Theme-atic

So here we are a week on from the election.  It's funny, isn't it?  After years of struggling with not enough themes in the macro space, if anything now we have too many; it's hard to keep track of everything being priced.  This, of course, is a good thing, as it provides mispricings and potential profit in cross-asset mean reversion strategies.   For instance, since the election copper and EM local currency debt have sustained 1 SD+ moves in the opposite direction for just the fifth time in the last decade.  (H/T the Git.)

Obviously, in terms of the post-election macro themes that are dominating the market, the notion of infrastructure-led reflation in the US is dominating the pack.  It's a good story, too; not only does it fit with some of Trump's campaign promises, but there's also a sense that this is something that ought to happen (at least amongst anyone who's had the dubious pleasure of riding Metro North into Grand Central Station.   It makes Southern Railway look like the TGV.)

Whether or not it comes to fruition is in many ways irrelevant, at least in the near term.   Surfing the waves of narrative and spotting the latest (or next) hope has been a fantastic way to make great money over the last week.  Long may it continue!   If the dollar can survive Yellen's testimony in a couple of days then we may have to present the Forecaster of the Year award to Buzz Lightyear by acclimation.

That being said, it does looks like some pricing has reached the froth stage, much like copper at the end of last week.   Although the chart isn't quite as ugly, 5y5y inflation swaps tried to bat on yesterday but pretty clearly rejected a further advance.   Some sort of consolidation/correction would not only be normal, it would be healthy.


In the big picture, however, there is one theme that is better established, more pervasive, and potentially much more significant than and road-and-wall building program.   Macro Man refers to the electoral rebellion against the comfortable consensus of globalization and the associated "elites".

From the Arab Spring to Syriza to Brexit to Trump, each defeat for the comfortable consensus has become more and more "unbelievable."  A decade ago, it would have been virtually unthinkable for the UK to leave the EU or the US to elect a president whose public statements are in some cases indistinguishable from passages in Mein Kampf.  Yet here we are.

Is Trump the apotheosis of this theme?   Surely nothing could be as big a surprise after last Tuesday?  As big a surprise?  Perhaps not.   As big a shock to economies and markets?   Clearly there could be.  The most obvious sacred cow yet to visit the abattoir remains the Eurozone, where "whatever it takes" has gotten the job done for 5 years now.

While it would hardly be a surprise at his juncture for Renzi to lose the referendum in Italy, thus eventually vacating power, the potential nuclear fallout- 5* wins an election with a mandate of withdrawing from the euro- remains a fairly wingnut risk case.  Slightly less wingnut, though still deemed unlikely, is victory for Marine Le Pen in next year's French presidential elections.  If the FN candidate were to win, she too would potentially set the wheels in motion for a Eurozone exodus.

To some extent, these outcomes have started to get priced.  The execrable performance of the 50y BTP is clearly not just down to bond market beta, and provides yet another reminder of the danger of central banks incentivizing people to buy bad assets at stupid prices.


The Bund/OAT spread has also blown out, and while at first blush the risk case looks to be in the price...

...a little perspective suggests that it isn't, not really.

Is a Bund/OAT widener a good trade from here?  Frankly, that depends on your time horizon and the depth of your pockets.  If 2016 is really about electoral surprise rather than rebellion, then at this juncture you'd have to put something on Renzi actually winning his referendum.  It seems more likely, however, that those who've only benefited from the global consensus through an increase in selective purchasing power rather than nominal incomes will continue to make themselves heard in the ballot box.

As long as that's the case, it's incumbent upon risk takers to remain on the lookout for both the threat of adverse outcomes and the opportunity that such outcomes may beget on both a tacticalk and strategic basis.
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checkmate
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November 15, 2016 at 7:49 AM ×

Vive la revolution !
You know life as a way of coming full circle. Does anyone here remember May 1968 ? I recall vividly the student riots in Paris where they demanded that the government of the time 'stop f..g with their rights'. Strangely, although the message is actually coming from virtually the polar opposite direction politically the message remains the same. In essence, I simply point out that over and above any other nation I can think of the French have history when it comes to demonstrating their ire with the establishment. Perhaps the only 'shock' will be to those who don't remember that.

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checkmate
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November 15, 2016 at 7:55 AM ×

Oh, do I need to point out that more than any other nation in Europe the French have been on the end of violent public assaults? Frankly, I find this issue in political terms to be disingenuous ,but for a politician to get elected based up on their 'strongman' image and willingness to slam doors on people so called responsible for these outrages by a blanket immigration control policy that is at odds with the EU principle on same. Tempting , very tempting and of course it worked for Trump already so why not Le Pen?

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checkmate
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November 15, 2016 at 8:08 AM ×

Completing the trilogy 'did you know' (Michael Caine lives) prior to the Brexit vote in June a poll of anti EU sentiment in Europe showed two countries where anti EU sentiment was greater than the so called 48% polled in the UK? Yes , they were 70% in Greece and 61% in.....France. Food for thought.

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Polemic
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November 15, 2016 at 9:29 AM ×

Look s lije a counter Trumptrend day in nearly everything.. bonds.. oil..copper usd/em.. even mxn. Eurgbp..usdjpy..Mining stock.. btps .. except US eq futures. So I therefore think they are lagging and worth selling.
.

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washedup
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November 15, 2016 at 10:21 AM ×

@checkmate - "Does anyone here remember May 1968 ? I recall vividly the student riots in Paris…"

No we don't because I doubt most on this forum were out of elementary school (or born) - I daresay if you lived in Paris as a student in the 60's, you simply don't get to ever complain about how drab your life has been!

@MM Its really really tough to translate any of this hang Marie Antoinette sentiment to actual trading given its slow moving nature, but my gut tells me the seminal event here is the implications for central bank policy going forward, and not the promise of fiscal expansion in DM, even if thats what the markets have chosen to fixate on for now.
Interesting comparisons being drawn to 1968 - the historically minded may want to check how markets did for the subsequent 10-15 years.

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NoE
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November 15, 2016 at 10:37 AM ×

This blog is the one thing worth still reading on the interweb. I'm with you Polemic, tradable reversal here I think in bonds and curves especially. ED flatteners on with Kevlar gloves.

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Bruce in Tennessee
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November 15, 2016 at 12:48 PM ×

For someone who I thought largely did not want political comment to be a mainstay of his blog, MM, you latest posts seem oddly out of phase. "Comments" of Trump indicative of Hitler? It is just an election, and people are tired of the corrupt crowd, much less Hillary Clinton. Would you prefer mass migrations of people at will? Borders mean nothing and if I would like to live in Panama..well shoot, just move there and declare myself a citizen? This is the globe where everyone gets a trophy, even if they suck.

I have found out that that isn't the way it generally works with money. And that is good. Stick to your knittin'.....

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Maverick
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November 15, 2016 at 1:16 PM ×

@checkmate: agreed - it will be interesting to see how CBs (ECB/Feb) respond to the jump in inflation expectations

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Anonymous
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November 15, 2016 at 1:26 PM ×

Being french I would say that even if Marine le Pen winning the election seems possible from a sentiment point of view, it's almost impossible due to the french electoral system.
We have two round of voting here and even if her presence in the second round is probable, the anti-le Pen reaction then is certain.
15 years ago her father lost 18/82 % in that round, so a 40/60% lost seems the best she could aim for.

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Bruce in Tennessee
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November 15, 2016 at 1:39 PM ×

http://www.alhambrapartners.com/2016/11/14/reflections-on-recession-are-a-very-real-affair/

This article goes more along with my thinking.. and is more based on economics than politics....that we've been treated to zirp/nirp

for too long, and that these chickens are now coming home to roost. As time goes on, unless we get away from the policies over the last 8 years...(actually quite a bit longer) we aren't going to solve anything. When our latest recession started we responded to it by creating a faux recovery built on debt/credit. Everyone and every government seems to have gone along with it.

Now it has been the area under the curve time in calculus, and it looks like a quagmire. I doubt we exit this anytime soon...not just a recession?

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Patrik
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November 15, 2016 at 1:51 PM ×

Bruce: Irrespective of if you think the means justifies the end or not, I think it's pretty fair to objectively say that Trump, LePen and part of the Brexit movement have chosen a way of communicating that has a strong resemblance to fascists back in the day. It's not really a political opinion, just a statement representing where we're at - and highly relevant to the investment climate we're in.

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Macro Man
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November 15, 2016 at 1:56 PM ×

Yes, clearly a Le Pen victory is unlikely. But then again, one thought that the anti-Trump sentiment would have been sufficient to defeat him. Still, if Le Pen loses that might perhaps mark the peak in anti-establishment voting.

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abee crombie
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November 15, 2016 at 2:04 PM ×

Im still stuck pondering this financials/reflation trade..thanks for the input guys.

I agree that its not only the higher rates, but also hopes of less regulation driving this, though looking at the reaction the higher interest rate beta names, like BAC/zions etc seem to be moving the most

The whole construction/industrials trade is a bit more doubtful in my eyes. It was just a few weeks ago the market was really worried about CRE (as it has been disappointing all year) and single family homes have been relatively flat, constrained by labor shortages. Sure pile into aggregates (MLM and Vulcan) but they look over priced to me. Transports are coming alive as well, but same thing, trucking was in the dumps a few weeks ago as well, now everyone loves it.

Thinking if this move is for real, then F or GM are a good catch up play. If its a rural construction renaissance, then pickup trucks should do well.. even if auto sales have peaked

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wcw
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November 15, 2016 at 2:04 PM ×

@Patrik, thank you. I did not read MM's comment as anything other than descriptive.

@MM, yes, we did think that, and then in the summer it became clear that R voters were going to vote R, after all, though I had DJT for a 45 handle, not 47. MLP in France is unlikely to win, but as with DJT there is risk to upside as well as downside.

A question for the room: it is common for both new incumbents and populists to gain support. What will the likely market effects of increasing DJT popularity be?

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Patrik
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November 15, 2016 at 2:05 PM ×

So far, and in time for French voting, will there be any visible warning signs flashing for voters to be afraid of voting LePen? So far it seems possible to build the story of Brexit didn't end UK, equities like Trump and enthusiasm of envisioned stimulus, etc. 2nd round of Hollande vs LePen or Juppe vs LePen.. In the former case it looks closer than 60/40 to me.. Not in tune with the opinions of Juppe among outside of the "elites" - he's obviously very much establishment for a long time, left as unpopular PM before, etc. I would have thought not the strongest profile to field in the perspective of "anything but the status quo/establishment/elite".

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checkmate
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November 15, 2016 at 2:51 PM ×

I would like to thank Anon 1.26pm. I'm always looking for a more inside view than my own on issues like this. I wonder aloud does a result 15 years ago have real relevance today? I have to say so much as changed over that 15 years.
As an aside I would also comment that months upfront the anti establishment vote both in the UK and latterly in the USA was priced to have small probability of success ,but as time went by the outcomes became tighter until frankly it looked like a coin toss. This time, wash, rinse and repeat ,or something different?
If I was really naughty I'd say what's the market price IF Merkel decides not run again? Think that decision comes soon does it not?

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JMT
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November 15, 2016 at 4:56 PM ×

Great analysis and trade observations MM since the election.
I'm not sure whether to laugh or cry whenever I see the 50 yr BTP chart, I'm still amazed that such a trade was done. Had the issue been for 1 or 2 billion EUR, I could see a demand from the marginal buyer as a liability hedge, but the issue was 5 yards and over 3 times oversubscribed! This is clear evidence that some people have very short memories.
Re the potential of a Le Pen victory, one thing that has become clear after Brexit and Trump is a quote from Churchill "The best argument against democracy is a five minute conversation with the average voter."

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johno
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November 15, 2016 at 5:44 PM ×

When you consider that both Brexit and Trump were anti-status quo bets, then MM's thought that Renzi might actually win the referendum is an interesting one. A "no" vote just means a return nothing getting done or even another technocratic government. Analysis I've seen suggests there isn't a clear path from "no" vote to a 5-star government.

I don't see Le Pen getting elected for the simple reason that the French electorate are mostly well-educated.

Nice trade shorting copper the other day, MM. I got over my fear of Chinese speculators and shorted some too. At the same time, I've taken some long EM exposure.

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Anonymous
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November 15, 2016 at 5:55 PM ×

To complete what I said at 1.26, if a brexit type of referendum was held in France, the exit side would have a fair if not big chance to win.
A le Pen win is something different, not only it has an anti-system dimension but also a racist and WW2 bad memories dimension attached to it, that's why it's a lot more unlikely and still relate to a result that happened 15 years ago.
Juppé who's is 100% etablishment would defeat her more easily because people from the left would vote for him while they would have a very hard time voting for Sarkozy and people from the right would have the same problem to vote for Hollande.
I guess that's enought for french politics :)

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CV
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November 15, 2016 at 6:08 PM ×

For the record on Le Pen, I think it is 50/50 even with the two-round system. This is why we have to expect a response in markets as the "campaigning" starts. Her "program" will be bonkers. EU exit, EZ exit, borrow for free at the Banque de France, no immigration, deportation of people etc. We know she can't put through all of these, but it will be squeaky bum time for sure.

I am with this by MM;

"if Le Pen loses that might perhaps mark the peak in anti-establishment voting."

But I fear this represents "hope" more than cynical analysis!

Another point. My biggest worry is not Trump, Le Pen, Grillo etc. They will be pretty bonkers, but what the f'ck happens when the working classes realise that they have been fooled by them. Do we snap back to a centrist kumbaya consensus or go even further out on the wings?

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Patrik
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November 15, 2016 at 6:20 PM ×

@Anon: thanks for comments.

@CV: My personality also leads me down those dark avenues.. At least I'm aware of my politically pessimistic disposition :/

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checkmate
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November 15, 2016 at 6:30 PM ×

Johno,
http://www.statisticbrain.com/countries-with-the-highest-lowest-average-iq/

Probably not a good argument citing intelligence as a defence against disingenuous politicians. I'd be more inclined to think the Churchill quote earlier held true. However , the caveat on that is when arrogance makes politicians forget that they have to play the game 'of fool most of 'em most of the time' then we are set up for recent outcomes.

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Leftback
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November 15, 2016 at 6:54 PM ×

LB is going to eschew political discussion and analysis and just talk about rates:

Bondmageddon may be coming to an end for now, but there is the problem that all the risk parity and pension funds just got creamed in the last week or so, and whether therefore we might be looking at some forced liquidation ahead of us, especially in those things that are now viewed as "trading vehicles" as much as investments (TLT, BTPs), and have become heavily traded objects of interest to non-traditional participants in the fixed income markets.

The muni market is showing some definite signs of a reversal today (we called that one yesterday), and preferreds are also showing signs of life, but the long bond and the broader market in Treasurys still looks vulnerable to another round of slippage; we have a PPI number coming out tomorrow. In any case, it's a reasonable guess that we have moved from "sell everything" in bonds towards "accumulate cautiously on weakness, but with Kevlar available".

We were thinking about Dame Janet's favourite inflation gauges on the subway this morning (another long and delayed ride), and looking at MM's 5y5y forwards chart, you would have to wonder whether Trump's election really merits a +30bp move in inflation expectations? We have now moved from 2.0% to 2.5% over a month or two, which is a lot, politics or no politics. The underlying driver of US inflation remains the price of oil and $WTI seems to be locked into a range between $40 and 50 for the time being, while US hourly wages have yet to break out of the strait-jacket in which they have been contained.

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Leftback
admin
November 15, 2016 at 6:55 PM ×

LB is going to eschew political discussion and analysis and just talk about rates:

Bondmageddon may be coming to an end for now, but there is the problem that all the risk parity and pension funds just got creamed in the last week or so, and whether therefore we might be looking at some forced liquidation ahead of us, especially in those things that are now viewed as "trading vehicles" as much as investments (TLT, BTPs), and have become heavily traded objects of interest to non-traditional participants in the fixed income markets.

The muni market is showing some definite signs of a reversal today (we called that one yesterday), and preferreds are also showing signs of life, but the long bond and the broader market in Treasurys still looks vulnerable to another round of slippage; we have a PPI number coming out tomorrow. In any case, it's a reasonable guess that we have moved from "sell everything" in bonds towards "accumulate cautiously on weakness, but with Kevlar available".

We were thinking about Dame Janet's favourite inflation gauges on the subway this morning (another long and delayed ride), and looking at MM's 5y5y forwards chart, you would have to wonder whether Trump's election really merits a +30bp move in inflation expectations? We have now moved from 2.0% to 2.5% over a month or two, which is a lot, politics or no politics. The underlying driver of US inflation remains the price of oil and $WTI seems to be locked into a range between $40 and 50 for the time being, while US hourly wages have yet to break out of the strait-jacket in which they have been contained.

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Anonymous
admin
November 15, 2016 at 7:08 PM ×

*U.S. 30-YEAR MORTGAGE RISES TO 3.78% FROM 3.38%, ZILLOW SAYS

has to be among the largest 1 week jumps in history

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Anonymous
admin
November 15, 2016 at 7:17 PM ×

Since election night....
US 30Y yield: from 2.5% to 3.0%
US 5Y: 1.2% to 1.7%
CDA 10Y: 1.0% to 1.55%
Mexico 10Y: 5.8% to 7.4%
Brazil 10Y: from 11.1% to 12.3%
UK 30Y: 1.8% to 2.1%
Poland 10Y: 2.6% to 3.5%

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wcw
admin
November 15, 2016 at 7:40 PM ×

@LB, in re inflation: Boehner was on teevee today stating, a, infrastructure spend welcome (and != stimulus) and b, please attach automatic raise of the debt limit. It's happening.

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medMac
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November 15, 2016 at 8:29 PM ×

@checkmate

"Does anyone here remember May 1968 ? I recall vividly the student riots..."
After this I'm inclined by default to rethink what I think I know, but still, I'm with johno in thinking there's not a clear path between the No and 5*. And I add that the outcome in Italy shouldn't have an effect on the election in France, which for me, is where the hammer could really drop and together with Merkel announcing she won't run could make parity no longer more than an hypothesis, but a wish ($ > €).
Re betting on Renzi, being at the beginning of my career and getting paid in €, I kinda have no choice. My natural hedge is having my assets USD denominated.

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Leftback
admin
November 15, 2016 at 9:18 PM ×

The modest bounce in the long bond today was on much lower volume than was the selling on the big down days, and so a bit more pain to come in fixed income over the next few days is our bet, although it will be more limited than last week's bondmageddon. Trading in muni funds was at a much higher volume relative to the down days, however, and the charts are somewhat more constructive.

Recent enthusiasm for the dollar seems to be fading a little as the € tries desperately to cling to support near 1,07. A trip to 1,05-1,06 is on the cards at some point.

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Anonymous
admin
November 15, 2016 at 9:22 PM ×

Will Europe wake up to a big Yuan move some morning soon? Coild change the rally perspective.

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Nico G
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November 15, 2016 at 9:45 PM ×

some weeks ago i wrote that markets would be merciless and clean stops on both sides before tape resumes lighter, and healthier. The limit down post election cleaned all weak longs who gunned for Hillary. Now you could say the monster rally since limit down has cleaned the guys who shorted the hole in fear of Trump. Can't help but be fascinated by such forces. To the trillion lost on bonds rout you can add bits and pieces of forex hurt, more repricing to come now but 2180 US equities can't exactly look like a safe haven you could guess many managers wish they could just stay in cash for a while. Brutal.

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Mr. T
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November 15, 2016 at 10:19 PM ×

So much emotion out there still. I keep hearing about various schemes to build out infrastructure financed by PE, pensions, etc - this is a horrible idea on so many levels, and one that I don't think will track at all. Is Blackrock really going to be held liable for faulty guardrails? For all the talk of "new ideas", I think we've seen this one before - bigger deficits, more borrowing. Here we are at 4.9% U3, CPI nudging over 2%, inflation tailwinds growing - and this is the environment where we are talking about a big bump in deficits. I know rates are up a lot, and its really tempting to ring the register on a good trade, but can you think of any environment where being short bonds has not been better? There is no way in hell im covering my long end shorts here. Look at the shitshow in the long-dated euro bonds - we have not seen anything yet IMHO.

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Nico G
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November 16, 2016 at 3:11 AM ×

for market students here

https://dailyreckoning.com/the-road-to-ruin-2/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+dailyreckoning+%28The+Daily+Reckoning%29

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Masud Monsur
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November 18, 2016 at 2:22 PM ×

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