A funny thing happened on the way to 130...

Namely, USD/JPY got sideswiped by EUR/JPY




Macro Man cannot believe he's saying this, but the euro continues to look like a safer bet than the yen for USD longs.   As alluded to previous posts, Japan's PPP has trended steadily lower over the years, thus making the current USD/JPY price of ~ 120 much higher in real terms than it was in 2007.

The chart below presents a simple PPP calculated using two different base periods: 1976-1980, which was the last time that the current accounts of the US and Japan were roughly in balance, and 2000-2005, a period which roughly corresponds to a full Fed easing and tightening cycle.


As you can see, the PPPs are almost identical no matter which base period you use.   The current level of USD/JPY spot (the chart is only updated through November) represents the highest premium over PPP since the early 1980's.  Yowsah!

In fairness, the OECD calculates a higher level for USD/JPY PPP, at 104 in 2013.   They are likely using a different price series for Japan than your author.  Nevertheless, the shape of the line should be roughly the same so the point still stands viz. current valuation levels relative to an equilibrium estimate.

Does this mean that you should buy as many yen as you can today?  Of course not.  For one thing, the relative policy stances of the two countries are about to swing as much in the dollar's favour as they've been in a while.    Moreover, the shifts in energy policy in the two countries represent a secular upward shift in the equilibrium level (resulting in smaller deficits for the US and larger ones for Japan.)

Nevertheless, it's useful to know when the rubber band has been stretched, and in the case of the yen it certainly appears to be that way.   Remember, kids: you have a choice when you decide to go long USD's.   Choose wisely....
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Anonymous
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January 6, 2015 at 3:52 PM ×

5-yr Breakeven Inflation rate breaking below 2010 low, back to August 2009 levels. QE4 or rate hike? Place ur bets

http://imgur.com/tMig2wS

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washedup
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January 6, 2015 at 3:58 PM ×

MM - how would you construct a series like this one for the Euro with the right country weights? Can you point me to a good methodology?

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Anonymous
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January 6, 2015 at 4:10 PM ×

Top 5 largest bank in world $DB @ 2+yr lows & very close to March 2009 crisis era levels

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CJ
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January 6, 2015 at 5:01 PM ×

illiquidity to start the new year is unreal. this is definitely a side effect of regulators trying to solve one problem and creating another... banks cannot effectively serve in the broker/dealer function anymore.

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Polemic
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January 6, 2015 at 5:36 PM ×

Fully agree re JPY. But then usdjpy is fully attached to the long Nikkei short jpy Abe trade too. Which is till deep in everyones drawer the best long term call. So a hosing would be in order.

As for liquidity. it's like sell side research. Punters expect it but never expect to pay for it. And why should no liquidity be a problem .If you don't think the price you are shown is a fair reflection on the correct value then don't trade. Ahhh yes.. money management rules. Having to do something at a wrong price because other rules say you have to. THAT is the problem.

If you have a reasonable macro time frame then illiquidity can be your friend allowing you to trade at someone else's expense.

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Anonymous
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January 6, 2015 at 5:38 PM ×

30yr UST just 2+bps away from 'LOWEST YIELD IN HISTORY' print

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Anonymous
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January 6, 2015 at 5:41 PM ×

MS broker to client : " i'm sorry m'am but we have no buyers at the moment of anything . Can i put you on hold ? "

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Anonymous
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January 6, 2015 at 5:49 PM ×

"Petrodollar" investors bought $2.5tn of assets in 5 yrs - not far off the near-$4tn the Fed spent on QE. What now?
http://reut.rs/14hUHCk

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Polemic
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January 6, 2015 at 5:53 PM ×

For every oil loser there is a winner. Problem is that the losers are concentrated in one sector whereas the winners are a huge cloud of the rest of the global population. So some newsworthy losses vs small unnewsworthy gains for everyone else.

Still think farmers must be chuffed to bits (unless they grown biofuels) !

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Anonymous
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January 6, 2015 at 5:56 PM ×

C Says
Looks like turnaround Tuesday din't get the message.
Don't suppose there is any interest in a proxy like NYSE margin peaked last spring and even has equity markets went up still did not reach the prior peak even in November? I know it's a blunt instrument,but when margin looks like it's peaked it's usually been a good time to notice.

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CV
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January 6, 2015 at 6:44 PM ×

Fair point C, but what is the prospect that Ms Watanabe and her equivalent in China takes over ;) ?. It is a bad day here in Retail R' US LLP, but I am still working under the assumption that between the worlds of collapse a la 2008 and the blissful ride into the stratosphere (only punctured by the occasional 5% drop), there is a huge middle ground which is exactly where we are going.

Have anyone even considered that Spoos might trade sideways for most of this year while other parts of the global risk asset space have some joy?

On illiquidity, this is an issue I worry about mainly in non-financial credit space. Ultimately the shorts here are simple though. You want to buy the originators/holders of the turds (Allianz aka Pimco, Templeton, and of course Blackrock).

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CV
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January 6, 2015 at 6:46 PM ×

Hmm that last "buy" should have been sell of course!!

Sorry ...

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Polemic
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January 6, 2015 at 6:46 PM ×

trading sideways CV? YES - I have and at this very moment am trying to write something about how 2015 will be the year of the whip.

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CJ
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January 6, 2015 at 6:47 PM ×

CV... in a world driven by liquidity, I could definitely see ECB QE resulting in EuroStoxx outperforming SP500.

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CV
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January 6, 2015 at 6:53 PM ×

@Polemic; looking forward to that. Enjoyed the piece on fiscal policy. Can you send that to Germany please (Merkel's office).

@CJ; Yes, that is kind of what I am talking about, but I concede that it has been a frustrating punt. Macroeconomic indicators (which is really where I do most of my work) are unequivocal at this point. Best leading indicator we have in the zone is narrow money growth, and it is turning up. Low inflation and high M1 growth is usually pretty good for equities in the Eurozone. We all know it is a basket case, but during the panic in 2011-12 and 2008 excess liquidity were tightening like hell due to a certain Trichet and his "second round" effects!

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abee crombie
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January 6, 2015 at 7:37 PM ×

I keep saying this but buying $40-45 oil is a no brainer. Shale oil decline rates at about 80% over the first 3 years. US shale production up 3.5Mb per day in the past few years. MS estimated that the supply demand imbalance in around 1.3mmb/d. You do the math. I am not saying we go back to $100, but $70 certainly is possible.

http://www.postcarbon.org/wp-content/uploads/2014/10/Drilling-Deeper_FULL.pdf

I dont get how now everyone is worried about deflation bc commodities are going down. When commodities were going up, we used exFood and Energy. CB care about wages, and slowly they are going up.

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Polemic
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January 6, 2015 at 7:43 PM ×

There you go CV - posted ..

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washedup
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January 6, 2015 at 7:53 PM ×

You are right on shale economics - only one problem - the experience from natural gas showed that producers kept squeezing out marginal productivity gains after it fell from 12, to 8, to 6, to 4.
And how on earth would crude @40 be a better bargain than natural gas at @2.90? Atleast we have been steadily building structural demand for NG over the last 7 years as people have gotten used to low prices - the only reason its supply has been up has been because of associated growth from the mad rush to produce crude, which if you are right is coming to an end soon. Also, its fortunes are linked to US demand which IMHO atleast has the potential to outperform the globe (energy wise).

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Anonymous
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January 6, 2015 at 7:53 PM ×

Back to the future...

US Treasury yield curve 1-02-09 / 12/30/14...

http://imgur.com/ouovplZ

after all this...

http://imgur.com/yHcK21Y

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theta
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January 6, 2015 at 8:25 PM ×

MacroMan: What if the Eurozone is where Japan was 20 years ago, i.e. the early years of the long deflationary cycle after a big credit bubble busted, a cycle from which Japan is now starting to emerge? and what if Eurozone is actually going deeper into the deflation era because of the austerity-driven fiscal policy (QE does NOT reverse that, QE is only about lowering rates and therefore raising asset prices and hoping to get second order effects, but it doesn't increase disposable income in the economy which is needed to stop deflation)? Wouldn't we then see EZ PPP drift higher the same way Japan's did as shown in your chart? In that case, wouldn't we expect to see EURUSD long term chart trend higher (similar to USDJPY going lower over the last two decades)?

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abee crombie
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January 6, 2015 at 8:33 PM ×

re; washed up

I agree about the ability of producers to find new ways to take out costs. Just look at the coal market, as that is exactly what has happened. I am not saying all production is going offline, but a big chunk will. I doubt many new offshore rigs will be deployed in this environment.

specifically related to NatGas, you have to remember that a lot of nat gas was a by product of the more expensive NGLs so that producers didnt care about losing on the dry gas. That is changing now as well.

btw, sub $3 nat gas is good buy as well, IMO. just much harder to actually buy natty.

IMO, those betting on a $20 oil are nuts. we are near a low, i just dont know exactly when

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Macro Man
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January 6, 2015 at 8:40 PM ×

washedup: Eurostat published EZ PPI back to 1995 I believe. To go further back, you can use a blended series based on, say GDP weights.

theta: over the long run, that could absolutely be an issue. I would suggest though that the euro could be in the '1996-1997' period in the Japan analogue; ie, the capital repatriation has already occurred, deflation has yet to be completely entrenched, and relative policy settings favour other currencies.

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washedup
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January 6, 2015 at 9:04 PM ×

thx much MM.

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Anonymous
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January 6, 2015 at 9:41 PM ×

I want my liquidity back...

https://twitter.com/nanexllc/status/552555789312081920

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CJ
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January 7, 2015 at 12:07 AM ×

The problem with the ECB's current asset purchase programs, as has already been alluded to, is that they have very little pass-through effect on the real-economy. As bank lending is a larger factor in credit creation than bond markets in Europe, QE will be less effective than it was in the US. That said, I don't think there's any harm in trying it when you have Eurozone inflation expectations in their current state.

If European policymakers were serious about taking the initial steps to solve this liquidity trap, then they would use combined fiscal and monetary policy. A combination that might work would be EIB guarantees of equity and mezz tranches of sovereign investment projects. This would have two major benefits:

1) more direct real economy/SME impact
2) create more ABS/covered bonds for the ECB to buy, rather than the current ABSPP/CBPP3 which just make a formal shift of the securities from repo accounts to the ECB's balance sheet.

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Polemic
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January 7, 2015 at 12:12 AM ×

re that - http://coppolacomment.blogspot.co.uk on the subject of fiscal pass through. Frances is worth following if you don't already

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Anony
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January 7, 2015 at 12:58 AM ×

Crude Long Term Trendline Near 45 This Week

http://www.dailyfx.com/forex/technical/elliott_wave/oil/2015/01/06/eliottWaves_oil.html

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Leftback
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January 7, 2015 at 3:26 AM ×

Using the analogy of the Fed and BoJ QE, any QE in the EZ will not do much for the real economy, which is actually improving slightly on its own. What it will do is help the prices of EU bank stocks, of course, so buy SAN, DB, BBVA, NBG (!) etc...

The $1T China program being brought forward did breathe life into a few of the commodities, the AUD and EM FX last night. The GDX is doing more or less what you would expect if DX was going to stall out and rate hikes go on the back burner.

Latest correlation cousins have been € and crude trading in lock step. Nobody can pick the bottom in Brent/wti but one thing is for sure, when it tuns there will be an absolute face-ripper in all kinds of risk assets.

Treasuries have been on a tear and today our beloved Long Bond went parabolic so we sold some more. VIX also peaked at lunch today, once the vol sellers arrive it will be Squeeze Box time:

Squeeze Box


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Nico G
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January 7, 2015 at 6:49 AM ×

European banks are bankrupt, period - you can play Mickey repricing bounces on them, but in the end they'll have to mark down their bonds/RE portfolios. Some day. They'll crash again and it will be a screaming buy, but shit needs to hit the euro fan first, so know your timeframe.

High oil prices used to be some form of 'tax' levied by Gulf states mostly, who in turn reinvested the riches everywhere in the developed world - investing directly in companies or at least splashing on Bugattis yachts and all fine things western

lower oil prices will slow down the 'oil wealth redistribution' to luxury brands and who knows if they will trim their investment portfolios as well. At any rate it is a monster headwind for Western economies and equities and here to last until the Saudis say otherwise

am quite chuffed the family property in London was sold to some oil guy last summer and i know that they regret it already, London property market is one example of an oil crash victim and switched from seller to buyer market rather abruptly.

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Anonymous
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January 7, 2015 at 9:25 AM ×

C says,
LB,
"Treasuries have been on a tear and today our beloved Long Bond went parabolic so we sold some more. VIX also peaked at lunch today, once the vol sellers arrive it will be Squeeze Box time:"
Finally we arrived back on the same page. I thought the same and did the same by the look of it.

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washedup
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January 7, 2015 at 2:55 PM ×

Nico - could u elaborate on ur "marking down bond portfolio" thesis for european banks? All I hear is how they are ridiculously cheap to book value (admittedly that brings back memories!). Are you talking loan books to oil producers, currency effects, UK real estate, which one?

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Leftback
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January 7, 2015 at 3:04 PM ×


The ADP number this morning was more or less exactly what you would have ordered if you were long equities. A moderate Goldilocks number, no fear of the Fed, no sign of a contraction, yet. As we mentioned last night, the stage is set for a sizable move upwards in risky assets. No clue about oil prices here but we will offer that CLG5 penetrated the lower Bollinger band and that usually precedes a snapback.

So here below is someone else who is proposing that the Fed will essentially have to talk down the dollar here to avoid a recession. Once you are in ZIRP, it's not necessary even to hike to induce a recession, all you have to do is allow the currency to appreciate rapidly and you are going to have big problems, especially if your currency is critical to one of your growth industries. We can expect a dovish collection of Fed minutes to assist the markets this afternoon.

Dollar May Be About to Fall

Nico, that was an awesomely well timed sale of London property before the hot money evaporated. Houdini-like.

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washedup
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January 7, 2015 at 3:39 PM ×

Y good call getting out of that London real estate - FWIW here in Houston houses in the more expensive neighborhoods have simply-stopped-moving. The price correction will probably happen in spring/summer, but I think owners of some rather bubbly property that were contemplating Lamborghini purchases (Houston style) are about to have a nasty surprise.

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January 7, 2015 at 3:44 PM ×

https://dwq4do82y8xi7.cloudfront.net/x/4bxuDwBo/

Will the downtrend continue?

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Leftback
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January 7, 2015 at 3:52 PM ×

Speaking of Bubbly*, Bucky is also pushing hard against his upper Bollinger* band. Those bands can be remarkably elastic. Dame Janet may have to show Bucky the back of her hand if this keeps up.

*Hey MM, see what I did there?

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Anonymous
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January 7, 2015 at 3:58 PM ×

Steen finds MM...
https://twitter.com/Steen_Jakobsen/status/552761557059244032

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washedup
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January 7, 2015 at 4:21 PM ×

Left - the odds that PhD economists staring at taylor rule and relative yield models appreciate what a parabolic dollar means to financial markets are minuscule - they will get to it a few days after a dollar funding crisis is front page news, and not a second before. I do agree that when they do you would see a significant correction within the trend.
Oh and believe me, there are plenty of dollar cheerleaders in DC who see this as a 'good thing' for that to be a one way conversation!
Well, in a way it is a good thing isn't it? I am tired of the potholes in my neighborhood - would be nice to have some of that eye-talion lake como investment property money come back stateside.

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Macro Man
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January 7, 2015 at 4:39 PM ×

Anon @ 3.58: While Steen may not know my real identity, I actually worked with him (kinda) in the mid-late 90's.....

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Mr. T
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January 7, 2015 at 6:04 PM ×

German bunds at 48bp seem to have an awful lot priced in. Widow maker trade of this decade possibly, but I think its worth a shot on the short side.

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hipper
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January 7, 2015 at 6:11 PM ×

Yeah LB, it's starting to resemble on the broad scale of things a bit like EM/commodity complex are making a statement that they have had it with this crap and are beginning to mutiny against captain Bucky.

But he's still stubbornly refusing to listen so far so it's kind of a tug-of-war going on....

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Nico G
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January 7, 2015 at 6:39 PM ×

our heroes from high school years, the cartoonists we grew up with in France, got gunned down today. They used to mock every religion, every country, every idiot, and they got killed for mocking islam.

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CJ
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January 7, 2015 at 6:44 PM ×

disagree w/ shorting bunds prior to knowing the details of ECB QE. If the ECB buys according the the capital key then it will end up buying 90% of German net issuance in 2015...

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Anonymous
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January 7, 2015 at 6:54 PM ×

Going for hawkish FOMC minutes with the doves flying on the wires soon after.

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Macro Man
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January 7, 2015 at 7:06 PM ×

Nico, Yes I saw the atrocity at Charlie Hebdo. As a transatlantic subscriber to Private Eye, I know the value of good satire. Sadly, there are cohorts on many sides of the religious and cultural divide whose system of ethics, morality, and justice never progressed beyond the medieval. They quite literally have no place in a civilized society.

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abee crombie
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January 7, 2015 at 7:22 PM ×

Mt T. I am with you on the short Bund.

pretty out of consensus now. I am too chicken to put it on, so it is probably a great trade.

LB what do you think of REITs here. Holding in very nicely. Will they be able to when NFP blows out?

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CJ
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January 7, 2015 at 7:22 PM ×

Pretty subdued mkt reaction to the minutes... I think the most important take-away is that the FOMC is willing to raise rates with core inflation at current levels, provided survey-based measures of inflation expectations remain stable over next several months.

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Leftback
admin
January 7, 2015 at 8:14 PM ×

Just catching up with news. Shocking, even after everything that we have witnessed in recent years. Satirists have been the world's conscience for centuries, and any civil society must find a way to protect this form of free speech.

Abee, I think REITs will go nowhere and keep on paying the divis, which might make them more attractive as the year wears on. NFP is NOT going to blow out (this one will be a Goldilocks number), and going forward "risks are now to the downside" as the Fed would say. If you consider who owns the REITs, this may be a relatively stable sector.

Currently we are long some Qs, for a trade. Once this move has run its course, we are very tempted to completely ignore all US vehicles [other than occasional moves into bonds] for the entire year, as I think it will be very messy and hard to trade. Thinking seriously about the 2015 portfolio being ABFA. If Bucky does what we think he is going to do, then 2015 isn't going to be much fun for US-only punters.

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Leftback
admin
January 7, 2015 at 8:40 PM ×

It's a bit of a concern to see articles like this on bonds from punters using momentum-based accumulation strategies. Not that we would want to be short Treasuries, but this may be a sign that one should curb one's enthusiasm:

Long-Term Treasuries Now a Momo Vehicle?

Fwiw, I can see at least a 2-3% correction for the Long Bond here, possibly more, before the 30y eventually resumes its downward march in yields.

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washedup
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January 7, 2015 at 10:29 PM ×

u could be rt on the ST long bond correction LB - I think it all depends on whether spoos boarded a rocketship or a boomerang today.
The pain in bonds is really all coming from the rather thoughtless institutional trade from 2014 of being long equities while simultaneously 'hedging' that from interest rate increases. So the last week has been max pain for that corner, but it also means that if equities get going the pressure to reduce risk on that front would decrease.
I am slightly long spoos here tactically, but will tell you that todays price action wasn't that great from a 'wedgie to the shorts' perspective relative to what we saw in Oct and Dec - I am inclined to say the mkt may simply not be as short as back then, not sure why. Of course a 40 point up day tomorrow would make me conclude differently!

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Anony
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January 8, 2015 at 2:04 AM ×

"Should King Dollar break resistance, it could be a portfolio 'game changer'!".

http://blog.kimblechartingsolutions.com/

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Leftback
admin
January 8, 2015 at 4:36 AM ×

Agree that the strength of bonds in the New Year was yet another short covering rally. Here is an extensive analysis from the Acting Man blog of sentiment and speculator positioning data in $ and €:

How Much Further Will the Dollar Rally?

As we suspected, everyone in the speculative community knows the dollar is going higher and therefore everyone is long, except for hedgers. For the Euro, it's the reverse.

Spoos up overnight on dovish Fed speak by Evans.

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