Five bricks in the wall of worry

While Macro Man has run a small short in the SPX over the last several months (though he took half off near the post-Brexit lows), he has not necessarily characterized himself as particularly bearish on the world.   For sure, there have been causes for concern- notably the through the looking glass impact of negative interest rates- but on the whole he has subscribed to a "muddle through" scenario for most macro outcomes.

Increasingly, however, he's observing a bit of cause for concern.   Admittedly, much of this is through the financial market channel...but that may be because in many parts of the world, the growth and inflation impulse has been lousy for a couple of years.  This is not to say that he's rushing out to purchase shotguns and tinned beans; rather, it's merely an acknowledgment that the bigger the confluence of disquieting factors, the greater the possibility of a financial accident that spills properly into the real economy.

For the relentlessly bullish, consider these another five bricks to add to the wall of worry:

1) Ten year yields reach all time lows.  While no single market has a monopoly on wisdom, it's certainly been the case over the last decade that bond investors have been more prescient than their equity counterparts at sniffing out trouble in both the real economy and the financial system.  While the low levels of US bonds yields generally reflects the dearth of yield on offer elsewhere, the recent nosedive is clearly indicative of concern that the global economy has received a nasty shock.  Generally, investors should treat the bond market like E.F. Hutton: when it talks, you really ought to listen.

It seems virtually inconceivable that the Fed will put rates up before December, and quite possibly not even then.  This in turn sends a similar message to a pilot shouting "OH NO" into the intercom of an airborne 747.  Even if the current rally in bonds is overcooked, the secular trend of yield curve flattening at such low levels of yield is not a bullish one.

  
2)  China.   OK, it's not exactly new news, but the great Chinese currency devaluation continues apace.   While the Chinese have previously used periods of global turmoil to adopt a policy of stability, this time around they seem more interested in kneecapping the RMB as quickly as possible.  If anything, the Brexit volatility has encouraged an acceleration in the RMB's devaluation against its reference basket:


Macro Man observed right after the Brexit vote that upside pressure on USD/CNH was likely to intensify, and so it's proved.   Stories circulated yesterday about PBOC agents intervening in the forward market (so as not to draw down stated reserves too quickly), which serves as a useful reminder that capital continues to flow out of China at a solid clip; upside pressure on USD/RMB will only intensify this phenomenon.   As we observed last August and again in January, when developed markets notice, good things rarely happen.

3) GBP/JPY.   Obviously there is nothing magical about the GBP/JPY cross; there's no secret squirrel following its progress and using its undulations to make a series of unusually prescient bets in global markets.   Yet its collapse represents the twin loci of pressure in foreign exchange markets: sterling weakness and yen strength.  To put things into perspective, this time last year GBP/JPY was around 187, a week or two shy of making a push up to 195.  Now?  it's looking all but certain to crash through 130.

Now, some observers may point out this decline has merely retraced the move from late 2012 through last summer, and this would of course be correct.   However, the pace of the decline is naturally substantially faster than the rally, and the twin pressures upon sterling (to weaken) and the yen (to strengthen) reflect a substantial disequilibrium that has yet to be reflected in, say, US equity markets.  Not that it should move Spooz tick for tick; of course it shouldn't.  But insofar as the pair reflects negative outcomes on both sides of the ledger (yes, a weaker pound will help UK exporters, but it's difficult to permanently devalue your way to prosperity) , it merely adds to the deflationary impulse being felt in many parts of the globe.   Historically, the US at least has been relatively immune to these types of events; then again, historically the US has had a much bigger growth buffer than it currently enjoys (solid Q2 tracking notwithstanding.)

4)  UK economic newsflow.  So another couple of property funds throw up gates amongst reports of significant investor concern.   While it's true that this was probably an inevitability given the liquidity mismatch between assets and liabilities, the fact is that it's come in the immediate aftermath of the Brexit vote...which sends a signal that it will have an impact.   Prosaically, the lessons learned from financial crisis are that when confronted with gates, you sell what you can, not what you want.  We'll see if they're applied this time around.   More immediately, consumer confidence has taken a significant tumble; perhaps yesterday's elimination of a couple of Tory also-rans will provide a boost, but somehow Macro Man thinks not.

 5) Italian banks.    As slow-moving train wrecks go, the Italian banking collapse has moved at light speed compared to Greek sovereign debt.   By most other standards, however, it's been a long, drawn-out, and painful process.  Banca Monte dei Paschi was founded in 1472, and it feels like it's been collapsing ever since.   While the authorities implemented a short selling ban yesterday, it seems difficult to credit that short sellers were the reason for bank's demise (as opposed to a veritable Mt. Etna of turds on the balance sheet).  It does seem like the long drama may be reaching its denouement soon, however; BMPS has more than  halved in price since the Brexit vote, and barring a reverse split will soon reach the "Planck price" of the minimum possible increment.

Perhaps the penny will remain suspended in mid air and the can will be kicked down the road once again.  In that case, dip-buyers can probably look forward to another relief rally.

But there's a funny thing about the wall of worry.   The more bricks you add to it, the smaller the remaining space to exit risk positions through the front door.  As Macro Man noted, he's not headed for the basement bunker yet...but he's getting a little nervous.
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Anonymous
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July 6, 2016 at 8:25 AM ×

Buy the dip people, buy programs are active n equity indexes.

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Anonymous
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July 6, 2016 at 8:34 AM ×

Good call. Dax has gone up for 25 minutes straight. VROOM VROOM!

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CV
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July 6, 2016 at 8:59 AM ×

Good points MM ... the wall of worry is steep as ever here. Can the market climb it? Italian banks are certainly now in their final stages of do-or-die. Renzi is right to push the EU to the wall. Either they "allow" a recap of they face the music of watching BMPS and perhaps some others fail, and possible Renzi being fed to the dogs. Your move Merkel/Juncker!

As LB aptly noted, Bashing Betty is back! Pro-cyclical mon/fiscal policy with a CA deficit of 6%-to-7% of GDP ... what happens next! Yep, the currency is torched. All eyes of front-end gilts though; if they go, we have a real problem.

Oh, and ... 25 minutes?! Is that the attention span of the average punter here?

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Anonymous
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July 6, 2016 at 9:09 AM ×

@CV - Anon 8:34 here - would appear to be that of the "buy program dip buyer". But now we've gone down 25 mins straight and DBank smoked new lows.

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Anonymous
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July 6, 2016 at 9:29 AM ×

Re GBP/JPY: it's difficult to have a strong currency and a yawning chasm current a/c deficit; and vice versa, it's difficult to keep a currency weak (are you listening BoJ?) when you have a Mt Fuji-sized current a/c surplus. The trigger might've been Brexit, but the decline was already baked in the cake.

Re China: I'm not sure if geopolitics is accepted as a risk factor here, but China's increasing military assertiveness in it's disputed maritime claims is definitely a -ve.

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abee crombie
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July 6, 2016 at 9:33 AM ×

Some of my own pros and cons.

Pro. Ism rebounding, oil rebounded, along with em FX stop depreciating. Some ems like india and indonesia looking strong .Dividend yields are very high on eu and jp equities vs negative rates. Q2 earning expected to mark low in spx,higher from therected expected. Companies have low bar so unlikely to miss massively. NOt much optimism anywhere.

Cons. Defensive led equity rallyou in spoos. Homebuilders rolling over even with lower rates. Transports in a Rut, financials now a big risk. Gold and silver zooming higher. Eu sub financial cds creeping higher. Central banks head in sand. Terrorist attacks at increasing frequency. World Trade and Asian pmi still very much in trending from start of year, crappy.

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Anonymous
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July 6, 2016 at 9:34 AM ×

@CV - A 1% move is a 1% move. Don't care if it takes 25 mins or 25 days, money is still the same ;)

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abee crombie
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July 6, 2016 at 9:35 AM ×

Sorry, writing with mobile and damn auto correct.

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Anonymous
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July 6, 2016 at 10:50 AM ×

re anonymous 834- let me guess u sold the high and got short ?seriously if u so good at jobbing u should have retired by now

for others who have a slightly longer attention span:

just too may things lining up for a rug pull here- keep in mind market recovered all lehman losses within a week as well before trudging lower. i am expecting test of lower levels in spoos which are holding up remarkably for now. while happy to stick my hand out for some swing longs this looks like a good spot to unload the dip bought last mon.
the big one here will be fed about turn and market losing faith in yellen and co. ecb bojj struggling - fed only game in town for now- once market gets it head around the fact that fed is now firing blanks look out below...


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gallam
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July 6, 2016 at 10:55 AM ×

Those are 5 nice solid bricks, but DB is an entire kiln's worth.

They are gone. A good first test of the post-Cyprus EUR bank resolution regime.

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Polemic
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July 6, 2016 at 11:45 AM ×

It's all looking horrid.

And anon 8.25 Your input is very useful as a reverse indicator . Keep it up. I dread the moment you are right, you will cost us money.

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Bruce in Tennessee
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July 6, 2016 at 12:15 PM ×

MM,
"he has not necessarily characterized himself as particularly bearish on the world."

...Well, I have tried to be pragmatic since Paulson discovered the end of the world was at hand...and I suppose the shorthand way I do this is to compare where we were in 2008 to what I see happening in the present.

I have not thought that we'd do well having governments rather than industry support our recovery. As the wise man said, governments don't produce anything. Yet they do...debt. And I think the prolonged ZIRP/NIRP has been bad, and if anything, gets worse with time. All this does is allow delay in accounting of the massive amount of government sponsored debt...it doesn't do anything good in the Adam Smith sense of normal markets. What is the Wealth of Nations now..? Credit?

I think the reason people like me get bearish and stay bearish is this time, in this set of circumstances, we seem to have lost the thread of how to get better...

https://en.wikipedia.org/wiki/Henry_Paulson

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Anonymous
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July 6, 2016 at 12:27 PM ×

@gallam

re DB ... what is your trigger ? MdeP failing ?

not sure that will happen .... surely its just more can kicking down the road ...

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gallam
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July 6, 2016 at 12:46 PM ×

@anon re trigger.

The trigger will be people stopping trading with them because Prime Brokers won't accept their credit. Informally, I would guess CDS around 350bps should do it if the share price carries on as is. That won't be curtains immediately, but it would certainly be the beginning of the end.

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CV
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July 6, 2016 at 1:37 PM ×

The morbid fascination with DB is really something. I mean, it's a turd, but in terms of global "Lehman" moments I am much more worried about.

1) A crash in China.

2) A major liquidity/suspension/redemption "event" in one or more of the BIG ETF/mutual fund providers. Templeton, Blackrock, EFTS, Vanguard etc.

3) Front-end yields in the U.K. becoming unhinged.

2) is particularly worrying I think. CBs have all their guns aimed at liquidity in the interbank market and to sooth any pain in systemic banks; that makes sense. This is what destroyed us in 2008. But what if liquidity failure spreads through the ETF/mutual fund arteries? They'll be playing catch-up! Of course, I concede that DBK could be a part of this in some way. But with the German/EZ curve now basically -ve across the entire curve, I think that explains pretty well why DBK and other EZ banks are being shot to pieces. In addition, it probably will be asked to raise more capital soon.

I guess what I am asking is this; what is the difference between DBK and CS? Both are down 65ish % since the highs in 2015. Is the former a bigger turd than the latter?

In the end, I just think the "EZ banking crisis as a global Lehman moment" is yesterday's news, but it sure does look ugly all day long.

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gallam
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July 6, 2016 at 1:49 PM ×

Sorry to keep hammering on about DBK, but the balance sheet has assets of 1.74trn and tier 1 capital of about 56bn EUR.

As per CV above, it is plain as day that they need more capital. But where will roughly EUR100bn come from? Certainly not from the German taxpayer whose representatives just said no to Italy playing that card.

Maybe they could have a rights issue?

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Doomsday
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July 6, 2016 at 1:50 PM ×

So everyone's talking about "Helicopter Money". Because we've had Z/NIRP, QE, bailouts etc as indirect debt monetization, but now apparently we need direct debt monetization.

Ofc monetizing debt will lead to corrosive levels of inflation (as Weimar Germany, Zimbabwe, Argentna etc found out). Is it only me that thinks people who call for Helicopter Money are fucking clueless. All feedback appreciated.

Long: gold, land and guns (in size).

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washedup
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July 6, 2016 at 1:59 PM ×

Interesting concept, this 'wall of worry'. In times of positive investor sentiment it serves as a healthy workout, like that rock climbing wall at the local gym - good for the glutes and hams u know.
In times of poor investor sentiment it acts like the wall from the game of thrones - the odds of being smashed to smithereens are high enough as they are, and even if you cross it, there are wildlings and the army of the dead on the other side.
Do I have a point here? Yes, IMHO its more important to focus on how the market reacts to these issues, and if there is a change in that reaction function, than to the issues themselves - all ideas on a neat way to do so welcome.
@Abee - India is looking like a mini disaster to me with NPLs rising at an alarming rate through the banking sector - the one that counts that is, not the foreign banks with the pretty receptionists and puny lending - just wanted to point that out since you seem to be seeing something different.

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Skr
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July 6, 2016 at 2:26 PM ×

The sad and crazy thing about "helicopter money" is... It will probably end up in the same place as QE money... In the stock market.

Never underestimate the power of greed.

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AL
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July 6, 2016 at 2:35 PM ×

CV, I totally agree with your point 2. While ETFs have become hugely popular in the post Lehman landscape, I am convinced that they still need to pass few tests in stressed markets. In what is certainly a contrarian move, we took the decision to eliminate such instruments from our portfolios at the beginning of the year .... Life of a stock/bond picker is certainly not easy these days, but I much prefer to own what I know.

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Anonymous
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July 6, 2016 at 3:15 PM ×

I understand problems where there is liquidity mismatch between the etf and the underlying, but where such mismatches do not exist (i.e. the total market etfs, sector etfs) where is the problem ?

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Anonymous
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July 6, 2016 at 3:19 PM ×

ISM beats by 5 standard deviations, DJIA drops nearly 100 points. Stupid fucks.

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Bruce in Tennessee
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July 6, 2016 at 3:27 PM ×

Well, I am an amateur, as I've stated before...but today I bought more AU and continued TLT as my main ideas....

I certainly wouldn't touch Dougie's TBT here...

(I have not dabbled in gold in decades, lads....)

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Eddie
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July 6, 2016 at 3:31 PM ×

I understand problems where there is liquidity mismatch between the etf and the underlying, but where such mismatches do not exist (i.e. the total market etfs, sector etfs) where is the problem ?

How exactly does "buying the whole market" work in your world? In mine it is done stock by stock or through futures (where the latter reminds my of portfolio insurance...).

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July 6, 2016 at 3:32 PM ×

economic data mean nothing now, pay attention to margin hike worldwide and CVA adjustment...
Cocos are here to collapse...

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checkmate
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July 6, 2016 at 3:43 PM ×

On a positive note may I send a thank you to Lloyds who so recently redeemed some bonds of mine. I suspect hindsight will show they did some people a favour.

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CV
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July 6, 2016 at 3:46 PM ×

"I understand problems where there is liquidity mismatch between the etf and the underlying, but where such mismatches do not exist (i.e. the total market etfs, sector etfs) where is the problem ?"

Liquidity problems in one market begets liquidity problems in another market. The nightmare scenario, in my view, is one of counterparty risks. What happens if iShares funds suddenly stop trading because its parent, Blackrock, has problems or is roiled by liquidity problems in key parts of its fund structure. These guys are the new AIGs in my view. They won't "go bust" as such, but they are counterparties to ALL of us in some way, and as a result they are the sharp end of the stick. And the kicker is ... there is no fail-safe liquidity if they have problems. CBs won't be able to help, at least not initially.

Now, don't get me wrong. I am not saying that this is absolutely certain to happen (I am not a Cassandra you know!), but I do think it is worthwhile keeping an eye on, especially in the non-financial corporate debt market, where we know bubbles likely are forming due to the hunt for yield.

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AB
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July 6, 2016 at 3:46 PM ×

Bank Stocks

Is it possible that bank equity is falling in value because the business is horrible, not because their is liquidity/solvency crisis looming?

How much will you pay for equity in a business that cannot make a sufficient ROE? Liquidation value? How do you feel about book value?

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CV
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July 6, 2016 at 3:47 PM ×

Well yes AB, on this ...

"Is it possible that bank equity is falling in value because the business is horrible, not because their is liquidity/solvency crisis looming? "

This is what I was trying to say on DB.

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Anonymous
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July 6, 2016 at 4:17 PM ×

Anon 3:19 here. As I said above, good to see fundamentals winning the day in US equities. All time highs by tomorrow...

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CV
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July 6, 2016 at 4:19 PM ×

Current action is a case in point. Basically, all major CRE funds in the U.K. now appear to be locking up. What happens next then? Well obviously some money can be raised, vultures will be circling etc. But at the end of the day, the chap who has his funds locked up will need to sell another part of his portfolio to raise cash, etc etc.

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Anonymous
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July 6, 2016 at 4:33 PM ×

Re: Uk property. These fund lockups are wonderful - the best thing that could happen to the Uk would be a 50% crash in property prices (commercial & domestic). Then Brits could stop speculating on this ponzi scheme and focus on re-balancing the economy. Let's hope it crashes soon.

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abee crombie
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July 6, 2016 at 4:44 PM ×

@ washed. I think the NPL's in the public banks has been an issue for sometime, now they are finally deciding to realize them. I think this is a good sign frankly. The public banking sector, which is still much bigger than ICIC and HDFC and the few other privates has been a big source of dismay for india bulls. Cleaning up the banks, recapitalize them, the thinking goes will help with infrastructure spending etc

RE DB/CS etc. When does the dividend yield become attractive enough as well. But if these num nuts in ECB want to see CoCo's bailed in, go for it. Stoxx will be 20% lower and they will have wasted a big QE bullet. Not sure what Draghi is thinking here. Markets are giving a pass at free money, yet they wont open the wallet? Just freaking bail out the banks alredy

@ Doomsday, agree it will end badly. Just think its a lot farther away than most expect.

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Anonymous
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July 6, 2016 at 5:05 PM × This comment has been removed by a blog administrator.
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Anonymous
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July 6, 2016 at 5:54 PM ×

Italians banning short selling of banks.

MM banning btfd comments in Spooz due to his offside short position ;))

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Anonymous
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July 6, 2016 at 7:18 PM ×

We would hike but well, the data wasn't great and bah blah.... maybe next time...
Why am I not surprised?

Janet, you fuckwit, you won't ever hike because your bosses have $20tn of debt that they can't afford the interest payments on. Period. Trade accordingly.

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Macro Man
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July 6, 2016 at 7:39 PM ×

@ Anon 5.54 No, I ban worthless comments from useless trolls who parrot the same useless comments every day (that the market goes up, that is. When it goes down, funny enough, they don't stand up to be counted.)

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Anonymous
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July 6, 2016 at 8:09 PM ×

@MM, Anon 5.54 here, just pulling your leg (hence the smiley face). Do Spooz ever go down though? Not on FOMC day it seems... :) Might follow those btfd-ers and get long into this...

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Anonymous
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July 6, 2016 at 9:18 PM ×

When will we see mean reversion of the long bond and gold? Are they peaking this week?

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Anonymous
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July 6, 2016 at 11:22 PM ×

MM ... an idea for tomorrow's post: Will this be the most important US jobs number evah? Will May get greatly revised upward? Will June be almost goldilocks? And will the US market use all that to break on thru to a new all-time high?

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Skyguy
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July 7, 2016 at 12:00 AM ×

Yield curve on JPN govt debt is negative, I'm seeing -34 bp for the two year and -37 bp for the 5 year...


Still trying to get my head around it.

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Anonymous
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July 7, 2016 at 3:26 PM ×

CV and others,

I looked at Annual and Semi-annual reports from Proshares regarding leveraged inverse ETFs and see that counterparties in Swap Agreements include DB and Credit Suisse...

Besides CP risk and ETF-vendor liquidity risk, could these be a ticking time-bomb for other reasons?

Thanks for your thoughts.



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Con Sys
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July 8, 2016 at 10:29 PM ×

U.S. Bonds tend to add value during the 3rd quarter * when market risk profile ( price based variable #2 ** ) is "high" ***

* http://seekingalpha.com/instablog/1109542-market-map/4897108-market-map-allocates-long-bond?source=instablogs_title

** https://stockmarketmap.wordpress.com/2015/11/14/market-map-model-tactical-asset-allocation-using-low-expense-index-etfs-2015/

*** http://seekingalpha.com/instablog/1109542-market-map/4757426-market-map-allocates-cash

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