit growth and trend growth, with a wider “gap” tending to expose an economy to greater risk of a crisis. Where have I read that before? Ah, on MacroMan!!Look, I’m sure I’m not the only one that nerds out to “Liberty Street Economics” and the BIS. What I love about The Economist version is, well, how awesome it is. They don’t caption their articles, but this guy is an absolute professional. Check this out: “On a rollercoaster, riders climb upwards slowly, their suspense building, then plunge downwards quickly, their stomachs lagging a little behind. In its deleveraging efforts, China’s government hopes to do the opposite. It has allowed the country’s liabilities to mount quickly. Now it wants them to plateau or drop gently (relative to the size of China’s economy), leaving stomachs unchurned.”Dang. I wish I could write like that. The article goes on to say that growth and inflation have closed a material portion of this gap in 2017, which is a valid point. But it is still well above levels that the BIS would suggest imply economic stability. Top shelf financial writing aside, this did force me to look back on my analysis from six weeks ago. As so often happens, the analysis stands the test of time, but the trades are a little shopworn. I did pitch them as hedges for a larger risk-seeking portfolio, but you are even farther away from low-delta strikes in currencies like SGD, CAD and AUD---and while 5y5y AUD receiver swoptions are probably still skulking around the same area, CAD rates are higher. My outright ideas to short CLP and COP are looking relatively good--CLP only recently made a material move stronger on stronger copper prices, but COP has weakened back above 3000 on continued weak oil prices and the stagnating domestic economy.  It brings up a dilemma in macro trading, tail hedging, or practically anything I guess--if you have a long time horizon, even in a couple of months you can move far enough away from strike prices to take out the gamma you are supposedly paying up for. I continue to like the hedges I brought up the first time around--heck, they may be even cheaper now. The price action of the past couple of months shows that timing is key...but if you are running a large portfolio you are likely not being paid to make decisions about market timing. That is why it is of great importance to find tail hedges at a reasonable cost in the context of a broader portfolio that is seeking long-term excess returns for a unit of risk. Otherwise, The Great Volatility Ambien Pill of 2017 will put you to sleep and you’ll wake up with in a bad neighborhood with your wallet missing. The article closes by saying, “Credit, on the other hand, should be a vehicle of economic progress, not a circular thrill ride.” True...but since the breakdown of Bretton Woods, global credit has undoubtedly been a thrill ride of historical proportions. As China continues to ratchet up towards the next peak, we can only speculate when we will reach the top and how steep the inevitable drop will be. That’s the best I got, Economist writer. Your move.  

20 июля, 06:23

Question for the Class: What Are the Unloved Asset Classes?

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Investing is a little like Lake Wobegon, everyone thinks they're above average. We all know that's impossible in the aggregate, especially after fees. Read any book by the saints of investing history and the same theme comes through time and time again--you have to be outside the herd to outperform. You have to be uncomfortable. You have to see a pot of gold where others see bees and sharks.Again like the residents of Lake Wobegon, we like to say we're contrarian. But often, we're not. We follow trends, chase performance, and fall victim to any number of cognitive biases.  We’re just wired that way. With that in mind--what is the out-of-favor, contrarian trade right now? Shorting FANG doesn't count--if you were a long-term investor, what asset class do you put your money in here to maximize risk-adjusted returns? What asset classes have been left behind by the huge asset inflation experienced in markets across the world during the QE-era?Here are a few options that I believe we can agree to throw out: Domestic stocks, which are trading at valuations never seen this side of the tech bubble, Developed market fixed incomeCredit of virtually any variety I can think ofReal Estate, which is touching all time low cap ratesGoing back to the pension funds I brought up last week, as well as a couple of other big real money investors I have poked at since then, the consultant industry is pushing real money towards greater allocations in private equity, which has seen returns above those of public equity markets in recent years. While consultants are by definition incapable of making out-of-consensus recommendations, I think these three charts argue that private equity is far from "contrarian":#1….2/3s of private equity’s portfolio companies saw margins contract relative to projections...so PE fund general partners didn’t improve the operations of their companies… #2...Yet private equity has done well...why? Multiple expansion#3... there is $1.4 trillion (!) in “dry powder” looking for the next private equity trade. This is money committed to PE funds but yet to be deployed...all chasing performance in an industry that saw margins contract in 2/3s of their portfolio companies...meaning they didn’t improve the companies, they just got in at a good price.  And I’ll spare you another chart---but buyout p/e multiples are at all time highs, and while off of 06-07 highs, debt/ebitda ratios are pretty spicy too.  What does that leave on the menu? (feel free to add your own here)Foreign Equity, presumably emerging marketsEM fixed income, presumably local, not USDForeign Real Estate (cheap markets raise your hand….not so fast, China, Canada and Australia)Smart Beta (?)Robots, AI, machine learning (?)Real Assets...oil/gas, timber, etc.Or...here’s the one that always gets people excited...cash. Or even...gasp...gold. Cash with a touch of gold to protect your purchasing power against profligate central banks will keep you within spitting distance of inflation and is the original long-vol strategy. You have the ability to buy assets at cheaper prices in the future at a time when virtually any asset class I can think of (please chime in with a cheap one!) is expensive by historical standards. You’re going to feel uncomfortable. You’re friends are going to call you insane. You need to withstand more than a bit of career risk. You will be the most boring guy at the next cocktail party. While your friends and colleagues are talking about the next PE unicorn they are chasing, FANG stocks, or dare I say, the pile of money they made in the EMFX carry trade, you’re going to brag about how you squeezed an extra 5bps out of your money market trade by locking in a juicy term reverse repo. Your date might leave with the Argentine guy with amazing hair. Hmm, cash and gold seem to check a lot of boxes. Tell me what asset class you think holds the title.

17 июля, 07:10

Economist Riff of the Week: The Big Mac Index--Buy EUR/SEK

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As vol continues to strangle any substantive macro trends, we’ll get back into the cycle of Economist articles to lead off the week. This week’s article for your macro consumption is the annual updating of the Economist Big Mac Index. I must confess to having a soft spot for the Big Mac Index. During my freshman year of college, my intro economics prof introduced the concept to the class. I found it fascinating, and it really connected the dots for what this whole endeavor is about--the quest to find some common “currency” by which we can assign value, or at least give us some evidence by which to make some subjective judgements. For me, it suddenly all made sense. By the end of the year I dropped my plan to be a political science major and the rest is history. So there you have it--here’s what I see as the takeaways, modest as they might be: Sweden still very high on the “overvalued”, and actually appreciating more. And it’s had a nice run lately, taking EUR/SEK from 9.80 to 9.53--SEK rates have underperformed EUR rates owing to some relatively good data and the potential for the Riksbank to move off of the lower bound of repo rates. That said, 2y2y rate spreads haven’t done much-- if I were to plot this out on a regression the residual is very close to zero. I’ll confess that I haven’t spent a great deal of time thinking about the land of my ancestors--but is there a good argument we’ll see a faster normalization of rates by the Riksbank than the ECB? Unlike with the fed, inflation could arguably be converging towards the 2% target. Sweden CPI and CPIF (CPI w/ a constant interest rate( source: Statistics Sweden Growth? Not too shabby.YoY GDP Growth  source: Statistics SwedenFigures for IP look more encouraging--- likely part of the broader trend in the European business cycle. I’d love to hear anyone with a more educated view here, but looks like eur/sek may have gotten a little ahead of itself. Good spot to take a crack at long eur/sek...9.50 looks likely to provide good resistance and an easy point to walk away if it breaks down and/or there is a persuasive move in the forward rate spread.2) Brazil--BRL has been on a very good run. A very wise friend once told me “when you are bullish, buy BRL. When you are bearish, sell MXN.” Given the political situation in both countries and a convergence in their interest rates, that’s not quite as true as it used to be, but the market sure seems to think so. I continue to like the potential in Brazil, but the politics will continue to be a three-ring-circus--indeed, how many currencies rally when the ex-president is sentenced to almost ten years in prison? Last week I alluded to the Mexican political maxim that “energy reform will be done in darkness.” Well, the metaphorical lights are about to go out in Brasilia...and maybe sooner in Rio. Politicians know what they have to do, they have the goods on the table, and soon they will be forced to do it. Stay long BRL. 3) ZAR...not as expensive as it used to be--and well, if your answer to the above question was “South Africa”, you would be correct. I think the question is when to get long here--rates are still attractive, and the only institutional respite in the whole country right now is probably the SARB... and you have the wild card option that Zuma is finally sent packing, to retirement, jail, or Zimbabwe...anywhere other than the presidency.4) Lastly….I know I am fly-over country, but where in the US does a Big Mac cost over $5? Maybe I buy too many Happy Meals to notice? Who would pay $5.30 for a Big Mac when $7 buys you a burger at Five Guys?Update: FRED led me wrong--in the initial version of this post the inflation and growth data I pulled from the normally reliable St. Louis Fed website “FRED” was wrong. I have updated the post to show the correct data, now taken from Statistics Sweden.

17 июля, 02:08

Repost: Nassim Taleb, Thanksgiving Turkeys, and Inverse VIX ETFs

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*This will be the last repost, I promise - will no longer use the blogger app that keeps deleting this post*We've documented here in the past the dangerous embedded in this current low volatility environment. If there is a volatility blow up, it is easy to imagine how easily things can snowball out of control. With that said, one of the areas not covered in minute detail is the prevalence of inverse VIX ETFs.Before getting into that, here is some free promotion for Nassim Taleb's Fooled By Randomness and Black Swan books.In one of the books (can't remember which one), Taleb pompously explains the simple concept pertaining the flaws of logic, the dangers of using specific incidences to reach general conclusions. One variant of this is using the past to predict the future. Amidst his grandiose and philosophically ridden text is quite a simple and down to earth example.There is a turkey who is fed and taken care of until it is Thanksgiving time. If one was to chart the well-being of a turkey through this course of events, it would go something like so:Now, when my parents heard I was trading my own money (back in undergrad...ah...those were the days), they frequently asked me whether I can lose everything in one day (they've heard the folktales and war stories of market-on-participant violence). I repeatedly said "No!".Even during the most violent market crashes, there are a number of opportunities for non-institutional participants to get out. 1987 is the example of the most violent and immediate market crash I personally know. Even then, market participants with a nose for market timing had a few chances to exit the market with relatively mild losses or even be able to profit.Then came 2017 and the prevalence of inverse VIX ETFs. Let's read a description excerpt from one of these bad boys. The investment seeks to replicate, net of expenses, the inverse of the daily performance of the S&P 500 VIX Short-Term Futures index. The index was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve.That statement brings up some intriguing questions:What happens when, in one session, the VIX increases by 100% or more?Has that happened? What happens to inverse VIX ETFs then?What if the VIX increases by 50% or more - what happens to levered positions on inverse VIX ETFs? etc. etc.First, has it happened?I looked at two different volatility gauges - the VIX directly and the older VXO (volatility for S&P 100) indicatively. Clearly, there is little that bounds these volatility gauges from appreciating upwards of 100% on a daily basis.In fact, here are the times in history (of data available to me) when you would've gone bust holding these inverse VIX ETFs, if they existed in the past. I looked at both daily returns (prev day close vs next day close) and intraday returns (prev day close vs next day high).I looked at scenarios with 0 leverage, 2x leverage and 3x leverage (believe it or not, I know of retail participants trading inverse VIX ETFs on leverage). I crunched some numbers and built a matrix with the 25 biggest return days in each scenario for each instrument. Times, when one would go bust, are in bold. Calculations are indicative as I am looking at spot VIX.So yes, it's possible to go bust when these volatility gauges spikes, especially when levered.What will those ETF instruments do when they should be down 100% or more?From reading the prospectus it seems that an event of a spike in volatility occurs, it would be an "Acceleration Event" defined as:  includes any event that adversely affects our ability to hedge or our rights in connection with the ETNs, including, but not limited to, if the Intraday Indicative Value is equal to or less than 20% of the prior day’s Closing Indicative Value.where the manager of the ETF will liquidate its assets and proceeds distributed.It's almost as if Nassim Taleb specifically built an instrument to illustrate his turkey concept.What about the larger market impact?From my digging, there seemed to upwards of 2.5 billion dollars invested in different VIX funds, mostly short vol in the form of XIV.Although 2.5 billion dollar seems small in the grand scheme of an entire financial market. It is still a sizable amount held by retail that can potentially disappear into thin air.Yield enhancement of a portfolio is all well and fine but there are ways to do it, and ways not to do it. There are also times to do it, and times when you shouldn't. Something to chew on.I assume not too many Macro-Man readers are collecting nickels via these inverse VIX ETFs at this point of the market cycle. But if you are, congrats on the money you've piled up - and you should probably reduce positions to an amount you're okay with, if it evaporates in a day's time.Portfolio Updates:Short oil. There are a few tidbits regarding oil that has prompted me to cover Thursday. First Venezuela is a mess and there is the possibility that no oil comes out of the country. This is a concern for a short like me, as they are a huge global oil producer.Additionally, higher US rates scare me as they can put meaningful pressure on US producers, which can lead to a reduction of supply.Thirdly, the chart's just not cooperating for oil - seems to be making a bottom.Lastly, perma-bull Andy Hall threw in the proverbial towel a week ago. I know it's anecdotal, but I think it speaks volumes regarding this market's sentiment.Even if the oil market goes lower, there will probably be an easier time to go back short - when it feels less like I am fighting the market.Short equities, we have seen the rally that I believed was in the cards - now will tech top out at this potentially lower high? I loaded up on an even bigger position Thursday. Will be either vindicated or stopped out within the next three sessions.Long USDJPY. Unlimited. Bond. Purchases. If JGB yields rise with the rest of the world's duration, then the BOJ has to buy more. The more the BOJ owns, the less liquidity that market will be and the more broken that market will become (just ask any bond trader).A reflexive process can potentially take hold here: the weaker the Yen becomes, fewer participants who are not mandated to hold JGBs will want to own them (not to mention less liquidity in the market). The less they want to own them the more they will want to sell. The more they will sell means that the BOJ will have to print more Yen to buy JGBs and also coincidentally make JGBs less attractive vis-à-vis the currency and also killing the market's liquidity. So how much Yen will the BOJ have to print in order to buy an asset that most will not want to own? I don't know but probably a lot. Probably moar.For all the commodity heads who follow the blog - look out for an upcoming softs post. Soft commodities, especially cocoa, are starting to look very interesting from the long side.Thanks all, as always, good luck out there.

14 июля, 23:01

Nassim Taleb, Thanksgiving Turkeys, And Inverse VIX ETFs

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*Sorry, technical difficulties - I think my blogger phone app keeps deleting this post*We've documented here in the past the dangerous embedded in this current low volatility environment.If there is a volatility blow up, it is easy to imagine how easily things can snowball out of control.With that said, one of the areas not covered in minute detail is the prevalence of inverse VIX ETFs.Before getting into that, here is some free promotion for Nassim Taleb's Fooled By Randomness and Black Swan books.In one of the books (can't remember which one), Taleb pompously explains the simple concept pertaining the flaws of logic, the dangers of using specific incidences to reach general conclusions. One variant of this is using the past to predict the future. Amidst his grandiose and philosophically ridden text is quite a simple and down to earth example.There is a turkey who is fed and taken care of until it is Thanksgiving time. If one was to chart the wellbeing of a turkey through this course of events, it would go something like so:Now, when my parents heard I was trading my own money (back in undergrad...ah...those were the days), they frequently asked me whether I can lose everything in one day (they've heard the folktales and war stories of market-on-participant violence). I repeatedly said "No!".Even during the most violent market crashes, there are a number of opportunities for non-institutional participants to get out. 1987 is the example of the most violent and immediate market crash I personally know. Even then, market participants with a nose for market timing had a few chances to exit the market with relatively mild losses or even be able to profit.Then came 2017 and the prevalence of inverse VIX ETFs. Let's read a description excerpt from one of these bad boys. The investment seeks to replicate, net of expenses, the inverse of the daily performance of the S&P 500 VIX Short-Term Futures index. The index was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve.That statement brings up some intriguing questions.What happens when, in one session, the VIX increases by 100% or more?Has that happened?What happens to inverse VIX ETFs?What if the VIX increases by 50% or more - what happens to levered positions on inverse VIX ETFs? etc. etc.First, has it happened?I looked at two different volatility gauges - the VIX directly and the older VXO (volatility for S&P 100) indicatively. Clearly, there is little that bounds these volatility gauges from appreciating upwards of 100% on a daily basis.In fact, here are the times in history (of data available to me) when you would've gone bust holding these inverse VIX ETFs, if they existed in the past. I looked at both daily returns (prev day close vs next day close) and intraday returns (prev day close vs next day high).I looked at scenarios with 0 leverage, 2x leverage and 3x leverage (believe it or not, I know of retail participants trading inverse VIX ETFs on leverage). I crunched some numbers and built a matrix with the 25 biggest return days in each scenario for each instrument. Times, when one would go bust, are in bold. Calculations are indicative as I am looking at spot VIX.So yes, it's possible to go bust when these volatility gauges spikes, especially when levered.What will those ETF instruments do when they should be down 100% or more?From reading the prospectus it seems that an event of a spike in volatility occurs, it would be an "Acceleration Event" defined as:  includes any event that adversely affects our ability to hedge or our rights in connection with the ETNs, including, but not limited to, if the Intraday Indicative Value is equal to or less than 20% of the prior day’s Closing Indicative Value.where the manager of the ETF will liquidate its assets and proceeds distributed.It's almost as if Nassim Taleb specifically built an instrument to illustrate his turkey concept.What about the larger market impact?From my digging, there seemed to upwards of 2.5 billion dollars invested in different VIX funds, mostly short vol in the form of XIV.Although 2.5 billion dollar seems small in the grand scheme of an entire financial market. It is still a sizable amount held by retail that can potentially disappear into thin air.Yield enhancement of a portfolio is all well and fine but there are ways to do it, and ways not to do it. There are also times to do it, and times when you shouldn't. Something to chew on.I assume not too many Macro-Man readers are collecting nickels via these inverse VIX ETFs at this point of the market cycle. But if you are, congrats on the money you've piled up - and you should probably reduce positions to an amount you're okay with, if it evaporates in a day's time.Portfolio Updates:Short oil. There are a few tidbits regarding oil that has prompted me to cover Thursday. First Venezuela is a mess and there is the possibility that no oil comes out of the country. This is a concern for a short like me, as they are a huge global oil producer.Additionally, higher US rates scare me as they can put meaningful pressure on US producers, which can lead to a reduction of supply.Thirdly, the chart's just not cooperating for oil - seems to be making a bottom.Lastly, perma-bull Andy Hall threw in the proverbial towel a week ago. I know it's anecdotal, but I think it speaks volumes regarding this market's sentiment.Even if the oil market goes lower, there will probably be an easier time to go back short - when it feels less like I am fighting the market.Short equities, we have seen the rally that I believed was in the cards - now will tech top out at this potentially lower high? I loaded up on an even bigger position Thursday. Will be either vindicated or stopped out within the next three sessions.Long USDJPY. Unlimited. Bond. Purchases. If JGB yields rise with the rest of the world's duration, then the BOJ has to buy more. The more the BOJ owns, the less liquidity that market will be and the more broken that market will become (just ask any bond trader).A reflexive process can potentially take hold here: the weaker the Yen becomes, fewer participants who are not mandated to hold JGBs will want to own them (not to mention less liquidity in the market). The less they want to own them the more they will want to sell. The more they will sell means that the BOJ will have to print more Yen to buy JGBs and also coincidentally make JGBs less attractive vis-à-vis the currency and also killing the market's liquidity. So how much Yen will the BOJ have to print in order to buy an asset that most will not want to own? I don't know but probably a lot. Probably moar.For all the commodity heads who follow the blog - look out for an upcoming softs post. Soft commodities, especially cocoa, are starting to look very interesting from the long side.Thanks all, as always, good luck out there.

14 июля, 07:04

Nassim Taleb, Thanksgiving Turkeys, and Inverse VIX ETFs

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We've documented here in the past the dangerous embedded in this current low volatility environment.If there is a volatility blow up, it is easy to imagine how easily things can snowball out of control.With that said, one of the areas not covered in minute detail is the prevalence of inverse VIX ETFs.Before getting into that, here is some free promotion for Nassim Taleb's Fooled By Randomness and Black Swan books.In one of the books (can't remember which one), Taleb pompously explains the simple concept of past history not being predictive of the future. Amidst his grandiose and philosophically ridden text is quite a simple and down to earth example.There is a turkey who is fed and taken care of until it is Thanksgiving time. If one was to chart the wellbeing of a turkey through this course of events, it would go something like so:Now, when my parents heard I was trading my own money (back in undergrad...ah...those were the days), they frequently asked me whether I can lose everything in one day (they've heard the folktales and war stories of market-on-participant violence). I repeatedly said "No!".Even during the most violent market crashes, there are a number of opportunities for non-institutional participants to get out. 1987 is the example of the most violent and immediate market crash I personally know. Even then, market participants with a nose for market timing had a few chances to exit the market with relatively mild losses or even be able to profit.Then came 2017 and the prevalence of inverse VIX ETFs. Let's read a description excerpt from one of these bad boys.The investment seeks to replicate, net of expenses, the inverse of the daily performance of the S&P 500 VIX Short-Term Futures index. The index was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve.That statement brings up some intriguing questions.What happens when, in one session, the VIX increases by 100% or more?Has that happened?What happens to inverse VIX ETFs?What if the VIX increases by 50% or more - what happens to levered positions on inverse VIX ETFs? etc. etc.First, has it happened?I looked at two different volatility gauges - the VIX directly and the older VXO (volatility for S&P 100) indicatively. Clearly, there is little that bounds these volatility gauges from appreciating upwards of 100% on a daily basis.In fact, here are the times in history (of data available to me) when you would've gone bust holding these inverse VIX ETFs, if they existed in the past. I looked at both daily returns (prev day close vs next day close) and intraday returns (prev day close vs next day high).I looked at scenarios with 0 leverage, 2x leverage and 3x leverage (believe it or not, I know of retail participants trading inverse VIX ETFs on leverage). I crunched some numbers and built a matrix with the 25 biggest return days in each scenario for each instrument. Times, when one would go bust, are in bold. Calculations are indicative as I am looking at spot VIX.So yes, it's possible to go bust when these volatility gauges spikes, especially when levered.What will those ETF instruments do when they should be down 100% or more?From reading the prospectus it seems that an event of a spike in volatility occurs, it would be an "Acceleration Event" defined as: includes any event that adversely affects our ability to hedge or our rights in connection with the ETNs, including, but not limited to, if the Intraday Indicative Value is equal to or less than 20% of the prior day’s Closing Indicative Value.where the manager of the ETF will liquidate its assets and proceeds distributed. It's almost as if Nassim Taleb specifically built an instrument to illustrate his turkey concept.What about the larger market impact?From my digging, there seemed to upwards of 2.5 billion dollars invested in different VIX funds, mostly short vol in the form of XIV.Although 2.5 billion dollar seems small in the grand scheme of an entire financial market. It is still a sizable amount held by retail that can potentially disappear into thin air.Yield enhancement of a portfolio is all well and fine but there are ways to do it, and ways not to do it. There are also times to do it, and times when you shouldn't. Something to chew on.I assume not too many Macro-Man readers are collecting nickels via these inverse VIX ETFs at this point of the market cycle. But if you are, congrats on the money you've piled up - and you should probably reduce positions to an amount you're okay with, if it evaporates in a day's time.Portfolio Updates:Short oil. There are a few tidbits regarding oil that has prompted me to cover Thursday. First Venezuela is a mess and there is the possibility that no oil comes out of the country. This is a concern for a short like me, as they are a huge global oil producer.Additionally, higher US rates scare me as they can put meaningful pressure on US producers, which can lead to a reduction of supply.Thirdly, the chart's just not cooperating for oil - seems to be making a bottom.Lastly, perma-bull Andy Hall threw in the proverbial towel a week ago. I know it's anecdotal, but I think it speaks volumes regarding this market's sentiment.Even if the oil market goes lower, there will probably be an easier time to go back short - when it feels less like I am fighting the market.Short equities, we have seen the rally that I believed was in the cards - now will tech top out at this potentially lower high? I loaded up on an even bigger position Thursday. Will be either vindicated or stopped out within the next three sessions. Long USDJPY. Unlimited. Bond. Purchases. If JGB yields rise with the rest of the world's duration, then the BOJ has to buy more. The more the BOJ owns, the less liquidity that market will be and the more broken that market will become (just ask any bond trader).A reflexive process can potentially take hold here: the weaker the Yen becomes, fewer participants who are not mandated to hold JGBs will want to own them (not to mention less liquidity in the market). The less they want to own them the more they will want to sell. The more they will sell means that the BOJ will have to print more Yen to buy JGBs and also coincidentally make JGBs less attractive vis-à-vis the currency and also killing the market's liquidity.  So how much Yen will the BOJ have to print in order to buy an asset that most will not want to own? I don't know but probably a lot. Probably moar.For all the commodity heads who follow the blog - look out for an upcoming softs post. Soft commodities, especially cocoa, are starting to look very interesting from the long side.Thanks all, as always, good luck out there.

13 июля, 08:22

As the Market Turns II....Time to short AUD?

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I know there are more than a few of you that have been disappointed not to see an Economist piece this week...but crikey, it was a bit of a snoozer this week. On the cover….the German current account surplus? This is breaking news? Next week...Leicester City closes in on the title….I wonder if they kept this one in the hopper for the week when there simply wasn’t anything else to talk about. Getting down to business...Yellen delivered the requisite “kinda, sorta, we mean it, but we are looking at inflation” speech that should be standard issue by this point, but seemed to catch the market a little off guard, or perhaps more accurately, gave a few fast money types an excuse take some chips off the table before that two-weeker in the Hamptons. Meanwhile, Bunds didn’t really decide what to do with themselves...but the day is coming. You don’t see this kind of selloff every day--tough to believe this is going to be the new range. Seems more likely to me we’ll see a consolidation back towards the 40-50bp range until we get a better clue on the next moves for the ECB, or more data on growth, inflation, etc. Meanwhile, Canadian rates followed along reluctantly--tightening 2-3bps in the belly after Poloz went ahead and pulled the trigger on the first rate hike since The Red Green Show was still on the air. The media rhetoric on the statement was relatively neutral, no real smoking guns--no mention of housing prices, and some emphasis on the broad-based nature of the recent pickup in growth.  I haven’t torn apart the quarterly report yet, but I am looking forward to it! In the statement, the fact Poloz wanted to highlight “recent data has increased confidence the economy will continue to grow above potential” is important, since it was the lack of momentum to close the output gap that caused the BoC to keep kicking the can down the road on rates normalization. That gives us a nice segue into FX...CAD continues its impressive run, weighing in as the G10 champion since the global rates selloff began on June 23. Commodity currencies aren’t really moving together--CAD obviously leading after the bike, but some diffusion between AUD, NZD and NOK as well. AUD stands out a bit for me here. The industrial metals Australia cares about aren’t doing much...and are holding in near YTD highs despite the downward pressure in energy prices. Natgas exports mean that fall in energy prices isn’t a big a boon to terms of trade as it used to be, but it is still positive. Given Yellen didn’t really say much to throw cold water on the Fed’s stated plans, and risk markets are as healthy as ever, I’m looking to get long USD. Looks like a nice entry point here vs. AUD, and sets up nicely if you want to get short the China credit story. The toppiness of that chart seems a little overdone given how rates have been moving in lockstep, despite the US engaging in a hiking cycle (such as it is, post-QE)But is the RBA about to throw open the flood gates on HawkTalk 2017? If they are, no sign of it yet. Safe to say there is virtually nothing priced in to the curve for the rest of the year. “Underlying inflation” is checking up off the lows as it is in a few different countries, which could be worrisome for an AUD short...’But growth figures have been lousy...And wage growth has been even worse.  The RBA is going to be in no hurry at all. So in a boring, low vol market, short AUD looks like a good, low carry way to get some risk-off exposure while potentially setting up for a larger move if the Australian miracle is finally coming to an end and/or some air comes out of the China bubble in the upcoming weeks and months....or if we simply see a USD resurgence on the crazy notion that these guys are actually hiking rates, rather than just talking about it. Not a strong view here, but a good starting point. Will dig deeper next week.