Three points

*  It's starting to look like the recovery in, well, everything might be somewhat more than a dead cat bounce.  Yes, the SPX has already carved out a nice W, but it lags the Bovespa, which is somehow up on the year, even in dollar terms.


The inverted head and shoulders pattern in copper has been well-flagged, but price action continues to look bullish with the neckline breaking.   Even during the "meltdown" copper held up relatively well; technically it looks good for another 10% upside.


Even global banks have caught a tailwind (though you might say that that as a necessity for all of this to be anything but a dead-cat bounce.)  Macro Man wouldn't be surprised to see the market turn a little more cautious early next week ahead of the ECB- once bitten, twice shy, etc.


Gun to the head, Macro Man would expect the general rally in sentiment to continue in one form another until, let's be cliche'd here, May or so.   At that juncture the prospect of the Brexit vote will be close enough to matter, and at some point markets will have to focus on the rather unappetizing menu of candidates on offer for the world's most important political office.  Late spring/early summer seems as good a time as any for another serious look down below.

* The recovery in risky assets leaves the Fed in a bit of a sticky spot.   As noted previously, a properly data-dependent institution would almost certainly be hiking this month given recent newsflow on employment, wages, and inflation.  That the market is pricing less than a 10% chance is a testament to half a decade's worth cherry-picked pessimism coming from the Eccles building.  If the scenario sketched out above were to play out, taking a pass in March might leave them looking like muppets by April- much like panicking last September seemed to leave them feeling sheepish swiftly thereafter.

Macro Man therefore likes being short the March Fed funds contract, which is pricing something like a 5% chance of a rate hike this month, assuming that Fed effective trades 37-38.  The trade cannot be a home run- not only is the upside limited to 10 ticks thanks to the way that the contract settles into the monthly average funds rate, but Macro Man is getting paid into shorts in tiny increments too small to be a rounding error to a large institutional portfolio.  Still, the OIS market should provide broadly similar odds without the liquidity constraints; where else can you make a bet on payrolls with such positive asymmetry?

*  Finally, following on from yesterday's post it's worth briefly mentioning inflation expectations, which at this juncture represent the primary barrier to the Fed tightening again.  Macro Man looked at applying a similar approach to that described yesterday to try to tease some insight out of the Michigan inflation expectations number.   Unfortunately, it proved to be a largely fruitless endeavour.  Generally speaking medium-term expectations are too well-anchored to display strong, consistent reactions to high-volatility variables; moreover, it's pretty obvious that consumers generally react to backward-looking rather than forward-looking data.

Still, Macro Man did find one relationship that piqued his interest.   Having acknowledged the issues described in the previous paragraph, he went ahead and used 5-year oil prices to back out an implied 5 year inflation expectation for non-energy inflation.   He then compared it with the trailing 5 year average of actual non-energy inflation.

Imagine his surprise when he saw what appears to be a solidly negative correlation between trailing inflation and expectations!   This certainly flies in the face of empirical examples observed elsewhere, including 1 year expectations from Michigan.   He suspects that it's little more than a statistical quirk resulting from lags in the data and an insufficiently large sample size, though if any readers have other theories he'd love to hear them! 



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CV
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March 3, 2016 at 7:16 AM ×

I was wondering when someone would mention Brazil. EWZ up 7% ytd, MSCI World, -4.5% ... funny how that works sometimes ;)!

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March 3, 2016 at 8:18 AM ×

What about shorting the bund MM?

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Polemic
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March 3, 2016 at 9:11 AM ×

Our posts are of very similar vein today MM. So natch I agree. Peru EPU ETF up 15% on the year too.

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Hotairmail
admin
March 3, 2016 at 10:04 AM ×

Earnings schmearnings.

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Hotairmail
admin
March 3, 2016 at 10:09 AM ×

A veritable outbreak of similar posts to that of MM's and Polemic's.

Let us add Shaun....(MM even gets a mention)

https://notayesmanseconomics.wordpress.com/2016/03/02/the-inflation-tectonic-plates-are-showing-signs-of-a-shift/

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CV
admin
March 3, 2016 at 10:48 AM ×

"Peru EPU ETF up 15% on the year too."

Monstrous rally in BAP! No -ve rates here and low penetration of retail banking. Ah well ... back to buying bonds, and worrying about deflation, right ;).

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TBC
admin
March 3, 2016 at 11:12 AM ×

MM why bit short the Apr FF future..
Much more downside with only 2 extra ticks of downside, whilst also capturing part of the Apr meeting

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jbtfd
admin
March 3, 2016 at 11:18 AM ×

Once again I have been proven correct with my "buy the dip" thesis, and there is more upside in equities to come. Seems funny that barely a month ago so many people here were calling for the end of the world and a collapse in equities... you really couldn't make this stuff up.

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Anonymous
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March 3, 2016 at 12:05 PM ×

Does not make you any less of a twat.

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Bruce in Tennessee
admin
March 3, 2016 at 12:29 PM ×

I'd like to see you do some work on productivity and markets MM...I noticed that the .3% productivity of the last year is,er, a tad low and was wondering if anything substantial could be deduced from that.
1. Do eras of good growth come after periods of low productivity?
2. Could this be hinting at stagflation, a la Carter and Arthur Burns?
3. Is our low productivity a sign of future increases in inflation, without the "stag"?


BTW jbtfd, I notice that all markets are still in the red for the last 12 months...

http://www.bloomberg.com/markets/world

If you've been following your thesis, I hope you've been making the rent...

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Polemic
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March 3, 2016 at 12:38 PM ×

@jbtfd I am watching the 4pm London price action to see if there is a correlation between you appearing and saying things are going to ramp and the 4pm buyfest. If so it will add to my thesis that your coding friends in the huge algo you talk about are letttiong slip what their signals are triggering on the day.

You may have your uses after all, not so much what you say( which is [contorl V] ), but when you say it.

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Polemic
admin
March 3, 2016 at 12:47 PM ×

or .. you are a bot attached to an algo program.

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abee crombie
admin
March 3, 2016 at 12:56 PM ×

So if value/ beaten down sectors and markets are doing well, wtf is up with European equities?

Indeed we are seeing a big rally but s&p Lt still looks toppish. Have to think growth will re-accelerate to really have indexes power a lot higher. If not, then we play the cyclical game. Wait for surprises to roll over again. Granted that could be a while. Maybe even into the summer.

Also 200 day in S&p should still be a nice test.

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Polemic
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March 3, 2016 at 1:15 PM ×

For jbtfd What a difference a month makes http://polemics-pains.blogspot.co.uk/2016/03/what-difference-month-makes.html a dinah washington rewrite

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Anonymous
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March 3, 2016 at 2:54 PM ×

On the British exit from the EU I do not know all the moving parts. What I do know seeing it first hand is that working class Brits have lost jobs to a tidal wave of immigrants from the rest of the EC, whose common passports allow unfettered access to Britain.

Take a weekend trip to London, and chances are that the desk clerk is from Poland, the porter is from Croatia, the waitress is from Italy, and the cleaning ladies are from Spain and Greece.

Actual Englishmen are to be found only in distant suburbs, or in unemployment offices.



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Jim
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March 3, 2016 at 3:20 PM ×

Bill Gross in rare form today...Gross: Epic era of credit expansion ending


"The global economy has been powered by credit for more than 40 years, says Bill Gross - noting official credit outstanding today of $58T is 58x that of 1970. That expansion, though, looks to be ending, as private sector savers are growing leery, and regulators build fences against fast creation. And don't forget the meager returns, with negative interest rates in 40% of Euroland, and out ten years on the curve in Japan.

The collapse in bank stocks globally isn't necessarily about energy losses. Price charts since 2007 for players like Citigroup (NYSE:C), Bank of America (NYSE:BAC), Credit Suisse (NYSE:CS), Deutsche Bank (NYSE:DB), and Goldman Sachs (NYSE:GS) suggest the sector's either a screaming cheap buy, or "a permanently damaged victim of writes-offs, tighter regulation, and significantly lower futures margins. I'll vote for the latter."

Then there's insurers, whose business models - which depend on 7-8% returns from risk assets - are at risk. They're not going bankrupt, but future profitability for companies like MetLife (NYSE:MET), Prudential (NYSE:PRU), and Hartford (NYSE:HIG) will be stifled as claims can't be covered as easily when investment returns are so lame.The same goes or pension funds, and Puerto Rico is going down Detroit's path not just because of overpromised benefits, but because they're not earning enough on their investment portfolios to cover those promises.

Central bankers, meanwhile, think they can solve things by cutting rates just a bit further."

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jbtfd
admin
March 3, 2016 at 4:37 PM ×

Anon 12:05 PM - I think you've got a crush on me.

BiT 12:29 PM - Equity indexes for the year are indeed in the red. However I have not been calling for higher prices since Jan 1, but rather since after the Feb fall to Aug 2015 levels. Hence "buy the dip". Precision timing isn't too important, one just needs to get long after said correction and let the algos do the rest.

Pol 12:38/12:47 PM - I'm not Ramp Capital, but they are definitely our friends :) Seriously though, you are onto something here...
Pol 1:15 PM - V good.

Finally, quiet day today on equities (as expected). Consolidation/pullback in spoos would be most welcome to lure in short-sellers before momentum algos smash above 2000 and take out the Jan highs.

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MrBeach
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March 3, 2016 at 4:42 PM ×

I think the Fed stands still. I am not sure what justification they will use. But to raise rates after the turmoil of January and February would be comically suicidal. One scenario if they raise rates: DXY immediately rises, followed by a bloodbath in emerging markets and commodities. This pulls down the energy sector in the US, which puts a drag on regional economies and regional banks. And we get to replay Jan to Feb in a matter of days instead of weeks.

@Jim: Bill Gross seems to have forgotten the lesson of 2008: when credit expansion ends, our financial system immediately goes in reverse, with rapid liquidation. The liquidation calls into question the balance sheets of banks, insurance companies and pension funds. This causes a run.

I think the Fed may be lucky enough to fire off one more interest rate hike this year. But QE4 is inevitable in <1.5 years.

@washed: From a previous thread, I'm curious about an unexpected rise in inflation and inflation expectations. I disagree with this thesis, but I don't discount it completely. The Fed has indicated they monetary policy will be accommodative, even as they raise rates. Do you think we'll get enough inflation to force the Fed to become more aggressive in raising rates?

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washedup
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March 3, 2016 at 5:29 PM ×

MrBeach - my thesis on inflation is more secular and long term in nature, kind of a mirror image of the setup I saw when crude was around 120-130 in Q1 2008, EM's were recycling commodity surpluses into treasuries, and low and middle income household formation , wage growth, and housing inventory all pointing the wrong way. Flows in the next couple of years support a gradual unwind of the long end as collateral and reserve by foreign central banks to raise cash and temper the dollar shortage. Also, there is some recency bias to assume that inflation will nicely cooperate with CB's in terms of being accommodative - don't forget they don't control the long end.

In any case, bonds have sold off after every QE, so if thats your base-case then empirically it supports the thesis.That said, I personally don't think we get another QE, instead, if things go south, we will see fiscal stimulus, especially directed at low wage earners as the new global solution in a couple of years and that will be much more inflationary. If things improve the fed will eventually start unwinding their balance sheet.

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abee crombie
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March 3, 2016 at 6:03 PM ×

@MrBeach, i generally agree with you that the system requires credit expansion, though I think less so in the developed world nowadays. The real risk is in CHINA for credit growth, imo. Overcapacity everywhere there and now ppl rushing into the 'safest' assets of Tier 1 real estate. When that bubble pops, watch out

This rally is quite amazing in the lack of tech participation. GOOG and FB blew out numbers last Q, are big HF holdings and yet are not doing much. Rotation, rotation I guess but they should be leading the market higher... contrast that with the strength of industrials (think manufacturing economy), which just popped above the 200 day..

so the message is, play cyclical growth & value (industrials) but now go defensive on secular growth (software tech) that is a little more expensive. I dont see style lasting very long but cyclicals were pretty cheap and now have good momentum so who knows

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Polemic
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March 3, 2016 at 6:06 PM ×

I'm wondering if all the stories of abundance are a sign of something else

Peak Abundance!

There's always to much of what you don't want right up to the point you want it.


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Leftback
admin
March 3, 2016 at 9:08 PM ×

Polemic! That is outstanding.

Nice song, Sir. Wait, but didn't you rip me off there w/o a h/t? I think I mentioned Dinah and posted that video here in Mid-February?? You have been on the money in the metals, btw, and the AUDJPY trade. A visionary among the reflationistas.

We sold our last chunk of Spoos today, back to our basket of reflation longs plus 70% cash. It's Happy-Clappy out there. We are expecting some profit taking ere long, especially in the overbought energy and crude oil sectors, where fundamentals remain weak but exuberance has become overwhelming of late. So we are hedged, purely for a trade. The turn does appear to be here.

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Anonymous
admin
March 3, 2016 at 9:25 PM ×

But LB, the Nigerian oil minister said there'd be a meeting in March with non-opec where he expects a dramatic move in price after.

He also requests that you send him $419 in advance of this meeting as a show of good faith.

Love, 419eater

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Polemic
admin
March 3, 2016 at 9:47 PM ×

LB, me old friend, any plagarism was wholly unintentional on 2 counts.. 1- i dont think I saw the comment ( lets be honest this board hit record comment levels over the last month . so apols. and 2.. and this is the sad bit, I had the song going around in my head but not until I googled 'what a difference a day makes' did I find out who had actually sung it! Sad but true.
Consider yourself hat tipped here postumously .. so to speak.

And as for any call I have on the market as MM wil testify.... watch out for survivor bias. but cheers

As for tops .. I ve no idea other than the american possies in investment banks are all rigidly ' its going down again'. SO denial factor still high .. but i did a unscientific twitter poll and 2 weeks agao it was 39%/29% just a short squeeze /base is in. and rerunning it this week its 33%/40%. Which is all probably due to price bias than true macro thought adjustment. I'm really not sure which way it goes and would liketo see some real money positioning reportsto see if teh massive cash balance have been rebalanced or if they have been left lagging the benchmarks.

Ok .. own up .. who posted a couple of weeks ago that PM quoting Margin Call 'listen for when the music stops .. and all I can hear is silence" quote for being very short equities. Can I suggest YOU SEND HIM A F'KING HEARING AID !

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washedup
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March 3, 2016 at 9:47 PM ×

@Pol - "There's always to much of what you don't want right up to the point you want it. "

Bravo indeed - like the sherpa said in Entourage - It's all so negative, man. I mean, the Man's most positive positive-tive is a nega-tive. It's a mega-nega-tive. Right?

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Anonymous
admin
March 3, 2016 at 11:17 PM ×

Check this out... I'll be voting Trump from now on:

http://ibankcoin.com/flyblog/2016/03/03/romney-launches-bizarre-attack-on-trump-in-scathing-speech/

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Macro Man
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March 4, 2016 at 12:36 AM ×

Please understand that I could literally not find your or anyone else's political opinions less interesting and respect the "no partisan political views" policy.

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Polemic
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March 4, 2016 at 12:39 AM ×

agree MM.. to the point I wish twitter had the opposite of search function, an anti search function to filter out tweets that contain specific words. Those words being any of the US presidential candidates.

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