Slippery slopes

Macro Man is back from his little ski trip, suitably chastened by the knowledge that the soon-to-be 14 year old Macro Boy the Elder is now the fastest skier in the family.  It seems as if it was just yesterday that your author was guiding his firstborn down the gentlest of Alpine slopes in a snowplow; now he's getting over-taken at speeds of 90 km/h, according to Skitracks.   That's too fast for Macro Man these days, particularly given the pair of ACL scars that he's sporting; when he asked his son how he managed to go so fast, the lad replied, "when I saw you go ahead of me, I just pointed down the mountain and quit turning."

The analogue to trading and investment could not be more obvious.   Those of us with the age, experience, and yes, scars of previous cycles may take it a bit more cautiously than some youthful Icarus who has yet to have the 'daredevil" chip uninstalled, but at least we generally make it down the proverbial mountain in one piece.  Every cycle has its "obvious" investment theme that comes a-cropper, and it's useful to have the experience of navigating down slippery slopes when they do.   This time around, it's looking like nothing less than the ability of monetary authorities to direct asset prices in the desired direction that may have taken a nasty spill on an icy mountain.

Macro Man was intrigued to see the relatively muted reaction to Friday's CPI data.  While it was perhaps notable that the headline annual inflation figure crept back above zero, the real story was of course in the core figure, which registered its largest monthly rise since May of 2006, which coincidentally enough was just around the time that the previous tightening cycle ended.  If one didn't know any better, one might think that core CPI was beginning to accelerate higher!


If the Fed targeted core CPI, this might be a big deal; alas, they've chosen the core PCE price index as their target, and that's barely moved.  Even before this latest CPI figure, the differences between the two measures was unusually large; the December 2015 spread of 0.68% was the largest since 2002, save for three months of similar magnitude in 2009.  What's interesting is that if the spread were at its average level of the last two decades (0.37%), we'd be looking at a core PCE inflation rate of 1.8% that nearly rounded to 1.9%.  With the unemployment rate where it is, it would difficult to see the Fed managing a single paltry rate hike (which is actually more than currently priced into markets) if the core PCE was printing at such a level with a similar trend.

What's particularly intriguing is that medical care showed a large rise in the CPI  figures, jumping 0.7% m/m and 3% y/y.   Readers may recall that one of the big discrepancies between the CPI and PCE measures is the weighting of health care, which comprises 8% of the former and some 20% of the latter.   If the PCE measure of health care cost were to register a similar jump, well then things could get very interesting indeed.  All the more so because health care inflation (or lack thereof) is one of the reasons that the PCE measure is so much lower than the CPI measure:


The PCE data is released on Friday.  Obviously, there's a lot of time between now and then for the equity market to do whatever it wants, but with Fed funds effective at 0.38% and January '17 Fed funds futures pricing a rate of 0.53%, that ( along with white eurodollars) looks like a very low-risk short going into this number in a few days.

Moving across the pond, talk in the UK is understandably about the Brexit issue.  The summit deal probably went about as expected; Cameron wrested a few concessions out of Europe and cemented the UK's unique place in the union, but these measures were never going to appease hard-core Euro-skeptics.

What's interesting is the free reign that the PM has given the cabinet and other prominent Tories to vote their conscience, and how quickly a couple of them, most notably Boris Johnson, have come out in favour of leaving the EU.

Mr. Johnson, for the uninitiated America reader, is essentially the antithesis of Donald Trump.  He is a long-time politician with chalky-white skin who doesn't take himself particularly seriously, cares not a whit for the state of his hair, travels to work by bicycle, and rather than making patently spurious claims about his physical fitness, puts his lack of athletic prowess on public display.  In other words, he's a clown, but people generally like him, he's held prominent posts (Mayor of London), and his voice will have some impact in shaping public opinion.

Although sterling has fallen fairly sharply at the time of writing, taking a step back it may be fair to ask why.   As noted above, the summit was largely within the bounds of probable outcomes, and while the date for the referendum was formally announced for June 23, we were always going to get a date for that sooner or later.  Perhaps it's a reaction to the dissent within the Tory party, though at this juncture it's early days in terms of judging the efficacy of the campaigns on public opinion.

There is still much that is unknown, including what Britain's relationship with the EU would be in the event of departure.  A comprehensive free trade agreement, for example, would mitigate much of the fear of the impact of a departure on Britain's economy, but who knows what the timing would be, or whether some latter-day de Gaulle would try to put a spanner in the works.

Ultimately, that is the reason why we're likely to see a risk premium continue to get built into sterling: not because of what we know about a Brexit, but because of what we don't know.  Once it starts falling down that slippery slope, it might prove rather difficult to climb back up.

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Whammer
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February 22, 2016 at 7:57 AM ×

Macro Boy the Elder has the advantage of immortality, at least in his teen mind. Hard to compete with that..... Just wait until he can drive; Whammer Boy has managed to crash one car within a month of getting his license.

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Polemic
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February 22, 2016 at 8:29 AM ×

The Pol girls have no ambition to be fastest down the slopes, the colour of the skiis and the brands of the accessories being of much greater importance as of course your audience is much larger in the lift queues, restaurants and bars than veiled up at 50mph down a slope!

I know that personal voting intentions during a general election are private MM, so let's rephrase the question.
"As a US resident with no influence over the outcome of the brexit vote, using pure logic and no emotion, how would you advise close friends in the UK to vote if they were to beg for your help?" And before you rifle through. Confusious quotes. One word answer In ..or Out. (And not both).

I've written quite a long post on my blog about Brexit. Just my own confusion towards it. So won't go on about it here.

Pol

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CV
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February 22, 2016 at 10:06 AM ×

You can still beat him at the basketball hoop, right MM?

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Leftback
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February 22, 2016 at 10:17 AM ×

I am sure you can still take him and Macro the Younger at tiddlywinks. I mean, come on, what self-respecting 14 year old ISN'T leaving Dad in the dust at this point? You do have two rebuilt ACLs, old man... you're lucky to be on the piste at all.

LB is in Mayfair this morning, one of MM's old haunts. CV, stop by if you have half an hour to spare.

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Leftback
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February 22, 2016 at 11:33 AM ×

All the US CPI is being driven by strong demand and rising rents in the apartment market, MM, which tells us that employment in the hot economies of the coastal cities isn't slowing down yet. The rest of the country is another story.

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Polemic
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February 22, 2016 at 11:43 AM ×


The 'Just a short squeeze' narrative is a bit absent from this stream today

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Macro Man
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February 22, 2016 at 12:24 PM ×

Pol: In. I reserve the right to change my mind of course, but I'm not quite ready to accept the assumption that life after Brexit will be the same, except with no EU contributions or "dodgy foreigners" on Albion's shores.

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Anonymous
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February 22, 2016 at 12:36 PM ×

Pol, it was an impressive gap and go on relatively light news. Kepy going through PMI's. Suggests to me positioning ahead of ECB in March. Bank sector strong despite HSBC earning and warning. Draghi has to deliver something pretty special, and there have been whispers/calls from various nations for global intervention via G7/20. This window is one for staying out of CB's way to see what they come up with.

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CV
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February 22, 2016 at 12:44 PM ×

"CV, stop by if you have half an hour to spare."

I would, but I am "exiled" to the North these days, trying to prove that you can still be "in the business" while not having to throw your money into the black hole of the London rental market.

I am in the Big Smoke often, though, so next time.

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abee crombie
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February 22, 2016 at 1:35 PM ×

GBPJPY breaking the (recently strong) correlation with SPX today I assume. A poster asked a few weeks ago why should we really care about JPY, and aside from the usual macro MEN answers about general risk etc, the reason is bc the MACHINES care about it... that is until they dont and switch to a different model, or in the native parlance, Regime Shift

Perhaps we are gearing up for a regime shift in central banking as well

Regarding rents, LB, you hit button. On Dollar Tree's last conf call, the CEO surmised that the reason why low income americans are still hurting even with lower oil prices is due to the increased rents & medical expenses. Anecdotally rents in my area have gone up a lot and it probably makes sense for a lot of ppl to look for FHA 5% downpayment loans instead, though unfortunately the limits in my county are quite a bit lower than most new homes

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Macro Man
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February 22, 2016 at 1:46 PM ×

As I mentioned in the post, there is a big discrepancy in the health care inflation rates of the CPI and PCE measures. If the gap closes in favor of the former, then complacent FI markets could get a very rude awakening indeed.

As for the JPY/risk correlation, it existed well before the algos came along, though of course on a micro term level they certainly do more than their share to perpetuate it. It's really symptomatic of a broader correlation of FX alpha trading and "risk". Historically, FX carry type trades were the ne plus ultra of risk-taking speculative FX trades, though that star has dimmed very considerably in the post crisis period.

As abee notes, there are different regimes that can come into play; indeed, there have been times in the DGDF era where the JPY would sell off along with the SPX because long yen was a popular speculative position.

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washedup
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February 22, 2016 at 1:50 PM ×

Good article MM - welcome to stagflation lite - while being completely agnostic to whether good times or bad times lie in wait for the US economy, I feel increasingly confident that CPI (and eventually PCE as well) will increase more in good times than it falls in bad times.
As painful as the move may be in he short term, the best trade over a 10 year horizon may be to be short spoos and blues - and it goes without saying one wouldn't need to be worried about being a crowded trade on this one!

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washedup
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February 22, 2016 at 2:06 PM ×

Interesting - global equity market cap is roughly $60 TN, and daily equity market turnover is $60 BN - that noted , and with due respect to the old wisdom on pinpricks and balloons, straws and camels etc, I am curious a) why they would advertise their intentions, and b) how they trend to execute their trades - end of month, little bit daily, quarter end - anyone know?

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Bruce in Tennessee
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February 22, 2016 at 2:25 PM ×

http://www.bloomberg.com/news/articles/2016-02-22/banks-keep-cutting-currency-traders-as-volatility-no-job-saver

"As banks around the world cut sales and trading jobs in an effort to reduce costs, the bloodletting in foreign exchange is proving to be among the deepest and most painful.

The world’s 12 biggest banks cut front-office currency staff by 5 percent in 2015, extending a trend that’s seen them reduce foreign-exchange headcount by more than a quarter since 2010, according to Coalition Development Ltd., a London-based provider of research and analytics for the financial industry. Layoffs among foreign-exchange traders last year outpaced those in equities, corporate finance and advisory, and fixed income, currencies and commodities trading broadly."

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Eddie
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February 22, 2016 at 2:35 PM ×

global equity market cap is roughly $60 TN, and daily equity market turnover is $60 BN

Washedup,

were did you get those figures from? I remember something similar in terms of ratio (it takes about 4 years to trade total market cap), but didn't get the figures. Iirc the ratio is similar, maybe a bit shorter, for the S&P.

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washedup
admin
February 22, 2016 at 2:45 PM ×

eddie - I have a very sophisticated proprietary model that calculates such and other things…

I wish - here you go:
http://www.marketwatch.com/story/global-stock-market-cap-has-doubled-since-qes-start-2015-02-12
and
https://www.kcg.com/volumes/current-monthly-volume-statistics

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Anonymous
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February 22, 2016 at 2:59 PM ×

MM, the link is broken, getting an ( Admitedly amusing) 404 From bloomberg

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Macro Man
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February 22, 2016 at 3:13 PM ×

Try this instead: http://www.bloomberg.com/news/articles/2016-02-22/sovereign-wealth-funds-seen-selling-404-billion-of-equities

the 404 error is both amusing and ironic!

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February 22, 2016 at 3:33 PM ×

Sales forbidden on govies?.. really crazy, especially in Europe..

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Eddie
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February 22, 2016 at 3:34 PM ×

Thanks washedup. I implemented your model and it worked wonders for me.

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Celeriac1972
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February 22, 2016 at 3:46 PM ×

Staying in front until 14 is pretty good going by the experience of my friends, one of whom was told to "trust your edges more" by his 10 year old last week. The Celeriac boys are 6 & 8, so I only have to worry about Mrs Celeriac for now. She's very stylish, but easily discomfited with a few tactical mentions of icy patches...

I'm intrigued by todays GBP weakness. I see little chance (as evidenced by the polls) that the UK will vote to go. The whole BoGo piece looks more like narrow-politicking by the minute, although the media are loving it. Non data-driven dips like this in the run-up to June 23 will be good tactical opportunities imho.

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abee crombie
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February 22, 2016 at 7:27 PM ×

looking at forward EPS for some major global indexes. WOW, things have turned down pretty badly for just about everything outside of NDX. Even my favorite trade LT trade, Japan has seen a stall in EPS and more recently revisions downward (yen related apparently).

EuroStoxx and FTSE have been particularly bad recently



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Buy Stocks
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February 22, 2016 at 9:45 PM ×

Doom will occasionally look smart in the short-term & will always look silly in the long-term.
- Cullen Roche

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jbtfd
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February 22, 2016 at 9:58 PM ×

Equities are once again surging today (as I predicted last week). People on this board would be well advised to stop listening to the bears here (Nico et al) who are consistently wrong.

Let me be clear: equities will not be allowed to fall - there are too many vested interests to prevent this happening. Every dip is to be bought. If you can't see this, a job in the local car-wash might be more fitting than finance.

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Macro Man
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February 22, 2016 at 10:38 PM ×

@jbtfd, Not that he needs defense from me, but Nico has shown an adaptability and, I imagine, profitability that is sadly lacking from your eponymous coterie. If equities aren't allowed to fall, how the f*** did EZ bank stocks drop 44%, the SPX from 2100 to 1800, etc. Given that we are closer to the recent lows than highs in most equity indices, it seems to me that the group that's "consistently wrong" is the jbtfders...ie, the kids going too fast down a ski slope that's too difficult for them, arms windmilling. It's not a question of if it will go wrong for them, just how and when.

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Hotairmail
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February 22, 2016 at 11:00 PM ×

Jbtfd at the onset of a 1,000 year winter is a dangerous game, even for short periods.

Like CV, reporting from Winterfell.

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jbtfd
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February 22, 2016 at 11:57 PM ×

Come now macroman, talk some sense. The bears were wrong in: 2009, 2010, 2011 (that correction was a buying opportunity), 2012, 2013, 2014, 2015 (the Aug drop was a buying opportunity), this Jan 2016 drop is proving them wrong again... need I go on?

The recent down-move in SPX from 2100 to 1800 is just another dip (we are back at 1945 already and will undoubtedly go much higher in coming weeks). EZ banks have always been rubbish, but equity indexes generally remain in long-term up-trends. If conditions worsen, then watch for government and central bank intervention of one sort or another (they cannot afford to let equity markets crash again). I know you all enjoy the bear case here, but it's wrong. Try buying spoos and actually making some money.

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Macro Man
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February 23, 2016 at 1:13 AM ×

The idea that there is only one way to make money, and that that way is buying dips in the SPX, is both absurd and incorrect. In my experience people who see the world in black and white terms, and feel compelled to insult the acumen or profitability of those who disagree with them, are generally frauds. You have no idea what sort of P/L commenters here generate, and I'll ask you to refrain from comments like the above. I'm tired of dealing with trollish comments.

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abee crombie
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February 23, 2016 at 2:44 AM ×

Jbtfd, I would agree with you if this was 2012. But not as much today. The fed doesn't care if equity markets go down a bit, and apparently neither do ecb or Japan, where the carnage has been much much worse. Focusing on the narrow leadership of spx, when even spx is being held up by staples and a few tech names is kinda lazy.

Over the past few days the value stocks and favorite shorts have ripped higher, probably as some hf get taken to the cleaners again ( if jan wasn't bad enough ) ..that has always been the trade I have been looking at. But while price is probably going to lead, we haven't really been having the uptick in PMI or commodity prices ( yes oil is stable but below $40 is still light out for most ) that you would want if you are buying some cheap cyclical stocks. Though em and commodity fx have led and are stable to almost making a decent turn.

Im. looking for some pretty defined levels to buy some puts soon

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Anonymous
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February 23, 2016 at 3:37 AM ×

Jbtfd seeing this is place as a bear cave is hilarious. From what I read, Nico was long but got out early (but hey he said he plays turns more), polemics blog clearly indicates his opinion (See his entry about bear toys), lb I believe is in hammmock mode and no one here has been cursing at the market.

In contrast, jbtfd and his ilk only seem to appear during rallies. Wonder why.


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Leftback
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February 23, 2016 at 10:47 AM ×

Regarding bear cave/s, not quite sure who jbtfd is on about there. I think most regulars here are swing trading this year.

We have held three types of positions this year: Hammock Mode, i.e. slightly long, mostly cash (twice), Full On Snorting Bull 100% Long plus calls (near Jan bottom) and Modestly (i.e. 70%) Long (currently), so not sure how that qualifies as being in a bear cave.

For a variety of reasons (travel etc.) we haven't shorted this year and we don't trade as nimbly as Nico etc.. so we like Hammock v Long as a general 2016 strategy. It's not so different from Jbtfd, except we are a bit more nuanced (and much quieter) about it.

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