The Dream Team

Say this for Theresa May:  when she said that "Brexit means Brexit", she wasn't kidding, at least according to her Cabinet appointments.  Indeed, at first glance it's a Brexiteer's dream team, with arch Eurosceptics in charge of negotiating the UK withdrawal (David Davis) and international trade (Liam Fox), an arch buffoon as Foreign Secretary (Boris, who else?), and a new Chancellor notable only for his utter blandness (Philip Hammond.)

In a sense, these are refreshing appointments, as we'll now have firsthand evidence whether the breezy assurances of quick free trade agreements will come to pass.  If they do, then the Dream Team can pat themselves on the back for a job well done and an important promise fulfilled.   If not, well  then one might have to consider whether they were telling porkie pies to begin with.

Today marks a potentially significant milestone, with the BOE perhaps set to break half a decade's worth of lethargy and actually doing something.  Contrary to yesterday's commentary, it is perhaps not quite so certain that the Bank moves today; in addition to five years or so worth of inertia to shake off, one could argue that a comprehensive easing program is best enacted in the context of next month's quarterly inflation report, which will have at least an initial read on post-Brexit data and be able to provide a better forecast than merely sticking one's moist finger into the breeze and hazarding a guess.

For choice, Macro Man still reckons that the Old Lady cuts by 20 or 25 bps today in the effort to prop up the "Brexit ain't so bad" narrative being promoted by both the Dream Team and the FTSE.   QE is probably going to wait for the QIR, however.  In the event of a no-go, one can imagine a further squeeze in sterling...though as noted yesterday, Macro Man would tend to view that as a selling opportunity.

It seems clear that while positioning may be large relative to liquidity, it's probably less large than it was at the end of last week.  Here's a fun fact for you: Monday's 4.07% squeeze in GBP/JPY was the third largest daily rally in that pair since the end of the Bretton Woods system in 1993 1973.  Unfortunately for believers in the "Brexit Bounce", the history of prior rips in GBP/JPY is not particularly encouraging.  



Friend-of-the-blog Matt Gittins of SpectraFX cobbled together an interesting table showing the top 10 daily squeezes of the post-BW era, then plotting what happened next.   This is reproduced below.    As you can see, while the rally usually carried on for another week or so, returns over the more meaningful 30-50 day periods were generally negative.  That GBP/JPY couldn't even manage to follow through yesterday isn't terribly comforting for would be bulls.


Oh, and in case you were wondering, VW still sucks.  They had the temerity to bid your author $500 for the car, or less than the bill for the work they've already done on it.  Amusingly, there's a class action lawsuit seeking recompense for the very problem that Macro Man has had.   Hey VW, what's another billion or two between friends?

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Anonymous
admin
July 14, 2016 at 7:17 AM ×

Cutting 25 actually perpetuates the "there's trouble, I told you so" story. So, given that its the puppet carney at the helm, yeah he probably will. Though personally, I don't see why you would use up these bullets just yet. Life hasn't stopped here and you still can't get a table in a restaurant!

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checkmate
admin
July 14, 2016 at 7:25 AM ×

Carney probably will move the rate, but one might ask has the FX move not already done the job for him?

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12yo HFM
admin
July 14, 2016 at 7:32 AM ×

As we foretold, the Japanese are bidding USDJPY relentlessly at the start of this EU session, and equities are going parabolic. The Dow is up 100 points in minutes. This game is better (and easier) than PokemonGO.

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Anonymous
admin
July 14, 2016 at 7:36 AM ×

BoJ talk of "Perpetual" bonds.

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Hotairmail
admin
July 14, 2016 at 9:01 AM ×

Apparently Clarkson is being lined up for a big job to join his buddies Hammond and May.

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checkmate
admin
July 14, 2016 at 9:02 AM ×

"Perpetual" bonds is helicopter money if you use it through PB's to reduce the tax burden. On the understanding of course that next double entries are eventual write off and a contra entry on the imported inflation via the currency channel.

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Polemic
admin
July 14, 2016 at 9:21 AM ×

zero coupon perpetual = cash

VW - give your boys a summer project. Be good for them. Strip te car down to components and put separately list them all on Ebay. Would be a great learning experience in many ways for the summer holidays,

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Anonymous
admin
July 14, 2016 at 10:46 AM ×

For CBs the temptation to be seen doing something (meddle) is always great, so perhaps we should give Mark Carney a pat on the back. As for the other pair in Tokyo: Dumb and Dumber?
https://www.youtube.com/watch?v=Ab5-rrQ0nOs

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northshore
admin
July 14, 2016 at 11:18 AM ×

May: "Monetary policy – in the form of super-low interest rates and quantitative easing – has helped those on the property ladder at the expense of those who can’t afford to own their own home."

Hammond (2012): "We started living a lifestyle both in private consumption and in public consumption that we could not afford. We borrowed to top it up ... now the day of reckoning has come and we are adjusting ... Some people are unwilling to accept responsibility for the consequences of their own choices": http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9244414/Families-must-accept-share-of-blame-for-Britains-woes.html

Assuming they meant what they said (probably not), guess we'll be finding out just how independent the BoE is.

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checkmate
admin
July 14, 2016 at 12:07 PM ×

Hohoho the BOE said ,no prezzy for you the FX already gave at the till. Maybe Carney is not so silly afterall. Something to be said for keeping your powder dry especially when there is so little of it left.

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checkmate
admin
July 14, 2016 at 12:11 PM ×

Mr Hammond,
So the govt of the day and the BOE and their intermediaries had nothing to do with all of those decisions that were made. They did not shape them or drive them in anyway at all? Then prey tell what the fuck use is any policy that arises from govt and it's satellite Institutions? Please put your head back up your arse where it really belongs. Apologies forum but politicians of all ilks really piss me off.

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Anonymous
admin
July 14, 2016 at 12:19 PM ×

Actually, I think it's a cunning plan - get Brexiters in the firing line, and let them eat their own dogfood. When by Xmas it's clear they have no clue, fire them and say "see they can't do a thing. Let's roll back (to at least a very soft brexit)"

Or, alternately, it's a different sort of cunning plan https://www.youtube.com/watch?v=AsXKS8Nyu8Q

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Bruce in Tennessee
admin
July 14, 2016 at 1:07 PM ×

http://fortune.com/2016/07/13/middle-class-death/

" The report found that as much as 70% of the households in 25 advanced economies saw their earnings drop in the past decade. The study tracked income brackets, not individual households, from 2005 to 2014. That compares to just 2% of households that saw declining incomes in the previous 12 years."

It seems to me the underlying cause of Brexit, and the dissatisfaction of those workers still in the EU, gets back to this, and probably the underlying cause of these lower incomes is ZIRP and NIRP and global government policy....I don't see any reason incomes should go up if these policies are continued going forward...those "lucky" enough to have disposable income to invest AND who pick the best investment of the moment AND can time the markets to within a hair of their weekly turn....well, you know.. :]) (it's a moustache...)

BTW, if this study is true, forget GDP...if 70% of households have seen a drop in earnings, have we avoided a depression? Just askin'...



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Tim Schulace
admin
July 14, 2016 at 1:21 PM ×

For all the derision being heaped on the Brexiters, where is the scorn for Osborne and Carney who told absolute bald faced lies before the vote, talking about huge tax increases and rate hikes respectively only to create a revisionist history once the vote was cast.

There is far more pain ahead for the EU relative to the UK. If rate cuts and QE had moved Betty to 1.30, carney would hurt his hand patting himself on the back. Instead, scorn is heaped on people that voted for a silly little thing called sovereignty.

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Anonymous
admin
July 14, 2016 at 1:57 PM ×

Tim, you are a voice in the wilderness. Most here find no problem with native Britains forced to compete for jobs with millions of unskilled laborers sent from the EU. They are worshipers of the "Inner Party" who disdain "individualism", constantly mock and belittle us "Proles" and treat the "Ministry of Plenty" as their god given right to endless, infinite wealth. Long live "Airstrip One"

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Anonymous
admin
July 14, 2016 at 2:14 PM ×

its starting to feel like a 99 style moonshoot is about to happen. this time the bubble is yield and everything that has any of it, doesn't matter if they arent bonds. crowding out of fixed income into equities. and we all know rates cant go higher

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Anonymous
admin
July 14, 2016 at 2:18 PM ×

This is a strong potential warning of things to come. I'm not a bear, but this is not welcome news to the ECB

"Another German Bund auction failed. €5bn 10y Bund launch gets only €4.783bn bids as first 10y sale w/ neg yields."

Just sayin'

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Anonymous
admin
July 14, 2016 at 2:54 PM ×

"Gaff"
"Malarkey"
Love the Anglicisms :)
Ta
JL

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Macro Man
admin
July 14, 2016 at 3:16 PM ×

@ Tim Schulace You are the first person to ever accuse me of not being hard enough on Carney. Must try harder.

As for "sovereignty", that's all well and good, but as currently defined by most Brexiteers it smells an awful lot like "getting all the benefits of EU membership while incurring none of the obligations." Gee, who wouldn't want that? Of course, in the real world, there's no pot of gold at the end of the rainbow, no 350m quid per week for the NHS, and you can't always get what you want.

But I really don't want to rehash these pro- and con- arguments again, so let's look forward.

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Polemic
admin
July 14, 2016 at 3:22 PM ×


Another goal for the Polemic FCBICBAUTAFUM 'Fade CB expectation into CB announcements unless they are for unchanged model."

I do wonder if it should encourage see to question the blind faith in the rest of the major CB's to keep pumping. AsMM says, BoJ expectations are Hot ... i say SCORCHING HOT. But then so is the BoJ s ability to disappoint.

Markets are hard to call from here because events MM's tone yesterday are garnering retrospective reasoning for a rally that many didn't see. But nothing has really changed has it? CB policy expectations have flipped to extremely accommodative on the expectation of a future global slow down caused by .. errrrr.. Brexit? I don't think so. I really don't. There are easier way to remove global Brexit risk that fk up the world's monetary systems.

Other countries wi punish UK on Brexit to the point where they themselves feel pain ( i.e. the global impact form Brexit) at which point 'something will be done' Mutually assured destruction tends to produce Cuba crisis resolution. So, whilst UK may well take a kicking on Brexit ( or may not) Global impacts will not be allowed.

Italian Banks, Dijsselbloem has already said they won't be allowed to damage EU. He is sweeping them under the carpet with his Bissell broom.

By the way. Asia, China et al. Seemed to have slipped back into the pack in the Peloton of disaster. China blow up dates come and go like BoE rate changes.






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Tim Schulace
admin
July 14, 2016 at 3:45 PM ×

MM,

Lumped in Carney more on the fear-mongering than anything else. Happy to see Brexiters in positions where they will have to eat their own cooking. Will be curious to see how it all plays out. Unlike the fear-monegerers, I do not portend to know the future. I know Merkel, Junker, et all will try to make it as painful as possible to the point where they will cut of their own noses.

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Sigma
admin
July 14, 2016 at 5:12 PM ×

Hi guys,

I am considering a leveraged strategy to invest equal wights in UK, EU and US financials, all financed with yen.

The leverage would be 1:1 and target return of 100% on the equity (in USD).

Three questions:

1) What is the probability of reaching the target return?

2) What is the probability of wiping out the equity completely?

3) What clients I should approach with this strategy?

Thanks

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Anonymous
admin
July 14, 2016 at 5:38 PM ×

Martin Whetton:
Fortress' Japanese REIT getting *paid* to borrow as swap rates go negative.

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Polemic
admin
July 14, 2016 at 5:54 PM ×

Sigma.

1 see 3
2. see 3
3. If you are asking these questions then I advise you try the ones in the pub at closing time. Or get an online casino.

One question back to you .. Are you regulated?

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Anonymous
admin
July 14, 2016 at 5:56 PM ×

WSJ: Hamada hinted at what we have said all along: helicopter money would be the precursor to hyperinflation.

As to whether the BOJ engage in further easing they said:

"It depends on how much stock prices will have recovered and how much the yen's upward momentum will have weakened by then"

So there you have it.

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johno
admin
July 14, 2016 at 5:56 PM ×

MM's skepticism on the BoE was right on. I happen think it was a great decision by the BoE. A free-falling pound does not inspire confidence, so squeezing speculators and introducing some two-way action was a shrewd move. Probably sets up for a decent short though, as MM suggests.

The move in USDJPY got my attention today. I'm still watching. Interesting remarks by Hamada on Reuters and Honda on Bloomberg. Still looks like bonafide helicopter money, which would require law change, is unlikely. A fiscal package plus some additional stimulus by the BoJ does seem likely, but I'd think they'd have to a lot more than the mooted 10 trillion of spending to get USDJPY much higher. On the topic of monetization, I thought this was a good read: http://libertystreeteconomics.newyorkfed.org/2016/06/the-rapidly-changing-nature-of-japans-public-debt.html#.V4e_PGNPLdk

Also on the topic of JPY, JPM has observed that the correlation between JPY and the US 10Y and made an interesting point. The large (FX-hedged) flows into USTs by the Japanese (and Europeans) is narrowing interest rate differentials, which is actually supportive of JPY. Hence you get weeks like last where net buying of foreign bonds was the largest since 2005 yet the JPY appreciated.

Thinking about equities and the possibility of fiscal stimulus providing another leg up, it's perhaps worth noting May's "end of austerity" talk. How she figures a 6% deficit is "austere" I'm not sure, but the rhetoric is worth noting for those looking for incipient signs of a global trend towards fiscal stimulus before the current economic cycle is over. I think most of us are expecting fiscal stimulus after the cycle ends, which would play into our (or is it just my?) fantasy of buying equities on the cheap. Beware of fantasies. 12yo HFM might have to up his SPX target to 3,000 ...

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12yo HFM
admin
July 14, 2016 at 6:18 PM ×

@Sigma: Sounds sick dude. Just to say, the correct spelling of 'weights' looks better in the glossy brochures... but onto answering your questions:
1) Extremely low
2) Extremely high
3) One's who a) are incredibly stupid, and b) have f*ck you money

Alternatively you can follow our investment approach. We operate an event-driven, long-only US equity asset allocation model, implemented via delta-one products. That is to say, we buy ES futures on dips ;)

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Polemic
admin
July 14, 2016 at 6:44 PM ×

Loving 12yo HFM

Hats of to the real person behind him. Though I am half hoping that it s actually MM in disguise.

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washedup
admin
July 14, 2016 at 7:16 PM ×

@Pol - I'm with u - imagine what he'll achieve when he is 13!

@12yo I have to ask in which 'events' drive your event driven strategy? Waking up in the morning?

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Anonymous
admin
July 14, 2016 at 7:29 PM ×

washed the event is the dip. ;)

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12yo HFM
admin
July 14, 2016 at 8:19 PM ×

@Anonymous 7:29: Correct. #hired

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Anonymous
admin
July 14, 2016 at 9:53 PM ×

Just when you think the markets are about to take a minute, perpetual bonds and BOE crank it up again.

Warsh on Cnbc was interesting today:
https://www.google.ie/url?sa=t&source=web&rct=j&url=http://www.cnbc.com/2016/07/14/fed-cares-more-about-stock-prices-than-economic-data-ex-feds-warsh.html&ved=0ahUKEwj5iZb36vPNAhUqJsAKHWywDs0QqG8IUTAJ&usg=AFQjCNG3jfDy-BqjFyqXw0uNL8XWeMKAtQ&sig2=KwYj8V8nLAewC4ro5ppBqA



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Sigma
admin
July 14, 2016 at 10:50 PM ×

Guys, thank you for the tips.

What I meant by 100% target return is the 100% target return achieved by my strategy by the year end of 2016.

As we speak, for the past two weeks, the strategy (well, the back-best of it) returned +30% (with 1:1 leverage of +15% unlevered returns) in local currency terms and extra +5% from JPY devaluation. By a modest extrapolation, +100% return by the year end on the leveraged version is well within the 95% confidence interval.

As for the end clients, this strategy is being marketed to:

1) FI guys who made a killing this year and want to keep the P&L locked until the year end to get a nice cut for their bonus.

2) Equity guys who were too scared to add on risk in February and the end of June but still hoping to get positive P&L by the year end and some extra digits for their 2016 bonus.

Please do note that, while my strategy can also be implemented with options for only of the upside potential, the cost is too high for a decent risk-reward balance. However, if you want to allocate risk-capital to my strategy, please do it with the double of your risk weight because the gap and drawdown risks on this strategy are so high that you may end up with extra equity liabilities.

If interested, please do dial me up!

On the other hand, 12yo HFM is offering you an alternative dip-buying strategy which many out there will end up following....

A lot of people here in Europe started the year with underallocating to US equities (outperformed ytd) and overallocation to EU and UK equities (both underperformed in EUR), in addition, the allocation to fixed-income was light... These people are now big down behind their benchmarks, so chasing of rallies and dip- buying will the game until the year in the hope get an extra pay-check early next year. You need something really big and unexpected to get scare them off. Forget the Brexit, ...xit, China, US recession, Tramp, etc - to get them of the loop, you need something really surprising, but yet probable, like a war conflict with Russia or civil unrest in Germany.


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Polemic
admin
July 14, 2016 at 11:03 PM ×

Sigma, please do not go out and try to peddle your fund. If you really believe it will work then put your own money to work in it and watch financial Darwinism drive your outcome.

I'll try to be kind but it is bloody hard.

Just look at what you are saying - 'By a modest extrapolation'. My Mother in Law is 90 years old and fit and well. By 'modest extrapolation' she will be fit and well at 180. Now, would you buy that idea? backtesting only models what has happened not what will happen

You are selling a monster risk nuts idea on one hand to FI managers who you say want no risk and on the other to equity managers who have missed the boat. These two statements are contradictory and also irrelevant as the fund is plain bonkers to start with.

'because the gap and drawdown risks on this strategy are so high' - you said it.

I don't think you are sigma, I think we have found the real 12yo HFM.

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Anonymous
admin
July 14, 2016 at 11:40 PM ×

i thought sigma was trolling what he is serious ?

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Unknown
admin
July 15, 2016 at 7:20 AM ×

Bretton Woods didn't end in 1993.

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Macro Man
admin
July 15, 2016 at 11:07 AM ×

Of course it didn't. That was a typo.

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