How about a nice warm cup of...

Another day, another shot across the bows from the Fed.  True, Boston Fed President Eric Rosengren was speaking in a personal capacity, rather than attempting to convey the will of the committee.  But in a modern  forward guidance, dot-plot world, every comment- particularly those of voters- is parsed closely and can influence (or confuse!) the public as to the likely trajectory of Fed policy.  And so, less than a week after Janet Yellen sang hosannahs to the fixed income rally and the magic pixie dust that it sprinkled over the US economy, Mr. Rosengren said yesterday that

" my own sense is that financial markets may have reacted too strongly. My assessment is that the U.S. economy is continuing to improve despite the headwinds from abroad. If my forecast is right, it may imply more increases in short-term interest rates than are currently priced into futures markets"

Well gee, I wonder why?  What could possibly have caused red December eurodollars to rally nearly 40 ticks over the last three weeks?   Could it be.....Satan?  Err....no.  It was the FOMC, of course, the very committee Rosengren votes on.  As it happens, Macro Man generally agrees with the statement
quoted above.  But with the policy outlook so cloudy and the mechanism so reliant on communication and guidance, it would be quite helpful if the Fed could get their house in order and deliver a consistent message during this time of uncertainty.  Perhaps it's beating a dead horse, but it really would be nice if the non-core members would just...well, you know. 

 Elsewhere, Spooz 'n' blues were in the news again yesterday after Jefferies' David Zervos was rushed to the hospital after sustaining a dislocated shoulder while patting himself on the back.  It's certainly true that the most mindless of "liquidity grab" strategies has performed strongly since mid-January, though it did have a nasty hiccup starting in early December.

While the chart above seems to suggest that the strategy has worked in more or less a straight line, the performance under the hood is actually quite interesting.  Macro Man ran a rolling 6 month Sharpe ratio calculation for his version of Spooz n Blues, and he found that the strategy a) exhibits a semi-regular cyclicality, and b) that performance is generally deteriorating over time, registering lower highs and lower lows in the Sharpe.


None of this is to suggest that a "sell everything" call is the proper one at the moment.  If anything, the chart above would suggests that the strategy could continue to deliver solid returns for another few months.   Of course, valuations matter, and one might reasonably consider that prices for both legs of the strategy and other risk parity vehicles are stretched.   When even an erstwhile arch-dove like Rosengren is saying that the front end looks stretched, it's difficult to be enthused about being long, Yellen's paeans notwithstanding.

Then again, with crude starting to melt lower, perhaps Yellen will be able to shift focus back towards domestic inflation when she plays her next round of whack-a-hawk.  Either way, with the market seemingly complacent (if that's possible) on crude, a slump back to $30/bbl would almost certainly be an unwelcome surprise.  As a reminder some of the risk management stops in Macro Man's intermediate CTA model come in at around $34.   He ran a short term version of the model as well, which suggests that quick-trigger models are perched on the precipice of going short again.

 Macro Man has stuck with his initial short SPX clip of the other week.  While it's roughly 1% offsides, it's been fairly easy to hold, as equities have shown little sign of upside impulse.  Given the downturn in crude and the impending earnings season, he way well decide to let a bit more fly over the next couple of days.
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Nico G
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April 5, 2016 at 8:26 AM ×

Dax - who tried to outperform Europe like a good German boy - finally losing it

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Amplitudeisofftobettingshop
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April 5, 2016 at 8:49 AM ×

Seriously, Macro Man...I'm in the middle of Eco 101 semester and I'm trying to apply this knowledge to the Fed speak. Very difficult. But what I do know is this...that the FED has teamed together to take advantage of home alone traders like ourselves and mind f##ck us into bad trades...psycho bullying. Its a good thing I have and "auto pilot" stop loss built in after years of having only one love ...horses. Can anyone tip me into a stable...I'm going to need years of horse therapy after this joke.

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Anonymous
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April 5, 2016 at 8:57 AM ×

Hello MacroMan, thanks for these renewed strong insights on what is going on. I am quite new to your blog and have a question regarding your CTA proxy model. I guess your usual proxy uses a MaxMin 40d windows (maybe not the one of today as you labelled it as 'a short term version')but still struggle to find out how the stops (1 & 2) are set up. If you have a moment could you tell us how does it work?
Many thanks

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washedup
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April 5, 2016 at 10:40 AM ×

@MM thats a very interesting chart on spoos and blues sharpe. If its been making lower highs and lows in a regime when mentioning inflation as a possible risk, and informing folks that a girl with wet hair crawled out of your TV set last night gets you similar looks, I wonder how it would perform when the oil crash is out of the baseline (its a mathematical certainty it will at some point).
Given the sheer size and participation of that trade, I think an exit from it at an institutional level is basically impossible if (when) performance ever turns. You think asset management performance is sub par now?

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Leftback
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April 5, 2016 at 11:11 AM ×

How long before punters cash in their winnings from Q1 and run for home? LB has already walked over to the corner of the room and picked up a pile of dollars [specifically the pile that once belonged to oil longs], and now looks forward to collecting more. Europe really doesn't look very clever at all this morning, there might be some more gap down openings ahead of us here.

Everyone seems to be convinced that the oil crash is over, and that oil, US high yield and inflation have made their lows for this cycle. LB would like to think this is correct, but looking at oil supply/demand and storage dynamics makes you wonder.... and as for US and European banks, if oil really does make new lows, we may finally see a lot of loans go very bad this summer.

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Anonymous
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April 5, 2016 at 11:13 AM ×

@jbtfd and other rally monkeys. To see how you play it from the short side, see my previous comments below.

Dax initial small entry at 9900 area, full entry above 10k. Reducing by 50% at 9600. I'm looking for a spike lower over longer term. Look at that European banking sector and euro. Ooh, and OECD just significantly downgraded German GDP.
Brent, initial small entry and full entry at the $41.50-$42 area. Reducing by 50% at $37.50.
Emini, initial small entry at 2040 with only a similar size added at 2060. Going to hold this through todays session and see where it goes.

You see, bears can make bank. Bulls make money,bears make money, pigs get slaughtered.


"To the rally monkeys:

" Anonymous March 18, 2016 at 2:26 PM
Anon 1:55 - THis trolling of the bears is laughable.....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"

You can timestamp that to GMT. I got my Dax and oil spikes and well onside. Down about 10 handles in the Emini. With all this fuel that the CB's are throwing, you'd think I'd be well offside? I'm not counting my chickens or any such thing but, the rally isn't exactly a face ripper in the US and it's stalled in oil and Europe.

March 29, 2016 at 11:11 PM"

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Leftback
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April 5, 2016 at 11:29 AM ×

Late arrivals to the long side of the commodity fun house might want to look at AUDJPY this morning as a FX proxy for risk appetite in that arena. It's down >1.5% this morning. The "face-ripper" is over and might soon be replaced by the "face in hands" day. You know what that looks like, it's what the mainstream press shows us the morning after the big down days. Now wait until people start buying dollars again, especially as positioning in the USD has moved astonishingly quickly to the other side:

CFTC Report Shows Dollar Longs at Lowest in Two Years

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washedup
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April 5, 2016 at 11:47 AM ×

Left - think yellen will be less dovish come thursday surrounded by her old buddies? I am beginning to see the view from your hammock (admittedly some disagreement in that I don't think crude makes new lows anytime soon) but its all about how the dame pontificates - hard to see a true flush with punters jittery about what bullish algos do with her words.

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Anonymous
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April 5, 2016 at 11:54 AM ×

jbftd is not perma bull, he is flat if you missed his note yesterday.

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Tim Schulace
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April 5, 2016 at 11:56 AM ×

LB,
I, too, feel that Bucky is due for a run, but I am also watching gold quite closely. While the $ may be a less dirty shirt (yen is the least dirty shirt), gold is a cxy w/o a CB more than a commodity. This behavior bears watching.

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Anonymous
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April 5, 2016 at 11:59 AM ×

Now this may well appear 'funny' as one Anon addresses another Anon above ,but hey ho. The point Anon is this. the forum was never about idiots who have a paramount interest in posting trades that make them look clever. The clue was always in the name. Personally I couldn't give a shit where you got short or long because for sure when such trades go wrong I won't find any sympathy emanating from my P & L if I was stupid enough to be influenced by you. If I am not going to be influenced and I assume the "I" will be "Us" because the majority here are far too experienced to be so influenced then the question to you (s) is why bother with such posts. If you want to stroke your ego just go stand in front of a mirror and repeat after me "who's a pretty by then".
Yours
Anon still seeking Macro

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Polemic
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April 5, 2016 at 12:13 PM ×

The interesting thing to me is the way oil and copper and the like started rolling a week or 2 back yet equities kept pressing higher. Right at the point that equities take a dive and cite oil and metals as the excuse, oil and metals stop falling. they are not joining in the big sell today. China isn't exactly dumping either. All in all this is not looking like, as MM noted above, a reason to 'sell everything'

So though the binary call on ' timberrrr' on all risk assets may look an easy call. I don't think it is. Things are a lot better than they were in February and though this looks like the start to a proper dump I don't think it is . More another bear trap, though maybe deeper than recent ones. Mixed signals though the most famous prices are red. I've written more over at my place.

Pol

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washedup
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April 5, 2016 at 12:32 PM ×

Pol - reading your blog, feel like the trade here may be to sell everything except commodities, but only for a small pullback - its the reverse of the rotation from last Q2. Japanese and European equities seem to be decent short candidates as well, but the latter is just so damn cheap once you take out the banks.
Does anyone know a good european bank ETF?

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Polemic
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April 5, 2016 at 12:43 PM ×

Well sort of Washed except I really don't think equities can continue tanking whilst commodities are on the way up. It''s more a timing thing.

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Anonymous
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April 5, 2016 at 1:00 PM ×

@Anon still seeking Macro - Anon 11:13 here. If that was intended as an admonishment to me, you can place it elsewhere.

The narrative is purely a display of how a short manages a trade, navigates the central banks and trades some macro.

A month ago, everyone here was lapping up the European banking sector and bund/btp spread. Take a look at them, they haven't gone away you know. Not exactly a ringing endorsement for ECB policy.

Ooil shorts covered in a big way while ignoring the fundamentals and the OPEC hocus pocus. Well, that's all back again.

Yours,

Anon

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Sucker
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April 5, 2016 at 1:12 PM ×

So what's the view on the big oil meeting?
Surely the will be a deal of sort.

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Skyguy
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April 5, 2016 at 1:58 PM ×

Washed@ 12:32

I've used EUFN, I wouldn't mind if it was a little more liquid.

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Anonymous
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April 5, 2016 at 1:59 PM ×

An oil deal? Listen to the Saudi's, Iran and Iraq. Also, look at their actions. Ignore all others. There will be no deal that reduces supply.A freeze with an Iranian increase is not a freeze,it's an increase in supply. Why make a deal in April, a few weeks before OPEC meeting? They simply used smoke & mirrors to gain a bit of respite.

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washedup
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April 5, 2016 at 2:00 PM ×

thx skyguy

@sucker, if you are trying to predict crude, do yourself a favor - stop listening to OPEC or focusing on storage at cushing and start following usd/jpy and inflation proxies.

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Corey
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April 5, 2016 at 2:47 PM ×

I figured equities are just having a delayed reaction to price action in oil (due to the Yellen effect) and the correlations will resume once the hope of the latest deal dissipates. Gotta have some more of the leveraged players in that space default before you can sound the all clear.

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Skyguy
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April 5, 2016 at 2:52 PM ×

I'm beginning to think there might be something to the inflation argument (at least "wage inflation in the US").

As BnT linked to a couple of days ago, productivity has been in the toilet for the last 5 years or so, so the Joe 6 pack isn't going to earn more that way. Headline unemployment has been higher. 4 trillion in M1 sloshing around in the banking system. And anecdotally, I'm seeing an awful lot of 15$ min wage stories floating around on yahoo finance. The American wage earner hasn't seen a pay raise in quite a while, and the cost of certain things keeps rising (health care and education come to mind).

US treasuries haven't twitched, though. And credit destruction can take a lot of funds out of circulation. Meh, I'll consult the magic 8 ball in a couple of months...

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Anonymous
admin
April 5, 2016 at 3:04 PM ×

Reuters: ECB policy is at limit of its mandate as Bund yields out to 9yrs
http://reut.rs/25IrxYy

Total BS. You cannot un-ring this bell.

Bank debt CDS spreads will never, ever be allowed to blow out again and the ECB will run over anyone who gets in their way.

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Leftback
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April 5, 2016 at 3:05 PM ×

There has been a huge recovery in credit (HY) along with the short squeeze in oil. Credit has rolled over now, since oil peaked above $42 in mid-March, and it has some way to go on the downside. Equities have tended to follow, especially energy stocks. I don't disagree with the comment about inflation proxies above, but I think in times of volatility the latter often key off the oil price and not the other way around. You can dismiss arguments about storage, but when cushing really is full, along with the other large depots, then all the pumpers can do is shut down production or simply sell oil (very) cheaply in the spot market. This glut can even be seen as a purely US dynamic or the time being, OPEC is irrelevant in the first iteration for $wti. Similar storage issues also exist elsewhere in the world, so there is little spread between WTI and Brent.

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Anonymous
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April 5, 2016 at 3:40 PM ×

That big sucking sound:

MS: After netting out purchases of global by central banks, 12-month net issuance by DM governments is ~zero

http://imgur.com/KNqDp2G

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Anonymous
admin
April 5, 2016 at 3:42 PM ×

global risk assets have been quite hard last week or so if one looks at jpy,oil,dax,nky,ez banks etc but spoos still on their own up here...given earnings and growth expectations i can't believe yellern's going to be holding this puppy up too long
could be a pretty rapid catch to the downside i feel...wouldnt be surpassed to get sub 2000 by friday

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Anonymous
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April 5, 2016 at 3:51 PM ×

I keep repeating that Kuroda is an imbecile or insane and I don't use these words lightly...

USD/JPY

http://imgur.com/KryI4jz

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Anonymous
admin
April 5, 2016 at 3:57 PM ×

A couple of Central Banker's weresecretly recorded discussing tipping their waitress after gouging on their 5 star meal ( that we paid for )

https://youtu.be/i9bBXLqmCRs

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Anonymous
admin
April 5, 2016 at 3:58 PM ×

Just two weeks until April $VIX settles and there's still a 1.40 spread over spot.

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Anonymous
admin
April 5, 2016 at 4:07 PM ×

Just read Michael Lewitt's new book which has a somewhat splashy title "The Committee to Destroy the World: Inside the Plot to Unleash a Super Crash on the Global Economy".
Good interview at Forbes...
http://www.forbes.com/sites/steveforbes/2015/05/27/money-madness-with-credit-strategist-michael-lewitt-from-apples-40-billion-of-debt-to-the-inevitability-of-a-u-s-default/#585379597916

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washedup
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April 5, 2016 at 4:11 PM ×

Left - you are wrong about oil driving financial assets - ask any crude trader and they will tell you they spend most of their time worrying about risk on and off (and if they don't they should, or they won't be around for long) - I mean do you think the 500 BN market drives the $50 TN markets (bonds and currencies) or the other way? Go look at what z9/z10 was doing as oil crashed by $60 in q3 08 - the physical market was plenty tight - just didn't matter.
Max storage at cushing is something bank research keys off to sound smarter than they are - I have talked to storage operators at cushing who will tell you its a lot more complex than just the cartoon headline number.

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Anonymous
admin
April 5, 2016 at 4:12 PM ×

Sweet headline...

"PUERTO RICO PRE-ANNOUNCES IT PLANS TO DEFAULT ON DEBT OBLIGATIONS"

Means nothing. Banks will now be "forced" to buy muni bonds.

Yellen sees this...

"Yellen Sees Risk in Muni Bonds Entering Banks' Liquidity Pool"

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Anonymous
admin
April 5, 2016 at 4:35 PM ×

I would agree with pol on the current conditions. China is stable. Commodities were overbought and are sold now. But a Jan/Feb style panic is a small probability event IMO.

Abee's hypothesis on the currency truce among Fed, PBOC, ECB, and BOJ is fascinating. Now this hypothesis is facing its first major test: Yen. Will BOJ let Yen appreciate all the way up and lose all their gains since 2014? Even under the obligation of a truce, my bet is that BOJ would be pressured to do something at least to stop the Yen from further strengthening, given the mostly negative economic data and confidence numbers recently. Before the 4/27 meeting, Kuroda seems to have only one public speech scheduled for now. It is going to be interesting to see what new trick he has in sleeve.

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Anonymous
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April 5, 2016 at 4:59 PM ×

Wonder if Greece will make a comeback ?

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abee crombie
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April 5, 2016 at 5:07 PM ×

Thanks anon but I just Ctrl C&V. Not nearly that smart

Japan Eco surprises in the dumpster, Dollar Yen breaking lows (though crosses still above, and is what matters more, fundamentally for risk off, IMO) and Japanese banks getting killed (Topix bank index was trading at .7x Book in the fall, now trading at less then 0.5) leading some to think we are in for another risk off episode. Perhaps, and given US equities are overbought, it wouldn't surprise me. Throw in rates and you have a pretty good reading..

However I just bought some oil. If cushing was going to fill up, it would have done it already. Maybe some more pain before summer diving season & refining maintenance.

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Nico G
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April 5, 2016 at 5:17 PM ×

washed

any European indice loaded with banks is a good short indeed. OTC unlooked after burst trading limits oblige, Deutsche Bank will take everybody in their fall. For that call only on DB last year, i would deserve a fucking round of hurray but im too busy making shameful loads of money

to anyone who still wonders about Greece well Greece is DEAD. This is only a part of DB problems but a real problem for European banks indeed. The $340 billions are GONE

i am soon returning to Greece for the usual 6 months stunt and 2016 will make 2015 look like a walk to an ouzeri

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Anonymous
admin
April 5, 2016 at 6:10 PM ×

The Atlanta Fed just reduced its estimate for 1st Qtr GDP to just .4%

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AL
admin
April 5, 2016 at 6:38 PM ×

Nico, I indeed tend to agree and risk of contagion to EGBs is already showing up with Portugal going pretty wide today. BTPs are next in my opinion with political situation getting somewhat more unstable. Greece is again on the radars, Brexit referendum getting closer ... Simply too much for a 1.28% 10y yield.

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abee crombie
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April 5, 2016 at 6:51 PM ×

FWIW, EU Bank CoCo's are hardly in the gutter like last time. DB for sure is a mess, I'll be watching to see if it breaks the lows at $13

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CV
admin
April 5, 2016 at 7:22 PM ×

This market is just too nervous for its own good. DB/Greece/Eurozone calamity now taking over from China/commodities, and bubble in corporate bonds. If you subscribe to the idea that the market loves nothing more than to climb a wall of worry, well there is that at least then ;).

March was a bumper month, though, and a decent end-of quarter means profit taking in April I reckon. It could be a rough few weeks ahead.

Overall, I also concede that the burden of evidence in the key equity indices firmly remains with the bulls. Charts look ugly all day. Defensive is the way to go. I have my eyes set on a "big short" too which I think needs to be put on now.

Finally, economic data not exactly looking nice either ... It's bonkers but the ECB could be buying equities come Q3. Fancy that!

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Anonymous
admin
April 5, 2016 at 7:33 PM ×

@AL - Portugals spreads are wider because of Portugal. No other reason. It is well under the radar for most but, they are in the proverbial shitter.

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washedup
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April 5, 2016 at 7:37 PM ×

@cv If you subscribe to the idea that the market loves nothing more than to climb a wall of worry, well there is that at least then ;).

haha yes CV - except this markets been raising its leg and urinating on the wall of worry more than actually climbing it, since 2014 - can't believe we are exactly where we were, well, too many times to even count.

On the idea of ECB's buying equities - how do you think the logistics will play out? buying say DAX futures and rolling it will introduce a massive con-tango, so thats out of the question. If they go stock by stock in the cash market then they'll end up with some ownership of the private sector across various countries yes? If they buy a massive stake in some liquid ETF then they will drive cross ownership for the custodian of the ETF.

All salient things to consider, but yeah I definitely think its a possibility by late in the year.

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CV
admin
April 5, 2016 at 7:45 PM ×

Hey Washed,

"can't believe we are exactly where we were, well, too many times to even count."

Indeed!

Re ECB buying equities. I have no idea really. I have tried to make sense of them buying corporates, and I can't. The market is too thin. In equities, of course, they have a more liquid market but you raise a couple of the many issues. They won't buy futures; no way. ETFs perhaps ... If the rout in bank equities continue that is a place to start. Propping up the main stakeholders of the ECB's own existence in the end. It would be mad, though. My head is spinning just thinking about it.

The bottom line though is this. Let us choose between two plausible scenarios.

1) Deflation/low growth wins, CBs lose. ZH et al rejoice.
2) Deflation/low growth leads CBs to panic (as in REALLY panic).

Of the two, I think 2) is more likely, and I am "long inflation" as a result. Hurting for the moment, though ;) ... although commodities have held their own so far this year.

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Macro Man
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April 5, 2016 at 7:56 PM ×

I'd have thought helicopter money would be more likely than the ECB buying equities, particularly bank stocks. How is the ECB to say "we won;t lose money" while also saying that the banks under their regulatory umbrella (and in their portfolio!) aren't "too big to fail"?

If the ECB starts buying shares in the very banks that they regulate, book your hotel rooms in Karlsruhe early to avoid disappointment.

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washedup
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April 5, 2016 at 8:04 PM ×

@CV - I basically see 1) as impossible, and therefore 2) is a bit moot - here's why - CB's cannot 'lose', defined as being powerless and out of ammunition to fulfill their mandate of employment and inflation, as long as we are in a fiat currency world with deflation giving them headroom and political cover to throw various brands of spaghetti at the problem till something sticks. There is some concern about collateral asset bubbles but in the end I don't think they care as long as they are seen as doing their jobs.

CB's will only lose once they become victims of their own success, i.e. we get an inflationary cycle combined with margin compression leading to layoffs - think of it is a massive productivity bust - thats when they are truly cornered - its really difficult to imagine but its happened before.

BTW wasn't zero hedge claiming 5 years ago QE would lead to hyperinflation and a dollar collapse? They've already lost - open and shut case.

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jbtfd
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April 5, 2016 at 9:51 PM ×

washedup 8:04 PM - you're quite right, ZH (and several others) did claim that. Frankly how they can believe such nonsense is beyond me. It's patently obvious that the aliens who control the central bankers have a much deeper understanding of economics and monetary policy in a deflationary environment than these doom-mongers ever realized.

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CV
admin
April 5, 2016 at 10:01 PM ×

"If the ECB starts buying shares in the very banks that they regulate, book your hotel rooms in Karlsruhe early to avoid disappointment."

I would say the same about helicopter money MM, although I concede that one of the advantages of the copter is that such a policy move really doesn't start at the central bank, but at "the treasury" or in this case the Commission and in Schauble's office. We are getting closer to a switch towards a "fiscal response" I feel.

Maybe hotels in Karlsruhe will be filled in that case too, though. ;).

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Anonymous
admin
April 5, 2016 at 10:04 PM ×

@washedup,

Very interesting on "an inflationary cycle combined with margin compression leading to layoffs ". You said that it happened before. Could you please elaborate on that?

Thx.

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Polemic
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April 5, 2016 at 10:35 PM ×

The big game for EU is trying to keep a lid on the cess pit and to appear human before the brexit vote. If DB goes critical and ECB bail it by buying its stock and Greece starts to blow again before the end of June referendum it is going to have s big impact on voting intentions. So far EU is desperately being painted as a battleship of stability that UK can't afford to leave when it's as shakey as a tramp steamer with a new lick of paint.

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Sucker
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April 5, 2016 at 11:45 PM ×

@polemic

Love the timing of your post, fits in well with my target for DB.

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Anonymous
admin
April 6, 2016 at 10:46 AM ×

"Inflationary cycle, margin compression, and layoffs"...hmm
I'll see that and raise it with this. After the 2010 decade of austerity and subsequent focus on reflation in employment we entered the 2020's with labour tight at least in terms of relevant skill sets and this squeezed labour costs higher as per 80's following the same issues in the 70's. The inflationary cycle didn't compress margins and didn't lead to layoffs. It led to price pass through based on a rise in real disposable incomes as opposed to credit expansion per se. You can thank me later ,but it's unlikely I'll make it that far.

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