ECB day bullet points

* It's a quarterly ECB day, which means that Draghi is "in play", but expectations seem relatively muted for this meeting.  It seems a given that some forecasts will be nudged downwards, but given the capacity constraints faced by the QE program it's hard to see them opting to increase the monthly purchases.   The capital key may get some more serious attention, given that that the ECSB is running out of bonds to buy in certain key countries (cough, Germany, cough.)   Reuters "sources" stories have been quite accurate recently, but the recent trial balloon on potential ETF purchases looks like just that- a trial balloon.  Perhaps that one will be referred to the staff for further study?

* Gotta love Carney claiming that the upturn in the UK data has come partially as a function of the Bank's aggressive and decisive policy action.   Uh, Mark, the only hard data we have so far is from July...before you acted.   As for sentiment, that the UK didn't join Atlantis in the bottom of the ocean may also have played a part.  You'd think that with all the victory laps taken by central bankers over the past few years that global growth would be better, wouldn't you?

* That being said, it is interesting to note that export growth in a few bellwether nations has turned up recently.   While a country like Japan is still suffering double digit y/y declines in exports, growth in South Korea, Taiwan, and Brazil is all positive, and Australia is essentially flat.   The acceleration for the first three countries since this time last year is notable.   While some of this may be a currency effect, might it suggest a bit of global momentum building?


*  If so, then perhaps one could expect the various monetary easing measures taken globally to get more traction.   Note that the charts of gold and silver are starting to look interesting again; having put in what looks to be an A/B/C correction, is the primary (up)trend about to resume?


* While Macro Man rarely comments on specific companies, even he can see that aspects of the new iPhone are woefully misguided.  (Can't we all be thankful that the days when these announcements were properly market-moving have gone?)  No headphone jack seems like a loser- what are you supposed to do if your bluetooth headphones run out of batteries?   And trying to charge $160 for a set of stupid-looking headphones that can get easily lost will surely dissuade some potential buyers of the phone.

But then it occurred to Macro Man that he ought to connect the dots.   Consider:
 
* Apple owes €13 billion to the Irish government

* Apple products are made by Foxconn in Taiwan

* Taiwanese exports have recently improved a lot

* Apple's new headphones are ludicrously priced

* The solution becomes clear.   Foxconn has manufactured a slew of these Airpod headphones, and shipped them to.....Dublin.   Consider that €13 billion =  $14.625 billion.   Divide that by $160 and you get approximately 91 million pairs of headphones.   Apple deliberately put a crazy value on the Airpods so they could ship them to Ireland in lieu of a cash payment.   Now Ireland's 4.6 million citizens each receive 20 pairs....which, given the design, might well last them nearly a year!




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Rossco
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September 8, 2016 at 9:14 AM ×

I suppose the success of the iphone will become apparent when we see how many of the mentally impaired sleep on the street for days before its retail launch

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Anonymous
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September 8, 2016 at 9:59 AM ×

http://wolfstreet.com/2016/09/07/u-s-commercial-bankruptcies-soar-great-debt-unwind-beneath-surface/

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Bruce in Tennessee
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September 8, 2016 at 1:01 PM ×

https://mishtalk.com/2016/09/07/multiple-recessions-ahead/

"TINA will let you down....."

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Anonymous
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September 8, 2016 at 4:02 PM ×

Has everyone gone to watch ladies doubles at the USOpen free day?

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Anonymous
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September 8, 2016 at 4:24 PM ×

Laughable situation in Europe...

- The outgoing RBA governor Stevens admitted today that global central banks were actively engaged in currency wars, weakening their currencies to boost exports in a beggar-thy-neighbor policy (hence ECB QE and NIRP)
- ECB QE and NIRP continues, even though it is destabilizing the EU banking system
- Corporate bonds now have negative yields; we are paying companies for the privilege of lending them money.
- The ECB has considered joining the BOJ, SNB and PBoC in buying equities directly.

Is anyone stupid enough to believe these central banks will ever exit this ridiculous monetary policy? They will not, because they can not.

If politicians move to fiscal policy measures, who will pay for massive infrastructure projects? More debt will be required for those.

There is only one way out, global debt will be monetized. Hyper inflation will follow. This is several years away, but when it happens it will happen fast.

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abee crombie
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September 8, 2016 at 4:32 PM ×

Interesting charts on Exports YoY. I was looking at the same thing, thinking about it vs ISM's. Notably Japan's Aug export were horrible, some of the worst in last 20 years. Thailand was crap. And even S Korea, its not like we are anywhere close to peak levels. I think a lot of the recent rebound a bounce from the commodity bust of the past 2 years. But with still slow US growth, hard to see exports picking up noticeably from here, unless Chinese consumers are going to become the new world growth engine which i still find highly unlikely with Employment PMI there stubbornly below 50 for the past several months...

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Anonymous
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September 8, 2016 at 4:55 PM ×

Hmmm... TLT down 1% just like that.

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EuropeanBull
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September 8, 2016 at 6:03 PM ×

The ECB today is a agreat example for the argument that Epsilon theory made (thanks again @Nico for pointing out some time ago):
"The only rational owner of a negative rate bond is a pure return seeker; there are zero income seekers holding negative rate bonds. Why is this a problem? Because income seekers will continue to own bonds even if the price goes down (for a while, anyway; at the very least, they are sticky owners). Return seekers, on the other hand, are not sticky owners at all. They will only own a bond if they think that the price is going up – meaning in this case that yields will continue to become even more negative, i.e., that there’s a greater fool (probably in the form of a Central Bank) willing to pay higher and higher prices for these income-destroying bonds – and they will sell in a heartbeat if they think this dynamic is changing."
(http://www.salientpartners.com/epsilon-theory/when-narratives-go-bad/)

The bond-bull market is the perfect momentum trade, but it is at a stage where it needs in more incremental QE.
Today the ECB was not hawkish in any way but simply pulled no additional rabbits out of their hats.
The long end shows how vulnerable it is if nothing incremental happens.

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abee crombie
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September 8, 2016 at 6:47 PM ×

Bad day for risk parity guys and vol sellers.... where's Sigma and his private island?
Thank you oil for the nice pop, taking my profits now.

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Leftback
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September 8, 2016 at 6:53 PM ×

Crude showing signs of life. We will short oil again, but not now, prefer to wait until it becomes overbought once more, and the October future expires, in 12 days.

HIgher oil drives inflation expectations incrementally, whether or not that moves the needle for the Fed is uncertain. ECB press conference probably driving the long bond more than anything else today?

Given the big move in oil, wouldn't you all say that cable, NOK and the loonie are remarkably weak today - for a market that no longer sees a Sept FOMC hike? Interesting....

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johno
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September 8, 2016 at 7:04 PM ×

EuropeanBull, I especially liked that quote too. Very interesting action in the long end today ... small short in WNZ6. My hit rate trading the long-end is especially low, so probably shouldn't even mention it.

Re ES, late yesterday I posted an excerpt from Kolanovic's latest piece. In a nutshell, he estimates (on the assumption calls are mostly sold to dealers by over-writers and puts mostly bought from dealers for protection, or so I understand) that dealers are small positive gamma here, neutral at ~2170 and quite short by 2150. This contrasts with the summer, where dealers were massively long gamma. Seemed to me SPY 10/21/16 215 puts were interesting on that basis, which I bought in a put spread.

Separately, sold some ES. Maybe early to do that, and better to wait. Normally I avoid consolidating, range-bound markets. But I figured I'd at least hedge out the ES-equivalent risk I've got from my long EM positions. And then some. Not much conviction on this ... I'm usually arguing here why it's foolish to short the US market (low rates => buybacks and M&A in US, less so in RoW).

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Leftback
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September 8, 2016 at 8:37 PM ×

Hammock Time zzzzzzzzzzzzzzz

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Macro Man
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September 8, 2016 at 9:17 PM ×

@ EuropeanBull, far be it from me to recommend length in any negative yielding bond, but the Salient assumption that the only holders of negative nominal yield bonds are return seekers is flat out wrong. What matters is the yield relative to the opportunity cost, which can be measured in a number of ways...the cost of holding cash, the cost of buying foreign bonds and swapping it back into domestic currency, the regulatory cost (via higher capital charges) of owning riskier securities or making riskier loans, the higher cost incurred by tendering lower quality collateral as part of a financial transaction, etc. All of this introduces substantially more nuance into the equation than merely looking at nominal yield, and suggests that in some cases the much desired comeuppance may not be forthcoming as quickly as some might like. Moreover, all of this leaves aside owners like global bond funds, for whom the bonds are in the benchmark, and not owning them introduces basis risk that may not offer commensurate reward (i.e., it's not like owning cash offers a higher yield than owning bunds.)

In sum, while it is absurd to own these bonds if you have viable alternatives, Mr. Epsilon Theory (and others)over-estimate the degree of alternatives out there, IMHO.

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Nico G
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September 8, 2016 at 9:33 PM ×

very dangerous to downplay current speculation in bonds - the Epsilon guy gave us a warning: that there will be STOP sell orders on the bond market on the way down hence the potential of downside acceleration, and even crash - which can not occur with sound investors awaiting coupons and principal years away

the leverage used by speculators front running the central banks of the world is phenomenal - nothing can be compared to 'the cost of holding cash' when there is no bubble on cash vs. such bubble in bonds of epic proportions ergo, those people are seriously asking for a bruisin' and should ponder their opportunity cost 180 degrees the other way

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Anonymous
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September 8, 2016 at 9:39 PM ×

I thought that, while Draghi maintained his mantra, it was pretty clear that they are near their limits. We're on path, up to govts and G20. He said this even more than usual. FED have been bleating on about fiscal works too.

Is the market going to listen or get ahead of itself as in last Dec? We sell off after OPEX.

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washedup
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September 8, 2016 at 9:55 PM ×

@Macroman/@Nico - to europeanbulls point, I find it pretty interesting how overall positioning these days is the mirror opposite of summer 2014 - back then punters loved equities and were optimistic about the economy and earnings, but saw rate rises as the salient risk to the thesis, and were short bonds of all stripes against equity length - this proved rather thoughtless as the summer came to an end, with the yield flash crash in Oct.

Now I think punters have piled into bonds imagining deflation as the biggest enemy to the secular (long equities) theme, with the additional twist that CBs will supposedly fight the deflation to the bitter end with further asset purchases, hence the liking for gold.

You guys can figure out the implications.

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Macro Man
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September 8, 2016 at 10:30 PM ×

Have "punters" piled into European bonds with negative yields? For sure CTAs are long, and yes they can stop out. Fast money guys own some too, but some of those deltas will be in options. But there are other holders too- banks/insurance cos/PF/asset managers who have a utility function that is not the same as fast money guys and CTAs. For there to be a crash, THOSE guys need to sell. Maybe some guy in Houston who enjoys tilting at windmills knows better than they do why they own them...but then again, maybe not. I'm still waiting for the crash in JGBs more than two decades after the watch for it started.

To reiterate, personally I wouldn't touch them with a barge pole. But to go short or expect an imminent crash is likely to be a waste of mental and financial capital IMO. In the real world, timing is important....meanwhile, the Salient guy doesn't give two hoots whether he's right tomorrow or five years from now.

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Cityhunter
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September 8, 2016 at 10:55 PM ×

what about Risk Parity Funds who leveraged up bonds position?

I agree with Nico that the key point is leverage. Hard to assess the leverage level in the bonds market precisely though. But i'm just amazed that it has become so widely believed that the world is going all Japanese, and yields will NEVER go up EVER.

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Anonymous
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September 8, 2016 at 10:57 PM ×

So is anyone buying this unique, once in a lifetime dip in TLT?

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washedup
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September 8, 2016 at 11:11 PM ×

Oh I am sorry MacroMan - were you expecting a trade idea from us that was going to work with pinpoint accuracy in the next 3 days? Well if we had that kind of prescience we would be off on an island specially designed for us instead of jabbering on your blog, wouldn't we?

So sorry to have wasted your time - as long as its 'windmill tilters in Houston' vs 'Lotus eaters in Connecticut', do take a gander at this official report on the october flash crash and let me know where the role of 'banks/insurance cos/PF/asset managers' who NEED to sell for there to be crash, is mentioned, and then explain why it would be any different going the other way?

http://www.bloomberg.com/news/articles/2015-07-13/here-s-what-we-learned-from-the-official-report-on-the-flash-crash-in-u-s-treasuries

I will save you the trouble - the answer is nowhere - those guys whose presence you deem so essential to a major market move will be picking their noses waiting for their Pentium computers to boot up by the time a move like would happen - its the marginal player that matters.

For FD, I have $34 TBT calls for December, and if your measure of a person's worth is recent PnL then clearly there is no conversation to be had right now - lets talk in a few months.

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EuropeanBull
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September 8, 2016 at 11:12 PM ×

re: bond-bubble debate

trying to clarify my stance here.

- I am an equity guy and do not have a FI background short bonds. I started to look at this in searching for answers why certain areas of my home turf went through the roof.
- in equity land the base is assumption is still that people buy financial assets to make money
- in FI land financial repression is working with full force, generating price-agnostic buyers through regulation (a colleague of mine recently said that we are already witnessing communist planning economics at work here not only are prices set by the CBs, trough ZIRP and QE, but also Basel and Solvency control quantity by commanding who has to own how much of what)
Ben Inker at GMO has written a nice piece on price-agnostic buying in one of their recent quarterly letters.
- I do not foresee a huge rate-crash but I see a lot of room for the long ends to move higher. No matter which region 100bps higher would still be lower than most anchor models for FV and fully consistent with the low-growth environment.
- last thought - and I see slow moving evidence in the institutional space - Investment frameworks will change. Any oversight commitee, that actually does its job, will reduce quotas and target bands for bonds allocation over time.

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EuropeanBull
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September 8, 2016 at 11:15 PM ×

first sentence above should read "I am an equity guy and do not have a FI background nor am I short bonds"

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Macro Man
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September 8, 2016 at 11:40 PM ×

Jeez, there are a thousand villages in England that can rest easy in the run-up to November 5th given the straw men that are being created here. Who has said that yields can never go up?

@ washed, the official report on the flash crash? The one that blamed some bloke living over his mum's garage near Heathrow? Pull the other one. If you believed that the regulatory treatment, panel of ownership, carry/risk characteristics, and market microstructure of bond and equity markets were the same, then using the flash crash as an analog for rates would be useful. I happen to believe none of those things, and there is ample historical evidence that price action in the two markets is dissimilar.

I am not expecting a pinpoint trade idea. I do, however, have enough experience to observe that calling for a crisis or a Damascene moment generally sounds smarter than it trades. I tend to view the Epsilon pieces through that prism-very erudite but not at all helpful in actually managing a portfiolio.

I would love it if the Dalios and other risk parity guys got their comeuppance, believe me. But again, I am old and hopefully wise enough to know that just because I want something to happen doesn't mean it will. I think bond valuations are cuckoo, but I need a much better catalyst than "err...some guys might sell" to make significant portfolio adjustments on the basis that yields will go a lot higher.

Using European bull's language above, the false dichotomy of "return seekers" vs "interest seekers" misses the veritable Everest of price agnostic buyers/holders of bonds who need to become gnostic and bearish for a bond crash to materialize (and BTW, a bond crash looks like 1994, not 1987 or 2008.)

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washedup
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September 8, 2016 at 11:48 PM ×

@MM - Dude - would you please read the f@#ng link before opining away?

http://www.bloomberg.com/news/articles/2015-07-13/here-s-what-we-learned-from-the-official-report-on-the-flash-crash-in-u-s-treasuries

the seminal phrase there is '-in-u-s-treasuries'

Look forward to your thoughts based on an actual read. Or not - I have the distinct feeling I'm not catching you in your finest moment for some reason - probably just bad timing on my part (there's been a bit of that lately!).

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Macro Man
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September 9, 2016 at 12:21 AM ×

@ washed Actually, I think I am entitled to opine about the prospects of a bond market crash on my own blog whenever and however I like. Frankly, I glossed over your link, because "crash" implies the price going down, not up which is of course what happened on October 15 2014. The sentiment holds though- I am not sure why we should believe the authorities on the bond melt up when they were so laughably inept at fingering the culprit of the equity flash crash.

More substantively, as you note none of the agents I mentioned were noted. Why should they be? They aren't the types to move portfolios on the basis of one day's price action, no matter how crazy it might be. If anything, they would generally fade, given that benchmarkers have an implicit long gamma position when things move sharply. In any event, two days after the melt-up 10y yields were back where they were the day before it. That's pretty much the definition of "noise". I was short EDs during that period- it hurt, but I held my guns because the move was so obviously stupid, and ended up making great money on the position. The eventual mean reversion of that episode isn't going to make me lose any sleep over night about European bonds falling to zero.

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Anonymous
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September 9, 2016 at 1:01 AM ×

I think it is important to keep cool and be patient under current dangerously dull market. I am sure something big is going to happen. I just hope I have the insight about what direction and when.

Personally I began to build up a short position on index gradually. At the same time, I had bought some previous losers in the market: shipping, solar, bio-science... My logic is that it is time for these beaten sector to rise if a deep correction is close.

The wall of worries for the bear case here: opec, Boj, fomc, and they all cluster near the end of month. Which makes vol a good bet right now Imo. Ecb is a yawn for bull, even for the 12yr here. Let's see if bear can overcome those walls of worries this time.

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Fired Macro PM
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September 9, 2016 at 10:11 AM ×

Got stopped out of NZD. The degree of fickleness this market seems to exhibit as of late is astounding.

I will also book profits on my EM Local Bond ETF position as well.

When things get choppy, I keep things simple. As of right now, /ES SPooz shorts are the only one that makes a great deal of sense.

I think this choppiness will translate to further uncertainly the rest of next week and on.

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