It's time

It's time.  A few weeks ago Macro Man noted that he was agnostic as to the next 3-5% in the SPX, observing that the technical possibilities of another W formation were "deferred not destroyed".  In the ensuing period Spooz have risen sharply to the top of his range of indifference, tilting the balance of risk in the process.  From here he is shifting to a better seller of strength; among his reasons for doing so include the following:

* Positioning.  At 1950, you could just about argue that residual shorts were hanging by a thread or that fast-money punters were fairly neutral.  Subsequent price action clearly indicates a covering of whatever shorts are left and a building a tactical longs.  While there likely remains scope for marginal buying, the balance of risk has shifted towards the marginal trade being a sale rather than a purchase.

* Option expiry.  All those quarterly equity and index puts purchased during the downdraft earlier this year expire worthless this morning.  You could argue that they haven't had much influence on the delta of portfolios for a few weeks now, and that's correct.  Nevertheless, they showed up on risk reports....and now they don't.  That protection will need to be repurchased at some point, injecting some negative delta into the market.

* Inflation is not good for equities.  There is a school of thought that if the Fed is going to play fast and loose with its goalposts and produce higher inflation, this reflation trade should be good for stocks.   While you can certainly argue that this will be the case for certain sectors such as resources, the empirical evidence points overwhelmingly in the opposite direction for the market as a whole.  After all, the entire post-crisis period has been an environment of low inflation, and the S&P has done stunningly well.   Are we now to believe that higher inflation is also good for stocks?    Think that way if you wish, but Macro Man will rely on the work that has served him so well in the past.

* We're nearing the top of the range.   Simply put, the closer to we are to the highs, the more compelling the risk/reward of short sales becomes  Macro Man has noted previously that in rangebound markets JSTFR works just as well as JBTFD; better, in many ways, given the speed of recent descents.  While 5% from the highs isn't the place to strap on a max short, it is the place to pare longs and form a plan for scaling into shorts.   That is what Macro Man is doing.



* The W is finished.  Macro Man first sketched out the roadmap for a W shaped recovery a month ago.   While mindlessly following analogues can be a dangerous business, in many cases they can provide useful insights into possible roads ahead.  This has clearly been one of them.  How closely has this W followed the last one?   Astonishingly so, both in terms of price and time.  In fact, from the breakdown point both Ws have travelled nearly the exact same path in an identical amount of time.   Why might this be important?  Because today marks the end of the previous W, both in terms of time and price.

In fairness, the current one has another 30 points or so to go before hitting its proper target, and it would be churlish to expect the two formations to endure for exactly the same number of days.  But the underlying point is that we're close to the technical objective, after which it would be natural to expect a consolidation and correction.    In conjunction with the other factors noted above, it makes a compelling case for cashing out on longs and layering offers above to scale into shorts with a stop at new highs.

As for the USD, what should we expect there?  Clearly from a positioning standpoint there has been quite a bit of pain, but what about from a fundamental perspective?  Obviously there are many dollar crosses, each with its own idiosyncratic factors that drive.   Let's stick with the big dollar, therefore, and have a quick look at EUR/USD.

If we posit that EUR/USD is ultimately driven by policy, we can drill down and isolate the monetary stances of the Fed and ECB by looking at relative shifts in the balance sheet and at interest rate differentials- in this case the difference in 1y1y swap rates, which generally approximate rate cycle expectations.

A simple model that looks at the relative change in balance sheet sizes over the past six months and the difference in 1y1y yields appears to do a reasonable job of explaining levels in EUR/USD.  According to this simple model, the equilibrium level of the euro is currently 1.1390, a rise of 104 pips over last week.  While this is hardly an open and shut case, as a quick and dirty exercise it does suggest that there is little compelling case for a further larger depreciation of the dollar.


What if we regress changes rather than levels?  Macro Man looked at weekly changes in relative balance sheet size and weekly changes in the rate spread as explanatory variables for weekly changes in EUR/USD.   As you'd expect, the correlation is substantially lower, though still solid for such a simple model (R^2 of 0.24 versus 0.72).

Interestingly, this model suggests that EUR/USD should have rallied 1.3%, versus the 1.5% that it has actually done.  Again, the message here is that the dollar has already done what's expected of it based on shifts in policy expectations.   It's easy to forget just how little was priced into the US short end a few weeks ago; naturally, if we were to return to those levels, the outlook for the dollar would be much worse.   Even at the recent highs in short term rate expectations, however, the market was pricing in less than is suggested by the dot plot.   Of course, with two more SEPs to come before December, there remains ample time for further downward shifts in both the dots and short rates.


If the USD short end does manage to stabilize, then it may be quite difficult to argue for much more dollar weakness against the euro.  Of course, it's easier to see it happening against currencies enjoying a nice terms of trade bounce, though obviously a lot has been priced already.  Macro Man said after the ECB that he didn't see much value in participating in the euro.  In retrospect, that was wrong- it was a nice trade from the long side.    That being said, if and as more shorts get squeezed towards 1.15, it will look increasingly compelling to re-enter shorts barring a total meltdown in US short end yields.

P.S.  If any of the G20 conspiracy theorists tells you that the low USDCNY fix "proves" that the Fed was throwing a bone to China, ask them why the RMB has made new lows against its basket since the Fed announcement?


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March 18, 2016 at 10:32 AM ×

Wise comments and positioning analysis....
Today i'm selling my long US corporate bond with big gains (F 2043, DOW 2042 and Apple 2045). more for rates reasons than other...

Honesly i'm not understanding US rates...why US curve is flattening again???
JGB out of control here....

I've just built a long cash position on Euro HY via ETF versus short Crossover...
Making sense also to rebuild a periphery widening here due to renewed banking sector uncertainty.

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Anonymous
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March 18, 2016 at 10:38 AM ×

Not to agree or disagree re the CNH, but isn't the USD weakening more important for beimg able to service all the dollar denominated debt that china and other EM countries have amassed over the past few years rather than as an outright devaluation of CNH?

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Anonymous
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March 18, 2016 at 10:44 AM ×

Fm underweight us and cash levels high. No belief yet.

http://fat-pitch.blogspot.co.id/2016/03/fund-managers-current-asset-allocation.html

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Anonymous
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March 18, 2016 at 11:08 AM ×

USD down, good for US exporters, energy, comms. EM and US HY up.
Some pressure off USDCNH. Euro and Jap equities not feeling the joy.
USDJPY has bounced from the 111 support again. We shall see if it holds.
DXY still in the big range 93 - 100. If DXY weakens a bit more I would think risk gets bid a bit higher. If DXY starts to strengthen again then everyone remembers that things arent all that diff from Jan n we selloff again - cowboy

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Bigtail
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March 18, 2016 at 11:10 AM ×

Good and interesting analysis.

Unless the G20 has agreed to keep the Usd low for the sake of the world economy, I´d say this is a Usd buying opportunity.
At least that´s how I´m positioning.
China may come and go as the focus for attention, but make no mistake - it is the center of economic gravity going forward. Gravity as in a blackhole.
China is about to enter a credit cycle - deval or not. This will eventually lead to a devaluation. Eventually = 6M - 24M depending on currency reserve reduction pace.

Once a Chinese deval becomes apparent / takes place, the USD will motor higher - a lot. This is not something even the G20 can do anything about.
For the world´s sake I hope I´m wrong. Unfortunately I´m afraid I´m not.

By the way - use options - It´s not just a directional hedging product for equity longs.

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Macro Man
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March 18, 2016 at 11:17 AM ×

@ Anon 11.08

Dollar denominated debt of Chinese firms is actually pretty modest, both as a share of GDP and as a share of total debt. Elsewhere it's a different story. While the weakness of the CNY has certainly increased of these firms to repay the debt (hence the posited increase in domestic borrowing to pay down $ debt), the real pressure for RMB weakness is via the exportation of capital to buy foreign assets.

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Macro Man
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March 18, 2016 at 11:18 AM ×

@ Anon 10.44 Merrills flow data shows a big reduction in cash this week.

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Amplitudeisofftobettingshop
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March 18, 2016 at 11:27 AM ×

Macro Man, Yellen's commentary is not unlike the commentary you read on celebrity instagrams..Yellen's bias changes with the dollar and so do they...here, take a look.

Sugar Daddy's R Us ( so go f##k yourself caption )

https://www.instagram.com/p/BC8vJYFKVHG/


Wait a moment!...let me in , let me in My Sugar Daddy,

https://www.instagram.com/p/BDEVHBPqVF3/?taken-by=nuclearpistachio


ps..total geeeeeeeeeeeeeeeeeeeeeeeerrrrrrrrrrrrrrrrrmmmmmmmmmmmmmmmmmm



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Anonymous
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March 18, 2016 at 11:29 AM ×

USD down is great from US companies (profit margins will increase measurably). This is extremely bullish for US equities. Corporate buybacks continue, again bullish for US equities. Economic malaise in EZ and JP mean that funds there will buy US equities (which are out-performing their own indexes), again bullish for US equities. Finally there is enormous cash waiting on the sidelines that will enter the US stock market as it heads higher to 2015 highs (they always buy late). In short, I expect US equities to continue to outperform through 2016.

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Anonymous
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March 18, 2016 at 11:34 AM ×

Re buyback, we entering a blackout period in the short term

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Bruce in Tennessee
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March 18, 2016 at 12:30 PM ×

http://www.wsj.com/articles/global-currencies-soar-defying-central-bankers-1458258134

"This disconnect could produce more volatility in financial markets. Even if investors can predict what actions central banks are likely to take, they are having a hard time predicting how markets will react, potentially sparking a pullback from riskier assets, such as emerging markets or commodities. It also underscores long-standing concerns about the prospects for global growth."

...Well, isn't investors predicting what action central banks are likely to take the way we've always made decisions about investments? The WSJ should just relax...this has been the only game in town for many years now. Pullback from riskier assets? To buy bonds with negative interest?

...Rod Serling would have loved this era...

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Reid Simon
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March 18, 2016 at 12:32 PM ×

Always great insight and interesting commentary! Love your work!

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abee crombie
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March 18, 2016 at 12:43 PM ×

Cheers Anon 11:34... buyback have been a nice steroid for the levitating US equity markets. If we start selling off, there is much less of a bid. Here is an older article but companies generally report around the same time of the year so I'm not sure why this years figures would look much different

http://www.marketwatch.com/story/why-goldman-sees-a-buyback-halt-as-a-big-opportunity-2015-03-24

So many views on US Equities here, but lest we forget we are all still pretty much trading oil. EM is an oil trade, so are commodities (duh) and AUD/CAD and a lot of other FX, Value vs Growth, HY , and probably some more markets I dont know. If oil keeps bouncing, we probably go higher, IMO. European financials suck balls. Dont look to them unless they break new lows.

China has a big property bubble. Tier 2 cities already done, so now everyone is rushing to buy in Tier 1. Economist had a nice article recently. Same reason they are buying houses in Vancouver and Sydney. Too much money there.

MM US Equities only dislike inflation when it gets above too high a level. I dont think that is happening anytime soon (though at some point for sure with the entitlement problem, IMO)

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Anonymous
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March 18, 2016 at 12:59 PM ×

Lol abee I love how that article calls zh a "contrarian" site hahahah

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Anonymous
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March 18, 2016 at 1:55 PM ×

Pretty much the entire Jan/Feb 2016 fall in Us equities has been reversed in a few days. There is no reprieve from the buy programs who will keep forcing these indexes higher. Oil will also rise and the bears will again get slaughtered, just as they have on every dip in the past 8 years.

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DownWithTheBeanCounters
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March 18, 2016 at 2:18 PM ×

There have been a couple of Bloomberg articles describing a trade where people are using yen swaps to create structures with high coupons. This is apparently driving demand for the currency.

http://www.bloomberg.com/news/articles/2016-03-09/how-global-investors-turn-negative-japan-yields-into-big-returns

There isn't much detail in the article. Could someone fill in the gap please?

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Anonymous
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March 18, 2016 at 2:22 PM ×

"There is no reprieve from the buy programs who will keep forcing these indexes higher"

Really? Coz I've noticed and even made a bit of money on many 'reprieves' since 2014 - in fact, the casual bystander may even be forgiven for thinking there are fewer actual rallies than 'reprieves' from them.

statements like this are a classic sign we are close to the beginning of a big 'reprieve' - take the time to read MM's article, would you?

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Anonymous
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March 18, 2016 at 2:26 PM ×

Anon 1:55 - THis trolling of the bears is laughable. I would class myself as a bear for the last number of years. Guess, what? Each year. I've outperformed the previous. Was I short into ECB? No. Into FOMC and Opex? No. I'm getting ready to short again though. Equities and oil. Small now. Large on any spike. All about timing of entry.

See you on the downside.

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Anonymous
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March 18, 2016 at 2:45 PM ×

Dont feed the troll guys.

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Big tail
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March 18, 2016 at 2:58 PM ×

Re Anonymous 11.08:

China: Chinese corporates sit on ca 1.2 TRN of USD denominated debt. Total debt to GDP is 350%, which is very chunky for a developing economy. Manufacturing labour costs are now only 4% lower than in the US.

In addition, they´re facing a credit cycle where it´s estimated that ca 10TRN USD equivalent (including shadow banking) consists of NPL:s. To top it off, China has a semi fixed currency regime = they can't print as much as they need of their own currency without devaluing.

I agree that the Chinese outflows are not helping, but they should be seen as a symptom, not the cause.

Net net, either the Chinese economy will implode or it will devalue and gain some valuable time. Guess which alternative humans pick, every time,,,,,,

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Anonymous
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March 18, 2016 at 3:00 PM ×

anon 2:22, 2:26, 2:45
Look, I enjoy your comments, but you guys have been saying that US equities will crash for ages and they haven't. Aug 2015, fall and rapid buyback to all-time-highs. Jan 2016, fall and rapid buyback to 2015 levels. I'd be happy to short spoos if they fell properly, the problem is they never do. Last real fall was 2008. Thus I remain skeptical of the bearish argument. In the spirit of open discussion pleas give me a reason why spoos will crash properly (I don't mean fall 5-10% and then rise 10% in 5 days), I mean like a 25-50%+ fall.

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Anonymous
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March 18, 2016 at 3:11 PM ×

Anon 3:00

You have only seen what you want to see. Since 2014, many regulars on this blog caught those big dips AND took profits. It is not an ultra bullish blog for sure, but it does not mean people here are mindless shorting the market. Again, timing is everything if you care to read MM's original post.



@anon 2:58, could you please share the source of 1.2 TRN of USD denominated debt for Chinese companies?

As for manufacturing labor cost in China, you are talking about some kind of labor costs adjusted for productivity right? Because last time I check, the annual salary of a common worker in China earns about USD10,000 per year in the coastal area, much lower inland.

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Anonymous
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March 18, 2016 at 3:13 PM ×

Sorry, my second comment is the response to Big tail, not some anon 2:58.

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washedup
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March 18, 2016 at 3:23 PM ×

@anon 3:00 "I'd be happy to short spoos if they fell properly"

see thats the difference- I am happy making a quick return with a tight stop when the risk reward in doing so turns good, and I made it very clear that I have only been doing so since 2014 (summer 14 to be specific) and the markets gone nowhere since - In any case WTH does 'falling properly' mean? If your threshold for not staying long is a rather cavalierly stated fall of 25% to 50%, you are essentially willing to take a 24.99% heater under the assumption that its a bull mkt? - I fail to see how thats good trading.

One reason why its not that hard to be bearish is that atleast it makes one feel like you are in the company of people with brains - as a trader I have to struggle to maintain my composure when the other sides argument is nothing more that, 'doh, market up, therefore up more, me buy…'

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hipper
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March 18, 2016 at 3:28 PM ×

FED preferred inflation measure PCE could blast past the 2% target in short order due to the larger medical exposure. How would they explain that then?

"Medical care: 3.50% from 3.00%.
Medicinal drugs 2.21% from 1.66%; Professional svcs to 2.08% from 1.92%, Hospital 4.32% from 3.96%."

https://mikeashton.wordpress.com/2016/03/16/summary-of-my-post-cpi-tweets-27/

Wonder if it's anyway related to medicaid kicking in which apparently forces everyone to buy health insurance covering everything, and a cycle where most people then use more healthcare to get their moneys worth hence increasing demand on the limited medical service supply driving costs up and increasing premiums further. If that's what driving inflation can it really be regarded "healthy inflation"? Ofc it drives the medical sector but it'll decrease disposable income going to other sectors which perhaps have higher multiplier effects, then it would be a net negative effect.

https://www.youtube.com/watch?v=I7pqRjHQ9BU

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Bigtail
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March 18, 2016 at 4:24 PM ×

Anon 3.11:

1.2 TRN USD source: IHS global insight.

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jbtfd
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March 18, 2016 at 4:29 PM ×

Global policy makers made a secret deal at the G-20 to weaken the greenback aimed at calming the financial markets. Since then the greenback has lost over 3% sparking a rally in stocks, emerging markets assets and commodities.

http://www.marketwatch.com/story/did-central-bankers-make-a-secret-deal-to-drive-markets-this-rumor-says-yes-2016-03-18?mod=mw_share_twitter

Why am I not surprised?

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Hotairmail
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March 18, 2016 at 4:52 PM ×

The rally off this W has been much stronger under the bonnet than the prior rally off the W. My Macro signalling 'Bear'-like conditions (that I use for deciding what and how to trade) is hanging by a thread and rests now mainly on falling earnings. As it is, P/E's are too high for my appetite...indeed, as I've mentioned before, GAAP trailing 12m earnings have gone negative on the Russell this week.

We're coming into a key period with Q1 earnings starting seriously first week April. Personally, I'm expecting further poor earnings despite the recent rally in commodities and the fall in the dollar. However, it may be that some optimistic guidance coud keep the market afloat (as I think Polemic has suggested in his blog in a roundabout way).

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Anonymous
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March 18, 2016 at 4:55 PM ×

MM, nice h&s on your China index chart, double left and right shoulders. Possibly?

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Anonymous
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March 18, 2016 at 5:07 PM ×

@bigtail

Wiki puts China external debt at USD $1.7 trillion, but only about 16.2% of GDP, which is really close to the bottom if you used percentage. Japan's ratio of external debt to GDP is 60%, as a comparison. I believe that it is a relative small factor when it comes to the impact of RMB depreciation, as MM said.

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Leftback
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March 18, 2016 at 8:24 PM ×

We agree with MM that several of the endpoints for the proposed W have been reached. Volatility has collapsed, and is cheap.

The following are now overbought and currently overextended: AUDUSD, GDX, IWM, XLE and CLJ16. The dollar is tremendously short-term oversold and dollar calls are cheap. So we have started some positions in line with the idea that the USD is now about to bounce. Call them hedges if you like, as we are constitutively long some EM, energy and miners - or call them directional trades. Reflation trades look to have run their course for the time being and crude oil at ~$40, (a call we made here when wit was sub-$30) now looks extremely rich against the backdrop of overflowing storage worldwide. Crude is currently leading a variety of other asset classes by the hand, so don't be surprised if she turns on you. Lookin' at you, HYG.

Seasonally late March is often weak, perhaps b/c it precedes the release of Q1 earnings reports that are sometimes not pretty, and Mr Market often likes to do a spot of Price Discovery in the weeks leading up to the release of those reports.

We wouldn't like to be described as bearish here, for we are agnostic yet watchful, and suggest that equity and commodity picnickers might need to be slightly more cautious with their foodstuffs now while camping close to the edge of the woods. As discussed here by MM and others, the dollar is obviously key, and now that USDJPY correlation has broken down, EURUSD looks ripe for a reversal to lower levels more consistent with interest rate differentials and that would be equity negative, especially for Europe, EMs and reflation trades in general. Finally we note that the mainstream financial media have noted a decline in the greenback, and this often indicates that a trend or counter-trend move has nearly run its course.

Bucky Bounce. You read it here first.

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Ali
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March 18, 2016 at 8:32 PM × This comment has been removed by the author.
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Anonymous
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March 18, 2016 at 8:33 PM ×

Great analysis. Very interested in your EUR model. Is it basically a semblance of a bi-variate regression, (Y = eur/usd, b1 = rates delta, b2 = balance sheet delta)? Just trying to dabble into my own REER-type models, etc.

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Bigtail
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March 18, 2016 at 9:52 PM ×

Anon 5.07 PM:

Yes, and the currency reserve is 3.2TRN USD, of which IMF deem only 1.2 TRN USD is liquid. It also deems 2.6 TRN USD the minimum currency reserve if the PBOC wants to maintain the fixed currency regime and a convertible currency. In other words, 1.7 TRN USD would be enough to knock out the present currency regime.

Now, still, I would´t lean on just external debt measures in this case anyway due to the sheer size of the NPL:s vs currency reserve.

As I mentioned, semi fixed exchange rate is a heavy load that makes the difference when a credit cycle knocks on the door and total debt to GDP reaches 350%. This is by far the highest debt amongst the biggest emerging market nations. The other ones have floating rates,,,,, As a comparison, Japan, the OECD country with the highest debt to GDP has 400% debt to GDP,,,, But that´s a developed nation - makes a world of difference.

The bottom line: the distribution of debt doesn´t really matter much in a credit default cycle. Especially not one on the extreme scale that China faces. Especially not one where there´s a fixed exchange rate. Especially not one where the country management dictates economic numbers and where policy incentivizes fraud and corruption. It all ends up with the taxpayer in the end, a taxpayer that will not be a happy camper during those circumstances.

Now scale this up to a 35 TRN USD banking system equivalent (a growth of 400% since the financial crisis without a credit cycle) add ghost towns, roads to nowhere and NPL:s estimated at 20% (shadow banking included).
Add a currency reserve shrinking quickly down to critical levels and a 7 TRN USD equivalent porridge of NPL:s in a 10TRN USD GDP economy.
Add vastly inflated GDP numbers and falling demand.

Sure, PBOC can print money, but with a semi fixed exchange rate regime that means the currency has to weaken.

Please go ahead and take the other side of that drastically asymmetric trade/risk if you wish, but I won´t.

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Mr Risk
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March 19, 2016 at 1:58 AM ×

Spot on...the party is nearly over. We squeezed some folks and it hurt...Shanghai accord is loads of fun for us conspiracy nuts, er, I mean strategists. But, PBOC definitely wants to weaken their currency under cover of a weaker dollar, and by the way the world wins with weaker dollar because its deflationary, so its win, win, but 1) this facts fitting a story, its a g zero world, and 2) why not see after a squeeze, vol collapse, VaR limits expanded that we see a sharp sell off...the market does not feel at all healthy when the trash is leading the recovery...

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Anonymous
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March 19, 2016 at 2:42 AM ×

Mr. Risk, I say old boy "One man's trash is another's treasure." Zero growth is a fact and all. No growth world, that's the mantra. Keep repeating it.

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Up_side_down
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March 19, 2016 at 2:53 AM ×

@ Washedup at 3:23

Re:"One reason why its not that hard to be bearish is..." Brilliant, I wish I'd thought of that, I know just how you feel.

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Up_side_down
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March 19, 2016 at 2:55 AM ×

MM, great post, great blog. Thanks

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Bruce in Tennessee
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March 19, 2016 at 3:02 AM ×

One reason why its not that hard to be bearish is that atleast it makes one feel like you are in the company of people with brains - as a trader I have to struggle to maintain my composure when the other sides argument is nothing more that, 'doh, market up, therefore up more, me buy…'

Thank you washed...MM, Lefty, you...you bubbas do have brains...as Lefty says..."agnostic"...and that would describe me too..you buy equities because the lemmings do, not because that thing above your neck indicates all is right with the world.

I, too, get very tired of the "just don't think, go long" crowd...they seem to be the caboose in the old coal trains...they see the smoke, but they are a looonnnnggggg way from the engine.

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Anonymous
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March 19, 2016 at 3:27 AM ×

BinT,
Not meaning to be too harsh, but, when was the last time you actually thought for yourself? Your comments seem to reflect a longing for confirmation that just doesn't exist. You can "feel" that you're on the brainy side, but unless you are actually researching, and most importantly THINKING for yourself, blindly following the "brainy" side is, "duh" really stupid. Some of these guys are really bright, but at the end of the day they are just people with opinions, and the best of them will readily admit to that.

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Down_side_up
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March 19, 2016 at 5:16 AM ×

Bulls v Bears, an analogy.
Take some oxygen gas then add twice as many molecules of hydrogen in a closed space. What we have here is a very explosive mixture, all we need is a source of ignition and “Boom” + H2O.

CB acitivities such as QEx, ZIPR, NIRP, LTROs and the like are the Bulls oxygen. The Bulls say this is beautiful to breathe, what’s wrong, that hydrogen there isn’t toxic, enjoy. The more oxygen they get, the higher they get so to speak.

Now excess debt, zombie Banks, mal-investment, asset bubbles etc. etc. are the hydrogen. A very explosive suite of cons that really has had the Bears in a fit, in some cases for several years. By now we’re right up there at that 1:2 ratio in my gaseous metaphor. All we lack is the spark.

Everyone is trying to guess which spark it will be, CNY crisis, Greek debt, BREXIT, Japanese bonds??? That misses the point that Real Bears are making, the spark is irrelevant - we have a very explosive mix on our hands and the CBs just keep on adding more O2 while the bad side (H2) keeps growing as well. It is just a matter of time.

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Polemic
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March 19, 2016 at 9:16 AM ×

Washed.3.xx

"One reason why its not that hard to be bearish is that atleast it makes one feel like you are in the company of people with brains - as a trader I have to struggle to maintain my composure when the other sides argument is nothing more that, 'doh, market up, therefore up more, me buy…'"

This hits on a function I have raised in another place. The assumed intellectual bias towards calling disaster rather than 'ok'ness.
It is fascinating psychological field which i think rests upon a feeling that OKness implies no need to do anything so no need to think so an implication that those being carried in the tide are unthinking and lazy.

Those that question the tide and worry about waterfalls ahead are therefore perceived as thinking and sensible.

But this assumes that the tide of laziness is to be long eqs/yield vs cash as there is more risk in equities so therefore those who express a full understanding of the risks to being long will be best evolved to survive.

Which is right. But where a market is just as driven by people taking active shorts the reverse is just as applicable but often not noticed. The value of wisdom of knowledge of why not to be short is just as valid as why not to be long.

If we were to use this years spx performance as a measure of the wisdom, intellect, sageness of either camp we can see it's a draw. There may be very clever intelletual reasons why the market has/should/will fall but that cleverness needs to have a deeper level of cleverness applied to it for why it has been wrong. The easiest, dismissive self placating, ego rectifying, world modelling is that everyone else is stupid and you are clever. You see this everywhere. But really assumed intellectual bias is self disproving. You may think you are clever but if you are wrong you are not. Unless of course cleverness is not measured by outcome but by process. In which case we need to reweight the importance of cleverness in making money in markets (now that is a huge topic in it's own right).

But here's a thought. If the market price is the weighted sum of all expectation, and the cleverest are in a minority by definition, then the clevest are those who understand the stupidest best.

You be as intellectually clever as you like but the way to making money in markets is understanding what ither people will do before they themselves will. And that has no directional bias.




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washedup
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March 19, 2016 at 12:20 PM ×

Pol - you are absolutely correct - the point of my comment wasn't to imply immediate bullishness or bearishness, but to illustrate my personal struggle - just how bloody difficult its become to get periodically long to make money suspecting that you are doing it as a greater fool drill, whereas becoming periodically short has created less dissonance because as you point out, it appeals to the cerebral, classically educated, financial history absorbing, academic side of your brain. It's hard to turn into a reptile when you are bullish and a wonk when you are bearish, but thats what it takes nowadays.

Some of it is maybe just my own frustration for not being able to come up with a cogent model, like MM's equity model for example, that backtests well and actually translates these CB actions into signals that give me some comfort (and I know its always false comfort) that there is a logical underpinning.

As for 'the clevest are those who understand the stupidest best', of course - I envy guys who can assess the future path of stupidity subjectively and be comfortable trading on it.

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Anonymous
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March 19, 2016 at 12:38 PM ×

Nice to know that old hands struggle with the same issues us younguns do. Thanks pol and washed.

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Anonymous
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March 19, 2016 at 12:53 PM ×

Why the ECB's NIRP will DESTROY europe:

Lower rates rob savers of income, destroy pension funds, and leverage the debt to a dangerous level when the trend changes. People will not borrow or spend when they have no confidence in the future and businesses will not hire or expand. You cannot stimulate the economy with lower rates while crushing it with taxes. It is true that the economic community was expecting a rate cut and more asset purchases of government debt. However, the ECB went further this time by saying it will start buying debt issued by companies as well as governments. While that is an improvement for corporations, whom typically have to pay back their debt unlike government, there is a dark cloud behind this statement. The debt they will buy, according to reliable sources, will be riskier debt of entities (banks) that are in trouble. Nothing these people can do will ever reverse the trend. They raise taxes to cover their fiscal mismanagement and then “stimulate” by employing monetary theory. They will never resolve the problem and this entire crisis will go into meltdown since governments only borrow more and never reduce debt. They have become victims of their own ignorance.

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Anonymous
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March 19, 2016 at 12:55 PM ×

Great comment by Polemic, above. Shows those bearish on equities to be just as narrow-minded as the jbtfd crowd.

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abee crombie
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March 19, 2016 at 9:43 PM ×

It seems to me ppl are obsessed about timing the equity markets. Good luck with that. I can't think of one great trader or investor who all he did was that, except for a brief period, ie trade, like ptj in 87...its systematically extremely difficult to forecast equity markets all the damn time. Everyone knows that. Hence you play around it. When markets are trending up, stock pickers do well and ppl play sector rotation. And when we have the occasional bear market, which we will have again at some point, jbtffd /Dow 30,000, ppl make money trading from the short side.

Sadly the fed has elevated watching financial market conditions ie watching the stock market to a new level.

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Anonymous
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March 20, 2016 at 6:11 PM ×

Just leave it to a group of linear thinkers to turn a thoughtful and analytical blog into a two team sport. Team JBTFD'ers are youthful arrogant and stupid,(they rarely if ever make quantitative statements) while team JSTFR'ers are brainy, sophisticated, and supposedly more data driven (however much their fears seem to repeat mantras taken directly from the main stream financial press)
If you look myopically at the line, it does go up and down a bit, but if you take a step or two back, dare I say "macro view' over time it definitely goes from the lower left to the upper right. Arguing, which team is right at a specific point in time is a foolish game.

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Macro Man
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March 20, 2016 at 8:21 PM ×

Re the question of Chinese corporate FX debt, this is timely and interesting:

Latest from IIF

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Anonymous
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March 20, 2016 at 11:10 PM ×

move along move along nothing to see

http://www.bloomberg.com/news/articles/2016-03-20/china-has-a-590-billion-receivables-problem-as-bills-go-unpaid

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Anonymous
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March 21, 2016 at 5:26 AM ×

@DownWithTheBeanCounters

Much late but the core of the trade is the x-ccy swap usd/jpy which reverted back to very negative levels (2y at -71bps). So you lend your usd to borrow jpy, swap the libors into fix and invest the yens into jgbs, all-in yielding, for the 2y term, around 150bps compared to ust around 85bps.

But this trade has no fx component or exposure and in itself doesn't move the fx, I think the x-ccy levels are a result of excess jpy liquidity due to jpy strengthening than the other way around, though I'm not sure this is the main reason.

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DownWithTheBeanCounters
admin
March 21, 2016 at 6:52 PM ×

much obliged Anon 5.25

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Bigtail
admin
March 21, 2016 at 8:23 PM ×

Chinese corporates on acquisition spree in the US. Urgent preemptive move of CNY into USD?
Q1 2016: $106B. All of 2015: $100B.

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