What a difference a day makes

What a difference a day makes.  There's loads to talk about today; so much, in fact, that the piece that Macro Man was planning to write for today will have to be put off until tomorrow, as there are other developments that merit comment.

First off is the news that Fortress is shuttering its macro fund.  Macro Man doesn't watch CNBC, but gathers that the usual suspects there were cackling and calling this the death knell for global macro as an investment strategy.  (By all means correct him if this appraisal is incorrect, but it certainly sounds in character.)

Let's be clear about something from the outset: although the FIG macro fund certainly traded macro products, its investment style was not one that typically characterizes global macro in its purest sense.  Consider two of the fund's most high-profile gaffes this year, EUR/CHF and Brazil.

Macro Man has touched upon both of these issues separately, so there isn't need to fully dissect each trade exhaustively in this space.  Suffice to say that in EUR/CHF, they were betting on a (perceived) high percentage chance of a small gain versus a (perceived) small percentage chance of an enormous loss.  While this position carried a modestly positive expected value ex ante, a raw expected value calculation is not the appropriate way to judge trades, particularly in the macro space.

Risk-adjusting the EUR/CHF expected return for what was clearly going to be a non-normal distribution in the event of a peg break should have disqualified the position from any serious macro portfolio.  Scratch 100 macro punters, and you'll get 100 versions of the same spiel about selecting trades with a positively asymmetric payoff profile.  This trade, on the other hand, was vol-selling, pennies-in-front-of-the-steamroller stuff....and pretty clearly contrary to the pressures exerted by macro fundamentals upon the market.  In other words, not "macro" as it was intended to be run.

As for Brazil...well, Macro Man has made his feelings known there for a few weeks now.  Of course, it is entirely possible for people of reasonable intelligence and goodwill to looks at the same set of factors and disagree.  The thing is, though, Fortress correctly identified that the fundamentals were lousy and deteriorating a year and a half ago...and still piled in and stayed in (if press reports and FIG's own public comments are to be believed) as they deteriorated further into what was pretty obviously a crisis.  That is less excusable.

So getting crushed by an FX peg break and a blow up in an emerging market country with large current account and budget deficits....it's not exactly breaking the Bank of England or recognizing the imbalances that led to the Asian crisis, is it?  Somewhere out there, those skill sets still exist, and the current environment suggests that they may be useful soon.   The death of macro, therefore, has been greatly exaggerated.

Moving to the Fed, it's interesting to see that two heretofore largely anonymous Fed governors, Brainerd and Tarullo, have both come out over the last day and a half and repudiated the by-now boilerplate language that "lift-off in 2015 may be appropriate, depending upon economic conditions."  No, these were two doves who don't think lift-off is required because inflation isn't rising and neither are wages.

It's difficult to argue with either of those observations, and if you think that both higher levels of wage and PCE inflation are absolutely required before taking rates off of zero, then it's difficult to argue with their conclusions as well.  We have thus apparently filled out the roster of the non-2015 dots in SEP plot:  Brainerd, Evans, Kocherlakota, and Tarullo.   Now, if one more Fed speaker hits the wires pooh-poohing the chances of lift-off this year, then it's time to sound the klaxons because something will have definitively changed.

(Macro Man was originally going to pen a long-ish post on this item, tying in the Taylor Rule and financial conditions as well...he hopes to be able to get it done for tomorrow.)

Finally, the about-face in markets.  Yesterday was really fascinating, as the microcosm chart of the SPX found a way to screw as many people as possible- it formed a double bottom, surged to new highs...and then crashed back to new lows in what was close to a straight line.  Ouch.


The reaction from emerging markets was particularly interesting, with some of the vulnerable usual suspects taken to the woodshed.   Macro Man noted yesterday how the shortest he will let himself get in a secular bullish macro trend is flat...the last couple of days' price action is a perfect example why.  Judging by the market action and indeed the comment section in this space, anyone with a bearish bent has not been dissuaded in the least by the corrective activity of the last couple of weeks; just as the SPX reached a critical technical threshold offering an attractive shorting opportunity, so too has bearish sentiment apparently reignited in the EM space.


Tomorrow sees the one-year anniversary of the fixed income "flash melt-up."  Only a brave man or a fool would bet on lightning striking twice, but if more dovish Fed speakers appear and EM and popular equity sectors get taken to the woodshed again, a 10 year close below 2% will leave yields looking awfully vulnerable.
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Anonymous
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October 14, 2015 at 10:41 AM ×

i am amazed that the comments form the two fed member you mention didn't get more coverage. i think fed communication strategy is in tatters and will make for interesting trading going forward- for the fed its time to shit or get off the pot-
i prefer to be long vol (gamma)here given the size of these moves - 5% up in a couple of days is still a sizeable move.


not sure about dollar, though trying stay long v euro and aud . more conviction in eq land where plan is to sell rips in spoos and staying long eurozone.
noted earlier that nothing changes sentiment as much as price action but i am amazed that with the valuation backdrop we have people are scared to miss upside as opposed to worrying about downside , this with spoos within touching distance of all time highs!

happy to play long side tactically but that trade has come and gone for now at least
good luck all

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ThudandBlunder
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October 14, 2015 at 11:10 AM ×

I don't think there's a right way to do macro per se. Macro can accommodate a range of styles and philosophies, especially if you consider that different investor pools might have vastly different expectations of the return distribution. What worked for Soros back in the 90s isn't going to work for Brevan Howard today.

Having said all that, this guy was by all accounts a complete loose cannon. Maybe that's commentating by result, but if half of it is true, good riddance.

Thud (the peanut thrower formerly known as VandalsStoleMyHandle).

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October 14, 2015 at 12:36 PM ×

The way EM/crude trades, Fedspeak, China, so much not making sense since mid-August. Poor earnings from Intel/JP Morgan - so US futures struggling for up...

Not making sense

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Booger
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October 14, 2015 at 12:49 PM ×

Eur.chf: This stuff looks so dumb in retrospect but recency bias and anchoring of expectations is human nature. The main reason I like to have a put option on China is that there is a possibility it contains 50 Fortresses and Glencores, papered over by crooked SOE managers, who are quietly getting their assets out of the country...

The Fed: Yellen is not exactly bitch slapping the doves down is she?? Maybe this confused communication is deliberate, a way of communicating a change in direction. With a few more months of weak data, JPM and friends begging for relief, she may well pull out the QE wepon again.

Any guesses on PPI and retail sales today? Being of bearish disposition, I estimate they both disappoint.

EM FX is looking interesting, I wonder if we have one last thrust higher or was that it for the rally?

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Rossco
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October 14, 2015 at 12:50 PM ×

Fortress worst years. 08, 11, 15. just sayin'

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Macro Man
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October 14, 2015 at 12:59 PM ×

@Thunder/Vandal Obviously there are many different ways to trade macro, and no one style can necessarily claim precedence over the others. That being said, the EUR/CHF set-up and "buying Brazil because it's shit" are basically the Platonic ideals of stupid trades which I don;t think are reflective of the macro community at large.

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Nico G
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October 14, 2015 at 1:23 PM ×

Booger 1000% agreed on China (talking my book of course) if you blend such mix of great opacity (ideology and the art of not losing face) and greater greed (no matter the cost to society and the environment) i have always believed China could not land but the hard way

remember how the best Chinese quants in activity worldwide were recruited after 2008 and brought back to the Mainland to guide their watchdog - well they all left last winter, which was used as the mani excuse for their stock market debacle

how do you say 'Après moi le déluge' in Chinese again

like Greece only 1000 bigger, China has been fleeced with so much money sent abroad and the way of the yuan proves those evaders right. Next thing your distrust of politics and fear of a melt down end up self fulfilling (cf. Greece)

how about 8th grade logic that the whole world bought too much stuff from China it does not need, that the Chinese bought too much stuff from the West they only needed to show off,, and everyone might go second hand for a while

Bordeaux red wines beware

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washedup
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October 14, 2015 at 1:25 PM ×

Indeed MM - in fact, people may look back at 2015-16 in a few years and recognize it as the inflection point in the fortunes of various asset strategies - u know, when the whole 'throw a dart at any equity and wait' game came to an end in a fairly permanent way.
On a medium to long term note, it kind of tickles me that for all we know, the 120 mph tailwind that made buffett aficionados look like geniuses for the last three decades, otherwise known as the great bond bull market,may be fizzling away, and yet no one is remotely equipped to recognize that other than macro punters, y'know, the same moronic a'holes who will never be employable ever again in their lives per CNBC.
Ah, the irony.

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washedup
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October 14, 2015 at 1:27 PM ×

@Nico

在我之后,洪水

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Polemic
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October 14, 2015 at 1:29 PM ×

Nico // agree with 'west has too much stuff ready'
As I have said before --->

But what of core demand for hard metal things and all the stuff that is made from commodities? Global demand is weak it is true, but there may be another trend arising. Aspirations appear to be changing with the arrival of Generation Y, they appear to be a generation of renters rather than owners with little desire to own one of everything. Perhaps this is born from having to live in ever cramped accommodation where it is impossible to store a lawn mower ( even if they had a garden), chain saw, workbench, ski kit, surfboard or garaging a couple of cars. Not a bad thing perhaps as I survey my garage suffering a lifetime of power tool purchases that probably see action once every two years. Renting when needed is a much more efficient use of materials. As they say - if it flies, floats or fu..ks - rent it.

Perhaps the West is reaching an end to its insatiable demand for personal stuff. We have an overhang of it as my garage is testament to. Give the next generation a phone, a laptop, superfast broadband is a shoebox sized apartment, with a Starbucks and artisan burger dive next door, no car and they appear to be as happy as Larry. Suggest to one of them that they buy a large house with 6 acres for the same price as that shoebox and they'll run a mile at the thought of having to look after it. Perhaps the common theme is that the next generation cannot be bothered to look after anything as it gets in the way with enjoying themselves or earning money in jobs that program machines rather than making them.

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Anonymous
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October 14, 2015 at 1:44 PM ×

Nice tweet (post US retail sales):
"RANsquawk ‏@RANsquawk 5 minutes ago
I think I can guess the #Fed decision in October..."

lol

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Booger
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October 14, 2015 at 1:57 PM ×

wow, that was a bad retail sales number and rather poor PPI. It looks like delaying fed hike to eternity so short-term it is EM FX positive. So one thrust higher it seems. Hopefully we see 0.75 on aud.usd

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Anonymous
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October 14, 2015 at 2:00 PM ×

I'm not sure whether there needs to be another dissenting voice. Historically has the Fed ever changed rates with 4 dissenting voices? I don't know the answer to that. Wondering if anyone does.
The other aspect of this is Yellen is a consensus type and I think it's a serious question whether her definition of consensus isn't achieved when so many dissent.

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Booger
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October 14, 2015 at 2:06 PM ×

Let me revise that. Perhaps that recent data caused a short squeeze and we are heading down again on EM FX! I really miss the good ol days when there were nice trending markets.

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Nico G
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October 14, 2015 at 2:06 PM ×

'if it flies, floats or fu..ks - rent i' lmao!

as a diehard fan of 'degrowth' - for the sake of our sanity but before that, for the sake of the environment your last post strikes a chord

we are moving to sharing everything minus the wife (for now)

MM i am using your website as a portal to all things (translation included, thank washed haha) i cannot believe that you ain't covering the biggest news out there

http://www.businessinsider.com/playboy-magazine-will-no-longer-feature-nude-women-in-its-print-edition-2015-10

this is it old values all gone we are in unchartered territories from now on

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Booger
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October 14, 2015 at 2:27 PM ×

Nico, I am not sure if I understand it correctly. I am supposed to read it for the words ?

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CV
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October 14, 2015 at 2:48 PM ×

Great stuff Polemic ...

After the nuclear war, someone will stumble over this

"Give the next generation a phone, a laptop, superfast broadband is a shoebox sized apartment, with a Starbucks and artisan burger dive next door, no car and they appear to be as happy as Larry."

Which is all they need to know really!

I am like that too, mind, except I like my car (a 12-year old petrol guzzling BMW), and there is no way I am renting it out or anything of the sort! It's mine!

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Anonymous
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October 14, 2015 at 2:48 PM ×

Lots of people positioned short so a nice rally on the US open, same as yesterday. When the HFT firms have run your stops we might get some pullback.

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Nico G
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October 14, 2015 at 2:48 PM ×

believe it or not Playboy is a really good read. In public places you just had to go real fast from the article before onto the article after centerpage but they are fixing this now

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Anonymous
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October 14, 2015 at 4:26 PM ×

Anon 2:48 here. It's as the HFT algo's foretold. Stops taken, market thus free to fall.

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abee crombie
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October 14, 2015 at 4:26 PM ×

Spoo's having a tough time at recent resistance, as NASDAQ isnt leading and now with oil pulling back, who will pick up the rotation battalion? Some big industrial reporting tonight/tom morning, could set the tone for the whole growth argument.

I thought we were for sure going to tag the 200day in S&P @ 2060 but maybe not.

JPY breaking the pincers now

Still confused, now slightly short

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Anonymous
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October 14, 2015 at 4:45 PM ×

SFFed says current rate policy is actually "tight" given current econ conditions

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Anonymous
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October 14, 2015 at 4:46 PM ×

12mo TBills have rallied 55% in last 4 weeks .... from 0.46% to 0.21% today

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Cowboy
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October 14, 2015 at 5:03 PM ×

A somewhat well known macro fund was talking to us to explain why they dropped 10% on eurchf. Their trade rationale was that CHF would weaken more than EUR with the anticipated ECB QE, and their faith in SNB was strong. (Not very confidence inspiring esp as the ex-trader drinking club had been talking abt putting on eurchf puts as tail hedge for months prior). More troubling was their response when asked what they would do goin fwd. "Well our risk controls kicked in and though we breached our loss guidelines, the controls were proved to work. The big boys (swf 'smart' money) are ok as they feel that once in a while you'll get hit with some 'unforeseeable' event. "

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Macro Man
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October 14, 2015 at 5:15 PM ×

Taking the view that the peg would hold and EUR/CHF would go up, ex ante, is reasonable, even if I might disagree. Articulating that through a spot position or worse yet, selling puts, when market forces had pinned spot to the peg and it was obvious that IF the peg failed all hell would break lose, is not. Disclosure: at my old fund, when EUR/CHF was ~ 1.22, I use to have the position on. I sold 1 figure wide put spreads to fund upside calls and ran tiny short delta against, which is the only way I could sleep at night putting my faith in an arbitrary peg from an arbitrary CB. When spot gravitated towards 1.20 and flatlined, I totally lost interest.

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Anonymous
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October 14, 2015 at 5:17 PM ×

Secular shift as West passes excess consumption baton to developing Asia et al, raising household savings rates and killing garage sales.

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Mr. T
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October 14, 2015 at 5:50 PM ×

I think you guys are too bearish. You can piss into the wind against the central banks, but why? It's one thing if you think they are turning hawkish or even if there are indicators they should be turning hawkish, but quite simply neither case is on display here. If anything we are seeing renewed efforts to stimulate and a real, concerted global effort to create above trend growth and inflation. If the primary mechanism continues to be asset prices it strikes me as a low probability bet to put on index trades betting for lower prices. It's a sexy trade, and it has lots of "I saw through the CB smoke" appeal, but its still a low probability trade.

PM's resilient again even w/o a viable inflation argument. I might be early but the valuetraps in the commodity space are too good to walk by.

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ThudandBlunder
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October 14, 2015 at 6:10 PM ×

We've all done trades we're not proud of that seem completely bonkers in the light of day; stuff's hard. There's space in the ecosystem for all sorts, even shoot-from-the-hip cowboys like Novogratz. As long as investors go in with their eyes open, I don't have a problem. Even though he might theoretically be peeing in the pool for other macro punters, it's not as if the rest of macro land has been tearing it up either over the last several years. As for the talking heads piling on macro, everyone gets it sooner or later; it's all part of the great circle of investing life. Plus, everyone loves a good blow-up.

If macro is in the dogbox, it's because the returns haven't been there. Maybe one can argue that the movie's not over yet, and over the fullness of the cycle this will change, but that's a difficult argument to make given most investors' horizons.

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Anonymous
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October 14, 2015 at 7:09 PM ×

Macro Man since this site has gone over to the Stoic's, please communicate your EWZ call more clearly. What is your time frame for not owning EWZ, five minutes, a lifetime???
Small Investors have a difficult time buying Brazil Sovereign Debt or Iran's or any other obscure principality you care to mention.
However, as was pointed out by the WSJ, Brazil banks are chock full of high yielding Sovereign's so even if they have massive losses on their loan book they will be re-capitalized eventually.
Looking at the components of EWZ today I see Fibria Celulose, Klabin and Raia Drogasil have all benefited from the depreciation.
As I write Vale up 1.89%, BBD 1.55%.
I have no doubt you are a much better FX Oracle than I'll ever be but please weigh in on your time frame.
Better yet clue us in on where all the relative value is in this sea of ZIRP.

PS- Your blog is always very entertaining. Thank You for that.

Morgan

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Anonymous
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October 14, 2015 at 7:51 PM ×

Investors are again paying to hold 5y German debt. Germany sold €2.44bn 5y bunds at -0.03%, 1st neg yield since Apr.

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Anonymous
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October 14, 2015 at 7:53 PM ×

Malaysian bonds..."sale of $6.5 billion in bonds that alone brought in close to $600 million in fees" to Goldman Sachs. Is that considered a high fee?

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Leftback
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October 14, 2015 at 7:55 PM ×

LOL on "buying Brazil b/c it's shit". Yeah, guilty of some of that here too, but like dude, it's about position size.... that alone saves my arse time and time again.

Europe and Emerging Markets (VGK/VWO) outperforming SPY today, and in fact KICKING BUTT, as you chaps would say. I think Mr T, CV, MM and others are on board the non-US bandwagon.

CV & LB Separated at Birth? Part Two. LB drives a 12 year old (manual) gas guzzling BMW. Paid for.. Not as fancy as a Tesla but. hey it's good for giving rides to US ladies who sometimes admit to being "a huge fan of stick". I'll get my coat..

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CV
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October 14, 2015 at 8:10 PM ×

Ha ha ...

Yep; gold miners, ags/fertilizer companies, and Europe doing the heavy lifting in Retail R' US LLP. I managed to avoid the Walmart disaster too, which was nice for a change, and got some tailwinds from other earnings this week. Mind you, this only just about compensates for previous earnings calamities this year, but we soldier on. I also confess to being long a very tiny LatAm position. God help me!

Could be LB, could very well be. Obviously mine is manual too.

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Leftback
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October 14, 2015 at 8:58 PM ×

For all the doom and gloom around today we have only just seen Spoos pull back close to the 50 dma. So this may be healthy backing and filling before another leg up towards 2040, or the 200 dma, which is now at SPX 2060. Vol sellers still in control with Vix < 18?

EURUSD is now knocking on the door of 1.15. So much for Euro collapse, Parity Fans... but you'd have to say it's had a good run and a reversal (and Bucky recovery) is on the cards here. Of late that has been bullish for equities, other than emerging markets.

The FOMC hike is so far off the table at this point that it's not even in the same restaurant.... just not seeing a great deal of macro factors to prevent Mr Market climbing the proverbial Wall of Worry. The Falling dollar will already be easing some of the pressure on US exporters and multinationals, and remember that Mr Market is always looking forward, and unlike TeeVee pundits, he is not as obsessed with Q3 earnings as he is with the outlook for Q4 and Q1.

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Leftback
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October 14, 2015 at 9:14 PM ×

We are not big FX punters, but.... USDJPY not far off the August lows (118) here, should provide support if we get there overnight, which is possible, but this level right here [118.50-75] has also provided support on several occasions. EURUSD to face stiff resistance around 1,16?

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hipper
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October 14, 2015 at 9:24 PM ×

Very strong statement EUR and JPY making against USD here. Historically not a good sign for eq bulls? Fed flip flop is starting to finally kick in on gold as well. Really bucky seems to be a key player here affecting most other things of interest. And is it already beginning to call the bluff of the claimed, famous "hike in our time" written on the peace of paper - a mere year before NIRP-wars really kick off. Like Spain in '36 was just a teaser, maybe we haven't seen anything from CB's yet comparing to whats still coming. A deja vu resemblance too far?

In the case of Brazil wonder if it will become a life saver or just kick the hard currency debt -crisis can down the road a bit further. But its interesting to think that depressing these EMs deep enough at some point they'll spring up in force, a.k.a alpha generator of a life time.

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Nico G
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October 14, 2015 at 10:45 PM ×

am short USDJPY at 120 something targeting 100. Took time to take off. Not an expert on yen but gut feeling is we'll see a complete Empire Strikes Back on the currency front. pretty much because noone is expecting it (long term stuff)

Europe (stoxx) seems to be finding some footing here so cut half of short, hoping to reload a bit higher (swing)

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washedup
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October 14, 2015 at 11:03 PM ×

I think the possibility needs to be considered that the dollar rally may be on hold for a long, long time (say a few quarters) before it goes risk-off kamikaze supernova into the final round of the EM crash - it wouldn't be unprecedented at all, and in fact we saw these periods aplenty in the late 90's.The EM hatred ship is quite crowded and careening from side to side, and captain Burbank and first officer Pal have done a few too many media appearances to avoid the victory lap indicator curse - there is a bit of a negative correlation returning between the dollar and commodities which had all but disappeared the last few months, which I see as a decent indicator of flows beginning to reverse some.

The long bond rally even with dollar weakness is the other tell - markets seem to saying (perhaps prematurely) that global growth is gone and the Fed will have no choice but to return with heroin meant more to bail out EM than for domestic concerns, hence the simultaneous rally in gold and treasuries in the last couple of days.

I am not sure piling into a spoos short, tempting as it sounds, is the best strategy here. I empathize with US equity bears fundamentally, and boy will their time come, but I don't think they are done bleeding.

LB thinks the dollar will rally and washedup thinks it may continue to fall - whatever u accuse the members of this board of, a lack of intellectual nimbleness should not be on that list!

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Macro Man
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October 14, 2015 at 11:42 PM ×

Morgan...there's a very long answer and a short answer. The short answer for me is that I want to see Bovespa P/E's in the single digits to adequately reflect the risk premium from inflation, high nominal and real rates, etc. That's where they were a dozen years ago, and that's where I think they're going again. At a forecast P/E essentially identical to Germany's, it's a no brainer for me- I get plenty of upside and much less risk from investing in Europe.

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Anonymous
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October 15, 2015 at 6:21 PM ×

What can I say except to steal a title from Raymond Chandler, "Trouble is My Business".

Morgan

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