Ten brief observations

Macro Man is still inundated with family for a few more days, so today's post will consist of ten brief observations:

* The 6 month moving average of non-farm payroll growth reached 230k in June, the highest level since April 2006 (i.e. just before the previous tightening cycle came to an end.)


*  As Macro Man has observed previously in this space (and again in one of his infrequent ad hoc Twitter postings on Friday), the average US unemployment rates over 10, 20, 30, 40, 50, and 60 years are all 6% or above.  The current reading is 6.1%.   How is that "elevated"?

* 'Tis true that the U6 measure is considerably higher at 12.1%....but that measure only goes back 20 years (during which time it has averaged 10.7%.)   Interestingly, the very first reading for U6 was that for the last employment report released before the Fed hiked rates in February 1994.  Its reading?   11.8%.

* Futures butterflies can rally for two reasons...taking tightening out of the curve, or pushing tightening forward.  The recent rally in eurodollar flies clearly represents the latter of these.   A few month ago  Macro Man noted that he liked being short the M5/Z5/M6 fly.   While that worked well for a while, it has recently rallied hard.  At zero, he might have to pull the trigger.


* A month ago Macro Man thought that the worm had turned in China vis a vis the exchange rate.   While it is true that the onshore and offshore deliverable spot rates are at their lows since April, the expected follow-through in the official fixing has been sorely lacking- indeed, they used payrolls as an excuse to push it back up!  Of course, last week's SAFE announcement could suggest that they are looking to harmonize the fixing and the spot rate before doing away with the former altogether (eventually.)



* Sterling seems bulletproof at the moment, unless (or is that until?) the BOE changes their tune again.

* The GPIF lost money in Q1 as their recently-bumped domestic equity holdings got shellacked.  When (for surely it is still when, rather than if) the holdings get increased further, Abe-san better hope the market cooperates or there could be trouble.

* Arjen Robben really is a comic book villain, isn't he?   One cannot help but think that if he had received the shoves in the box that Costa Rica's strikers got in the second half, at least one penalty would have been called.

* Does the Brazilian striker Fred do anything but back into defenders and fall over?  Macro Man cannot ever recall seeing such a donkey playing for the Selecao.

* Neymar's injury was unfortunate for a couple of reasons.   Not only does it rob Brazil of their major attacking threat, but it also means that Macro Man will have to (temporarily) retire one of his favourite gags of the year (and one that's especially timely given the current sporting calendar):









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abee crombie
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July 7, 2014 at 2:01 PM ×

hahah on Fred. 4 shots on goal all tournament, and 3 of those were against Cameroon! Hulk will need to step up. I dont get Robben, the guy runs so hard all around the pitch but manages to 'trip' over everything. Surely the refs will catch on at some point?

In between games on saturday I picked up the BIS annual report. Some interesting thoughts but not much new on the likes of expansionary monetary etc. However one section caught my eye and I suggest to read it over, was on Inflation. Apparently inflation's relationship to a nations's 'output gap' has been decreasing with time (pg 49-60). BIS points out that inflation is more correlated among nations now and that global factors have a larger influence (commodity prices, Asian labour prices). It is not so much the national output gap that matters but more the global one, according to the BIS. They think there is still room for disinflation via lower income countries producing more (ie move factory from China to Vietnam or Bangladesh) but we have to see about their productivity levels. Speaking of which, they think recent measures aimed at stimulation agg demand and not improving productivity is a long term mistake, which I strongly agree with. But improving productivity isnt as easy as it sounds.





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Anonymous
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July 7, 2014 at 4:13 PM ×

Special in repo: 2Y, 3Y, 5Y and 10Y. Collateral squeeze now across entire curve

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Leftback
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July 7, 2014 at 5:11 PM ×

A 5d chart of the US yield curve makes interesting viewing. Talk about a reversal. Fixed income markets took one look under the hood of the gleaming new jobs report and realized it was just an old clunker with a spray job after all.

Given the Dow 17k party hats, the complete absence of top calling last week and the sharp spike in volatility today, one wonders: did that jobs report perhaps mark The Top? Not calling one, just musing. We are surely not going to see any changes in the Fed's tapering schedule, so sooner or later market participants may decide to curb their enthusiasm, and their leverage.

Fred does nice work in Brazil's own box at set pieces. Perhaps he and David Luiz should just switch positions. Hope they don't win.

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abee crombie
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July 7, 2014 at 7:09 PM ×

I disagree on the brasil, but Jeff Saut agrees with you on the 'top'

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Leftback
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July 7, 2014 at 9:38 PM ×

Catfish Capital has been perusing some of those delightful Puerto Rico bonds again for its flagship Bottom Feeder™ fund. Not something one should ever buy at par, needless to say, but down at the murky river bottom of Muni Creek there is always a patient buyer.

Some of these puppies traded at 39c on the $ today, a situation worth watching. When the last fund manager finishes crapping later on this week, then we'll see how cheap these things are going to get, already closing in on Greek govies during the crisis. Can there be significant defaults in the present low rate universe? If that happens, then we can expect a lot more trouble in muniland.

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Anonymous
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July 7, 2014 at 11:56 PM ×

Fantastic post MM and good perspective on the data. Pretty much sums up the asymmetry of the modern Fed's reaction function.

Sound analysis as well on Fred, he is worthless

Leftback - you have been bearish on the economy for as long as I've read your ZH-esque commenting. I hope you've been long the belly and slid down the curve in that time because your macro views have been dead wrong.

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Leftback
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July 8, 2014 at 4:38 PM ×

Anon @ 11:56, not quite sure what stick you're trying to hit me with. But I have been "dead wrong" have I? Wrong about rates staying low? Wrong about 10s not zooming north of 4%? Or wrong about the US economy not achieving 5-6% GDP "escape velocity" to depart the liquidity trap?

OK. Game on. Let's try the economic stick first. As far as the economy is concerned, you might just take a retrospective peek at Q1 GDP and see if I was wrong last Fall about the consumer being strapped going into the winter. As far as the economy in 2015, we'll have to wait and see. The last jobs report doesn't mean a whole lot, the US is just sputtering along in second gear, creating an average of 150k jobs a month. So it looks like you may have scored an own goal here.

Now we'll get to rates. I have clearly stated in this space that the actual Taper (not the hint of the Taper) and the end of QE would be accompanied by falling rates at the long end as investors gradually unwind positions in risky assets and slowly reverse the compression trade in credit. The 10y has come in 40-50 bps since peaking at 3%, and I think you'll see this momentum in rates continue. In any case, we are nowhere near the 4-5% "bond crash" scenario you were all yapping about, so this is like a clear handball in the box by you. LB scores from the spot. 2-0.

Perhaps you are beating me with the performance stick. In this case, I would refer the honorable gentleman to the performance of the long bond, muni bond CEFs and the REIT common and preferred stocks, all of which I enthusiastically accumulated late last year and discussed in this very space. As a result, LB is beating the SPY by several points. So I think it's LB 3 Anon 0 now.

Or maybe it's much simpler, and your withering critique is all about the Spoos. Here I am happy to concede a late consolation goal, but also should point out that Spoos correlate rather more tightly with the bloated size of the Fed balance sheet than with the real US economy. LB 3 Anon 1.

So, as all you've got is opinion, and I have facts, are you willing to accept defeat?

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Leftback
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July 8, 2014 at 4:41 PM ×

almost forgot ...and have a nice day!

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Anonymous
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July 8, 2014 at 5:57 PM ×

Anon @1156 wrote "you have been bearish on the economy for as long..."

Honestly is there anything to quibble with here about the economy? Its still pretty crappy by pretty much all standards. Turning that into a trade is a whole different story.

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Leftback
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July 8, 2014 at 6:20 PM ×

A lot of these discussions arise b/c of recency bias and location-based sampling error. Let's face it, to folks in Potomac MD, Short Hills NJ, Woodside CA and New Canaan CT, life is looking pretty good. The problem is that things are not nearly so good in Baltimore, Newark, Stockton and Bridgeport, all parts of Real America that are largely unable to suckle at the breast of Dame Janet. We are all in this together, remember?

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Anonymous
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July 8, 2014 at 6:24 PM ×

Anon 1156 making the timeless mistake that the economy=the stock market.

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Anonymous
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July 8, 2014 at 7:28 PM ×

@LB, I was going to stick up for you, but of course you are more than capable of doing that yourself. I have managed to do fairly well by following a number of your recommendations -- e.g., I was buying T's when the 10-Y went up near 3.

Please don't be horrified at the prospect of random strangers investing based on what you say on the Internets ;-) I remember you from way back in the Ritholtz days when folks hung out there. I wish I would have had the wisdom to follow your call on the "LB bottom"! I wonder whatever happened to ben22??

- Whammer

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Anonymous
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July 9, 2014 at 1:09 AM ×

@LB,

I have been following you since Traders Anonymous days. Just wish Karen "red shoes" was at this site as well!

Always excellent commentary and greatly appreciated!

RG

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Anonymous
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July 9, 2014 at 4:29 AM ×

Anon 11:56

How about this pearl of wisdom on April 16, 2013 to sell VIX vol as the Taper Tantrum got started

Or how about on May 16, 2013 about a '2013 stock market bubble' and only 20-30 bps to go in the long end before the long end moved double that and stayed there for the rest of the year?

im not saying you are wrong, i'm not saying you are right. i think everyone appreciates your input and you do seem well informed. but i think you should also appreciate Emerson's line, 'a foolish consistency is the hobgoblin of little minds'. and to me, as long as i've read you, you have been bearish on the economy, think equities are overdone, and think rates cannot go up.

and yes, the economy is not the stock market and it's not blazing hot. but if you read R-R and the performance of post-bubble economies, 4% nominal GDP, 2% inflation, low rates, increasing values of the collateral that squashed the banks/economy, and a stable currency isn't exactly bad either.


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Anonymous
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July 9, 2014 at 5:04 AM ×

Anon 11:56

Or this from April 15, 2013

"One of the points made here by Gundlach that we have repeated here often is that the punters and brainless TV pundits calling for a spike in higher US rates that will bring about some cataclysm are completely out of their minds"

Are you only cherry-picking the winners?

Again, I am not calling you wrong or right and do think you have valuable views on the market so keep up the commenting. And prediction I believe is a mug's game and have long subscribed to the view that those who predict don't know and those who know don't predict. But I am saying as long as I've read your views you've sounded like a broken record. Rates did spike last year, equities did rally and continue to do so, and the economy hasn't fallen off a cliff and some would argue (like Ray Dalio) that the US is undergoing a 'beautiful deleveraging'

That is all

And good day

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Anonymous
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July 9, 2014 at 6:58 AM ×

Does it really matter if your "right" or "wrong"?? its all about the PnL aint it?

If it is as true as he saaid "beating SPY by a several points then good on LB for doing that even though getting it "wrong".

@Anon 11:56, im not a huge fan of LB's comments on some occassions (no offense LB) but i appreciate people inputting views and sharing their views with people - up to you to accept, reject and more so how to trade that view.... aint it?

- Iceman -

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CV
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July 9, 2014 at 7:37 AM ×

I gotta tell you anon@11:56: ... ah, nevermind ...

I think the key point here exactly that rates have NOT gone up on tapering (LB's main discourse here). Instead, the front-end has moved higher as it desperately tries to price in what the Fed is doing. So, this is ...

1) Flattening, NOT steepening! Maybe this will finally end in the second half, but so far this is not what we are seeing.

2) The short duration/shot EM cry was deafening towards the end of 2014. Now walk me through what a LONG US 10y/EM equity position has done so far this year (risk adjusted!). Pretty good right ;).

3) What worries me most is that bonds and stocks are now going up together again. We are setting up for a puke probably coinciding with commodities/oil melting up for give us a little bit of a inflation/rising yield scare. I suppose the silver lining is that commodities are still enjoying record low inflows, so maybe that is where you hide out.

Claus

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