How do you judge liquidity in a bond for which there's no price?

Another day, another hopeful rumor that takes equity prices back from the brink.   This time, it was a hint of a suggestion that oil producers might coalesce around a production cut, though amusingly the person who broke the "story" didn't seem to interpret her quotes that way.   In some ways, it feels like the old days of Team 1250, though in fairness this week Yellen hasn't sounded particularly sympathetic to the occasional whinges from Congress that the stock market's had the temerity to go down.

Yesterday's Coco post prompted some readers to share anecdotal colour, little of which was encouraging.   Simply put, liquidity is non-existent for these bonds at the moment, which is one of the reasons why ancillary instruments are being used as a hedge; owners simply cannot get shot of their inventory.  At least they can sleep soundly at night knowing that the New York Fed has decided that corporate bond liquidity is just fine, thank you.

Somehow, the idea of using bid/ask spreads during a time of easy financial conditions and generally rising prices to judge market liquidity when the market turns seems very, very wrong.   Macro Man is reminded of his days trading USD/CNH in the early part of this decade, when the market was decidedly smaller than it is now.   It was 30 pips wide in $50 million to get in, but 3 big figures wide in $10 million to get out.  For better or for worse, there are a couple of candles on the chart that he can point to and say "that was me."

How do you judge liquidity in a bond for which there's no price?  By the volume of tears shed when the owners realize that they are stuffed.   One thing the NY Fed did pick up on, at least, is that trading volumes for corporate bonds has gone down, as has the average ticket size.   It's a good thing that the overall size of the corporate bond market has shrunk, then, isn't it?

Anyhow, the situation with the Cocos would be amusing if it weren't so sad (and dangerous).  Consider that policymakers and regulators have:

a) Eviscerated the low-risk yields available to investors,
b) Generated rules to allow, nay encourage, the issuance of arcane and hard to value securities that offer the yield that's now missing in government bonds, but at the cost of short gamma and negative convexity to the owners, and
c) Mandated that traditional intermediaries cannot participate in the market as principals, thus ensuring illiquidity and a treacherous voyage of price discovery.

If you were trying to design the perfect mechanism for a financial meltdown, you'd have to work pretty hard to beat this perfect storm of moronicity.  Macro Man half-expects some regulator to blame gravitational waves for the ruptures going on in markets at the moment.

There were a few moments yesterday, particularly in the morning, that had more than a faint whiff of climax about them.  When USD/JPY dipped back to 111, the greens were up 20, and Spooz were this close to 1800, there was definitely a sense of panic in the air.   The only thing missing was a proper rip in the VIX, which rallied, but seemingly half-heartedly.  Indeed, price action in the VIX has generally suggested that a final flush is not in the offing.

Or has it?   It's easy to forget, given that we're close to lows that have been tested several times, but the net change in US equities on an index level hasn't been that great recently.   Macro Man plotted daily VIX levels with the one month change in the SPX over the past year; he was surprised to see that the VIX actually looks pretty rich at the moment.

Perhaps the market is panicking, after all.   For sure, all of the rates trades that Macro Man's tried this year have been blown out of the water, because money market curves don't want to do anything but flatten, for reasons that are clear to all.   Beyond the obvious issue of equity price action, that the Riksbank cut rates to a more negative level than expected yesterday with GDP growth of nearly 4% says it all.  (Incidentally, after this week's testimony Macro Man wouldn't be totally surprised to see a bill emerge from Congress banning negative rates from the Fed.)

Two themes that have worked, however, are USD/JPY and GDX.     Gold had its best day in about five years yesterday, as equity negativity and the (pardon the pun) penny dropping over negative rates has lent a bid to precious metals the likes of which haven't been seen for some time.  More broadly, of course, the dollar has weakened against many things other than oil, which doesn't hurt, either.

One of the reasons that Macro Man has liked GDX is that it is "cheap" to gold.   Part of this is a currency effect; many of the companies in the underlying index are domiciled and listed in Australia and Canada, with clear implications for the US dollar value of their stocks.  However, that doesn't explain all of the discrepancy.   There are no doubt some idiosyncratic corporate issues to boot, but still; underperforming gold by 50% since the beginning of 2012 is pretty stunning.   All the more so given what oil services stocks have done in relationship to crude over the same period.


The day after an 8% gain probably isn't the ideal time to buy GDX (or anything else for the matter.)  Still, as a strategic hedge against NIRP and general policy-making idiocy, you could probably do a lot worse.

Finally, Macro Man would be remiss if he didn't post the (actual) follow-up to I Should Coco, which is fitting on so many levels that he doesn't know where to begin....



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Anonymous
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February 12, 2016 at 7:23 AM ×

Always loved Supergrass. Next post might be to the song "...and we're Alright!"

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February 12, 2016 at 7:47 AM ×

Suga: Kuroda expalined negative interest rates to Abe

I think that Abe whatching Nikkei close is well understanding without any help


About mkt liquidity...it's not only Coco, i remember 2008 when people sold liquid names because illiquid were no bid, creating big confusion and market neutral blow-off

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Anonymous
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February 12, 2016 at 7:49 AM ×

JPM's Kolanovic Warns Upcoming Recession Could Be Comparable To 2008 Crisis; Says "Buy Gold, Cash And VIX"

Interesting as this guy has made a lot of good calls...

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February 12, 2016 at 8:42 AM ×

two scary story in Italy, please take a look to Saipem and MontePaschi..

huge politic impact IMHO

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Anonymous
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February 12, 2016 at 9:28 AM ×

According to my deleveraging them we're still in the long downleg of this which harmonises with current illiquidity. Yet markets rarely straightline and yesterday I thought we felt very much like we are at consolidatory juncture. Safety plays in US treasuries and Gold (GDX) look like doing a switch back to bottom picking sold off risk assets. Accordingly I banked the safeties looking for short squeeze assets.

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Anonymous
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February 12, 2016 at 9:47 AM ×

"Moronicity". Whatelse might one expect when central bankers go looking to resolve economic problems by consulting people who share the same view of the world has themselves !This is a bit like intellectual incest in that the gene pool of ideas for problem resolution has been shrunk to produce "Moronicity" which stands for the buck-toothed inbred twanging his banjo with a stupid grin. The central banker suit and dentist polished teeth provides only a skin deep difference.

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Eddie
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February 12, 2016 at 9:48 AM ×

TheBondStrategist:

Monte dei Paschi is a basket case, but what exactly happened to Saipem? Aren't they somehow (partly) owned by the Republic of Italy?

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February 12, 2016 at 10:16 AM ×

Saipem is somewhat similar to BMPS... CDP (similar to Italian SWF) has bought a big size from Eni some months ago, spending about 300mln. Now Saipem is doing a huge diluitive capital hike and stock lost about 80-90% and is trading below issue price... so net net Italy spent 600mln euro and is losing about 330mln... it's a way to close a hole in Eni balance sheet also.
Now media haven't realized that but it could be a sensible story for Renzi

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Rossco
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February 12, 2016 at 10:19 AM ×

In around 2005 I was wandering around the trading floor of the erstwhile investment bank that I worked for watching sales guys placing asset backed's into European dumb money like they were dealing cards. When I asked whether there was scope to set up a proper secondary trading desk, where we could hire some bright sparks armed with all the numbers, I was told that it would be pointless. Why ? "Because no one has wanted to sell anything yet. They're not those kind of bonds" "We just send them a valuation every month and they seem happy.

Worked out well in the end.

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Booger
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February 12, 2016 at 10:40 AM ×

Gold is living up to it's anti-dollar qualities recently. The long dollar side is looking attractive in terms of short term positioning though:
long dollar, short gold, short 30yr

Industrial production has slowed, dragged down by the rest of the world, and this was apparent from Q3 2015, but the jury is still out regarding whether there will be enough of a slowdown for a recession. In the meantime I like the odds of a bounce in retail sales today and even if there isn't, the positioning in short dollar is getting overcrowded.

Gold, I can't get too enthused about it, the move in the last month has been near parabolic (15% in 1 month) and that has to end sometime (like yesterday ?). I think this is as good as it gets for gold for a while. If the U.S is going into recession, the Chinese, Russians and anyone else needing cash will be selling gold and getting USD. And if the U.S is moving forward then even one rate hike this year will be bad for gold.

It is very interesting that we have gone from pricing in 2-3 rate hikes a month ago to only 50% chance of even one rate hike at all this year ! And nothing has actually changed in terms of macro-fundamental data so I like the odds of going long dollar here.

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Gnome of Zurich
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February 12, 2016 at 11:28 AM ×

As every decent Gnome, I like a hoard of gold and GDX... but I am selling some now to buy financial stocks. This sell-off looks in many ways like 1987: Fed-hike, high margin debt, a lot of angst about a global Depression just because of the sell-off. Gold spiked only for a short time then.

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Macro Man
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February 12, 2016 at 11:34 AM ×

One thing I would note re USD and reversals etc with retail sales today is that 9 of the last 12 retail sales figures have disappointed consensus.

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Booger
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February 12, 2016 at 11:56 AM ×

MM, perhaps I am talking myself into my own book here, but those odds mean the consensus is low for retail sales!

I think the risk is asymmetric, a bad retail sales number is probably not going to send the dollar down much but a good figure may put rate increases back on the table.

In any case, what can drive the dollar down further here ? rate hikes are essentially priced out, USD.JPY and EUR.USD covering (for equity hedging presumably)has been pretty spectacular but any further risk aversion may well result in dollar strength.

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Bruce in Tennessee
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February 12, 2016 at 12:47 PM ×

http://www.theguardian.com/business/2016/feb/12/japanese-stock-market-plunges-5-as-global-rout-gathers-pace

"The sell-off on Friday prompted the value of the yen, gold and government bonds to soar as investors rushed to traditional safe-haven assets.

The yen was 110.985 to the US dollar on Thursday – its lowest level since October 2014 – punishing Japanese exporters, whose overseas earnings will suffer further if the yen continues on its current trajectory.

“The markets are clearly starting to price in a sharp slowdown in the world economy and even a recession in the United States,” said Tsuyoshi Shimizu, chief strategist at Mizuho Asset Management."

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Bruce in Tennessee
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February 12, 2016 at 12:50 PM ×

It would be easier to post except I always get that "select all images with pictures of kumquats" wrong....

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Bruce in Tennessee
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February 12, 2016 at 12:57 PM ×

http://www.bloomberg.com/news/articles/2016-02-12/asia-s-rich-advised-to-buy-yen-as-boj-s-negative-rates-backfire

"Money managers for Asia’s wealthy families are favoring the yen as it benefits from the turmoil in global financial markets. Credit Suisse is advising its private-banking clients to buy the yen against the euro or South Korean won because the Japanese currency remains undervalued versus the dollar. Stamford Management Pte, which oversees $250 million for Asia’s rich, told clients the yen is set to strengthen to 110 against the dollar as soon as the end of this month. Singapore-based Stephen Diggle, who runs Vulpes Investment Management, plans to add to assets in Japan where the family office already owns hotels and part of a nightclub in a ski resort. The yen has outperformed all 31 other major currencies this year as Japan’s current-account surplus makes it attractive for investors seeking a haven."

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the greyman
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February 12, 2016 at 1:04 PM ×

HSBC Steven Major on Bloomberg: Helicopter money and debt forgiveness next for Japan

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thegreyman
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February 12, 2016 at 1:36 PM ×

"Macro Man half-expects some regulator to blame gravitational waves for the ruptures going on in markets at the moment."


LIGO measured a displacement 1/1000 of a neutron radius. A regulators moral compass even thinner.

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thegreyman
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February 12, 2016 at 1:43 PM ×

Joke of the day...

BBG: Deutsche Bank CoCo Ratings Cut by S&P

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washedup
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February 12, 2016 at 1:44 PM ×

Wasn't this market worried about the dollar debt of EM and what interest rate increases were going to do to them? I must be high because I am seeing EM currencies off the lows, the dollar weaker thanks to the yen, and less pressure on China (which purportedly was the REAL problem) to engage in beggar thy neighbor devaluation.
BinT - kumquats - love it - i think when LB stops posting, he is really just pretending to be on the hammock because he can't get past the challenge and doesn't want to admit it.
JK.

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abee crombie
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February 12, 2016 at 2:06 PM ×

Starting to get a reversal in Rates, big reversal in JGB's and US 10yr looks like a blow off, at least for a short time

I wouldnt think equities would be able to rally strongly going into the weekend but we did make a stand at 1800 so you never know

On EM FX, yes it has held in rather well lately, though mostly in Asia. MXN still getting whipped

On inflation vs deflation, i think the problem we often run into is that really there is no one inflation index. There are always some prices going up and some prices going down. However capitalism, technology and free money are usually a good recipe for deflation in most goods. Asset & wage inflation is a whole other topic

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Anonymous
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February 12, 2016 at 2:22 PM ×

atlantt fed should be moving gap tracker back up from 2.5% ...so wages up consumption up and savings up..wtf is wrong with low commodities prices...this is a massive transfer from commodities producers to consumers and risk looks well priced here
as negative as i i have been on spoos the us economy is not going into recession i think- not looking at the data so far
...im getting long dollars, nikkei and equities in general here and will close out long GDX on open...has been a ok ride and i was never a gold bug anyway!
funny that zero hedge doesn't mention gap tracker on the way up...
agree with short long bond trade as well..have some bund puts i got yesterday ...will look to add on a break below
regarding ecb , given the noise around -ive rates they just might go with a massive increase in asset buys( corporate bonds/equities?) and while there is general revulsion with CBs the markets will chase any bounce.
For me the clear sign will come on any follow through- the second day move needs to be bigger than the first oversold pop and vix futures needs to believe

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Anonymous
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February 12, 2016 at 2:40 PM ×

Rally monkeys are itching for an outing IMO - duration uncertain - that could yet become a marauding. Anti-monkey devices duly deployed:
https://www.youtube.com/watch?v=K3Nm-t5EGgQ

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MrBeach
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February 12, 2016 at 3:56 PM ×

There is certainly panic felt on the part of holders of illiquid securities. When the market for auction rate securities seized up in 2008-2009, I'm sure a lot pants were soiled. With the larger backdrop of financial crisis, I believe holders of ARS probably felt they were SOL. I haven't looked it up, but I believe ARS were eventually settled by the banks.

@mm: I think CoCos will probably follow a similar path. To quell panic, some will be bought outright. Eventually, they will have to be retired and replaced. This was my observation about the death spiral a few posts ago. Any obvious death spiral (holders of illiquid assets shorting the issuer, leading to greater losses) needs to be promptly shut down - so it doesn't lead to total loss of faith in the issuer. My DB position is doing great today.

@washed from yesterday: Being long bonds here is not my cup of tea. My observation about the Fed setting the inflation rate is more an academic observation, not a trading insight. I think we're in for a long, long period of disinflation. Having said that, for the near future I'm currently long REITs and now dipping into emerging markets. Betting on spreads to widen for REITs and for the dollar to weaken for EM.

IMHO, the big unknown variable is the price of oil. We can hope for the BoJ to intervene, for Janet to back down, for Draghi to fire his bazooka, but none of them can shut down the oil spigot. There is no global oil cartel anymore. Why should Saudi or Russia reduce their take so that Venezuela and the shale guys can take more? This is econ 101. Without cooperation, everyone will produce at full throttle. Perhaps the Chinese will introduce a massive stimulus program to sop up the supply? This doesn't seem like the kind of thing that can happen in a weekend.

Perhaps global demand for oil will organically rise in the near future? Given the geopolitical, technical, financial, and sovereign politics involved, I have no idea how to predict the price of oil. I do understand demand. Where is oil demand for the next 12 months?

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Nico G
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February 12, 2016 at 4:18 PM ×

debt forgiveness is next for the whole world

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CV
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February 12, 2016 at 4:21 PM ×

"Starting to get a reversal in Rates, big reversal in JGB's and US 10yr looks like a blow off, at least for a short time"

Yes, I think everyone should forget about Spoos for a moment and enjoy the show in bonds. It will be a lot a of fun. Rule number one when rates are low: leverage is needed to make returns. That hurts on the way out. Very telling candle yesterday in yields in all key markets. It smells burnt in here.

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abee crombie
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February 12, 2016 at 4:34 PM ×

MrBeach. We had some ARS, though not from bank issuers. They mostly did get called. Was a boring trade but took a long time.. if you are looking for similar action today, look at Canadian prefs ;-)

If saudi arabia balanced the oil markets, today, and say the price went to $60 or so, they would be much better off (lose 1m of volume but make $30 of price on oil) they would have an extra $240M per day. But that ignores the longer term game theory implications.. and Venny or Russia isnt taking share. Its pretty much US Shale and Canadian oil sands (which will ramp no matter what given their high fixed but low marginal cost)

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Anonymous
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February 12, 2016 at 4:35 PM ×

Agree with @Nico, @the greyman

Debt forgiveness definitely is in the card for China, which had done in 90s.

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MrBeach
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February 12, 2016 at 4:36 PM ×

@Nico -

During the 2008 crisis, I proposed a new bank product: the 0% Interest only mortgage.

Debt forgiveness for the proletariat is a political non starter. But I could see Central Banks warehousing sovereign debt in ever increasing numbers an in perpetuity.

For the for seeable future, misallocated capital and artificially inflated asset prices can only be supported through central bank intervention.

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Skyguy
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February 12, 2016 at 4:42 PM ×

@ Mr. Beach,

I got stuck with ARPS back in Feb-08. Quite the learning experience, that (note I didn't buy them, they were transferred to me).

The issuers bought some of them back, realizing that the liquidity mechanism was likely broken permanently. Whether you were one of the lucky ones to get some of your ARPS turned into cash was a random process. I was finally made whole because the SEC and Attorney general of NY sued my Broker and and part of the settlement was "making whole" individuals, small businesses and charities. Settlement date Aug 08, buyback date Nov-08. Needless to say things were very interesting by that point, but they paid up at the last minute.

The SEC then proceeded to attack the problem on a bank by bank basis. The last I checked, some unlucky individuals who bought them from smaller banks/brokers still had the things on the books for the next 25 years and they were paying libor rates (like 15 basis points).

Only one big bank volunteered to buy them back from duped individuals.

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washedup
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February 12, 2016 at 5:02 PM ×

@Nico - debt forgiveness is next for the whole world

Indeed - developing countries are the champs at this, and China, oh don't get me started on China when it comes to sweeping the icky stuff under a titanium lined rug.
In DM, which likes to pretend there is a market economy, this would necessarily have to take a different form - since the experiment of inflating equities and inflating away nominal debt to make balance sheets look healthier is shall we say, faltering, more draconian measures will be taken eventually, and will have to be couched in a politically expedient 'oh look, we are also reducing wealth inequality in the process' message. I am thinking social security tax holidays, infrastructure bills, and so forth.

Will we eventually get to the point where a drone shows up in carefully census picked neighborhoods and drops wads of cash? Doubt in our lifetime - the deflation problem will be in rear view mirror way before we get to that point - sorry Kyle Bass.

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Anonymous
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February 12, 2016 at 5:46 PM ×

The actual, physical drone drops will be reserved for when the machines have confined "jobs" to the annals of history and us people are gathered around our Hunger Games-style supply drop off points, "discussing" with our neighbours how to "fairly" share out the goodies...

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Anonymous
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February 12, 2016 at 6:02 PM ×

Woah this place getting grimer then zh

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Whammer
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February 12, 2016 at 7:04 PM ×

@washed, I think we are way overdue, at least in the U.S., for infrastructure spending. It should be good for "regular folks" and, what the heck, it might be good to have sound bridges, sewers, etc.

I'm trying to catch up with you on your rationale for why that will be bad for equities. Is it via the expected mechanism of higher wages, higher interest rates, and therefore the hit happens in equities?

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abee crombie
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February 12, 2016 at 7:28 PM ×

I'm a little late to this, but just noticed more than a few banking insiders have bought shares

Dimon just spend $26M (even if that is that pocket change to him
Citi Chairman bought 1M shares on Jan

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washedup
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February 12, 2016 at 7:40 PM ×

whammer - exactly - higher wages, higher interest rates leading to margin compression and the end of buybacks should be the secular story - not a crash and burn by any means, just very very low returns for a long time. I don't think the markets will accept the new paradigm till it hit them in the face with a frying pan though, so I think the 10 Yr would need to be past 4% before markets stop celebrating reflation and go 'oh shit'.
Did I hear impossible? We were at 4% in october 2008 with spoos at roughly 900. For now we should be stuck in a 1.25%-2.5% range for a while though.
Interesting thing I heard today - 104% of the equity market losses this year have come during european and asian trading hours. Can't verify,but does confirm the 'crisis' is made in Asia - not news to anyone on this board I'm sure.

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washedup
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February 12, 2016 at 8:19 PM ×

@MM/abee - any thoughts or model updates on japanese stocks here? been a jolly good 30% bloodletting from the highs - corporate japan seems to be rather enjoying low oil prices too.

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Skyguy
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February 12, 2016 at 8:42 PM ×

I'm beginning to believe in VIX > 30 as the bounce indicator. It very briefly punched that level yesterday... and here we are 1.5%+ up on SPX, celebrating the oil bounce to (whoo hoo!) 29 bucks a barrel!

Regards,

Skyguy

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Macro Man
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February 12, 2016 at 8:43 PM ×

In an Abenomics world, I kind of don't see the point of playing Japanese stocks on an index level....USDJPY has the same payoff profile with more liquidity, etc. So what you're really asking is would I buy USD/JPY here? I mean, maybe playign for a tactical bounce, but my reading of the charts and general sentiment is that it goes lower.

(Also re Nikkei, it's broken loads of longer term levels on the Ichomoku chart, which doesn't bode well at all.)

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washedup
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February 12, 2016 at 8:46 PM ×

thx very much MM.FWIW I think its cheap fundamentally but who cares in this environment.

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Skyguy
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February 12, 2016 at 9:28 PM ×

@Washedup,

DXJ worked as advertised for me (Currency hedged Japanese equities) until I sold it last August.

I have bad luck with currencies. I was long USD/JPY for ages when it was at 84. Then the moment I sold it Abe came along...

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Nico G
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February 12, 2016 at 9:31 PM ×

and all this time i thought Ichomoku was a renowned sake

one (of many) funny aspect of world markets today is how Greece finally disappeared off the worry radar

the country is annihilated, debt will never been paid, the 2015 can stopped a couple of yards down the sunny road... so we are ripe for a passsionate summer over there

have you folks looked at a Greek banking index chart say, since October. You don't get to see such every day

then again, the Greek hold up might be (of many) arrow in DB balance sheet ribcage

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Leftback
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February 12, 2016 at 9:52 PM ×

The last few days we saw tons and tons of Doomsayer article headlines like this one:

http://www.marketwatch.com/story/is-it-really-2008-all-over-again-2016-02-12?dist=afterbell

With that in mind, a short-term bounce was not that surprising. A bit cautious on Tuesday, as we return from the long 3-day weekend, but presume that annihilation of options holders will be the main item on the agenda next week and that generally spells a rip-snorter of the kind we witnessed today. Longer-term, it is still a bit doubtful that oil has found its true lows, so thas a concern, and I am with MM on the prognosis for USDJPY, he has been spot on to this point (take a bow, mate, that was really exceptionally good, perfectly timed, brilliant bit of FX trading.... and you know how it pains me to say that).

Have a great w/e everyone while Funny Money, Nico, LB and other swing traders examine our wounds from early in the week and gains from today's rude rodgering of the Shorties.

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Macro Man
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February 12, 2016 at 10:13 PM ×

Nico, not everyone has taken their eye off of Greece. But given everything else that's going on, hand-wringing over Greece at the moment is like a guy who's just had a heart attack complaining about the blister on his pinky toe.

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Anonymous
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February 12, 2016 at 10:14 PM ×

actually MM i think nky could easily tag 17k even with usdyen ranging 113-115...as i had mentioned earlier today gdp is tracking upwards and usd should recover again...im bearish us earnings but not us economy ..we are having a garden variety correction - which feels like the end of the world but then so is the psyche post 2008..think bounce could get to 1950 but eventually get around 1700....
feels like a trading market - options premium look to cheap given size of moves...looking fro 2950-3000 area to unload some estx.(looks very far at the moment but were there last week!)

heres a question: if macro data stars improving in the US ( citi surprise index does mean revert) and rate hikes get priced back in what happens to spoos?

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washedup
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February 12, 2016 at 10:41 PM ×

anon 10:14 - funny you caught me thinking exactly about your question - a) such an outcome is likely IMO and b) spoos will probably be meh, same rotational crap with domestic consumer type stuff outperforming yada yada, but treasuries could come off mount everest at-least to base camp.
Additionally, I think now that CB's have about the same relevance and gravitas as the male anopheles mosquito, good news is good news till further notice.

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hipper
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February 13, 2016 at 12:02 AM ×

Sold most of TLT and all GDX today. Kinda out of ideas for now. Oil did present a strong display but it seemed an offshoot from yesterdays OPEC nonsense. I still think positive equity correlation shall persist. If RU/SA are already at close to peak production, it means the clock is ticking as there is no more "excess" when US/Canada starts faltering, except for whatever comes out of Iran.

There probably shouldn't be more Greece style kabuki theaters. I think they created the permanent stability mechanism with which they can extend everything to perpetuity without even having to vote, or at least everything is much more streamlined now. All in all, are we done with the EZ bank, China, Fed hike, massive EM USD debt risks for now? What else is there left? The banks are obviously monetary issues which will be quickly resolved if/when they emerge? Just think those won't turn out to be bottlenecks since Draghi is in high alert mode to jump into take care of NPLs or other troubled assets.

The big picture deflation trade switching to an inflation trade sounds interesting. If there's anything certain it's that no one is prepared for it. And some say that the way wage growth is now going is actually increasing Fed hike chance, but nobody seems to have acknowledged it.

A good note here: After the first hike, M2 growth is not decelarating, rather short term annualized growth has been increasing.

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abee crombie
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February 13, 2016 at 2:55 AM ×

On Japanese stocks I mostly agree with mm, near term linked with currency. If you look under the hood, since last year it's been a huge out performance by defensives, including a pretty expensive health care market. Japan has a lot of exposure to global autos and financials, like Europe which seem in the gutter but pretty cheap if we don't have a full blown recession. The rotation we started to see in miners and energy isn't a big factor for Japan since they are a very low weighting. Fix the banks and Japan will do fine. Mitsubishi bank down just as much as the crappy us and euro banks. From the little I know about it, I think it's also another black hole balance sheet.

Longer term I love Japan, the change in corporate governance is happening. But it's a cyclically geared index. So I lowered my buy points to add. Interesting note that David kotock said they are max overweight it.

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abee crombie
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February 13, 2016 at 3:04 AM ×

Hipper, if you are looking for ideas, join the single stock/ sector land. So many interesting opportunities right now, though you will obviously have a lot of beta.

U.S. Housing related stocks in the gutter. But aren't lower rates a good thing for U.S. housing. Total mispricing if you ask me. U.S. Housing has several years of runway. Small cap tech also looking interesting. Lots of great single names thrown out be they have yet to flex profitability or missed an inflated number or two. But as you have seen with the internet giants, operating leverage is there and once it's turned on, cash flows hit pnl, very quickly. This is what Amazon was bid up on last year, on the expectation of that. Still waiting for them but others less known are interesting.

I'm also curious to know if there are any trades with the sek, seems to me Sweden economy is doing very well. Ireland too. But hard to figure a macro trade.

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Booger
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February 13, 2016 at 10:27 AM ×

Oil: it has been weak this month despite dollar weakness, so having tagged $29 on Friday, I suspect we may see lower lows next 2 weeks.

With this in mind, commodity currencies got to what I thought was an excellent level to short on Friday close, so I took a full position in that. The idea that the fed has been too hawkish has been fully priced in but the proposition that commodity currencies CB's have been too hawkish recently given where commodities are has not.

I was reading an article by David Beckworth today:
http://macromarketmusings.blogspot.com.au/2016/01/the-balance-sheet-recession-that-never.html
He offers the interesting view that the Australian economy only missed recession in 2009 because they remained ahead of the curve on rate cuts Vs the natural interest rate. He makes an interesting point that in terms of debt load and terms of trade collapse, if there was any country that should have gone into recession it was Australia in 2009, but it didn't. Just goes to show that household debt load is only tinder and without a spark may lie there indefinitely. There was probably more to it than rate cuts being ahead of the curve (i.e the china infrastructure stimulus) but maybe that was a major effect.

The Canadians surprisingly didn't cut last month, but it seems there is a good chance of one in the next 3 months. The next BOC rate statement is 10 March. The New Zealanders and Australians are also in danger of getting behind the curve, if they aren't already.

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Booger
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February 13, 2016 at 10:52 AM ×

Fed: if they were targeting inflation they would hike again. But if they were targeting SPoos they wouldn't !

But then again with the current hike mechanism with IOER, there is more of a payment to the banks so it may actually be stimulatory. It's all rather confusing.

Given that Yellen has not actually said anything to take March off the table though, and macro-fundamental data is pretty similar to December, as March approaches I wonder whether a rate hike possibility will be priced in again.

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Anonymous
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February 13, 2016 at 12:59 PM ×


"How do you judge liquidity in a bond for which there's no price?"

The question is the answer, surely?

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Bruce in Tennessee
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February 13, 2016 at 1:01 PM ×

Why couldn't you raise in March?

...Since the Fed rate increase we've seen the dollar get weaker and interest rates go down...

...It's magic!

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Whammer
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February 14, 2016 at 12:08 AM ×

@BinT, magic indeed. I'm not sure how to explain that one to my daughter in her first college econ class.... She is in Tennessee herself ;-)

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Anonymous
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February 14, 2016 at 4:02 AM ×

@Booger,

While I agree with you that AUD NZD CAD have room to drop, I that that RBA and RBNZ are not behind the curve. They are probably ahead of the curve the whole time.

The reason is that zero bounce interest rate seems to be a dead trap for CBs to escape, US EU Japan all have difficulties to leave ZIRP zone and the capital allocation had been greatly distorted in the meantime.

RBA and RBNZ are smart enough to avoid that and hopefully they would not be forced into that position. Instead, AUD and NZD had largely devalued. I believed that their devaluation were great stimulus for their economies and they are close to the fair value right now. They can still overshoot to the downside. But for the monetary policy, RBA and RBNZ have done very good jobs.

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Amplitudeisofftobettingshop
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February 14, 2016 at 7:33 AM ×

Macro Man, tomorrow when the market resumes for business and you put finger to keyboard , please remember the case is closed in regard to CEO's and investors with vested interest in buybacks of stock. We're done.

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Bruce in Tennessee
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February 14, 2016 at 1:10 PM ×

http://www.nasdaq.com/article/new-york-fed-finds-large-increase-in-debts-held-by-those-over-age-50-20160212-00427

"Americans in their 50s, 60s and 70s are carrying unprecedented amounts of debt, a shift that reflects both the aging of the baby boomer generation and their greater likelihood of retaining mortgage, auto and student debt at much later ages than previous generations.

The average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003, according to data from the Federal Reserve Bank of New York released Friday."

Morning, gentlemen! In the "Why not warm up that thing on top of your neck" vein, if older Americans are now 50% more in mortgage debt than 2003, why?

Yep, Obvious answer is we had the great recession. But some of the smart bubbas opine that as you age, you should have a larger percentage of your money in "safe" (!) areas. What if ZIRP has created the rush to put your home back into mortgage? If these older bubbas were in stock, they were made "whole" since 2008....



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Bruce in Tennessee
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February 14, 2016 at 2:16 PM ×

http://www.cnbc.com/2016/02/12/what-negative-interest-rates-can-do-to-us-stock-market.html

" The hope is that negative rates will force banks, which store money at the Federal Reserve, to spend their cash rather than pay the central bank to keep it. That would in turn spur the economy. But what often gets lost in this discussion is what happens to the average investor — and the outcome isn't pretty.

In theory, falling interest rates should increase stock markets — and low rates over the past few years has boosted equities. That's because when rates drop, investors have to buy stocks — and usually high-yielding ones — to make any money. However, that's not what's happened in regions that have already gone negative.

What should an investor do in negative rate environment? Ashwin Alankar, Janus Capital Group's global head of asset allocation and risk management, said to hold more money in cash. Despite it not making much in a bank account, it the U.S. goes negative, the global economy will be thrown into such uncertainty that putting money into anything else is a risk."

....OR, we could have another boom! ...Nattering nabobs of negativity.....

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thegreyman
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February 14, 2016 at 9:05 PM ×

The chart that should scare the hell out of all of us...

Market price of CDS on senior debt of Europe's largest banks as of February 8.

http://imgur.com/J2l7hEg

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Anonymous
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February 14, 2016 at 9:13 PM ×

re thegreyman said 9:05
dude ,not the most liquid instrument to look at ...if anything basis spreads widening out ..yes banks are not in great shape but that's not chart scaring the hell out of me...yet

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thegreyman
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February 14, 2016 at 9:45 PM ×

anon 9:13pm

From 92 at the end of January to 137 on February 8 is stunning.

We are now in a deflationary spiral, on the cusp of a massive bank failure and another collapse of global trade finance. The political ramifications will be huge even more frightening than the markets reaction.

You either have added convexity to your portfolio or joined LB in his hammock and stashed your cash in a mattress.

My long term target for emini futures is now 1487. Not kidding. #timestamp

Good luck to all of us.

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Anonymous
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February 14, 2016 at 11:09 PM ×

The average 65-year-old borrower has 47% more mortgage debt . . . .

Sure, but in 2003 that was 6% to 8% debt and today it is certainly under 4% if not even lower. What matters is the comparative debt service burden -- probably best measured by net debt service divided by net liquid worth?

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Bruce in Tennessee
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February 14, 2016 at 11:47 PM ×

@anon @11:09

If you read the article the nincompoop conclusion is:

"The New York Fed report stresses that the rising debt for older Americans isn’t necessarily a bad thing — from a separate survey, they note the net worth of households with heads aged 65 or older is similar in 2013 and 2004 and 2007, so the rising debt is balanced by rising assets. The other point is retirement-aged consumers historically repay their debts at higher rates than younger borrowers."

...I think you realize that the element that is bad is Time. At age 65, the working years are probably over...to state that it is OK to have more debt at the age of millenials And at 65 grossly overlooks the fact that the younger generation has decades to pay this off. The 65 and up generation will go to their grave with higher debt levels than earlier 65-year-olds.


..No, the joker is the age factor. 50% more mortgage debt isn't ok...if you think so, good on you Mate. I see a Corvette in your golden years! The government has become sell side for credit...it is as ubiquitous as advertising...because that is what it is..

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Anonymous
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February 15, 2016 at 2:59 AM ×

Bruce, maybe you should lighten up a bit. At least they're not liar loans, unless they used social security payments to qualify.

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Nico G
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February 15, 2016 at 3:57 AM ×

Looked at long term charts this week end

the 2009-2015 recovery channel is pretty well defined on Eurostoxx, the low reached last week is precisely the .618 Fibbo retracement of the straight 2011-2015 advance and falls a few points short from channel support line.

last week low is also a clean 30% down April 2015 peak. All in all a 'satisfying' depth for a first wave. Should a bounce materialize the 50% retracement of the whole down points at.... the infamous January opening downgap, a level that every trader wants back because every trader missed the impulse down

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Nico G
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February 15, 2016 at 4:08 AM ×

as fo Dax the low reached last week is precisely the .50 Fibbo retracement of the straight 2011-2015 advance. The precision is once again staggering

Dax and Stoxx were moving in tandem during this correction, being the two most used benchmarks for European investment - Dax ends up losing a micro tiny less than 30% off 2015 peak

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abee crombie
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February 15, 2016 at 4:42 AM ×

Is the market due for a bounce? well if macro was driving the impulse down (bc earnings werent anything special, outside of Eurobanks who had a lot of financial market exposure, being thats how they roll ) and now Yen and T-Notes are bouncing hard and CNY has been stable for like 2 weeks, I wonder if equities can muster a rally. With US closed, Euro markets should be a good tell. They have been leading the way lower. Maybe Nico's magic number works?

Global autos are being thrown out here, even as companies raise dividends, at least Ford and GM that I could easily check. Trading at 6x or so, one has to think earnings are going to fall by quite a lot to get to an expensive multiple (say > 1/3rd). Is that possible, sure for a cyclical industry I guess but just wanted to point out what is already in the price. If auto sales stay pretty flat this stock is very cheap... so who is right, George Soros or GM managment.. hmm not a bet I want to make against soros, though no one is right all the time

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Nico G
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February 15, 2016 at 5:02 AM ×

Spoos globex and most European CFDs are indicating 1% up following CNY biggest move in 10 years, Nikkei +5% etc

this expiry week could be explosive i will trail both stoxx and CL oil position with stops at entry

tomorrow i am buying Italian penny oil stock Saipem - first stock to enter 'baby long term portfolio'

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abee crombie
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February 15, 2016 at 6:45 AM ×

Can someone explain to me Kyle Bass' argument of why China needs to devalue? Arent they running record trade surpluses? so what is a going to be the advantage of a lower FX rate?

China had another massive trade surplus, just announced, though maybe the market says dont believe the trade numbers bc capital outlflows are inflating exports? Does that make any sense bc apparently its the other way around, and that imports are over invoiced when capital OUTFLOWS are occurring...

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Nico G
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February 15, 2016 at 6:50 AM ×

'if' they needed to devalue the dollar peg would be enough - the dollar index will go down 20% this year

on the contrary i would venture that China first and foremost effort would be to stick to a STRONG yuan to reassure its 1% elite and curb current massive capital flight.

that would be a good explantion on why the peg was substantially moved yesterday to avoid going down with the dollar.

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washedup
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February 15, 2016 at 1:26 PM ×

from the FT:

“Name me a US hedge fund that isn’t short the renminbi still,” says one Asia-based strategist. “They all have to be — their investors expect it — even if they’re not sure what will happen next.”

Great - nothing better than to be in a trade because its the 'in thing'.

Anyone want to bet on who wins this battle? The erstwhile masters of the universe who control perhaps $500 BN of currency capital in the highest estimate, a few of them sporting smug but nervous grins and others tightly clutching their gonads, or the combined artillery of CBs with $10 TN of firepower? As for the yen strengthening, maybe I am naive, but weakening your currency is a lot easier than strengthening it, isn't it? Who succeeds, BoJ or risk-aversionistas?

This really isn't about what would be possible in normal times - the average hedge fund is a shadow of its risk taking ability from the 90's and even 10 years ago - they now have 'stops', y'now. Talking their books in the 'times picayune' won't help either, Kyle - by the time some story makes it to page 1 its time to get out, not in.

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washedup
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February 15, 2016 at 2:40 PM ×

@abee - "Can someone explain to me Kyle Bass' argument of why China needs to devalue? Arent they running record trade surpluses? so what is a going to be the advantage of a lower FX rate? "

I believe the argument is that debt is too high, so chinese businesses will get caught in a spiral where companies with USD debt will have to sell renminbi at increasingly lower values, leading to capital flight, depleting govt reserves, leading to, you get the idea - classic gamma loop. Somewhere along the way they will have to reduce RR and re-stimulate the economy to prevent social unrest etc etc, to add fuel to fire. Then the helpless chinese will realize they need to go back to their mercantilist ways and in a final act of desperation, try to export their problem and bail out exporters by making walmart toys cheaper in a big devaluation.

The weakest part of the argument from a trading or position standpoint is that its never made clear why the authorities would de-value on an ex-ante basis to make speculators rich when its clear they don't care about export growth. In other words, the argument assumes a high degree of helplessness and resignation on part of the govt and that the only way out is a beggar thy neighbor trade war. But China has all but stated they are done with the mercantilist era, and their focus is on getting investment down and consumption up anyway. It could all be a lie but chinese retail sales were up 11% in Q4 - again. Its almost like speculators are assuming they are playing heads up poker with traditional rules against a steadily weakening opponent, but in reality the game could be tennis in the dark for all anyone knows. The richest part? PBoC is 'up' 15% on the year on their fx govt bond reserve holdings, while the guys betting against them are down 15-20% because of a myriad of reasons!

Ouch - I think that was a ball hitting my….

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