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18 сентября, 07:51

Dollar and Rates Bounce Imminent?

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The dollar's slaughter has been well telegraphed, as US rates have marched lower due to a combination of persistently low inflation and as some market participants deem potential recessionary conditions imminent. What if I was to tell you that the opposite could be imminent? Would you be interested in reading further?In the past, we have also documented on Macro Man in a commodity catch-up post that the markedly strong move in copper and other base metals in the past has usually hinted at strong economic growth and inflation.These two factors being at odds for what seems like an eternity (in trading terms) leads to my belief that we will eventually hit a make or break moment will the divergence between these two correlated asset classes will mean revert.Let's get into it.So I am claiming that we probably have a significant bounce in the dollar in the making...A few drivers that can potentially make this bounce happen:1) The big one to me is the break of correlation between inflation/inflationary products. Using copper as a proxy, we can see that the returns of the two products show a clear correlation - obviously, this makes sense vis-à-vis economic intuition; the R-squared is a bit low as copper is naturally more volatile compared to breakevens. We have seen a huge run-up in copper but breakevens have sputtered. I see this correlation maintaining and the gap between the two closing.  If we have a rise in breakeven inflation going into year-end, then that means there would be a corresponding move in rates, and thus a notable bounce in the dollar as well.2) That transitions us to point number two - rates. I'm specifically looking at fed funds futures where we are pricing in a tad more than a 25bps hike by January of 2019. Whatever outcome materializes in the US economy, it seems to me that the fed funds curve is too flat and investors are being too cautious.Like I said, whatever the outcome may be, PnL is path dependent - you will undoubtedly have rhetoric, communication, and expectations to shift (at the very least during pockets of time from now till 2019) where we see both a drop in fed fund futures across the curve as well as a steepening of the fed funds curve.That occurrence should coincide with a dollar bounce. 3) Okay, we've talked about inflation and rates from a correlation perspective. What about the fundamentals? Inflation has been stubbornly low, but there are signs of an uptick bubbling below the surface.Wage growth has been tepid but a couple indicators show continued increases overall. Average weekly hours worked has also spiked. Even if wages fail to materially increase, the increase in hours worked should lead to extra total wage income.The magnitude of the increase will be amplified by years of QE.Again, like most markets, corresponding moves aren't always immediately and 1 to 1 in nature. It can take a bit before the market comes to an epiphany - that "Ah ha!" moment.4) The US economy and the global economy seems to be doing okay. Everything seems safe-ish.  Looking at some very basic metrics such as GDP and unemployment here. The growth has continued from then till now, and we are still on track for additional growth. I get it. We expected an explosion of growth after Trump and that hasn't really happened, but things are not worse than they were two years ago! Yet rates and USD in real terms have round-tripped back where we were two years ago.5) Another trigger would come from the rest of the world. With FX these last few years being a game of lemmings where countries deviate little from the lead of the United States. It might be time to wonder if we are due for a pick-up of catalysts and rhetoric from other countries concerning the strength of their currencies, as well as disappointments from other central banks regarding their hawkish policies.Europe and China need to be the main culprits. With that said, many in the rest of the world are involved as well.First China: they recently got rid of the deposit requirement for FX forwards - something they implemented two years ago to slow the devaluation of RMB. This should make it less expensive for companies and investors to buy dollars while selling the yuan. And guess what? The dollar is cheaper now.Although the change itself is mostly symbolic and not necessarily a force to be reckoned with, it can potentially serve as a canary in the coal mine for future attempts to stem RMB appreciation.Europe growth has been very strong - and the FX market has responded accordingly. This is a bit of a question mark for me - interest rate futures' pricing is hovering around record lows for a ECB rate hike by June 2018.If we get some convergence there, that would mean Euro sells off a bit - helping dollar bounce - but in terms of the intricacies of the ECB at this point in time? *Shrug*Now the rest of the world. The most dollar sensitive countries are obviously in EM. Many of the Asian countries have already shown signs of intervention against their strengthening currencies as they start to accumulate reserves, specifically in dollars.Exhibits below for your entertainment:Eventually, dollar shorts should notice. Again, I've noticed in the past that these trades in these currencies often preceded moves in US rates. Canary number two for the aviary, anyone?By the way, shout out to fellow contributor Shawn who shared an article articulating what is beginning to transpire across the world - you can read all about it via the link below.https://www.cfr.org/blog/few-words-dollar 6) The Donald and the Fed are changing quickly. Stanley Fischer is gone. Uber-liberal Brainard will probably follow. Who's Trump going to nominate? Probably Republican-type candidates - guess what? They are usually more likely to be hawkish than dovish.To me, that in itself is compelling thought. What can potentially make it more compelling? Well, the Donald seems to have started working well with Democrats as of late. Let's project that further - if they can manage to pull together a deal for tax reform, even if it's not super impactful, it will be symbolic. It will symbolize that Donald can get things done - I would think the rates markets would immediately do a 180 and return to the post-election regime. Yes, I am projecting here, but think about the risk reward of your positioning at this point. Should the rates go higher or lower? Should dollar go higher or lower?  If he does pass through tax reform. What's next? Tariffs? Additional government spending? Again, just projecting here...Inflation?!?! *Gasp*7) Lucky number 7. I'm big on sentiment - from the eye test, I think people are pretty close to limit short USD at this point. Just a hunch.Hey! It's free blog okay? Take it or leave it! :)Are there catalysts?I hate catalysts. It's been a lonnnnngggg post, please bear with me a little bit longer. A lot of what I have detailed are projections - but that's macro trading to me - you have to anticipate in order to correctly speculate. Maybe that's why I'm often a little bit early on these things. Hmmmm.But often your returns and risk-reward decay swiftly if you wait for a clear catalyst to materialize. So... in my opinion, proceeding with some caution is probably better than proceeding before it's too late.General House Cleaning:Stocks short - Yeah threw in the towel like Mcgregor on August 29th. Geopolitic risk is definitely subsiding. Let me explain.It's not that there can't be another crazy development tomorrow. But the market is just not ready to go down just yet - traders should know what I'm talking about. My Ah ha! moment was when North Korea launched their "hydrogen bomb". Along with the hurricane, the market was confronted with a copious amount of "bad" news.  Equities gapped down, but by the end of the day, it actually covered the gap and closed higher!Disgusting, I know. But looks like the indexers and VIX carry monkeys will get to make money for a while longer.EM equities - this has been an impressive move. I believe this is a multi-year trend when I detailed it long ago.With that in mind, it has run up a lot. If the dollar does bounce, we are probably going to get a shake out of the weak hands and late comers to the trade.Cocoa and sugar - both bottoming nicely. I still maintain sugar might be a tad too early. Cocoa looks really good and I strongly believe it can rip. I even did some work to do a seasonality adjustment. Below is the inverse inventory on a seasonally adjusted basis vs price. Please excuse the poorly drawn arrows.Anyways, have a good week guys.

15 сентября, 19:49

Happy Trails, Hugh Hendry.

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I was going to post this as a comment in the prior post...but I got rolling into full "post" length. The Macro world lost one of its godfathers this week. Hugh Hendry has thrown in the towel and closed his fund. If you've been in this business long enough, you have been through what Hugh Hendry is dealing with. You can hear it in his voice in this interview--there are elements of regret....and relief. You can't keep a guy like him down--he'll be back, stronger than ever.But how did this happen? Hendry claims, or at the very least implies, the global macro model is “broken” due to higher costs, low carry and fewer opportunities. What does this mean for the asset class? He's absolutely right from a business perspective. So much has conspired against global macro. Not only has the regulatory environment changed to make running the fund more difficult and expensive, but fund raising has become more difficult, time consuming and onerous, and leverage is *dramatically* harder to come by and more expensive than it was 5, 10 or 20 years ago. From an economic perspective, there is simply less alpha to go around when central banks are putting their thumb on the scales. Combine that all with flat curves and zero carry and it is amazing some funds are able to slog on as long as they have--I remember when the 4-5% carry from unencumbered equity was a nice pot of cash at the end of the year. No longer.When I talk to pension fund and endowment managers today about how they invest their money, they want a more persuasive value proposition than "I'm smarter than the average bear." They see the market as divided up into pots of risk premia for them to exploit with their long-term time horizons. That is why they have this blood lust for private equity--historical performance argues there is a premium there that will generate superior long term returns. While that is debatable--look at my thoughts on the subject here, and here--that is the conventional wisdom being sold by armies of investment consultants, and as I highlight above, these investors need returns beyond the “LIBOR-plus” benchmark for global macro. There is some space in alternatives for global macro hedge funds but investors are gravitating towards a more persuasive pitch about how a manager builds and sustains and edge in this market relative to one that is "global" and taking trades as the market comes at them. Maybe that's right, maybe it isn't, but that's where the market is today.Combine all that with money money money...Competition is fierce. Fees are still high. And the fuses are short. Tough to see how the genie will go back into the bottle for the asset class.   

13 сентября, 22:14

Bitcoin: Is It a Currency, or Something Else?

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I’m going to go ahead and kick this hornet’s nest and see what happens. Bitcoin. There, I said it. Jamie Dimon’s diatribe yesterday got me thinking again about Bitcoin cryptocurrencies at large. I’ll be the first to admit that I am an old school currency trader--I know first hand there is little else that draws the admiration of the citizenry of an autocratic regime with a hyperinflationary monetary policy than the US dollar. If you were bold enough to click through to that link, you see that there has been 1 million percent inflation in Venezuela since Hugo Chavez took power in 1999. But that was way back in mid-May--now it is 3 million percent and counting. The Venezuelan Bolivar lost 2/3s of its (already worthless) value in only 77 days.When a third world autocrat implements capital controls, the objective is generally to prevent the citizenry from fleeing the local financial system for the safety and security of the US dollar. In Argentina, until early last year you couldn’t just waltz into a bank and ask to have your pesos converted into dollars--moreover, grain exporters couldn’t freely repatriate dollars without a morass of taxes and red tape. So even from a corporate perspective, you can see the power of a currency system that would enable you to circumvent government controlled financial systems.And that’s what makes Jamie Dimon nervous!! Few banks are as highly levered to the interaction of the US and international financial system than JP Morgan. Freedom of movement and libertarian absolutism is the basic, global value proposition for cryptos in the foreseeable future. So what is, or should, Bitcoin be worth? I guess I am old enough that I have to go back to my international economics textbook to match up Bitcoin with the definition and uses of a currency: A currency is a medium of exchange that is used to buy or sell assets, goods and services. We think of it as being tied to a country or central bank, but it can be stuff like airline miles too--a currency I try to convert into dollars, magazines or airfares as quickly as a Venezuelan with a sack full of bolivars.What is a good currency? A solid currency needs trust. The entity and monetary system backing the currency needs to be predictable, legally stable, and widely recognized. Some currencies FX traders think of as lousy currencies, like the Turkish Lira have depreciated dramatically--but are still legally recognized tender in the international financial system. A good currency must be a store of value--as a TRY holder, I would have lost money in USD/TRY over the past several years, but I would have made some of that back holding TRY assets at much higher interest rates over the years--and I would have had the freedom to convert to USD at my pleasure any time during that period. So the currency held its value--it didn’t go completely to pieces like the currencies of Venny or Zimbabwe.Most simply, the changes in value of such currencies are driven by trends in real interest rates and the domestic expected return on capital relative to foreign return on capital.How does Bitcoin fit into that system? Here’s where I am going to throw out my fuddy duddy opinions and we'll see if the millennial set or the cryptocurrency true believers can set me straight.Medium of exchange: Bitcoin has a $65bn market cap and trades millions of dollars per day. You can get online, set up a wallet and buy into it relatively easily and virtually anywhere.  That makes it a widely recognized medium of exchange. Sure, it is well off the billions of dollars traded every day in EMFX currencies or trillions in DM currencies. But it is growing and will probably rival small country currency volumes soon. So a modest but growing “check” here.  Store of value: Ok, so help me out here--I am long bitcoin--what interest rate am I going to draw on that? Can I lend it out? Nobody is borrowing in bitcoin. I see value in using it as a dark-web currency but not as an asset. I understand the value in being outside the traditional financial system but the PBOC moves last week show that governments have an incentive to make lives difficult for crypto traders and ICOs, even if they can’t completely shut it down. Which leads to the last bullet...Trust: Do I have any confidence in what it will be worth tomorrow?  Not really. Do I think it will be equally liquid and accepted non-country based asset, like gold? Not really. Will it be overwhelmed by some other cryptocurrency long-term? Maybe. Will governments and established banks crush or co-opt it? Maybe. The tin-foil hat crowd will be happy to opine on how this will be the first discussion topic at the next annual illuminati jamboree.I'd love to buy into this--it really does appeal to my anti-establishment impulses. But I’m from Missouri on this one. Show me. No interest rates, no monetary policy, no capital markets, no derivatives...but long on hope and the blockchain story. I don’t even want to get into the “fair value”, bubble talk, or astronomical recent returns--I just need convincing on how cryptos are defined as a currency, and how that will interact with the establishment. And again to throw my lot in with Jamie--blockchain is a totally different topic--that is a technology that has enormous value for payment systems and corporate supply chains. Even if and when the technology is there to implement blockchain’s promise of the “smart contracts”, distributed bookkeeping, and real-time payments, I still want to get paid in dollars! And I don’t think that is going to change in my lifetime. Am I just behind the curve here? Convince me otherwise!

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08 сентября, 20:18

Linkage Friday: Another Bullish Voice on China, and Views of France's Labor Reform

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Just thought I would dash off a few quick thoughts before we all throw in the towel for the weekend.Macro: Wow...the horsewhipping of USD continues unabated, with some very big levels either getting taken out--1.20 in EUR, .81 in AUD, and CAD approaching 1.20. Not to be left out is the kiwi which is finally outperforming after getting kicked around for much of the metals-driven rally over the past three months. Looking at EUR crosses you see....nothing. This is more of the same--China demand, risk-on, reach for yield...welcome back, 2006.  We missed you.If you are young enough that you weren't on a trading desk back then, well this is what it was like.Interesting to note the strong bounce higher in yields after the gap overnight--I would guess more flow driven/profit taking at this point but no doubt the theme is intact. Stocks not quite the BTFD theme but notable there was absolutely zero follow through to the modest selloff earlier in the week.I'm going to take the easy way out and post a few links to some insightful things I saw this week:The WSJ had a great article on the "mystery", or "conundrum" if you go back to the Alan Greenspan days, of higher growth paired with stubbornly low inflation. I like how this one identifies what are really productivity gains--tech companies bringing new capital investment and business methods to staid industries that allow them to cut prices as they grow, rather than encouraging demand-push inflation.This article, which was almost in response to the one above, goes into the Fed's thinking on the topic. I continue to be torn on if they will pull the trigger and hike in December--the easing of monetary conditions driven by the market moves above tilt me towards the "hike" camp but it won't take much more bad data or low inflation figures to give them an excuse to sit on their hands.Getting back to the China issue, I'll again cite the folks over at BCA, who had this chart and commentary, which is supportive of the guys at China Beige Book that I mentioned earlier this week:"China’s August macro data to be released in the coming weeks will likely surprise to the upside. Some market signals from global assets that are traditionally sensitive to Chinese growth trends have shown remarkable strength of late, likely signalling further upside in the Chinese business cycle. Metals prices have been firm across the board. Stock prices of metals producers in major producing countries have significantly outperformed their respective benchmarks, likely pointing to an imminent upturn in China's leading economic indicator. The Baltic Dry Index, the benchmark for bulk shipping rates that is largely driven by Chinese materials demand, has stayed elevated, probably a sign that China's bulk commodities intake has remained fairly robust. All of this still paints a bullish backdrop for global risk assets, despite the obvious geopolitical risk."At this point, someone is going to have to tell me why this is going to stop...my facebook feed just popped up a "memory" from five years ago where a friend had posted an article called, "China's Mother of All Debt Bombs" and asked me my opinion. I said it would blow up sometime in the next 1 to 20 years. I'll chalk that up as the right call. Lastly a couple of links to The Two Pillars of French Labor Reform, and Macron's Labor Gambit at Project Syndicate. I think these, especially the second one, sum up the situation rightly--the reforms are big, in that they are being proposed in a political environment where they could actually pass...but they are small in that they are really incremental relative to how many other country's operate. They will only be successfully if they are the beginning of a reform movement, rather than Macron's political suicide. Only that will drive the resurrection of the "animal spirits" in France and drive profits and employment. As I mentioned earlier, I think that is worth taking a swing at French equities relative to other eur-based equity indices, although I must admit I am not knowledgeable enough on the components to know how the risks pair off. After all, I'm just a bond guy...I'll leave that to the equity pros...   

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06 сентября, 23:06

CAD to China to Copper to FroJo

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So the BoC went ahead and did it.  That’s two hikes, and unwinds the cautionary/pre-cautionary hikes of 2016 when oil prices were code blue. “Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining.” They’ve been telling us that for the past two of three years, is it really happening now? Poloz and Co. go on to mention that the global economy is picking up, and more synchronous than in the past--which is also consistent with some of the strong, or at least persistent, growth data out of China, and the spectacular move higher in base metals, which portends continued strong manufacturing growth. But we haven’t seen much outperformance in CAD….at least not compared to its commodity currency brethren. The 1.2% stronger move today should put a little space between the loonie and AUD...And NOK...And this should leave behind the newly resurgent CLP, which has again crawled out of its low-real-rate grave thanks to the amazing run in copper prices.As I mentioned yesterday I thought we would see a slowdown in China and metals prices by now that would cause commodity currencies to give up some of their YTD gains. John Maudlin had some good points on this from one of his buddies at “China Beige Book”, a research outfit I’ve never heard of but one that made some very good points on the resilience of the China credit/growth re-boom: “A lot of this now seems consensus – as all good assessments should in hindsight – but if you recall at the time (mid-to-late June) there was growing sentiment that (1) the economy had already peaked for 2017 and was now starting to slow; (2) deleveraging was having a major effect on corporates; and (3) the commodities sector had likely peaked in Q1 and was now in slowdown mode as well. Our data undercut all of these.”“CBB data show aluminum firms wildly outperforming the current market narrative, seeing broad Q2 gains in revenues, profits, volumes, output, and new orders, as well as cash flow, which jumped into the black for the first time in our survey’s history. The why is less clear than the what, but one obvious possibility is aluminum is the latest recipient of some of China’s excess liquidity. ““In Q1, corporate reporting to CBB showed credit tightening was limited to interbank markets. In Q2, it hit firms: bond yields and rates at shadow banks touched the highest levels in the history of our survey, and bank rates their highest since 2014. So why did borrowing not collapse, denting the broader economy? One reason is what we call the “Party Congress Put.” While borrowing did see a mild drop for the third straight quarter, companies’ six-month revenue expectations remain robust in every sector save property. Companies assume deleveraging is transient, likely because they are skeptical the Party will allow economic pain in 2017. It will not be until 2018 when we find out whether deleveraging is genuine – because it won’t be until 2018 that it will actually hurt.”Bottom line, these guys mention the deleveraging and tightening is hurting property firms and cash flow….but that isn’t hurting the broader economy….yet. When does the other shoe drop? Well, not until well after the party congress at the end of October. Will copper stop its crazy run higher before then? EMFX and the commodity currency club is poised for continued strength-- with inflows continuing--and yesterday's Brainard comments signaled the Fed is not going to get in the way any time soon.  If inflows persist and start to seep into FDI and the broader economies in commodity driven economies...welcome back to 2005-2006. Canada doesn't seem like a recipient of those flows so long as oil is still stuck in the 40s, but that theme should be intact for those driven by base metals in Australia, Chile, maybe even South Africa. Low natgas and oil prices will benefit those countries too...as well as soft commodity exporters like Argentina. What else is going to throw sand in the gears? North Korea? the ECB? A trade kerfuffle or a NAFTA trainwreck? Not seeing any likely culprits here. Back in the Atlantic, no macro opinion on the natural disaster front...just prayers to everyone in the path of Hurricane Irma. Took me a sec to realize that was what was driving frozen concentrated orange juice futures.At first I thought it was the Dukes. Which I say just to have an excuse to post this, which I think every trader should be required to watch as a part of his or her training. Stay safe out there!!

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05 сентября, 07:32

Did Norges Bank Just Drop a Bomb?

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Welcome back to the rat race everybody. I hope you enjoyed the holiday or pseudo-market-holiday, depending on your address. What did we learn while at the beach? Rates rally, gasoline prices rocket higher, but the God of US Breaks has spoken….”5y inflation 5 years forward shall be between 2.21 and 2.28.” I had a couple of drinks with an ex-colleague...he’s French and was in town on vacation with his Italian girlfriend. Judging by the tail end of these graphs, they weren’t the only one on the famous European August holidays. Similar story over in FX land...EUR continues to be the story of the year. ZAR made a run higher over the past couple of weeks, but nothing else notable. Which brings us to the always fascinating world of swap spreads. Hey, a market where something happened the past two weeks? In 2y spreads, a move down from 26 to 21 in a week gets some people very, very excited. This means as rates were rallying, 2y swaps were outperforming 2y UST. Is this the debt ceiling rearing its ugly head? My guess here, and I'm open to other interpretations from those a little closer to the source... is that the FTQ bid from more North Korea noise combined with illiquid markets and the debt ceiling pushed more macro guys into buying eurodollars rather than front end UST futures. I’ll take the other side here and call for a move back towards the mid-20s... I think the move in rates is a little overcooked, and even with Trump’s historic and downright bewildering ineptitude, I can’t see how a Republican president takes a Republican congress to the mat on the debt ceiling. They will find a way.  And if North Korea nukes us, you could do worse than to be long swap spreads! While it may not manifest itself in the front end of the US curve, there was another story that hit the tape late last week that I think is very important. Norges Bank, the manager of Norway’s bottomless pot of oil loot, released a letter to the government in which they call for some major changes to their management of their massive fixed income portfolio. To quote (emphasis  mine): “For an investor with 70 percent of his investments in an internationally diversified equity portfolio, there is little reduction in risk to be obtained by also diversifying his bond investments across a large number of currencies.The benchmark index for bonds currently consists of 23 currencies. Our recommendation is that the number of currencies in the bond index is reduced. This will have little impact on risk in the overall benchmark index.We propose that the Ministry goes back to a specific list of currencies for the bond index rather than leaving this decision to the index supplier... The most liquid market for bonds is currently that for US Treasuries, followed by those for bonds issued by countries in the euro area and the UK...An index consisting of bonds issued in dollars, euros and pounds alone will be sufficiently liquid and investable for the fund.”The letter says that the new benchmark would be roughly 58% US Treasurys, 38% European debt, and 8% UK Gilts. Here is the breakdown now: The big losers here are Japan, Canada, and the entire emerging market bucket, which the letter goes out of its way to bag on. So at some point in the next year there is likely to be some outflows from EM local debt and into US, Euro and UK paper. While that should be nominally positive for my long swap spread trade, the larger impact will be felt elsewhere.  This move away from EM debt is a radical departure from the commitment this fund made to the EM asset class back in 2012, when they abandoned the market-cap weighted index method, which put them into big, heavily indebted countries like Japan, Spain and Italy, at the expense of EM. They switched to a GDP weighted method, which was a big move. Here is what happened to the net holdings of Mexican government debt when they made the switch: That's right, in a $70bn (now $100bn) bond market, Norges basically went from nothing to $4bn in 2012, and then to $6bn in 2013...but not right away...they started buying after the selloff driven by the taper tantrum, and didn’t stop the rest of the year. Rates ground lower relentlessly and swap spreads were the story of the year. So the move to reverse that could be a big deal in EM, especially for debt-thirsty countries like Mexico that rely on foreign investors to plug their fiscal gap. And given the size of the fund and its exemplary quality of management over the years, this could be a leading indicator for other SWFs and large pension fund managers. Their conclusions are relatively radical--zero diversification benefit...liquidity problems...a poor index composition...you can feel the distrust in the asset class when you read the letter. Will this be the day the second generation of EM inflows rolled over? Stay tuned!

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24 августа, 15:55

Dallas Fed Paper: PCE Inflation to be Revised Higher

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Here's a little red meat for the inflation and monetary policy junkies out there. Two economists at the Dallas Fed released a short paper yesterday entitled, "Getting a Jump of Inflation.” I was hoping for something like an inflation jump to conclusions mat.But it’s even better than that. These guys totally buried the lede...they close with this (emphasis mine): “The BEA estimated April 2017 PCEinflation at 1.72 percent (as of August2017) and June 2017 PCE inflationat 1.42 percent. Based on Fed surveyresults, it’s likely these figures will berevised higher—to 1.90 percent and 1.55percent, respectively—at the next annualrevision in summer 2018. Thus, theeconomy may be closer to the FederalReserve’s definition of price stabilitythan is commonly believed.”Take five minutes and read this thing--they describe how only a couple of high-frequency data points (the Fed aggregate prices paid index and to a lesser extent, ISM prices paid) predict inflation just as well as the second and third revisions of the PCE data set. Bottom line--these guys see underlying price pressures that aren’t yet showing up in the headline inflation data. Could be a sign that the market has gotten too complacent on Fed expectations, and the market is overextended in the usual suspects like short USD and breakevens.   And commodities keep on truckin’Copper is partyin’ like it’s 2012...the luxury shopping malls of East Santiago will soon again be teaming with shoppers spending new found loot. Wasn’t so long ago that $3/pound seemed like a cruel memory of a lost time to your average Chilean economist. Woe be the trader that ignores the ides of September...or Jackson Hole!

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22 августа, 20:00

Remember the Thing with North Korea? KRW is Still a Good Short

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Oh so long ago, in the halcyon days before "Charlottesville", our number one worry was a nuclear conflict with North Korea. Hmm, yes, it has been a slow news cycle, hasn't it? And while we're on the subject, am I the only one that noticed the word "Charlottesville" is already being used as a pejorative adjective to describe all that is wrong with the country, the far-right, intolerance, or whatever is stuck in your craw, no different than places like "Watts", "Stonewall",  or "Midtown". Trouble is Charlottesville *was the home of one of the Fathers of our Country and the author of the Declaration of Independence*. He's on the money. Literally. Sorry guys, this one's taken. But I digress. Getting back to North Korea, or the relative lack of interest after cooler, or at least, simpler, heads prevailed, probably won't stand as the last word on the subject. I clipped this chart from the folks at BCA. They highlighted how a short KRW/long JPY position is still near historical extremes, and sets up nicely for a risk-off move, especially one driven by events on the peninsula which would drive both sides of the trade--a weaker KRW, and an unwind of short JPY carry trades.I suspect part of the driver here has been not only the pickup in manufacturing demand over the past year or so, but also the massive inflows into EM, which for some reason benefits South Korea, despite looking nothing like an EM country. This article in bloomberg noted that the bond market saw only the second weekly outflow of the year--a trend which is can't last when yields are as pathetic as they are there. I did kick this idea around a few weeks ago, and while I noted the market has been complacent on Trump’s propensity for craziness, I thought there would finally be a bid for USD after six months of a good old fashioned horse whipping. Well, maybe that’s finally starting to turn...time will tell. Looking at the chart, we’ve seen a good 2-3% move in both USD/KRW and the JPY cross since late July--the cross is finally breaking out of a range that has held since the US election, and usd/krw continues to be a cheap short for a number of geopolitical risks, EM/China risk, and “USD fuerte” risk. And still screens cheap! Carry on….Great to have abee and Detroit Red going live again... this subsidiary of TMM2 is going to put out the “Gone Fishin’” sign until Labor Day--although there will be more abuse of spreadsheets and databases than fishing. But I will probably break down and post if something really compelling pops up. Stay safe out there.

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21 августа, 06:29

Cuckoo For Cocoa/Commodity Catch Up/Stock Market Topping Process/China From Ground Level

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Long-time no post - hope everyone's been well. Was away on a 3 week+ trip to China (the 6th country I've traveled to this year!). Had some difficulties overcoming the great firewall. Good to see Shawn holding things down!A long one today, so please bear with me.Cuckoo For CocoaThis picture can sum up how I feel about Cocoa:We've talked about grain commodities in past by looking at supply and inventory numbers to gauge risk reward and general surplus vs deficit of crops.As I have stated in the past, the growing cycle of grains is relatively shorter than that of softs. Rips are usually less sustained in grains - long bear markets and short sharp spikes - than in softs - as there are massive cycles of bull and bear markets in softs.We had a sizable rip in grains, specifically in wheat, but it was not sustained. Still too much supply out there and we might have to wait until next year before we start falling into deficit and price can sustain an up move.Moving along.Sitting here now looking for opportunities to gain diversified returns, I think there are opportunities setting up to get long softs, specifically cocoa, and to an extent sugar as well.The reasoning is similar to things I've cited in the past grains post - these are two commodities have fallen so much in price that they are bound to return from a stage of surplus to deficit as production cuts back due to low prices.In cocoa, the previous shortage from 2014-2015 has been replaced by a supply glut. There are even talks that the current levels in prices are leading South American producers to abandon cocoa for cocaine!That leads me to think the bottom is in or pretty close.Cocoa surplus is now well telegraphed. We've experienced a notable build up in stockpiles. As these inventories start trending off the highs, we are in danger of seeing a reversion in price as well. Below is a chart of 1/x price vs ICE cocoa inventory.The last production print for cocoa is still high but that is a slow-moving factor and should be priced in. In fact, it is slow enough for you to potentially fade it. Outside of the commonly documented turmoil in the Ivory Coast (the biggest cocoa producer in the world, you can see other big cocoa producers (Ghana, Indonesia, Brazil etc.) also fluctuates based on price cues. With prices declining, then bottoming over a year's time, cocoa production should start fading accordingly.Oh yeah, and people are heavily short this thing. Squeeze, anyone?Sugar has similar fundamentals to cocoa. We've had the boom back in 2011 when there were 300+ sugar mills in the South of Brazil. By the end of the bust, mills and companies were mired in debt. You basically had 90 mills left in Q4 of 2015. The thing with sugar mills is that they need to be retrofitted every few years. The many mills left in Brazil needed to go through this process. However, retrofitting a sugar mill is like replacing ink for those old cheap printers - the ink cartridge itself would be $20 for a printer that only costed $25. So it was safe to assume that a number of mills in the group remaining would shut down due to a combination of too much debt and a much-lowered sugar price. On Feb 22, 2016, there was huge buying interest in sugar going into the close. After markets were closed, ISO announced a surprise sugar shortage. Sugar ran up from the lows to ultimately hit 24 handle. Turns out the catalyst was El Nino. After the price surge, stockpiles printed the lowest they've been since 2011. Production declines in Brazil stopped and started to trend higher, although India production still didn't show a clear nadir. That was enough to send prices back down.Turn the page to today,  The height of the price move has led to a turn of the fundamentals. Brazil production increased but Indian production is still low. If we sustain lower prices a while longer, Brazil production would be in danger of pulling back again. This one might be a little early - we should eventually see the sugar surplus move back into deficit and witness a surge in prices again. One concern here is that stockpiles have only increased modesty - which is why I think we are a little early here. And since the market is short, we could potentially see a squeeze that materializes as a fake out for longs. Something to keep in mind.General Commodity Catch UpFirst, looking at the commodity world as a whole. Commodities have been a hugely undervalued versus stocks. This trend doesn't last forever and historically will mean revert.This is hard to time this trade as this commodities "bucket" encompasses many things - each subcategory of commodities, and even different commodities in each subcategory can possess stark differences in the underlying supply and demand dynamics.With that said, there should be general lift off in commodities soon.There is something peculiar here to note.The base metal index has tracked US Breakevens well. But recently, we've started to see a break.Copper supposedly has a Ph.D. in economics and I assume the other base metals are its colleagues. Copper's data is more easily procured so from this point on in the post, I'll just use that as a proxy.Copper has been drifting higher and higher after a long period of consolidation post-Trump elections win. Obviously Trump = building stuff, better economy, etc. so it made perfect sense. Breakevens also exploded higher as the above would mean inflation.However, interestingly, the break of correlation can mean a few things: either1) Copper supply and demand dynamics are so in support of a higher price that it is meant to trade higher regardless or...2) Ph.D. copper disagrees with Ph.D. interest rates.Funny, it's not like we ever have Ph.D.s disagreeing with each other when it comes to the economy.Combining inventory data from LME, COMEX and the Shanghai Metal Exchange, we can see that there could be some fundamental reasons why copper is getting bid.Whether that draw inventory is driven by real economic growth requires more digging - I recall a time when Red Kite drew record amounts of inventory as a speculative ploy only to lose their shirts and possibly their kites when prices did not respond accordingly.Something is definitely fishy here. Don't have a strong inclination - need to ponder some more. Ready the bathtub.Stock MarketTopping ProcessGot some flak for the Nassim Taleb Vix post. The market ran up 270bps-ish against me and is now back down.Face not ripped off? Check.Shirt still on me? Well, more like a tank top but...Check.Most of you who have ample experience in the market knows that a market top and bottom is usually a "process". With a not much lower high in the Nasdaq and Spooz and clear lower highs in the Russell (read leading indicator of risk) and transports, I feel pretty good.How good?Good enough to build on the position. I'm getting conviction that even if we haven't seen the top of the bull market, we will at least have a proper correction (at least 15% to 20%)I'm up on the trade for now - we will see how things go. Keep looking for this lower lows and lower highs.Back in the spring, I thought this bull market still had a year plus to run. Now? I am not so sure. There are some cracks there in the economy and nobody can argue whether we are at the beginning of the end of our current cycle.Trust me, as somebody still trying to land a seat at a proper macro fund - I would strongly prefer that I am wrong here and the bull market continues.But as speculators, we play the cards dealt and like I said, we will see how things go.Oh, and obviously keep an eye on the VIX. like we've detailed in the past, there are market structure reasons alone where a sustained higher VIX can lead to a selloff. China From Ground LevelMy trip was purely recreational so I would be selling you guys short if I was to make up intelligent sounding, yet bogus market insights.With that said, whether you find them insightful or not, some observations:- We all know China is huge in its consumption of all things. But being there. Standing amongst seas of people is awe inspiring.- The transition for China from a producer nation to a consumer nation is a massive undertaking - but it might not be as difficult as people think. The population there has been living under the monotony that comes with communism for so long, they earn for consumption.- Everywhere I went, people bought the best things, wore the best brands and drove the best cars (that they could afford) - so it's not just the foreign luxury brands, it's also the Chinese brands. The population has a much more pent up urge for things, for goods.- People take pride and enjoy their work, even it's menial. I'm not sure if it's a cultural thing or a standard of living thing. For example, a Mcdonald's employee here gives you attitude. While there, they are respectful and seems, on the surface, happy. The job in both countries is considered a minimal salary type of role.- I visited a lights factory when I was there. Although machinery and automation are starting to take over, labor is still relatively cheap for semi-automated, semi-skilled type of factory jobs.- The public bathrooms are disgusting.- The snacks are so much better.That's it, guys.As much as I love traveling, it feels pretty damn good to be back. Happy Monday.

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15 августа, 07:20

The William Dudley Speaks...Still Waiting For Inflation

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I might be the last generation of people that remembers EF Hutton. It was a middle-of-the-pack brokerage that got bought out as the industry consolidated in the late 80s. They had these ads that had the catchy tagline, “When EF Hutton speaks, people listen.” Today, when the William Dudley speaks, people listen. Let’s go straight to today’s AP interview with the man himself and drop the money quotes: “My outlook for the economy hasn't changed materially since the beginning of the year. Continue to look for growths around 2%, slightly above trend, growth sufficient to continue to tighten the labor market.”Steady as she goes, then?“If (economic growth) evolves in line with my expectations, I would expect -- I would be in favor of doing another rate hike later this year.”Fair enough...not backing off...we hear you, Bill. But really, why do you still want to hike?Now the reason why I think you'd want to continue to gradually remove monetary policy accommodation, even with inflation somewhat below target, is that 1) monetary policy is still accommodative, so the level of short-term rates is pretty low, and 2) and this is probably even more important, financial conditions have been easing rather than tightening. Stocks are hot...right. There are long lags between getting to a tight labor market and that actually showing up in higher wages, and those wages then pushing into inflation.Ok, here’s where it gets interesting...despite unemployment at or below their estimate of full employment (or NAIRU, if you will), we’re still waiting for that “lag” to stop crushing inflation readings.What we have to do, though, to discern is, what we see on inflation, is this temporary or is this something that's going to be more persistent?  I think the jury is out on that.Can you give us a “best-by” date on that jury? That leaves this….which may be one of my favorite central banker quotes of the year:“The reason why inflation won't get up to 2% very quickly on a year-over-year basis is because we've had these very low inflation readings over the last 4 or 5 months. So it's going to take time for those to sort of drop out of the year-over-year calculation.”To summarize: Growth, still goodLabor market, still tightInflation, still invisible. But just you wait until the low numbers roll out of the index. Bill...I know some Argentines that can take care of that for you. Call me. But I think if you look at inflation sequentially, in other words what's inflation likely to actually do over the next 6 months, I'm expecting somewhat higher readings than what we've had over the last 6 months.”Rookie question...how has your inflation forecasting performed over the last five years?  In fairness to Bill and the Fed, inflation forecasting is a mug’s game. Let’s take a look at a few charts that might shed light on what he’s thinking. This is the “inflation dashboard” at the Atlanta Fed. I’m not sure how often labor costs have been at the 99th percentile while expectations have been in the 20s, but it must be pretty rare. Let’s drill down into labor costs: Creeping higher--I’ll agree with Bill, the jury is still out here. Could settle in at the top of the band.More people are getting raises. Although I wager this is more typical, and the past several years have been anomalous. Again, supportive. I’ll save space and dispense with the unemployment and first-time claims chart...you know what they look like. So Dudley is right--the labor market is showing signs of tightness beyond simply the unemployment rate. But what about prices? Both headline and trimmed mean PCE are trending downwards. No signs of trouble here. The broader CPI trimmed mean index looks even more encouraging for the dovish camp. And his points on asset prices being in line with the state of the economy? Well, credit expansion doesn’t argue there is anything amiss. Again, consistent with the “steady as she goes” approach to monetary policy. Same for capacity utilization--some room to run on the runway here. With inflation expectations crawling back into their grave, the market has clearly cast its lot with the dovish camp. In all...I hate to say it...but the evidence ties out to much of what Dudley says. He glossed over the *actual* inflation data way too easily--something the TIPs market clearly picked up on--and there isn’t much to suggest that is going to change anytime soon….other than labor costs. So we’re back in the cycle of watching the data for the next clue on monetary policy. Only now do I think the market has it about right on the odds for a December hike at something like 30%....that is about what we have been conditioned to fade Fed governor pronouncements. Regarding the broader point on risk appetite, and financial conditions--carry on!! All there is here is a tepid endorsement of what we knew already--yet high-frequency data is showing some signs of weakness. Let the party go on…

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14 августа, 07:31

Around the Horn With TMM2: China, VIX, High Yield, SPX...even AAPL!

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TMM2 doesn’t quite have the “Gone Fishin’” sign out for the balance of the month, but it is pretty close.  For lack of any persuasive ideas, I’ll roll through a few charts as well, and save the compelling stuff for later in the week. Earlier this evening the monthly batch of economic data from China came out right on schedule, and right on lousy too. Industrial production and retail sales were notable misses. Certainly isn’t disastrous enough to portend an end to the world as we know it, but it is supportive of this graph, which is one of the favorites with our friends over at Zero Hedge. Is the “credit impulse” theme starting to take shape? I think the jury is still out, but nothing that has happened domestically or in developed markets has done much to change my mind. I do agree it will be a bigger and bigger theme as we come into Q4. I don’t think global demand is poor enough to be a big setback for the Chinese machine--time will tell if the slowdown in credit growth turns into a driver for global macro. That dovetails nicely into this chart from what can only be considered the opposite of Zero Hedge...Bloomberg. It is the typical bbg article that highlights a compelling graph and then struggles to connect the dots. Yeah--the local bond market has been suffering as the PBOC tightens both liquidity and lending standards. But these two graphs were trucking along in opposite directions for the entirety of 2014 and 2015. I don’t see much evidence to suggest why that can’t happen again. A more interesting question might be why base metals are doing so well while there are signs of a slowdown in the Chinese industrial machine. First, on copper--I think supply is a factor there--earlier this month the Chinese government through some sand in the gears of copper scrap importers, which was probably supported front end futures--and second, production continues to struggle for any number of reasons from falling ore grades to higher input costs. Yet there is little evidence that global industrial demand at large is waning--with Europe gaining (some) momentum, and the German export powerhouse continuing to steamroll all in its path, maybe the rise in metals isn’t so crazy. I’m still skeptical--I’d fade this (or as we have discussed elsewhere, short CLP) if anything.  Turning back to the US--you can always tell when a market narrative is firmly entrenched when small moves cause big headlines. I spent most of Thursday and Friday either chasing my kids around or buried in a spreadsheet--but I read panicky headlines in my news feeds about “VIX up 50% this week.” Well, ok...I guess we did come far closer to nuclear annihilation than we have since the days when my favorite pastime was playing baseball against myself in the backyard (back off...I was an only child living in the middle of nowhere). Anyway, wake me up when high yield rolls over and takes out levels from, I dunno, 2016. I agree with LB and others that the lack of a significant selloff in stocks amid a jump in vol shows this is a pretty typical over-positioning/crowded trade/unwind type move. If you had to put a nickel on VIX 20 or VIX 10, which would you choose? I’ll take the under. From the stocks are overvalued file...our brothers over at Wolf Street showed this chart--which I think can be summed up as “the growth of earnings has been greatly exaggerated.” I continue to believe that the rich valuations in stocks right now MUST be pricing in faster gdp or earnings growth, despite no compelling growth, fiscal policy or regulatory reason for doing so. And monetary policy? Is the Fed on hold => buy stocks? Not at these levels, Margaret.  And just for fun, I can’t even remember where I grabbed this chart last week--but if I recall the underlying theme was that the SNB was a driver of higher stock prices earlier this year, especially in tech.  Maybe...but am I the only one that noticed that the SNB seems to show up to buy a ton of AAPL shares every New Years???Oh, and I just have to mention that Trump said military action isn't out of the question in Venezuela. Because....we gotta bomb sumthin'? Because...sumthin' about commies? Because...sumthin' about oil? Can I change my vote to the hippocratic oath? First do no harm...

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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