The Quincunx Page Turner

First, let me say that this post is primarily a page turner. Turning the page on the blog to free up white space for the comment section to use as the last one is a bit full. It is purely a lift of a post I wrote elsewhere and should be considered as Polyfilla in the decorative works of the new TMM2.


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It's been a while since I last posted as I have been waiting for the realisation that Trump was not going to be a shoehorn to economic prosperity to dawn, as his extremes either shock the rest of the world into moving away from buying US assets or his changes collapse in a cloud of impracticality. Neither of which has happened.

My simplistic de-Trumping plan has turned from a binary game of all on / all off into a multi-dimensional game of chess. Hard Trump and Soft Trump, to borrow a Brexit phrase, are forms of Trumpism that are quantum-like and more probability waves than certainties. The strength of policy swings on a Tweet or judicial feedback. With foreign policy we have seen back peddling from 'hard' as the one China policy appears to have been acknowledged, Japan declared ‘best friend’ and Canada told that Trump is only planning ‘tweaks’ to NAFTA.

Yet the rhetoric against the likes of Basel III remains as strongly worded as ever and the deregulation of US banks could cause some of the greatest strains between the US and EU. Since the 2008 crisis regulations have been seen as much a moral crusade as one of practicality. Dodd-Frank and Volker, though nice ideas, were never fit for purpose and the laws of unforeseen consequences have produced all sorts of schisms, whether it is liquidity holes in corporate bond markets or just ridiculous generalised reporting conditions on markets that were not exchange based. So getting rid of these, or at least watering them down, would be a sensible compromise between practicality and moral protection. At least that’s the line I am willing to excuse the panel of top bankers currently advising Trump with.

Basel III is a bigger issue. If McHenry’s letter to Yellen is properly representative of new policy then it hits the EU head on. The EU has been proudly touting its new banking regulations which should identify weak banks (yes, done in style) and be part of the path towards a unified European financial system, whilst also allow the politicians to wave a huge moral flag in triumph. But what happens if the US banks are suddenly told they don't have to play by the same rules? They instantly have a competitive advantage unless the EU backtracks and loosens Basel III in response - Highly unlikely for them to do such a massive U-Turn just because Trump has pushed them into a corner - or they immediately remove the US’s European banking licenses if they don't comply.

This is al the more interesting coming in the wake of Brexit where apparently the US banks are threatening to up-sticks for continental Europe, well let’s be honest, it’s a threat as none of them really want to go. France may well be offering sanctuary to US scientists and the world's bankers, but if it were really that great they would have gone there already.

There is a small version of the State of Liberty on the banks of the Seine in Paris and I was wondering if they should attach a plaque to it similar to the famous one in one in New York -
Give me your scientists, your bankers, your huddled masses yearning to breathe free, the wretched liberals of your teeming shore. Send these, the visa-less, Trump-tossed to me, I lift my high tax rates besides the red tape.

But if the US banks aren’t going to be playing to Basel rules there may not be that tide of bankers. Indeed, the UK would be looking pretty as an intermediary between the two. It would also support another idea I was nursing, the introduction of an offshore Euro market in line with the original Eurodollar market. If London launched such a beast the EU would not be able to control it yet it would provide a method for EU unregulated institutions to fund and lend Euros just as the Eurodollar market did for Russian held dollars when it was established. The great thing about the City is that it has thrived on bypassing regulations, or rather, creating the most efficient systems to mitigate their impacts. It's what it thrives upon.

But back to the markets, I am lost. I see risk piling up everywhere except in the markets, which are driving on upwards. I don’t need to list the European stresses but I think this sums up the EU's position pretty well.







There are so many possible outcomes to current uncertainties I am looking at the markets as a quincunx-  not a Harry Potter creature but another name for the 'bean machine' devised by Sir Francis Galton.




The box itself could even be used as a metaphor for Trump's policies. An Executive Order, or even just a tweet, is dropped in the top and it rattles down through so may deflecting processes that, though you think you have an idea where it is heading, the policy's final resting place may be some way off where it started.

Add in the rest of global politics and you end up with so many variables, or pins in the box, that the sum of paths may well mean that there are not any fat tails, but the standard deviation of the resulting distribution is a lot wider than volatility pricing is currently suggesting.

I have been discussing buying volatility now rather than direction as I was, or so far have been, wrong on direction but I am being amply reminded that the scenario we have could be looking like the great vol compression of 2006. With Mr. Cohn (bless his poor cotton socks having to take that meager compensation for having to give up his job at GS) at the helm, the perception is we are going to have a smooth path to financial wonderfulness with the lifting of bank restrictions and the extension of credit underwriting all risk. In a way it's a passing of stimulus back from public QE to the private sector banks, a pay off for, or by-product of, lifting the bank restrictions. Some would no doubt ask what happened two years later, but we won't go into that now. But, back to volatility,  buying vol doesn't necessarily need a turn lower in markets to perform, though falls in markets do drive up implied volatility. You can buy implied volatility and be measured against realised by managing the hedges rather than, as with the VIX, buying implied volatility and being measured against implied volatility. There is a big difference meaning you can make money being long vol on rallies, despite perceptions.

Especially when people gets squeezed out of a large short call positions.


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Right there you go commenters, new space to play with.
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washedup
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February 15, 2017 at 11:57 PM ×

@Pol thanks for that page turner we definitely needed that - a simple 'this page intentionally left blank would have been acceptable' to us poor sods, and here you are with something quite thought provoking.

That last statement about option call gamma caught my eye - I traded derivatives for many years, and I think I recognize a gamma fueled surge when I see it - alas, its impossible to prove, but definitely feels like the way we ramp through specific levels that some thoughtless structures sold cavalierly by banks to hedge funds when it was considered impossible we would go through 2200 are coming home to roost. How so Q1 2000 - back them some of those calls were Nico's, and he would probably attest that they don't exactly make for lasting value investments! My point, they will eventually expire or get hedged. Then we shall see.

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Nico G
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February 16, 2017 at 3:53 AM ×

damm i was still posting on last page

to whom it may concern there seems to be a lot of gamma shorted above 2300 into February expiry:

http://www.zerohedge.com/news/2017-02-15/multi-billion-trade-meltdown-here-reason-markets-inexplicable-surge?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29

which might give Abee another reason to sell into strength - well done on the yankee financials! As you saw banks are still dead money in Europe but the US counterparts have already priced in Reagan 2 deregulation and all-out white collar crime for next half term. It's very stretched and whether a 10Y at 4% will help them make money more than it will screw the entire US capital system remains to be debated.

on that same note, seeing Goldman perform that much since Trump's election is well, ironic. Didn't they ban their top employees from donating to his campaign? Hell everyone at GS with stock options and vested shares owns him diner. More generally, it sickens me that so many liberals who tweet vomit on Trump are making so much money on current rally.

is it ethical to make money on Trump when you call him a prick a maniac and a treator? haha o tempora o mores

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Nico G
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February 16, 2017 at 4:01 AM ×

i posted above before i read Pol and washed

Pol grazie mille for the video it is 9 seconds watched in loop and pure gold

and washed, how prescient of you to suspect gamma snafu this quarter! as per zh post relayed above

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IPA
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February 16, 2017 at 4:20 AM ×

Nice post, Polemic!

The market is ripping (err... crawling up) into the face of those of us who simply don't accept how absurd the whole premise of the rally is. I mean if they can leak the Flynn stuff, they could then leak the corp tax and infrastructure plans. Right? Wrong! They have nothing to leak. They simply don't have a cohesive plan or needed support for one to be passed. Meanwhile, the market is enamored with whatever the adjective of the day is - today it was "massive". So as DJT walks around the Trump Tower (err... White House) and reads the fake news about himself, he is thinking of the next adjective in order to divert the attention from the brewing Russian scandal and his defeat on the travel ban and try to score one of very few wins he could. Let's remember, he thinks he was the single reason Dow crossed 20K. He thinks he can keep the market above it, talk it up and take a credit for it. He knows Obama left with a high approval rating due to the improved economy and stock market.

Sending ground troops to Syria should be another way to escape the scandal headlines. This is starting to look so Nixon-like, it's plainly scary.

Full disclosure: I am short XRT, XHB, IYT, SMH, NVDA, INTC, MU, FB, BMO, TD, RY, KRE, EQR no matter what phenomenal massive plan is unveiled.

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Nico G
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February 16, 2017 at 5:48 AM ×

as a recreation, here's some brainy input from spellbinding Steve Pieczenik on current US politics

https://www.youtube.com/watch?v=2BWtBK-1Dpc

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Nico G
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February 16, 2017 at 7:06 AM ×

back to work with the excellent:

https://blog.thinknewfound.com/2017/02/anatomy-bull-market/

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JMT
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February 16, 2017 at 2:58 PM ×

Great post.

Just to add to IPA's comment, I like his 'implied' adjective and completely agree that we are going through a period that is very "Nixonesque". How this evolves is the albatross that weighs over the markets.

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Napoleon
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February 16, 2017 at 3:09 PM ×

https://www.theguardian.com/us-news/2017/feb/16/deutsche-bank-examined-trump-account-for-russia-links

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johno
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February 16, 2017 at 4:12 PM ×

There's your "Catalyst."

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hipper
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February 16, 2017 at 4:34 PM ×

Gold/pm's holding up on both DXY/US10y up and down days. What's going on here? Also the deep state swamp seems to have gotten a victory out of Trump, if not completely neutered him on foreign policy. I wouldn't be surprised to see them doubling down on domestic as well now that they see blood in the water since that is what they do most of the time.

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Leftback
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February 16, 2017 at 4:42 PM ×

MM (the man himself) has been watching USDJPY and pointing out that things could go pear-shaped if the pair turns downward. Today's roll-over in the dollar and yields seems to fit in with that view.

Once again, if we are discussing crowded trades, long dollars and short Treasurys are very high on the list.

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johno
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February 16, 2017 at 7:22 PM ×

Thinking aloud on USDJPY ... price action yesterday was terrible given the data. I've also noticed how the tight relationship between USDJPY and rates since Nov 8 had been breaking down the past couple weeks. Still rates are key to the cross and I don't see USDJPY mis-priced much on my models. With the rates markets now pricing 2-2.5 hikes this year, I've definitely warmed to the yen, and it has the added benefit of balancing out my book a bit. I was short overnight, but am flat now, trying to figure out what to do.

Is "Catalyst" the catalyst for a market downturn? I wouldn't hold my breath, but at least it makes one more comfortable hedging out risk here, which is what I've done some of today. Catalyst saying it closed Feb, but it's suspected the exposure was rolled to Mar. Even so, if the strikes are around 2350, we'd have hit peak gamma yesterday. By the way, who sells 1x4 call spreads or 1x4 anything spreads, for that matter? Ah, a physicist. Makes sense.

Meanwhile, the CIA is at war with the US president. Interesting how American liberals now have a love affair with the CIA. You know, those guys with their ace assessment of Iraqi WMDs, of Viet-fricking-nam? Seriously, reality is stranger than fiction.


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IPA
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February 16, 2017 at 7:45 PM ×

I forget the name of the political pundit who said on the inauguration day: "give the man 100 days and a duck tape". That was brilliant!

Folks, we rallied like 10-12% for this. Just shoot me now, resuscitate me in June.

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Nico G
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February 16, 2017 at 8:21 PM ×

" American liberals now have a love affair with the CIA" and as far as Amendment 1 is concerned, they're acting like pure fascists and do the work for the very people they claim to despise.

Hunter Thompson must be twist n' shouting in his grave - Dems have become the Reps he derided and vilified throughout his magnificient writing. For the Hollywood breed of liberals and stock investors the idea that Trump rally makes them richer is personally unbearable.

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IPA
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February 16, 2017 at 11:59 PM ×

Just want to put this out there before I get shot :) Not that they (WH and Congress) even remotely have any idea on what the proposed tax reform and infrastructure plan will look like and/or when they will release any substantive details, but based on what we heard in the presser today, looks like it'll be a while before we enter the sausage making phase. I hate to draw a parallel with TARP debate and all the market volatility that came out of that, as the times were different and the whole financial system was on the line, but we know how DC has a tendency to fight over every little detail, and they will go back and forth on this one as there is really nothing major on the line now and urgency will not be present (except for republicans who want to quickly capitalize on their WH/Congress sweep before 2018 election comes). Also, from what I heard today, DJT and Schumer have become even more fierce enemies at this point and will simply not give up an inch. Can you imagine what the Congress partisanship and animosity level will be like by the time they vote on Obamacare repeal/replace? Who thinks the market has the patience to sit through that messy debate and wait for tax reform and infrastructure plan debates? Let's give this one a few days to sink in.

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IPA
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February 17, 2017 at 1:32 AM ×

"A border adjustment tax, they say, is the best option on a limited menu. Without it, they contend, tax reform will die."

http://www.politico.com/story/2017/02/paul-ryan-tax-reform-republicans-235117

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johno
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February 17, 2017 at 3:33 AM ×

Thanks for sharing that story, IPA. "Trump's chief strategist Steve Bannon likes it, but the president’s chief economic adviser, Gary Cohn, is opposed, according to people who have talked with them." And further on, "A source familiar with the White House’s thinking said it’s unlikely Trump would try to push through the border-adjustment tax if key administration officials and senators are still divided over it."
So, that's how I'd have expected Cohn to come out on the matter. The takeaway, if this article is correct, is that BAT won't be part of Trump's proposal. Anyone have a different view? I think this is one of the most important things to have a view on the next two weeks.
I'd still bet that tax cuts will get done, even without BAT. But I don't see how the tax rate is going to be 15%.
Can you imagine, by the way, a BAT with the USD (only) up 6-9% as JPM predicts, average weekly earnings flat-lining as they have, and inflation (before BAT) already approaching 2%? Middle class squeezed. A big fat recession going right into mid-term elections. Not to mention retailers whose margins are getting killed by AMZN, having to shut down so many stores? Sen. Cotton is right -- only an intellectual would be foolhardy enough to do this. But please, someone set me straight if I'm wrong.

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Nico G
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February 17, 2017 at 3:36 AM ×

The only 'phenomenal' aspect of the tax reform will be the amount of time it will take to lead to a complete fiasco. You can't get tax cut without a BAT paying for it and any border consideration is a direct threat to world trade. Fourth graders can understand that 'you tax me i tax you' protectionist logic. Hence there is absolutely no consensus within the GOP and (bi)partisan reality will hit campaign promises hard and cold. At best you get a horrible, dysfunctional compromise and Donaldtax matches Obamacare in complexity and inefficiency. It is a real pain in the ass (and the wallet) to see how stretched US equities are, 100% hopium ahead of any concrete reform and a 13/22 partial cabinet

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Whammer
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February 17, 2017 at 4:28 AM ×

Trump is showing some brilliance in reducing the size of government, you must admit. He can't get anyone to work for him, so think of the $$ savings!

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Celeriac1972
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February 17, 2017 at 7:37 AM ×

Nico - the Newfound paper is fascinating. Thank you for sharing.

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Al
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February 17, 2017 at 9:05 AM ×

Re Catalyst hedge fund...

http://www.zerohedge.com/news/2017-02-16/catalyst-confirms-it-was-behind-market-move

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Al
admin
February 17, 2017 at 10:42 AM ×

Catalyst...Reuters from 2013....

http://uk.reuters.com/article/catalyst-fund-etf-idUKL1N14018P20151213


"Miller's base case is that most leveraged ETFs are poorly designed because the nature of compounding wipes out their gains over time.

An investor who puts $100 into a two-times leveraged fund realizes a gain of 20 percent if the index it tracks goes up 10 percent in one day. Yet if the same index goes down 9.1 percent the next day to fall back to its starting point, the same investor who had $120 will realize a loss of 18.2 percent - or $21.84 - and be left with just $98.16.

Miller uses options to hedge his holdings, focusing on making bets that an ETF will have choppy trading rather than sprinting off in any direction, a strategy that he says limits his losses.

For example, he has a net short position on both an ETF that offers a triple positive return of an index of Russian stocks and one that offers a triple negative return of the same index based on the idea that Russian stocks tend to be volatile.

Indeed, both funds are down this year significantly, while their underlying index, the Market Vectors Russia ETF index , is up 22 percent. The bullish fund down 27.6 percent while the bearish fund is down 66.9 percent.

To be sure, the strategy is not foolproof and carries risks of its own, including high trading costs incurred from frequent options trading and the risk that a leveraged ETF goes on a prolonged run beyond Miller's strike price, leaving him on the hook for theoretically unlimited losses."

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washedup
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February 17, 2017 at 12:35 PM ×

@johno regarding BAT - Paul Ryan was pretty emphatic in his support for BAT yesterday at his presser - with Mick Mulvaney heading OMB and probably insisting on something revenue neutral, most likely the tax cut stuff will just drag on and get muddled with no resolution till a crisis hits and they can get it done without offsets (because u know, desperate times desperate measures and all that).

As for Trump 'pushing' anything - the guy seems rather illiterate, so he will sign whatever is brought to him as long as he gets to play with the shiny pen after. The Bannon vs Cohn idea is interesting on that front, but I don't see how they can propose anything that is not explicitly seen as incentivizing US corporations re-shore, given thats what the base expects.

I think people are missing a key risk here - that the white house + congress gong show makes this election black swan the last hurrah for conservatism in the country, and the massive backlash puts a heavily left government (and congress) in place by say 2022, complete with soak the rich populism and single payer healthcare. The problem then would be in assigning a quasi permanence implying 25 multiple to a near term tax cut induced earnings pop.

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johno
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February 17, 2017 at 4:06 PM ×

@washed, my mind turned to that key "risk people are missing" the night of the election. However, the stock market doesn't look out that far, and so will fiddle its way off the ledge.

@nico, despite Ryan and Brady's protestations, it is possible to get corporate taxes down without the BAT. Just to 25%-ish, not 15-20%. How does the market respond when effective tax rates are already at 25%-ish anyway? And how does the market respond if we do get BAT, with trade backlash, USD volatility, and impossible-to-model earnings for several sectors? Maybe just a yawn and bid higher, setting up for a crash into the next recession. For the time being, the stock market does have the global growth cycle going for it.

Some days or weeks ago I asked whether people thought Melenchon could join up with Hamon. And today, that is the big story. Apparently they're talking, also with Green, Jadot. If they combined and kept the sum of their polling percentages, they will be in the runoff against Le Pen, and risk of her winning will be MUCH higher than otherwise.

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IPA
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February 17, 2017 at 4:57 PM ×

My thoughts on tax reform and something Nico G said about DJT's opponents now standing to profit from him. I am watching a group which may become the best indicator of the tax bill's passage - airlines. Warren Buffet dipped his toe in the group before the election but majorly loaded on their stocks right after the election in hopes of a tax cut. Of course, he did not say that, we think that. The man knew or purely speculated before the election that DJT would win. Let's remember that Buffet was his strong and very vocal opponent. 2017 is not supposed to be a kind year for the airlines and it's clear that a tax cut to 15% for the sector with an effective tax rate pushing 40% is what the Oracle is banking on. While he initiated a smaller position in AAL, DAL, and UAL in Q3 2016, he upped the ante by a ton in Q4 and loaded up on LUV as well. If Warren thought something other than tax cuts I think he probably would have bought them sooner. He absolutely hated airlines ever since his USAirways debacle in 1990s. Now he possibly stands to profit from the advantage which may be given to them by the man he so strongly opposed. How ironic...

Anyway, I am watching airlines stocks' closing prices as of the day they met with DJT. Berkshire's 13F became public a few days after. Should they lose the altitude in a major way, I will start to think that hopes of a tax cut are waning. Certainly, there are other headwinds for them but probably fully priced in (and now they have a Buffett put), unless crude oil decides to take a major hike above $55.

JETS

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thud
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February 17, 2017 at 5:08 PM ×

Re: BAT

Nails have been hit on the head -- you can't get a deficit-neutral tax plan in place without something to balance out the reduction in corporate taxes. Without that deficit-neutral piece, you can't get it through the Senate under reconciliation.

@washed: Key risk indeed. The lack of GOP solidarity (if there ever was a chance for such a thing) calls into question the key assumptions of a Republican D.C. I wonder how long the market will accept the delay between expectations and action. At some point FX vol will translate over (especially to johno's point about BAT)...

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johno
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February 17, 2017 at 5:12 PM ×

Re BAT, sometimes the outcome isn't binary. What are the other possible outcomes here? Ryan now talking about possibility of "a gradual transition" to BAT. Another possibility is a BAT rate lower than 20%. If anyone sees a fudge here, please share.

It's funny, Yellen talking about inflation. Blackrock talking about inflation. I don't see it. Look at ECI YOY Index and REALYAWE Index ... flat-lining.

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thud
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February 17, 2017 at 6:51 PM ×

God bless Boeing.

Brilliant.

Seriously, though, some parts of the speech seemed to channel Reagan... ideas from the that era's playbook when it comes to tax reform and fiscal stimulus? Tempered with the differentials in debt, rates, and workforce demographics, of course.

johno - agree with non-binary outcome. Again, it speaks to the uncertainty of what this tax plan will really look like against the ex-ante of market action since the word "phenomenal" was thrown around.

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hipper
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February 17, 2017 at 7:39 PM ×

https://www.youtube.com/watch?v=snDpp9DxcEE

lol, US state secrets and foreign policy intentions flying around

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dfdsfiol
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February 17, 2017 at 9:09 PM ×

Bears are a rare breed these days:

http://www.zerohedge.com/news/2017-02-17/another-bear-throws-towel-canadas-most-famous-investor-closes-bearish-hedges-after-h

All signs of a elevator drop coming...

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IPA
admin
February 18, 2017 at 1:27 AM ×

Oops...

WASHINGTON POST

Fannie Mae says Trump’s tax cut plan could drive it into the red

February 17, 2017 at 6:27 PM

TREASURY

Fannie Mae could be hurt by tax cuts

Mortgage finance provider Fannie Mae said Friday it will pay the Treasury $5.5 billion in dividends in March, but warned that it would face losses and again require taxpayer support if President Trump’s plan to slash corporate taxes comes to fruition.

A significant cut in corporate tax rates, from the current marginal federal rate of 35 percent, would result in Fannie having to write down its deferred tax assets, according to the government-sponsored financier.

If the write-down were greater than its capital, Fannie said, it would have to draw on its credit line with the U.S. treasury, as it did during the global financial crisis more than eight years ago.

Fannie’s quarterly dividends stemmed from its $5.04 billion in net income in the fourth quarter, which lifted its annual income to $12.31 billion in 2016 and its total payments to the government to $159.9 billion.

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abee crombie
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February 18, 2017 at 5:44 AM ×

met with a bunch of PM's the past few days. Have to say I didnt find any that were bearish on the cyclical outlook for the economy. Trump has his 100 days. after that the questions will start getting tougher. But until then i think market gives him benefit of the doubt.

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checkmate
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February 18, 2017 at 11:53 AM ×

I was willing to give Trump the benefit of the doubt. That is, that is public demeanor was some kind of 'show'. Having parsed some of his recent media events I conclude that I was wrong. The guys an unintelligible moron. Back him if you want ,but I'll take a pass.

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IPA
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February 18, 2017 at 5:04 PM ×

abee, I don't think it'll be the economy that will bring the market down. Not calling for a crash or a bear, but a 10-15% correction would suffice to reset the "animal spirits" recklessness of sub 10 VIX. You have a bully intrenched in the highest office in the world of politics, armed with a nuclear arsenal which he just casually mentioned at his first presser. My notion is simple, we will wake up one day scratching our heads and wondering what we were thinking. Limit down would take on a different meaning altogether. While he is sitting and writing daily list of adjectives for juicing the only theme holding his presidency together, he blows away close allies and gives ammunition to fiercest enemies all in one presser. It was a political suicide. What a shame! I said it before and let me repeat, he single-handedly will end this rally. I think it'll be a fight with Paul Ryan or a geopolitical matter. Economy would follow...

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abee crombie
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February 19, 2017 at 1:27 AM ×

IPA you may very well be right. I am just waiting a little bit before gearing up the shorts. Sell in May maybe...I dont have the mental capacity to fight the tape all the time

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johno
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February 19, 2017 at 6:40 PM ×

@abee, thanks for that feedback from your meetings. Seems consistent with sentiment data I see, which has institutions very bullish. One thing I perhaps didn't appreciate at times the past couple months is how Trump's election coincided with a cyclical lift. Arguably, there was risk premium going into the election which got priced out too. With cyclical factors pushing out the next recession beyond 12 months, an election over with, and duration riskier, it's hard to argue with a higher stock market.

@checkmate, yes, he is not inspiring confidence. His tax plan, the timing for which seems to be pushed to mid-March from before Feb 24 previously may be a reality check for the market. We'll see.

By the way, can anyone imagine a scenario where we introduce a border tax and China doesn't let its currency fall 20%? China is the world's factory, so that's where the adjustment would have to happen. If it doesn't, the shock to US middle class real income will push the US into recession (not to mention China). But let's imagine China does let its currency go. Trump will probably call them a manipulator then, tariffs will be applied, trade war, etc.. And then China will have massive outflows, depression, etc.. IF Trump includes a border adjustment tax in his proposal, I think it's extremely courageous to hold equity risk. Of course, the market may trade up on the very low corporate tax rate the tax enables, and that would be God's gift to sell equities.

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IPA
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February 19, 2017 at 8:00 PM ×

johno, I finally bought a TV and turned it on this morning. The "phenomenal" and "massive" tax reform is UNPASSABLE.

The cyclical factors you are referring to are the delayed orders going through now due to election uncertainty lifted. It is unsustainable at best and will be followed by sharp drops at worst. Pull up Philly Fed Mfg Index going back to 1971 and draw a horizontal line through 40.

http://thehill.com/homenews/senate/320306-graham-ryan-tax-plan-wont-get-10-votes-in-the-senate#

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thud
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February 20, 2017 at 5:50 PM ×

IPA, you were without a TV following a margin call, right? Hah! Unless that wasn't you who posted that... then the joke falls flat and this post spirals out of control quickly.

Moving on.

johno, good point on the coincident cyclical lift -- I think some narratives miss that point, and I think it's an important balance to the near term hand-wringing over Trump's missteps. Regarding your question over the BAT scenario, Brad Setser has some good thoughts:
http://blogs.cfr.org/setser/2017/02/14/how-serious-is-the-threat-to-global-financial-stability-from-a-border-adjustment-tax/

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johno
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February 20, 2017 at 6:24 PM ×

IPA, we don't even know yet what Trump's tax plan is. My going assumption is that Ryan/Brady's plan is un-passable, but that a base broadening reform plan bringing the rate down to mid-20s is passable. We'll see. We still need an Obamacare replace/repeal. From WSJ: "GOP leaders consider handling Obamacare first vital for procedural reasons. It’s necessary to resolve the costs and tax implications of the health plan to write a new budget. And under congressional rules a new budget plan is necessary to provide an umbrella under which a tax overhaul can be passed with a simple majority, thereby avoiding a potentially deadly Democratic filibuster in the Senate."

When I look at the Philly Fed, I see confirmation of the cyclical upswing. Hitting 40 hasn't meant dropping into recession shortly afterwards. Quite the contrary. Last couple times, eye-balling the chart, were mid-83 and end-93. Those following years were good times for the stock market.

Unless Trump does something stupid, I could well see the next real challenge for global growth being a post-19th National Congress slowdown in China. I wonder whether the market will be able to price that before the fact.

Weekend barbs exchanged between Hamon and Melenchon are, to me, more positive for OATS than Le Pen going up a point in the polls.

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IPA
admin
February 20, 2017 at 6:46 PM ×

thud, yes, it was me :) Have not had a margin call in 17 yrs (knock on wood). I was trying to add some color to the debate. I have four TVs in the house and almost never turn them on. My kids own the rights. There is rarely anything worth watching any more, especially now! I get my raw news from the wires and personally don't like to be told by the reporter what they mean.

johno, my point is that most of the spikes in Philly Fed and ISM (as was correctly pointed out by abee) mark short-term highs in the economic noise. It gives traders a good mark to shoot for in contrarian way. I don't hold positions too long so I am not going to argue the good times the market may have over the long term. We are due for a serious correction here, imo.

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thud
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February 20, 2017 at 8:12 PM ×

IPA, color noted and appreciated! More humor is what we need here. Fear, ridicule, and sarcasm make us better.

Anyone have any commentary on the grinding higher of long oil speculative positions?

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washedup
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February 20, 2017 at 9:52 PM ×

@thud the oil positioning issue is quite overstated - both as % of OI and total capital it comes nowhere close to prior peaks - plus, producers have been hedging like crazy and someone has to take the other side - US production will likely surprise to the upside this year, but for now specs may get away with it given seasonality and some interest in inflation hedging. Its really the latter thats been keeping a floor on crude - if long bonds get going and/or IPA is right on a deflationary pulse (however temporary) coming back thats when I would worry about oil - right now its in the Charlie Munger 'too hard' category as far as Im concerned.

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Nico G
admin
February 20, 2017 at 10:58 PM ×

not overstated in image

http://imgur.com/a/DIElL

you gotta love the bottom at the bottom (early 2016)

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Nico G
admin
February 20, 2017 at 11:30 PM ×

recreation:

check the line up at Maher two days ago.... wish we'd get more TV like this

https://www.youtube.com/watch?v=6CEVC2Wu8uQ

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EM/PM
admin
February 21, 2017 at 11:09 AM ×

If even a light version of the below takes effect, Chinese bubble funding will grind to a screeching halt. Look out below in basic materials.

https://www.bloomberg.com/news/articles/2017-02-21/china-said-to-draft-rules-to-rein-in-asset-management-risks

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thud
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February 21, 2017 at 4:42 PM ×

@washed, many thanks for the insight - especially in the context of current vs. prior peaks. My little rinky-dink model shows an increased loading of the inflation expectation factor on prices on a rolling basis, but I had a feeling I was looking through a soda straw and focusing on that too much.

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