Down the hole?

It's Jackson Hole week, and markets are at least slightly abuzz at a speech given by Stan Fischer wherein he observed that the Fed is close to its targets.  This in turn has been taken as a sign that the door for a 2016 rate hike remains open, even though the immediate policy outlook received short shrift from his speech- it was mostly focused on the issue of low productivity growth.  Still, the belief is there that perhaps the core of the Fed is edging away from its permanently glass-half empty worldview, given that Dudley has also seemed receptive to a rate rise recently.  The million dollar question, of course, is whether Janet Yellen also cleaves to this belief, and if so will she get off the fence in Jackson Hole.

The preponderance of historical evidence suggests that the answer to that question is an unequivocal "no", of course.  For the past few years, the slightest wobble at home or abroad has served to exercise a veto power over policy normalization (which is really what the current campaign is all about), and it seems difficult to credit that much of a radical change to that modus operandi is in the offing.

That being said, it does seem as if the domestic economy's momentum has improved recently; the Atlanta Fed's GDP Now measure looks for Q3 growth just shy of 4% annualized.  To a large degree, this represents payback for the weakness of the prior couple of quarters; still, payback is a helluva lot better than an empty hole where growth was supposed to be.


A natural reaction is to observe that the GDP Now forecast is usually overly optimistic.   Natural, but incorrect.   Macro Man went back and tabulated the final GDP Now forecast for each quarter along with the eventual out-turn.  In point of fact, the Atlanta measure has under-estimated growth by a cumulative  1.4% over the last five years, as illustrated in the chart below.

  
So if the GDP Now forecast is correct (and admittedly it could still be revised down, perhaps dramatically), that would represent the strongest rate of GDP growth in two years, and take YTD growth back to a 1.87% annualized rate, which is pretty close to trend these days.  Obviously a forecast is a pretty flimsy foundation for a policy shift given the Fed's past behaviour, which is no doubt why many on the committee want to see the forecast come to fruition before countenancing another (oh-so) modest shift in the policy stance.  On the other hand, as the old saying goes money talks and bullshit walks, and Esther George at least seems tired of the Fed's two-year stroll down Uncertainty Lane.

While fixed income puts over the past few years have been the greatest waste of money since buying the Pets.com IPO, it's interesting to note that bonds have entered what might be termed the "corridor of uncertainty", pictured below.   The current price zone has represented the support level since the Brexit vote while also serving as resistance prior to that episode.


As noted last week Macro Man trimmed some of his tactical fixed income short before the minutes, and he will almost certainty cut the rest before Janet takes the mic in Wyoming.  However, it is worth bearing in mind that if she decides that part of a "resilient monetary policy framework" is not panicking every time a Chinese noodle stand runs into a spot of bother, bond could really go down the hole (both literal and figurative.)


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Anonymous
admin
August 22, 2016 at 8:47 AM ×

You can try and be as clever as you like but the fundamental question is will Yellen back a hike ?
The FOMC members have lost credibility in trying to steer the short end, they forget that FFs settle at policy, 0 or 25; they don't settle at 8bp (the level where they would like us to price the chances of a hike), and after the Jun July debacle - the Fed need to work a lot harder to move the curve.
Sep has 4bp of hikes in, Dec has 15. But who wants to chase 7 bp (Dec gets to 22 priced in just before) and hold that position for 4 months when there is 15 bp of downside and the Fed are scared of their own shadows. And the mkt is not prepared to chase up the Sep probability from 4bp.....Fisher backed 3-4 hikes back in Feb / March - hardly voted that way has he ???

So will Yellen signal Sep hike at J Hole or not......mkt will only act when she gets serious.....v hard to trade !

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Leftback
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August 22, 2016 at 1:04 PM ×

Another summary below along the lines of "it's the FOMC Politburo that matters". Interesting that we should use a Cold War analogy about a group of much-derided Soviet leaders who only slowly reacted to the changes in the world around them…? So while we have heard the arguments about Fed credibility before (and agreed), we think this time there really is a wolf.

http://www.marctomarket.com/2016/08/fischer-joins-dudley-waiting-for-yellen.html

We would posit that if the FFR market is pricing in 4 bps in September, that they currently have a possible ~20 bps of moving to do and that a combination of Dame Janet's claws and a >225k August jobs number would probably suffice to take them there. In addition, if MM were to prove correct regarding Q3 GDP, then Dec FFR may actually have to move ~30 bps as well !! By this scenario, there would be two hikes and we would end the year with FFR at 0.75% and Granny would be getting about 1% on her savings account!! Many Europeans would dream of that.

With regard to US FI, it's probably going to be the Bear Flattener, with less movement at the long end than the front end, but nevertheless, MM's chart tells its own story, and we would be inclined to stay well away from US fixed income and all of its rate-dependent bastard children (and yes, even my beloved mREITs).

We are short IYR. Multiple large black clouds usually indicate there will be an imminent downpour. Even in August…

The oil squeeze may be over. A small commodity market can sustain a sharp squeeze for a couple of weeks via extremely heavy-handed manipulation of the options market (yes, we see what you are doing behind the curtain) but fundamentals (rig count, over-supply, storage) and FX trends remain as bearish as ever for WTI. We can only assume that the coincidence of the "new bull market in oil" (LOL) with the expiration of August futures and options was just that - a complete coincidence*.

Have a great week, all.

* Engage irony detector.

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Nico G
admin
August 22, 2016 at 2:49 PM ×

one of the most respected market timers of all time forecast for Q3

https://www.youtube.com/watch?v=8-dPqzXDdgw

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Leftback
admin
August 22, 2016 at 3:07 PM ×

Ha. Tom Waits is unique.

Another song for the week, reflecting Dame Janet's summer of indecisiveness:
My Ever Changing Moods

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

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washedup
admin
August 22, 2016 at 3:24 PM ×

Nico - brought back memories of 'The Wire', one of my favorite shows of all time.

I do believe the specific prescription suggested by the song, is to wait for these guys to assemble in the conference hall, then lock the door, jam some big boulders against it, and throw away the key permanently - voila - better society!

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Anonymous
admin
August 22, 2016 at 3:25 PM ×

Throwing this out there...

SoS

https://www.youtube.com/watch?v=4fWyzwo1xg0

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Armchair expert
admin
August 22, 2016 at 4:13 PM ×

US equities are being slowly accumulated through this thin summer trading. Once September arrives there will be a MASSIVE breakout to the upside, taking SP500 to 2300.

There will be NO rate hikes from the Fed in 2016, and probably none in 2017 (unless Trump wins the presidency, in which case the Fed will hike rates to 5% overnight, crash the world's financial markets and blame it all on him).

The USD will be forced down by the Fed, back to 2014 levels. Euro will rise heavily as a result, causing further problems in Europe. However the EU will collapse anyway, regardless of USD effects, and we will see the Euro abolished before 2020.

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Nico G
admin
August 22, 2016 at 4:41 PM ×

dude that's a lof of work from an armchair

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Anonymous
admin
August 22, 2016 at 5:04 PM ×

I will make a prediction here. My proprietary model suggests that 19000 is a critical level(major top) for the Dow Jones index. I'm not calling a strategic short.. What I mean is that this bull market which has lasted for the past 7 years is effectively over. Maybe we have a few more puffs left in this market, but I would be very cautious in buying risk assets at this juncture.

Now as to what will act as a catalyst.. I do not know. My guess is that since it was the CBs that got us here, it will be failure on their part that brings this market down. But then there is a lot of bricks in the wall of warry(China, Eurozone, recession in US) and any one of them could be the trigger.

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washedup
admin
August 22, 2016 at 5:15 PM ×

@anon 5:04 - given how useless everyone's predictions have been, we have all collectively decided to focus on the venue, more specifically the piece of furniture from where the prediction is made rather than the forecast itself - so, given that you seem like a recent arrival to the board, we will give you another chance - do u say this from an armchair, hammock, office chair, or ottoman?

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abee crombie
admin
August 22, 2016 at 5:45 PM ×

from a noted bond bear and Fed hater

http://www.cnbc.com/2016/08/18/paul-singer-and-elliott-management-say-bond-market-breakdown-to-be-sudden-intense-and-large.html

I wouldnt be surprised if Yellen makes a hawkish speech that equities rally on the back of financials and it would probably be extra good for EU equities in that case. Really depends on what the Bund in addition to US 10year does. But agree with LB, more of flattening trade in the end vs long end

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johno
admin
August 22, 2016 at 6:30 PM ×

With all the talk of "r-star", it's fun to re-read Montier's piece:
https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/the-idolatry-of-interest-rates-part-i-chasing-will-'o-the-wisp.pdf?sfvrsn=4

Slow days. Lightly positioned this moment, outside Chinese-buyer merger arbitrage bets, which is a quasi-macro trade.

Any thoughts on Chinese H shares, e.g. FXI? Ostensibly cheap market and PPI oya forecast to hit zero later this year, after >4 years of deflation.

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Anonymous
admin
August 22, 2016 at 7:14 PM ×

I am adding shorts on SP500 here. Too much optimism had been priced in, a correction is very close. My window is the next two weeks. If I am wrong, ready to cut loss and wait for another signal.

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abee crombie
admin
August 22, 2016 at 7:36 PM ×

Aside from the high correlation to 10y rates, and my view on that, I am reconsidering my view on utilities after looking at relative performance...

https://postimg.org/image/joimnjqq9/

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12yo HFM
admin
August 22, 2016 at 7:48 PM ×

This market is so easy to trade that I've taken time away from the office, firstly for a baecation, and recently to further some political goals:
http://www.kmov.com/story/32807204/12-year-old-running-trump-campaign-office-in-colorado

I note that US equities are still moving up however, so our thesis and positions look good. EZ-money. Laterz.

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Macro Man
admin
August 22, 2016 at 8:28 PM ×

So 12YO HFM expects EZ returns on Spooz? Is he short then?

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MrBeach
admin
August 22, 2016 at 8:29 PM ×

As much as I want to believe Yellen and company are ready, willing and able to raise in September and perhaps in December, we have to remember that perhaps the PBoC isn't too thrilled with a rapid rise. Will they fire off a warning flare this time around like they did last August?

At some point the endless ZIRP/NIRP/QE is going to eat its own tail - perhaps the glut in oil is the start of that process. With capital nearly free, pullingl hydrocarbons out of the ground to sell at a profit has been a good deal. When everyone jumps into this business it seems inevitable that oil prices will crash. With the crash in oil, will come a crash in the profit margins up and down the supply chain. This leads to sovereign debt crises in heavily indebted leveraged producers. This comes back to haunt banks and SWFs that have lots of exposure.

In July of 2007, Citigroup's Chuck Prince famously said "“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing." He was out of Citigroup by November of that year.


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Nico G
admin
August 22, 2016 at 9:06 PM ×

August 2016 a.k.a "Death by Theta"

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Armchair expert
admin
August 23, 2016 at 12:55 AM ×

We will have QE for the rest of your lives... why? Simply because with $20 TRILLION of US sovgn debt, any reversion to long-term avg rates would implode the world economy. Thus the Fed (and other central banks) are PRAYING for inflation, and doing ALL in their power to make it happen. Boosting asset prices via endless QE, ZIRP/NIRP etc. Eventually this will trickle into wages, ensuring a soft default on US govt, corp and private debt loads.

You can take all your financial theory textbooks and burn them. Central Banks are the ONLY fundamentals in markets this past 6 years and for the foreseeable future.

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Flowthrough
admin
August 23, 2016 at 1:29 AM ×

LB, not sure I would view oil as you do.
Yes, OPEC production freeze/cuts are BS, but that was just to spook shorts. Have been inventory drowns for several months now, production is declining and we are in weak shoulder season. If I were OPEC i would spike the price a bit in current shoulder season and then let time work.

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Anonymous
admin
August 23, 2016 at 1:43 AM ×

they last seven years have been death by theta.
that said, i think bonds look vulnerable on that chart, shorts covering/capitulation on the break above 170.
fed continues to hog the spotlight and "facts" on the ground are good enough to act anytime, while bond sentiment is pretty extended.

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Anonymous
admin
August 23, 2016 at 2:08 AM ×

http://ibankcoin.com/flyblog/2016/08/22/investors-begin-to-worry-about-the-long-term-prospects-of-a-government-controlled-japanese-stock-market/

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AW
admin
August 23, 2016 at 7:04 AM ×

Death by Theta!

Feel like that should be an album name or something.

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Eddie
admin
August 23, 2016 at 8:03 AM ×

Probably the sequel to Mantas' Death by Metal... Chuck Schuldiner's humble beginning.

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Anonymous
admin
August 23, 2016 at 9:41 AM ×

US national debt is $21 trillion. In 2000 it was about $3-4 trillion. There is a problem with paying higher interest rates on such a large amount of debt. We already pay enough interest to China to fund their entire army’s budget. You're welcome.

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Anonymous
admin
August 23, 2016 at 9:46 AM ×

US state pension funds (South Carolina, Hawaii etc) have resorted to selling premium in size on the SP500. We all know that this produces a good yield, and that any risks are minimal (as AIG found out during the GFC). Anyway, when they go bust, the taxpayer can just bail out no? You're welcome.

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Anonymous
admin
August 23, 2016 at 10:20 AM ×

Nothing but good news, BoE ZIRP/QE is creating a massive pension crisis in the UK:

http://www.bloomberg.com/news/articles/2016-08-23/u-k-pension-plan-shortfalls-have-investors-digging-for-answers

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Anonymous
admin
August 23, 2016 at 11:20 AM ×

Anon 10:20 this is not a UK problem alone. People in their 30s today won't live to see a pension, but they sure will get the benefit of enjoying paying ever increasing pension security payments. As the future payoff for these go down, they effectively transform into a 100% tax, money which you will never see during your life again. In many European socialist countries these can be up to 6% of the gross income, on top of your normal tax rate which is very very high imo and will be going up. Just another consumer group to get completely whacked. A complete catastrophe.

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Bruce in Tennessee
admin
August 23, 2016 at 1:14 PM ×

It isn't that hard to see what's happening globally..as most realize, ultra-low interest rates for a prolonged period of time are hurtful to the average Joe on the street. Not just pensions, but for a reasonable return on their money with reasonable risk. Wonder why Joe is avoiding the stock market? They've experienced two 50% corrections in less than 2 decades...putting money to work here...is that a "resonable risk"?

I imagine central banks will continue until we're all broke. I can also imagine inventive ways to create new government revenue in a time of eternal ZIRP...why not increase taxes on equity transactions rather than profits? (If that is the only game making money.....?)

The possibilities are as numerous as the stars..

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Anonymous
admin
August 23, 2016 at 1:53 PM ×

A minor quibble, but your GDPNow vs. Actual GDP chart uses the final revised GDP figures (including the periodic comprehensive multi-year revision), not the original release at the time of the advance GDP print--which is what the Atlanta Fed estimate is shooting for. This may have been intentional, but if not, it does seem a certain data provider's "actual release" field isn't pulling the correct values at the moment.

Oddly enough, the cumulative difference with the actual advance values still comes to -1.4 pp, but even so, isn't the appropriate nudge a -0.1 pp average underestimate (on a quarterly basis), not a full 1.4? Most of the cumulative miss comes from 4 quarters in the first half of the quarterly sequence.

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