Summarizing Draghi in 5 pictures

1)  A damp squib.   While expectations for yesterday's meeting were not particularly high, they were still higher than what we got.  A majority of the sell0side ECB watchers expected at least an extension of QE beyond March of next year.  Instead, we got nothing.   Not only that, but whenever given an opportunity to drop hints about an upcoming extension/change to the capital key/expansion of the types of assets to be purchases, Draghi played a straight bat and sent the question straight back.  Indeed, if one were to take Draghi's responses at face value, you might think that the governing council spent five minutes agreeing to do nothing and then spent the rest of the meeting talking about the upcoming Manchester derby.







2) Passing the baton.   Draghi spent more time than usual emphasizing the need for fiscal and regulatory authorities to do their bit.   "Structural reform" has been a constant prescription from the ECB ever since Wim Duisenberg first took the mic in 1999, but the current president of the ECB was especially vehement in his call for the politicians to enact policies to boost productivity and ensure growth-friendly fiscal settings (easier said than done in many cases!)  In passing the baton, is Draghi tacitly acknowledging the limits to what monetary policy can do?  Perhaps, though he seemed overtly bullish on the impact of the unorthodox policy regime, calling upon the most important tool in the central baker's arsenal, the counterfactual.


3) A robust recovery- really?  At one point Draghi boasted that the ECB's policies had generated more robust growth than in previous recoveries.  While that may be the case if your name is Jose, it's less apparent if your name is Josef, Giuseppe, or Joseph.








 4)  Accommodative policy across the forecast horizon?   Draghi did engage in a little verbal chicanery.   While refusing to be drawn on whether QE would be extended further or the capital key altered to permit further buying of bonds currently approaching the limit (though he did note that a task force is looking into the transmission of policy!), he did say that the staff economic projections assumed a continuation of the ECB's accommodative policy across the forecast horizon.  Does this mean that they assume the ECB will maintain current interest rates and bond buying through the end of 2018?   Inquiring minds want to know.  In any event, the strip is flat as a pancake, with no curve whatsoever between June '17 and June '19.

   5) Mild disappointment.   All in, the market reaction can probably be best characterized as one of "mild disappointment".   Neither yields nor the euro rose to raise many eyebrows, and the Eurostoxx barely finished down on the day.  This is probably largely a function of the belief that Draghi retains cards in his pocket that he is preparing to deploy come December.   A similar meeting outcome then might meet with a stronger reaction.  Ultimately, Macro Man sees European bonds as way too expensive to buy and way too frustrating to sell.  Keynes' famous phrase about market irrationality has probably never been more apt.  Still, if one wanted to play an uptick in Eurozone inflation and an eventual shift in the policy stance, you could do worse that to do so via the Euribor curve trade pictured above.  There's literally nothing priced, the flattening has unsurprisingly run out of momentum, and with the ECB possibly more sensitive to the negative externalities of deposit rate cuts the slow-burn potential for an asymmetric payoff looks pretty good.











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checkmate
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September 9, 2016 at 9:07 AM ×

I am not sure how we get at some current understanding of the bond market in terms of constituent participation and the complex dynamics of regulatory participation vis a vis speculative . All I really know has 'retail' is I see no value most of the places that I habitually look. On that basis alone I don't want to see much of that market in the portfolio which is very strange given how much weight has been in their over the last 7 years or so. I also know I've an habit of being early so it doesn't surprise me if I'm selling out to cash before others might do so. Indeed, looking at some auction results it looks really sticky and a decent reason to just hold. Hard to understand any crash outlook when so many bigger institutions are that sticky. The speculative participant who might be triggered into selling is probably just going to get mopped up one would think before their 'blood' was drying on the P&L.
In short I don't want to own most bonds anymore because I don't see how the portfolio is going to benefit with so little value apparent ,but neither do I feel like taking an opposing position. I can think of more than a few big money managers who tried that with Japanese bonds for years and got nowhere fast. I think the justification was somewhere between diversification and so called fundamental analysis of the Japanese economy. Personally, I'd just call that kind of participation , churn.
As for Draghi I think he is the master of media market manipulation and I wouldn't like to play him at a game where he started with a clear strategic advantage. What he really thinks as opposed to what he really say's, I don't think we'll ever know until he writes his memoirs.

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Fired Macro PM
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September 9, 2016 at 10:12 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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Anonymous
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September 9, 2016 at 11:17 AM ×

Equities and Bonds are purely consolidating before another large move higher. The level of government and central bank support for these assets is unprecedented, it's been the buying opportunity of a lifetime. I'm astounded at the amount of people who wish to throw away money shorting these markets, nevertheless, thanks for providing liquidity.

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checkmate
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September 9, 2016 at 11:22 AM ×

Catching up on the US and Sep Fed here I have to say this looks a little Brexitty. The market soothsayers say it's only got a little chance of happening ,but the price action set up looks like it's saying something different with one of those rising triangle patterns forming where with absolute over the shoulder hindsight everybody cries out 'surely it was obvious'. I don't know ,but the pressure on yields appears to be forming for them to rise. Cue a batch of 'celebrity' economists to get in front of interviewers and espouse with suitable gravity that the UK's influence on slowing global growth was perhaps, possibly, might have been, indeed insert any other words to hedge a view so it doesn't bite you in the arse,overestimated. The sound of vomiting from the toilets is the sound of little retail losing their lunch.

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CV
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September 9, 2016 at 12:09 PM ×

Where are on the operation "Reverse Twist" meme at the BOJ and the ECB?*

The ECB would struggle to do this of course, because they can't buy short-term paper, but they can shift into corporate paper if they want to buy less long-dated paper.

*Full disc: I am kind of pushing this narrative at the moment, so I am biased ;)

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Nico G
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September 9, 2016 at 12:11 PM ×

anon 11:17

no we want to say thank YOU for making such bubble possible - smart money is gently selling to a million of little Einsteins just like yourself. Shhh peaceful.

i had no idea people would get that stupid again - after March 2000, after late 2008, i thought that equity buyers and volatility would disappear for good - i seriously thought swing trading was dead and was ready to retire

so thank you again for giving us the third golden opportunity in a lifetime - i intend to retire after that one - after riding 150 spoos for as long as i can, until everyone is bearish

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Rossco
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September 9, 2016 at 12:11 PM ×

So, we have reached stimulus fatigue.

Eurostoxx looks a clear short to me in the same way as the Nikkei did at various points in distant history when the BoJ lost conviction



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Rossco
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September 9, 2016 at 12:12 PM × This comment has been removed by the author.
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September 9, 2016 at 1:33 PM ×

Bearish setup in FI confirmed, helped by MrDraghi and BoJ.. yesterday Mario repeated a lot of times G20 release, probably pushing on fiscal side...is the mkts realizing something?
Equity mkts are not realizing that some divvy factors and smart beta + risk parity could install some vol...

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Anonymous
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September 9, 2016 at 2:01 PM ×

where is 12yo HFM? Need some leverage to buy the dip?

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September 9, 2016 at 2:10 PM ×

According to me in a bear market (it's a hypotesis..) Sp500 has biggest leverage to the downside in EPS.. why? Buyback, it's simple, they leveraged on themselves...if you add all gamma play and vol sellers you have a recipe for a JUMP to the downside. so maybe a cheap put OTM could make sense.
What's missing now? Credit. i hope in a wake up call...

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Anonymous
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September 9, 2016 at 2:17 PM ×

Interesting, especially in light of last night's conversation re bonds/leverage to see the market searching for a new narrative here. Sustained move in prices can do that - suddenly everywhere you look the story seems to be fading for QE.

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Anonymous
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September 9, 2016 at 2:23 PM ×

To add to last night's thread, it's not just about the explicit leverage among sectors of the bond market, it's about the implicit leverage to the narrative "the long end can/will never go down" across all assets and mandates. Feels like we hit peak bullishness ...

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Nico G
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September 9, 2016 at 2:25 PM ×

everything is leveraged through long duration on nearly ZIRP - bonds, real estate, discounted earnings etc

you cannot have the whole world leveraged on near zero rate expecting zero rate forever and expect decades of greater fools. I am amazed they could take the game all the way fo fall 2016.

you cannot have legions of idiots expecting every central bank to buy EQUITIES. Why the heck should ECB imitate kamikaze BOJ when it clearly does not work. Why even one person would expect ECB to buy equities is beyond reason.

Of course this monstruosity and incredible short opportunity will only be obvious to the 12 yo hfm, funny money charecters in hindsight amid a new era of ZMA (Zeroed margin account) you lot can't say you had not been warned

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Leftback
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September 9, 2016 at 2:52 PM ×

Fed funds rate market is on the move. Gundlach pointed out the massive degree of complacency, a lot of people would be caught offside by a September hike, and they did say they are going to do it, after all. Not a lot of time to adjust here if they do.

Some of you 12 yo may want to bid on IWM puts, EM punters may want to hedge by buying UUP calls, while other geniuses may be wanting to buy back the vol they sold and shorted.

Wait until the media changes the "official narrative" to bearish. That's when the vomiting will start in the toilets....

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t0mmy berg
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September 9, 2016 at 3:07 PM ×

LB. It is all happening too soon. I was hoping for 2250 at least on the ES. Also, maybe the lack of official buying in long duration means that long rates move higher, but if the Fed really does do a surprise hike in these conditions, the real economy will not take it well, inflation expectations will fall further, and that should be a recipe for say the 30 year to spike higher in price, not lower as it is doing at the moment. But technically hard to argue as it faked out a break higher out of this wedge and has now broken out lower (price wise). I own a bunch of out month VIX which has been pretty stable, and was trying to buy some March for 19.50 but no luck.

Could it be these knuckleheads are trying to engineer a steepr yield curve just to make things look better? Or to try to help the banking and insurance industries? Markets WILL see through any engineered solution

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Anonymous
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September 9, 2016 at 3:12 PM ×

Good slide (p43) from Gundlach showing hedged return on G3 bonds having converged to zero, for non-US buyer.
All in. Time to hike...

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johno
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September 9, 2016 at 3:33 PM ×

Just took off shorts on ESZ6 and WNZ6. Got especially lucky in latter, adding to position in Asian hours. Probably best to let them run, but haven't breathed yet this morning, so need some time for that and can re-short afresh. Stopped in USDBRL earlier. Left with long SPY put spread, FXI calls, and my G Z6 vs TYZ6 trade.

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JMT
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September 9, 2016 at 3:35 PM ×

I agree with "Checkmate" and his use of the adjective 'Brexitty' when describing the Sep FOMC and market complacency. There are way too many prognosticators with the view that there is 'zero' chance the Fed tightens in Sep. Although it is unlikely, the Fed have made a point that they want to move, and we will probably get a heads up before the 20th should they intend to (Hilsenrath perhaps?). (Draghi's non-commitment yesterday could be correlated with an impending Fed!)
A second 'Brexitty' event, imho, is the upcoming US elections. 'FiveThirtyEight' has the probability of a Trump victory up to almost 28% while the markets have it closer to zero. With such potential for market disruption rather than being copacetic, OTM put strategies out the curve and in the S&P make a lot of sense to me, even after today's early moves.

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CV
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September 9, 2016 at 3:36 PM ×

"Could it be these knuckleheads are trying to engineer a steepr yield curve just to make things look better? Or to try to help the banking and insurance industries? "

You better believe it! That is the narrative they're pushing and the market is eating it with gravy at the moment. Nevermind Spoos ... look at EZ banks today. Absolutely utterly hilarious. Draghi is having an extra grappa tonight! Of course, global financials ARE actually cheap based on their own fundamentals as the only major sector, so it does make some sense.

Of course, if he actually looked at the recent EZ economic data, he would choke on that grappa, but hey! I think LB is right on September/The Fed for what it is worth, but won't this just be a big starring contest then. I mean, if Spoos dip 5% into the 21st for example, will they dither?

Any lines on how the vol selling pension funds are doing. Extra lap dance last week, a late proctologist appointment this evening. Life as a punter eh ;) ?

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Nico G
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September 9, 2016 at 3:40 PM ×

do you know why they will hike in September?

1) because Hillary cannot defend a 'one way' Fed since Obama took office. It would not look serious you know, all that 'democrat market friendliness for the 1%' thing. She probably wants a 'suddenly' un-accomodative to have a better stance during presidential debate i.e. 'I agree with Mister Trump that the Fed was probably too accomodative for too long and [bullshit] i told them on many occasions but as you can see, they drastically turned around in September'

2) along the same line, a couple of guys at the Fed 'might' have a chance to keep their job with a Trump win IF they have shown merciless, uncompromising normalisation in September. Trump could keep the few guys who had the ball to start deflating the 'false' economy he has been ranting about as in 'they listened to me'

so all in all i wouldn't be surprised of a 50bp hike in September and the markets drifting down from now onward as the aforementioned becomes clearer and clearer

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wcw
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September 9, 2016 at 3:46 PM ×

> wouldn't be surprised of a 50bp hike in September

If the Fed hikes 50 bps this month, I'll eat my hat.

Note, my hat is a cheap chinese made paper hat, so harmless to human health, but it would still be highly unpleasant eating no matter how well prepared and spiced.

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Leftback
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September 9, 2016 at 3:47 PM ×

NIRP has become ZIRP and then PIRP in German 10y.... there is nothing like a bond market dislocation. The behavior of very large markets can be awe-inspiring.

A while ago we mentioned our cheeky short of IYR. After the Gap n Crap this morning it is sub-81. Gaps were waiting to be filled at 81 and 79. Enjoy.... This was an obvious short - all the Dumb Money had piled in there. Seriously. More gaps at 69 and 67..... God forbid.

Another item from the Double Line presentation that caught LB's eye was the graph of ECRI future inflation gauge (FIG) v 5y or 10y break-evens. It is page 22 in this webcast:

https://www.scribd.com/document/323435233/Gundlach-Prez-9-8-2016#from_embed

The lack of coherence between the traditional inflation measures like 5y5y forwards and real inflation measures or projections (CPI, FIG) is becoming obvious. The reason, of course, is CB induced distortion of the bond markets and the influence of non-traditional participants. Even this Fed doesn't want to get behind the curve on real world inflation.

"Mind The Gap".

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Anonymous
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September 9, 2016 at 3:49 PM ×

I awoke this morning and discover a new market narrative. Amazing power of the CBs and their missionaries.



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Nico G
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September 9, 2016 at 3:51 PM ×

jmt, cv, we all posted the same thoughts - on " if Spoos dip 5% into the 21st for example, will they dither? " i want to say, absolutely not

too many people think the stellar 2008-2016 stock market performance under Obama is good track record for democrats when it is actually the opposite (again, with all that 1%, class division thing). It's almost an embarassment

so expect the market to be down on the year when elections come - it will be much easier for Hillary to claim that no they had no control on the markets at all it was only ir'rational exuberaaance and 'as you see markets are way below their highs'

so down from here, with capitulation around election date - that would be a great dip to buy into year end

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Nico G
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September 9, 2016 at 3:55 PM ×

wcw anything made in China you should NOT eat

is 'narrative' the new 'paradigm'? financial bloggers have fallen in love with the N word

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Anonymous
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September 9, 2016 at 3:59 PM ×

So SPX (except financials), TLT, REIT's, EEM, and PM's all selling off in unison until election date, with VIX and UUP the only ones rallying?

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Anonymous
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September 9, 2016 at 4:01 PM ×

So lower stocks to show the little people we hear them and keep Trump away from the White House! Love it!

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Anonymous
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September 9, 2016 at 4:05 PM ×

Let's not forget:

"Real estate stocks are getting a place of their own in the market today. As of the close of trading today, the industry will become its own sector in the S&P 500, bringing the broad market index up to 11 divisions. The move primarily affects real estate investment trusts (REITs), moving 28 issues with nearly $600 billion in market cap out of the financial sector and into the new real estate heading.

S&P chose today to introduce the real estate sector because the day also marks a "triple witching" in the market. The term refers to the expiration of contracts for stock index options, index futures and options during the final hour of trading. That will give market participants time to reallocate on a day where conditions are conducive to making changes."

"It's a day with a huge amount of liquidity in the market, trading is faster and more efficient than usual, and it's a good day for people to rebalance their portfolios," said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. "There will be some people who will be rebalancing their portfolios to make sure their weight in real estate is the right weight."

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Leftback
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September 9, 2016 at 4:06 PM ×

Speaking of China all we need now is a weekend CNY/CNH devaluation...

Anyone around for 1987? LB wasn't. I bet there were loads of 21yo around then who got eviscerated. We could see VIX double next week and move from contango into backwardation. [Reflexivity works both ways, remarkably enough]. Now that's when the fun really starts for Chad, Brad and Thad - our young vol sellers over at the pension fund. Bring some brown paper bags to work next week guys, and a change of underwear.

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Unknown
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September 9, 2016 at 4:10 PM ×

Triple witching is next Friday, not today

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September 9, 2016 at 4:13 PM ×

LB @ 3:47 - As that guy who only shows up to say "I told you so" I've been beating the drum for higher inflation on this blog forever. Inflation linked products have been cheap for a long time. iBonds for individuals in particular were a great deal. Still are actually.

And rate hikes are only going to make inflation worse this time.

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abee crombie
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September 9, 2016 at 4:22 PM ×

I need a weekly close under 2100 to get really bearish. I'm short here but not pushing anything til that happens.

Plus the last time we had a big down day that closed on/near the lows (brexit) it was followed by capitulation selling and then a rip roaring rally.

Big rotation as many pointed out. Staples gapped down hard and utilities have been weak for a while. Suits me fine but whatever move we have in rates, for a week or a month, will be reversed unless we get inflation, which seems distant at this point. For me it all about Bunds and they still have a long way to go

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Unknown
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September 9, 2016 at 4:36 PM ×

Triple witching is next Friday, not today

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September 9, 2016 at 4:41 PM ×

Abee @ 4:22 - "...unless we get inflation" - Perhaps should read "...unless the market recognizes the current level of inflation".

Core CPI is 2.2%, Clev Median CPI is 2.6% and Atlanta Sticky CPI is 2.7%. Unless there is a total collapse in housing or medical care prices (unlikely) this is only going to go higher in the next 2 years. Especially if they bump interest rates and do nothing about M2.

CPI swaps or at least a nice barbell of TIPS and commodities will probably be nice outperformance for folks in the managment side of the business.

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12yo HFM
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September 9, 2016 at 4:43 PM ×

Today is a 'generational buying opportunity' in the SP500. I see this as a 'last chance saloon' for those of you bros 'left behind' to join me in my journey to instant riches. I understand your apprehension, but you have to realize a little secret: namely that I drew a 'support line' on my ES chart & as such fail to see how price can decline much further. I look forward to Monday's reversal and the 'mega trade' that awaits. Peace.

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September 9, 2016 at 4:46 PM ×

Agree with Marshall.. only Tarullo and co don't see inflation...

however a september hike now is more political than other.. so huge uncertainty.. 50bps is out of sight for me..

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checkmate
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September 9, 2016 at 5:09 PM ×

What the Fed does or does not do in Sep is immaterial. When you have an asset group that's been the 'go to place' for so long all you need is to generate enough noise and uncertainty regarding the pricing of that group. Big guys like Gundlach will be standing to onside licking their lips watching the minnows create a value entry for them to top back up on what they have already taken profit on.

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Anonymous
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September 9, 2016 at 5:11 PM ×

@12yo HFM,

Really? I can't wait till Monday to leverage up my short on SPX. how big a size you want from me?

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wcw
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September 9, 2016 at 5:11 PM ×

Marshall Jung, TheBondStrategist, sticky core CPI is still below 2% YoY. 1.8 is well up from 1.1, I guess.

The Fed's gonna Fed, so if against all thought and reason it raises some fraction this calendar year, so be it. But it won't be inflation qua inflation that did it.

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johno
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September 9, 2016 at 5:14 PM ×

This talk of steepening the curve as a policy is pretty interesting. Saw it first mentioned a couple days ago but can't remember where. But now we see this Reuters article citing BoJ sources. That's a big deal. This moment I'm still watching WNZ6 after covering a little earlier (but back in -ESZ6).

Two China observations: 1) CNH forward points are spiking post-G20 (I hinted at the possibility of this last week, but didn't do the trade), 2) Chinese PPI beat consensus and JPM sees YoY PPI deflation ending in Q4 (deflationary to inflationary regime should be very positive for Chinese equities).

In Europe, tax cuts being mooted in Germany and France, feeding the "fiscal stimulus is coming" narrative. Watch out bonds. Also in Europe, there's been a hawkish change of tone at the Czech CB. I missed it. EURCZK '17 forward points have had a big move. Would anyone here following this situation care to comment? What do they think about selling EURCZK 12m forward?

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September 9, 2016 at 5:30 PM ×

Just to pitch in a bit of structured macro briefly
FED targets PCE, which is far from target at this point. Yes, they follow various other measures of inflation and yes those measures have been increasing but that occurred in the past few months. And yes inflation does autocorrelate to some degree, however this is the past. Output gap drifted to neutral in the US and according to our estimate for Q3 and Q4 (based on our forward looking composite indicator with a lead of 3-4 months) gap will drift back to negative territory, keeping PCE way below target. As a sidenote, currently the way we stand it will be a great accomplishment if 2016 annual growth will be over 1-1,2% by year end. Stating the obvious, labor market is pretty much done, tight and enjoying the sunshine - we are at full employment so yes FED could hike and likely will do so. However, to us it is a fade in rates market and a great entry to dollar shorts in coming months.

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Leftback
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September 9, 2016 at 5:56 PM ×

@Marshall said:

"Abee @ 4:22 - "...unless we get inflation" - Perhaps should read "...unless the market recognizes the current level of inflation".

Core CPI is 2.2%, Clev Median CPI is 2.6% and Atlanta Sticky CPI is 2.7%. Unless there is a total collapse in housing or medical care prices (unlikely) this is only going to go higher in the next 2 years. Especially if they bump interest rates and do nothing about M2. CPI swaps or at least a nice barbell of TIPS and commodities will probably be nice outperformance for folks in the managment side of the business."

Yes!! Right on, Marshall, and I have to agree that there is a truckload of inflation out there in the real world, if you are poor or a millennial who is renting. Those people vote and they know that the rich have received a sloppy BJ on a regular basis from Obama and the Fed. 25bps isn't much for savers but with an election ahead it's better than an added burst of inflation.

Macro is back. The reversal we saw yesterday in European bonds was a critical event in this autocorrelated world of risk parity and HFT algo-driven trading.

Today has seen an entire month's worth of gains wiped out for our 12yo hero. August's Buy The Dip and Sell The Vol P/L virtually erased within a few hours, and the shift in sentiment and media narrative hasn't even begun.

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Panda
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September 9, 2016 at 6:07 PM ×

Fed funds only pricing in a 24% hike probability in September. With the hawkish posturing of previously dovish voting members, it seems like there's still some room to move on the Fed futures. Although if the S&P decides to nosedive hard then that will probably push September off the table (once again).

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12yo HFM
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September 9, 2016 at 6:52 PM ×

QE4 is coming (probably Monday).

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abee crombie
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September 9, 2016 at 6:58 PM ×

@Marshall. I hear your points and agree with LB housing and medicare inflation is worrisome but if you have a big sell off in equities which leads to a recession (which is the risk I am worried about, not a 5% dip) then I find it hard to see inflation staying at current levels and or rising.

I agree with most sentiment on this board that the TINA belief and bonds can never go down was a way too crowded but I find it hard to see the US 10 year up above 2.5 and US Equities down more than 10%. If that happened, look out below bc risk parity guys would be done. But it would set up a nice opportunity to buy afterwards.

My main point is that I doubt the lunacy of CB buying is done just yet. US 10 year rates have come down bc the term premium from foreign buyers. That trend is likely still intact.

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Anonymous
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September 9, 2016 at 7:04 PM ×

Why do I think the Fed won't hike? Janet wants to keep her job.

"Since 1928, there have been 22 Presidential Elections. In 14 of them, the S&P 500 climbed during the three months preceding election day. The incumbent President or party won in 12 of those 14 instances. However, in 7 of the 8 elections where the S&P 500 fell over that three month period, the incumbent party lost."

A stock market correction might push just enough people onto the Trump side of the ledger ("the economy" is his strongest issue as far as polls go).

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Anonymous
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September 9, 2016 at 7:18 PM ×

I assume "12yo HFM" is just a nomenclature!

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12yo HFM
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September 9, 2016 at 7:25 PM ×

@Anon 7:18 Would it shock you to know that I am neither 12 years old, or a Hedge Fund Manager? ;)

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Anonymous
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September 9, 2016 at 7:32 PM ×

Now I regret that I have not added enough shorts in the past few days.

On the Sep hiking chance, I still believed that Janet would not hike and she is the one probably driving the final decision. Remember, originally Obama strongly wanted Larry Summers to have this job. It is fellow Dem who said that it was time for a female Fed chair and now she got where she is (of course she had the academic background and experience).

So do you think that she would jeopardize another fellow female Dem's (Hilary or her friends probably helped her to get that job in the first place) chance to set history on white house by hiking in Sep and causing a stock market crash before the election?

I could be wrong but I am not willing to bet money on that chance and still stick to the prediction no hiking in Sep now.

Another thing here, the spread between bonds such as EM bonds, corp bonds, high yields and T-bonds are narrowing right now. During usual stock market crashes, this spread should rise, not the other way. So my thinking is that this is a controlled liquidation, not running to the exiting door moment. There is no panic, yet.

My long position in beaten sectors did not hurt much so far, so I would take profits on most of my short positions and may even add more longs on those beaten sectors.

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johno
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September 9, 2016 at 7:35 PM ×

12yo HFM cracks me up: "QE4 is coming (probably Monday)."

Re those CNH forward points, I was reading commentary citing rumors of PBOC intervention, draining liquidity from the offshore market. And that, my friends, is why you don't play this through USD.CNH on IB. The PBOC will make sure you don't make money by jacking up CNH HIBOR on you (and IB accounts pay CNH HIBOR plus a whopping spread). Rather, you'd have to buy USDCNH forwards on the occasional dips in the forward points, or do some other clever trade I'm not thinking of.

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Mr. T
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September 9, 2016 at 7:51 PM ×

If that happened, look out below bc risk parity guys would be done.

If we want to get all bearish, from my perch the average risk-parity book has become a joke as cross-asset correlations march to 1.0. And what happens to face values for dsd-based books in the face of historically low vols? The "hunt for yield" looks downright pedestrian compared to the leverage requirements needed to keep a RP book on its DSD target in the face of constant vol selling. In fact, I see the two as reflexively aligned - the "pensions selling puts reaching for yield" results in more leverage, which finds a home trying to arb smaller and smaller spreads as correlations climb. The problem is this has been going on for years now - calling a top on this is gonna be real tough. That said, its easy enough to see how the cycle turns. The vol sellers stop, correlations decrease, dsd's rise, books get smaller, resulting in vol, etc. So what would that cycle turn look like? Well for starters the risk adjusted returns of selling vol needs to be less than the traditional sources of yield. With a YTD XIV buy'n'hold returning 43% at 2.86 sharpe vs TLT returning 14% @ 2.1 there still is a ways to go. Obviously this is a super simple naive approach, but my point is the returns are still too strong to see the cycle as broken. This kind of approach is not going to be able to call the turn, but it might help identify a real regime change.




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Nico G
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September 9, 2016 at 8:00 PM ×

am willing to fund 12yo HFM to the tune of $100k just for the entertainment provided

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Anonymous
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September 9, 2016 at 8:15 PM ×

Thank Jah that there are people like Nico in this world that can strongly illuminate the bifurcation in expectancy of the direction of this almighty market's imminent performance.

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September 9, 2016 at 9:01 PM × This comment has been removed by the author.
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September 9, 2016 at 9:05 PM ×

Have a good weekend guys.. Maybe 12y hfm will feel as 3y hfm

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Leftback
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September 9, 2016 at 9:11 PM ×

Spoos closed on the lows.... that means the 12yo dip buyers weren't getting the Kevlar gloves out. A good thing, because something evil this way comes, at least for the vol sellers and dip buyers.

Monday morning will be interesting, especially if there is a shit show in Asia on Sunday night. Wonder if all those VIX shorts had fun today? Watching them try to buy it all back after the market opens on Monday would be extraordinarily amusing.

When you make really big mistakes in positioning, Mr Market has a way of being unrelenting and cruel. No exit rally this time, the sucker longs are trapped, Mr Market is going to gap 'n' crap for a few days until there is real fear out there once again.

Have a great w/e, all.

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Fired Macro PM
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September 9, 2016 at 9:17 PM ×

Wow, what a day. To the 3rd Anon who mocked/thanked me for providing liquidity... right back at ya bud. Seriously thanks for being freakishly long.

Sure hindsight is 20/20. But if you look at my rationale for holding Spooz shorts since last friday, and if you were to handicap the odds of an either a breakout or a breakdown, prudence actually was on the side of the latter.

Anyhow, thanks for your service - you are right, we certainly all do play a part.

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Nico G
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September 9, 2016 at 9:24 PM ×

to be noted, Europe overperformance vs. spoos (an additional 70bps today) since European banks and their record compressed valuations found some footing at the prospect of rates going up, among others

all that announced by yours truly a few weeks ago before it actually started. bon week end

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12yo HFM (margin called)
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September 9, 2016 at 9:29 PM ×

@Nico: Any chance I could have an advance on that $100k?

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Fired Macro PM
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September 9, 2016 at 9:30 PM ×

Despite having doubled my shorts on Tuesday and all, I do think this is not the washout that takes us down 10-20%. I think this is a short-term scare, one which I'm looking to cover on a follow-through day. I also happen to think that equities is just playing catch up to the reversal bid in the USD. If you were to just look at risk assets today, you would think that DXY made a runaway move to 97... instead its moved just 0.3%.

After few more days of carnage/repricing/repositioning, we should stabilize before the week of fed decision. Of course by that point, its all in Janet's hand and given the tantrum and ugly divergences, Janet should hold fire.

However if Janet stupidly does hike, she will be handing the election to Trump - now then we will go from polls tightening to Trump possibly taking a lead. Imagine the debate night later this month with the headlines of 600pt carnage in the Dow.

Ah, now that will cause the move some of you guys are looking for. But until Janet makes her move, I'm reminding myself that my shorts are only a week RENTALS.

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Boris Kurgan
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September 9, 2016 at 9:32 PM × This comment has been removed by the author.
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johno
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September 9, 2016 at 10:06 PM ×

Good call shorting ES, FMPM. Thank you for getting us (me) thinking about it.


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Anonymous
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September 9, 2016 at 10:30 PM ×

@Fired Macro PM

Agreed with you on the short term scare argument, unless some big player got margin call over the weekend.

I sold most of shorts and still keep a few OTM puts, and catch some falling knives (in shipping and industrial sectors), most of which have already been close to their 52-week lows and are at nearly 50% of their price a year ago. Hopefully they won't cut my hand.

On the market, BOJ, FED, OPEC and presidential election debate, all seem to produce great uncertainties here. But then again, where there really is panic, TLT would need to rise, not falling apart like this.

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lol
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September 9, 2016 at 10:54 PM ×

http://imgur.com/a/6cXsT

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Anonymous
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September 9, 2016 at 11:23 PM ×

A sample size of only two, but so what ... I'm a sucker for these kind of stats:

"Last 2 times S&P 500 was down 2% on Friday and the next day was a Monday were 8/21/2015 and 6/24/2016. Following Monday down 3.9% and 1.8%." -- Ryan Detrick




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Boris Kurgan
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September 9, 2016 at 11:36 PM × This comment has been removed by the author.
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Flowthriugh
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September 9, 2016 at 11:49 PM ×

Not sure. I am very long US midstream energy. Even after today, I am still up for week.
Seems to be too much celebration among bears. Is that bullish? Today was first bit of vindication they have had in some time.
My general impression is big days, up or down, tend to be counter trend. You get some big days down in bull market, and big days up in bear market. But the trend is day after day of grinding moves up or down. That was the way it e=was in 2008-2009.
Monday likely to be down, but let's see how next week plays out before we are sure the world in coming to an end (only happens once you know).
I doubt Yellen hikes, and if that is case she will leak news soon. No way Yellen hikes .5%.

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Anonymous
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September 10, 2016 at 1:18 AM ×

"A selloff in bonds would lead to a correlated liquidation across equities because of record leverage for risk-parity and other quant funds for whom coordinated selling in both asset classes could lead to a dramatic deleveraging that would beget even more selling. BofA calculates that even a relatively benign 2% selloff of the S&P coupled with just a 1% selloff of the 10Y could result in up to 50% deleveraging, which in turn would accelerate further liquidations by other comparable funds, and lead to a self-fulfilling crash across asset classes."

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Anonymous
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September 10, 2016 at 1:19 AM ×

@Nico i noted ESX held strongest on performance of banks and euro. I think we still have Opex to play out. Always a good squeeze lower before that. BoJ Steepener twist and Gunlach got things going today. Badly needed the vol. Was worried after the ECB no vol show.

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checkmate
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September 10, 2016 at 12:29 PM ×

Demographics and portfolio allocation. This is the one that keeps coming back onto my board for scrutiny. We're probably all aware of the portfolio models that are intrinsically linked to the life cycle. Without some massive shift in behaviour I keep coming back to the conclusion that equity markets are going to get thinner and thinner sans central banks taking up that mandate of equity buyers. The logic is straight forward enough. Aging population will tend to gravitate towards portfolios that are fixed income heavy and equity risk light. I also wonder about the consequences of that and how they might be effected by the fact that so much of our youth are coming into their investment life cycle weighed down by education debt that in effect constrains their ability to be the next 'buyer' market that would normally counterbalance, take the baton, from the aging sellers. I'm still thinking this through trying to connect the dots. Welcome other peoples thoughts on this issue.

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Anonymous
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September 10, 2016 at 5:18 PM ×

VIX futures trading hours trade nearly 24 hours a day, five days a week.
Start Sunday at 5PM

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Anonymous
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September 10, 2016 at 7:00 PM ×

Fixed INCOME...there is no yield or it's negative. Old folks (or their pension funds) are forced to liquidate assets to purchase health care and social services provided by those millenials. Old people's life expectancy and end-of-life health care costs will increase more than their "healthy" years and willingness and ability to save.

The pendulum will start swinging in the opposite direction, slowly at first, but turning into a wrecking ball laying waste to real value of those bonds exacerbating the old folk's troubles.

I predict there will be atleast 2 generations worth of people regretting their laziness to procreate to provide hands to change their diapers.

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Anonymous
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September 11, 2016 at 2:14 AM ×

Anon7:00PM

I'm banking on no wall and a flood of immigrants to change those 2 generations worth of diapers. And I really wouldn't view it as laziness but an altruistic gesture towards the global environment.

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abee crombie
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September 11, 2016 at 5:36 AM ×

Interesting thoughts Mr T. I find it interesting that one of my fav strategists Francois Trahan turned uber bearish on Wednesday after some horrible ISM new orders data. I mention him bc he has been pretty on the money lately.

Sure the move in 10 year didnt help Fridays collapse but wonder if there was some real money behind that move. Zervos has also been bearish on equities since brexit or so.

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johno
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September 11, 2016 at 5:55 PM ×

@ abee, I don't get Trahan's stuff, but am always interested to hear his take. One interesting thought he's expressed in the past is that "inflation/oil is the new Fed." I wonder whether his bearishness is predicated on rising DM inflation sapping real wages/consumption. I saw earlier this week a summary of Edwards' thoughts arguing that.

For now, I interpret Friday's sell-off as reflecting 1) the sell-off in the long-end triggering selling of "bond-like" equities (even if just a rotation into other sectors, it'll at least increase vol), 2) dealers getting short gamma, starting from 2170 as argued by Kolanovic (we've gone from a long record gamma summer regime a to short gamma regime, so vol will now be higher), 3) de-leveraging by vol-sensitive players.

People point to Draghi as catalyst for the bond sell-off (could someone tell me what, if anything, he said that was really narrative-shifting? I didn't hear anything), but I wonder whether the Reuters article on a BoJ policy of steepening the yield curve isn't more significant. The second article airing that idea, so maybe some truth in it. If the BoJ wants to steepen the long-end, I'd be very, very nervous holding shares of Campbell Soup!

Focus is on Brainard. I doubt she makes a hawkish shift. Tarullo is another dovish board member. He spoke Friday and there was nothing there suggest a shift, to me at least. My question is whether this is a buyable dip in, say <5Y duration EM local bonds/EMFX carry, or whether the step-up in vol and pressures on the long-end make that one to avoid.

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cowboy
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September 11, 2016 at 6:56 PM ×

People were talking about risk parity and quant guys force selling after brexit, with spx down 5% in 2 days and prior 3mths VIX average 15. Didn't happen. Now calling for risk parity unwind with a 2% downmove and past 2 months VIX average around 13? What % downmove in SPX would trigger cascading forced selling?

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Anonymous
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September 11, 2016 at 10:17 PM ×

@Anon 2:14 - The immigrants won't be changing your diapers, they'll be stealing your money, assaulting your daughters and committing other crimes. You will then be taxed further to pay for housing and benefits for them. Enjoy.

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Anonymous
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September 11, 2016 at 11:23 PM ×

Agree immigration would've been good if it was done right. "Uncontrolled", "unlimited" occurring for the "long term" aren't exactly the key words in this assumption.

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Celeriac1972
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September 12, 2016 at 12:41 AM ×

Re Risk Parity - I think the systemic risks ("forced cascade selling" etc) that are being associated with these strategies are overstated. Total AuM is approx USD500m and equities probably account for no more than 20% of this.

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