European Inflation Breakevens Show...US Tax Reform Not Priced In?

Amidst the noise this week, there has been some chatter about increasing inflation expectations in Europe. This is certainly relevant given the continued run of good economic data, from output, employment, and consumer confidence.


The WSJ highlighted 5y5y breaks--which have purportedly increased--although given the brave new world of suppressed vol, the orders of magnitude are ridiculous. Is this increase supposed to catch Draghi’s attention in the press conference this week when it has increased a big 15bps?  


Moreover, it is debatable how much information is embedded in breaks when correlation to US breaks looks like this. I’m not going to bother you with an overlay of oil prices, but I think you get the picture.  


Looking at the residuals of 5y5y us breakeven vs. 5y5y eu HICP breakeven, it is such a quiet dataset that you can pick out each relevant macro event. A positive residual indicates high US breaks relative to EU breaks.  
  1. Nov 11, European Debt Crisis
  2. Mid-2012, Taper tantrum
  3. 2015, Falling oil prices/EM stress/EU deflation fear
  4. Nov 2016: Trump/April 2017: Fed Hiking/ECB sitting on hands


Today? The residual is zero, and has been stuck in a roughly 5bps range since May.


Yet the lack of any movement in this chart is illustrative in the context of the recent rise in interest rates. A substantive tax reform that juices US growth, eases fiscal policy, and/or increases long-term budget deficits isn’t in the price. Or to the extent that it is, the impact has been offset by increasing expectations for global growth in general and European growth in particular.


And quickly on another of my favorite subjects: if you read one piece about foreign exchange this week, make it Brad Sester’s most recent post on “Follow the Money”. It’s a great breakdown on how and by which channels countries with significant current account surpluses are intervening to keep their currencies weak (and worth noting that while my long usd/krw trade was a dud, it didn’t not work because the BoK was on the bid).


While not relevant to the US, it is an interesting thought process to apply to Hungary in the context of our recent discussion about their C/A surplus, export competitiveness, HUF and local rates.


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IPA
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October 24, 2017 at 5:28 PM ×

Prepare for takeoff on WTI.

GS's Kostin is warning traders that 60 on ISM is the ceiling and it's time to exit equities in the s/t.

I remember @abee wrote a piece on that exact ISM number earlier in the year. Maybe Kostin reads TMM2? :)

https://www.bloomberg.com/news/articles/2017-10-23/goldman-sachs-warns-peak-growth-may-spell-pain-for-u-s-stocks

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October 24, 2017 at 5:57 PM ×

I was just discussing this with Brad himself last night. The debate was about EM's history of hot money outflows and whether we should let some countries slide with a C/A cushion or not. The problem is that from Thailand to Vietnam to India they all do the exact same thing. Their all mercantilist's by nature. The U.S. made the mistake of allowing the early Pacific tigers like SK, Japan, and China get away with it. Like always, we had strategic concerns. Well, that doesn't sound like free trade to me then? That sounds much more like geopolitical military strategy than it does real free trade. Korea and Taiwan are both bad about this. Unless we show some sand and put a stop to this behavior, it will just continue.

Problem is India is a huge deal for several reasons. They need so much infrastructure and basic and medical facilities that if they don't get it soon it's going to be bad. Modi would like the US to provide it to India. China is not their friend. Pakistan and Bangladesh port battle are examples of Chinese encroachment. This alliance would give the US a huge boost in the Pacific, India could finally grow, the US would make bank by building up India's infrastructure, which would make trade between the two countries very important. India is usually on that Treasury list. I have it in front of me now. So, what actions should the US take? Now, Brad's point was in regards to Thailand's behavior, but it essentially applies to all of them. It's just in their (Indian and pacific island nations) nature...

So what do you think MM contributors? Should the US take a stand and stop being walked all over in international statecraft? Also, with the C/A imbalances...do you guys think it's understandable that EM's store up on dollar reserves considering history. Hoarding reserves for capital flight concerns is one thing, but many of those nations are going a bit overboard.

Shawn liked the piece man. I don't know what to make off the 5y5y breakeven chart. Maybe it's a reflection of Trump's battle with the establishment in both parties to get ANYTHING done. Maybe, like you suggested it's a global growth expectation issue.

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johno
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October 24, 2017 at 9:12 PM ×

Interesting observation on break-evens. Inflation in DMs seems very global (vs local) and is priced that way. Probably even more apparent if housing costs are stripped out of the inflation measure.

Yeah, the reserve accumulation seems overboard, especially in countries like Taiwan and Thailand, and strange that Trump's Treasury hasn't been more assertive. A couple things to note though. One -- with USD used to settle most global trade, rest of world needs to run surplus with the US, so this is by-design. Two -- excessive reserve accumulation is partly a response to the Asian Financial Crisis. Short of imposing capital controls, what lesson were Asian countries to take from that trauma? Run surpluses and stockpile reserves.

It's the quiet before ECB and the Fed appointment. Trump is taking hand polls now? WTF? Taylor just surged 20% points on predictit.

Any views on NZD out there? I maybe trade this one once a year. From what I read, any change to RBNZ will likely have minimal impact upon rate path. Less migration probably deflationary for assets, but inflationary for wages? Other measures announced are a mix, but higher minimum wages inflationary. The mean reversion monkey wants to see some trade here, but the macro trader is unmoved.

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checkmate
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October 25, 2017 at 12:35 PM ×

Hands up looks like I called the UK growth wrong. I said in very early summer that the UK would be borderline recession by the end of the year. Whilst 0.4% 3rd qtr is hardly romping away it still doesn't look like 0 - 0.5% annual. I thought that slowing construction and auto would be enough to drag the numbers down further ,but apparently not. At least even Carney is going to struggle to flip flop on the next rate meeting. Poor qtr for me though. Clearly out of step.

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johno
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October 25, 2017 at 4:47 PM ×

It happens, checkmate (to me, more than most!).

Position-squaring ahead of CB meetings. EURNOK once again screens expensive. Put on a mean-reversion trade there just now.

Funny. Easing cycles happen quick, but tightening cycles unfold slowly, especially with FX-driven inflation feed-backs. Exhibit A: Canada today. Doesn't seem a great environment for trend-followers.

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October 25, 2017 at 6:00 PM ×

I took an early position on natural gas and just have been killed. Checkmate, ur not alone...damn it sucks.

Johnno, what are yuor thoughts on Canada. I'm short CAD and still looking for a way to get exposure to a possible real estate collapse. CNY and CNH have been funny again. IF china eases its capital controls I think capital flight will take off again. Where ever that money lands will be risky going forward

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johno
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October 25, 2017 at 6:25 PM ×

Have to work up some thoughts on CAD. Striking that BoC says data "confirmed our faith in our model of inflation." Not many central banks saying that these days! Anyway, market obviously got way ahead of itself, extrapolating the unwind of the oil collapse cuts into a rapid-hire hiking cycle. After the US housing bust, we US-based investors expect over-valued housing markets to collapse everywhere, but I'm not sure that's the modal resolution to over-valued housing markets. Another thing to consider is China is a country of 1.4b people, the top 1% of whom all want property in Canada and/or Australia. There are not that many single-family detached homes in Vancouver's West End!! Calling a top on that has been a mug's game, for a long, long time.

abee was inquiring about shorting EMFX a couple weeks back, I recall. Nice timing, sir! What do you think now? I'm totally flat there, besides some tiny premium at-risk in longer-dated structures.

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johno
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October 25, 2017 at 11:41 PM ×

A few more remarks on CAD, having read over the MPR. A lot of emphasis on output gap as driving inflation with a lag. Now seen at 0%. I looked at spread between Fed Funds and the Canadian O/N rate versus the spread between the IMF's estimates of US and Canadian output gaps. Seems to explain the rate divergences since the mid-90's and would suggest Fed Funds a bit higher now, as is the case. Looking at unemployment and broader measures of unemployment (like U6 versus BoC's Labor market indicator) suggests Canada is behind the US cycle a bit. Looking at forward 3m OIS rates at end-18 and end-19 there's 18 and 13 bps differences. I wouldn't price that spread tighter (as it was a month ago, which seemed way too aggressive at the time), but don't feel compelled to bet it goes wider either. Regarding the real estate market, I again challenge people who say the Ontario restrictions will cause a recession to explain why Vancouver's market picked up again after similar restrictions were imposed there (chart 7 in the MPR). Also, the MPR mentions that resales are already picking up in Ontario. USDCAD has been pretty nicely explained by regressions on rates and oil. I see USDCAD being about 1.3-sigma expensive here, but I'd probably wait to fade that until positioning has been worked off and it's a bit more compelling. Anyway, that's my two cents (or maybe negative ten cents?).

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IPA
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October 26, 2017 at 2:23 AM ×

I dunno about USD/CAD but Canadian banks are looking toppy here. TD, RY, CM, BMO - all have juicy setups to the downside. I would say short the relief rally tomorrow with a stop above the recent highs. Not much risk but quite a bit of reward.

@Shane, I spy a possible surprise on Nat Gas inventory tomorrow. Will light the crazy animal on fire (pun totally intended). Been waiting for a breakout above the trading range for a while now. No real damage done to my position but it's starting to piss me off a bit here. Just the state I like to be at sometimes :)

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October 26, 2017 at 3:27 AM ×

@johnno great research bro, thank you. So many different ways to look at it. I keep seeing negative signs coming out of Canada so...we'll see. I also saw today that BOC is blaming NAFTA negotiations for poor 2017 export numbers. They have also had lower domestic consumption as well, but mums the word from the CB. On top of that the BOC fails to highlight the recent rate increases that have caused the CAD exchange strengthening. It seems like that could be hurting exports as well. IMO these omissions are telling. It tells me that I'm right regarding the Short CAD idea.

@IPA I like the banks calls. I'm looking into it as we speak. Yeah my Nat Gas position was just me getting ahead of myself (and the market) It kicked my butt to be honest, hahah. Nothing I can't handle, but fuck...I'm not giving up on it though. I also believe the the inventory figures might shock some folks. So I'm looking forward to that. Anyone have a position in US corn. I took a flyer on a position bc Some of the farmers I know told me that Indiana will report a big negative USDA figure in terms of total yield or bushels. Illinois was at about par as well. Those two states are crucial for supply. So far I've had a hell of a ride with this trade. Making up for my GAF with Nat Gas!

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Leftback
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October 26, 2017 at 12:46 PM ×

Time for Dr Aghi….

Has everything been appropriately leaked and priced in to bunds? We'll soon know.

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Leftback
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October 26, 2017 at 1:11 PM ×

A bit of a non-event, priced in, but some interpreting this as dovish. Bunds catching a modest bid.
Risk-on relief rally on tap today in the US, we'd be inclined to fade that.

Inclined to think we will see a significant squeeze in Treasuries soon, perhaps as soon as tomorrow's GDP?

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johno
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October 26, 2017 at 1:20 PM ×

All the banks recommending bund shorts going into ECB. ECB delivers on their expectations, more or less, and bunds rally. As you'd expect ...

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johno
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October 26, 2017 at 4:31 PM ×

As always, instantly offside in my EURNOK mean-reversion trade. Silly monkey!

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IPA
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October 26, 2017 at 9:05 PM ×

Encouraging to see crude close higher despite USD strength today.

Nat gas continues to wait for prolonged cooler weather. Somehow I think it will sniff the shorts out sooner than that. Enough said.

I still like XRT higher from here. Inverted h+s on s/t within the l/t double bottom formation and $46 projected target. And still like AMZN lower with an 8 as the first digit of its per share price in not too distant future.

Apologies for recycling... No major new thoughts except the aforementioned Cad banks shorts. I am in those as of his am.

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johno
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October 26, 2017 at 10:01 PM ×

Fun day. Draghi nobbles EURUSD. 1st hike timing pushed out again and narratives like "estimated 15-20b/mo reinvestment purchases + 30/b = hardly any slowdown!" Multi-year high COT positioning. The chart guys are seeing head and shoulders patterns everywhere (EURUSD, AUDUSD, USDSEK, etc.). EURUSD looking vulnerable on rate spread models (magic eight ball, I mean, model says 1.13). Boy oh boy!

The popular cross-market rate trade (receive US pay EU) got smoked, again. The short bund long UST where I was mercifully stopped at 1.82 some weeks ago hits 2.04%. Ouch. The Scandi currencies faired worse than EUR, rate expectations there being extra sensitive to the ECB's QE wind-down/lift-off. Added to EURNOK short on that (something I do only for trades that were clearly mean-reversion trades from the start). Separately, sold EURCHF against my soon-to-expire in-the-money EURCHF RKO calls to lock-in profits.

Meanwhile, predictit has Taylor at 29%. 29% odds that all hell breaks lose? But hey, VIX is at 11 instead of 9. It's in the price!

Back to counting my after-hours GOOG profits ... the company that every hungry genius wants to work for trading at about the same forward multiple as the median sh1t US company where your thoroughly unimpressive new son-in-law gets/is given a job. Wrong price!


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johno
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October 26, 2017 at 10:24 PM ×

I bet all the zerohedge readers are going to end up buying the top in FANG and ROBO. Their anxiety about the "disappearing future" (to automation, AI, etc) will reach such a pitch that they'll end up paying anything for a perceived stake in that future. 9/10 times the ironic answer is the right answer, so I make that prediction with my usual high conviction!

Shawn, what did you make of the BCB decision yesterday? Curve steepening there today, to the benefit of your trade.

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IPA
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October 26, 2017 at 11:44 PM ×

Yeah, my AMZN trade ain't looking too hot in afterhours. No question, the tech news just keeps on getting better. This being said, would you want to sell bad or good news? I just don't think AMZN can finally generate meaningful profit growth after the disruption phase is completed. I get it, many more new low margin markets to disrupt out there. BS continues longer than one expects. Hiding a stop above the high. Take me out or make me right. Target $850.

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Eddie
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October 27, 2017 at 8:00 AM ×

@Johno: I wanted to come back to your remark a couple of days ago regarding Hoisington, M0 and M2. Assuming that M2 is some constant multiple of M0 is a tall order, at least when looking at UK data: https://imgur.com/a/IaHxl. So it looks like they got this one wrong. But then I am no economist and things might be completely different in the US (although I doubt it).

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October 27, 2017 at 2:35 PM ×

What did I tell you about the signals coming out of the BOC. Rate hikes when the market priced in two hikes at below 50% odds. Headwinds to the economy for multiple reason, but NAFTA is soon to b a hill they die on. They defend there position and walk away from NAFTA or the understand the gravity of the situation in regards to their economy and start compromising.

What's the M0 M2 question about it? I must have missed a post...I like money aggregates I'd like to check it out.

Okay, so fucking yesterday at the close? CVS blown out on Amazon news, then they are putting together a hail marry for AETNA????? Unreal, but only to be topped off by this morning news of a British company called On-Line Plc...I think...anyways they changed their name to include block chain and it instantly soared 394%...Hello over zealous algo's.

Markets man...


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johno
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October 27, 2017 at 2:59 PM ×

I think there's a better shot than markets presume of no-NAFTA, however, it's probably not that big a deal for CAD. My understanding is there's an existing fallback agreement trade between Canada-US. Mexico not so lucky, however. Anyway, dollar rally is on. Once the average punter starts thinking this is more than a counter-trend rally, then sell your dollars. I'm maybe that average punter, so I'll be watching myself closely ;)

M0, M2 discussion was a critique of the Hoisington analytical framework. Think Eddie was corroborating my claims with data above. As I say, one thing everyone should have read and digested is: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

What should be done with all those Ec 101 textbooks written by Dr J Evans Pritchard, PhD:
https://www.youtube.com/watch?v=tpeLSMKNFO4

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Eddie
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October 27, 2017 at 3:01 PM ×

Re M0 M2: check the last comment here:

https://www.blogger.com/comment.g?blogID=34323687&postID=1528870552820140132&bpli=1

Johno had a good point there.

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Shawn
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October 27, 2017 at 3:17 PM ×

i was going to put a few thoughts together this morning but nobody seems to read the "around the horn" pieces anyway--so I'll just pop in my two cents here.

1) Brazil CB: As expected, market WAY overreacted to the removal of the further easing language--The point is they didn't declare and end to the easing cycle. Rally on.

Looking back on my piece from August, I was right about the curve flattening, but only minimal progress on the reform agenda. Inflation has been supportive, something I didn't dig into too deeply. BRL has been a bit of a sled with USD rallying at large. But hasn't got to pieces, either. I think the broader positive theme is intact.

2) BoC: interesting to see Poloz and Co. make reference to export weakness they claim is attributable to NAFTA uncertainy. YOURS. Macro Tourist nailed the move here and updated his view on it yesterday, I have nothing to add to his view there--other than the hair-splitting argument that the weakness of the economy coinciding with the rate hikes is correlation, not causation.

3) ECB/EUR: Surprised the market reacted so strongly. Worth noting spec positioning charts in EUR, MXN and probably any other number of currencies, but these are the only two I noted--very long; these guys are probably looking to head for the exits.

4) Oil: everything coming together here--further minor supply outages (I'm looking at you, Venezuela) combined with continued strong demand. FUERTE. A Venny default today or next week might turn this into a further circus, but I have a feeling they are going to pay.


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October 27, 2017 at 3:38 PM ×

Found the Hoisington discussion. Thanks

Ahh yess @Johnno nice YouTube post. I will put my own spin to the famous poets scene

"This is a battle...a war. The casualties could be your hearts and souls. Armies of econometricians running around trying to measure human action and free enterprise. You can't measure that. You can't measure the economy."

I added the Austrian school points of contention. But hopefully you get me.

Indeed, let's throw away those econ 101 books and find some real in depth research. I might suggest Ludwig Von Mises's "Human Action" although it is blacklisted from the typical Keynsian MBA/PhD curriculum. It's all you need to know about money and human action in markets. Translation...real economics

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Skr
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October 27, 2017 at 3:47 PM ×

@ the lad that said short eur/usd at 1.20 it is time to smile (post more often).

@Shawn 117 comprehensively broken whatta gonna do?

@Red Detroit how did you get on with that seat?
I guess your smiling too.

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johno
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October 27, 2017 at 4:04 PM ×

One stock that doesn't fit "the anxiety bubble" trade: TSLA. Bunch of arrogant computer nerds who think they can "hack" auto engineering. Hacking the DoD is one thing; mass-producing an automobile another. Success not breaking an egg at a Physics Olympiad, notwithstanding. Also, consider the onslaught of new EVs coming in just two years. The automakers will be cutting each others' throats on pricing to get share in the "future." P(TSLA becomes a truly mass-market maker) = low. In 10 years, it'll be a semi-defunct brand Geely or some other Chinese automaker will buy for $1 billion. Having said all that, I've done like zero work. Just some Friday fun. (johno implying he does "work" on anything? that's news)

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October 27, 2017 at 4:30 PM ×

I agree completely with your $TSLA take Johnno.

Did any of you guys hear about Honda's new combustion engine? Man...love to get peeps opinion on battery technology because Im not sold, at least not yet. I see batteries working in smaller devices and then growing into its future.

To knock off the only vehicle design that has ever existed EV's will need to be more efficient, more powerful, safer, cheaper, etc...Because it's just the rules of the game. The rookie has a huge hurdle rate. Kind of like burden of proof for the prosecution. They can't be sort of right or sort of convincing...the prosecution has to hit a home run and make it a no doubter Aron Judge style.

Random, I know, but I meant to mention it on a thread at some point (mazda engine rollout) One last thing, there is a new kind of steel making process that people think will make vehicles lighter and there for boost performance with less cost...see the end of my post for a quick metallurgical treat (just kidding its hella boring, but its a reference).

So In a cash strapped world, when inventories on auto dealers lots are backed the fuck up to forever...any opportunities for fatter margins... big auto firms (IMO) will take full advantage. I'm not suggesting EV dies on the vine, just not so sure its the future yet. I'm dealing with a slow day as well Johnno...uneventful, so Im messing around as well!

http://www.millennium-steel.com/wp-content/uploads/2017/05/pp062-065_ms17.pdf

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Leftback
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October 27, 2017 at 4:54 PM ×

I hate to get all global macro here, but we now have an independent Catalunya.... Spanish bond yields are climbing.

Spain is going to send the tanks in, basically, in some format. This is going to be a very tense weekend, and I believe that this will not end well, or for some time. Bunds will catch a bid, and with the bund-10y spread at 200 bps, buying Treasuries here would seem to be a no-brainer. [Full disclosure - long TLT]. Remember that massive short 5y position? Now add Powell as Fed Chair. ISM 60, rising rates, GDP 3.0%, high equity valuations.... this might just be as good as it gets for some people.

The short vol selling trade (via SVXY optionality) is showing some promise. The last drop in SVXY on Wednesday was sharp, and although Chad, Brad and Thad bought the dip in SVXY, there might have been a few moments when they felt sick to their stomach. The next drop in SVXY will be a massive puke. This trade is stale and everyone is on the same side of the boat.

Not sure we are there yet, but somewhere out there will be a Monday morning gap down open that will challenge the "portfolio management skills" of a lot of newer market participants. It's been a while since we got to see how Dumb Money handles a sell-off. Nasdaq in the grip of a vicious squeeze today after AMZN earnings. We remain focused on the highly leveraged small caps; in a falling market this is almost always the weakest segment.

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johno
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October 27, 2017 at 5:37 PM ×

Further to my, "when China drops growth targets, its stock market will double" ironic truth thought: http://www.scmp.com/news/china/policies-politics/article/2117060/xi-skipped-gdp-target-purpose-says-aide

LB, I actually bought some FVZ7 on the headline. Already flipped it, but I suspect you're right about going long treasuries here. Counter-argument would be big year-end stock market rally with bonds selling off alongside. Also, Politico says "Trump changes his mind about it every day" which is a bit scary, because Taylor really should be a non-starter if Trump is a "low rates guy" as we imagine.

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IPA
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October 27, 2017 at 6:44 PM ×

Oh my, it's that time again. AMZN to new high and no stopping this tech train. I stepped aside and chose a quick bullet in the head vs a death by a thousand cuts. This gave me time to enjoy WTI rally for the rest of the day (at least I am right on something today). Had it not been for CVX I think XLE would be closer to $70 right now.

Not to rain on anyone's parade, but this Fed Chair saga is way overblown. Last time I heard the lack of inflation was a "mystery" and Fed was tracking the cell phone bills for answers. Would you please give me a break? Next they will send the staff to Whole Foods on a perpetual search for more answers on the lack of inflation, and as of yesterday the "mysterious disruptor" may be close to selling drugs in 12 states, thus sending Pharmacies and PBMs on a hunt for insurers (CVS/AET) as prices are about to plunge. Apparently, it's the volume that they are going to be after now. What a travesty! More importantly, what is Fed going to do about that? It's as much of a mystery as the fact that internet and low prices are here to stay forever and will be applied to all facets of our lives. Just get on with it already! Status quo to continue, I say.

Speaking of which... DXY is at a very important level here. It is facing a big resistance at monthly 8 ema (95.30-ish). This looks oh so close to Oct of 2002 but one had to wait for months to get the answer.

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October 27, 2017 at 6:47 PM ×

So with Catalonia popping off in full effect this weekend anyone looking to short periphery sovereigns or maybe Spanish banks (Santander) Bunds and treasuries are the obvious longs...just curious. Also anyone on the thread fuck around with USD/ZAR? I'm a bit unfamiliar with the details in South Africa....I know the story, but I don't have any kind of unique insight into SA politics to take a chance just yet...

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johno
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October 27, 2017 at 8:40 PM ×

I'm pretty sanguine on the Catalonia risk. Instant economic suicide, so I don't see it happening. And just look at Puigdemont. Not the picture of a charismatic leader to lead people into certain doom. Of course, there's BoJo and Michael Gove leading Brexit as a fresh counter-example to my flippant remark.

I trade ZAR now and then but haven't been focused of late. Gigaba fumbled the budget, so I'm guessing market is starting to price a downgrade and outflows. Bigger picture is ANC is corrupt, divided, and unpredictable, and SOEs are a bleed on country's finances. But terms of trade have improved (China) and the country's debt is mostly local-currency denominated. With Powell likely announced soon and risk sentiment still strong heading into the usually bullish November, not to mention US rates now more sensibly priced than in Sep, I'm not sure I'd look to go outright long USDZAR, but long BRLZAR maybe interesting ...


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johno
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October 27, 2017 at 9:30 PM ×

Hardly a strong view, but shorted some USDCAD today. Positioning still scary, but guessing this doesn't get more expensive versus model unless narrative really shifts. BoC is a forward-looking bank that believes its inflation model, so I don't see the narrative changing so drastically on account of Wednesday's "caution" remarks. Could easily be wrong and even if right, there's probably a much cleverer trade to be done in options, but ...

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October 27, 2017 at 10:22 PM ×

You're shorting USD/CAD? To each his own...I'm a humble dude. I've been wrong before.

I love your call with BRL/ZAR I don't have a position, but I'm thinking about it. Straight long USD/ZAR is just uncomfortable for me. Looking deeper into SA's problems. Maybe I'll feel more sure about my conviction in a few weeks.

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Shawn
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October 27, 2017 at 10:38 PM ×

Where's Catalonia's Nicola Sturgeon? sigh.

I'll drop a quick post on high beta EMFX over the weekend, really in reference to their underperformance, one broken down between 1) oil importers/exporters (predicable), Asian export powerhouses (and building reserves) and 2) idiosyncratic risks. ZAR loses on both #1 and 3--and has taken a significant beating in terms of trade as ZAR depreciates and oil prices rise. That being said it is the currency people love to hate...unless local/political risks deteriorate or EMFX *really* goes down the rabbit hole, I'm not sure whats left there. Bottom feeders are going to look for signs this will instead be a catalyst to finally run Zuma and his cronies out of town.

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johno
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October 27, 2017 at 11:07 PM ×

My trades nothing to fear, Shane. Could very easily be wrong.

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October 27, 2017 at 11:57 PM ×

No, I see where your coming from Johnno. I was just pretty convinced by my research. I'm always looking for constructive criticism...its how I learn. I think it might be more of a dollar strength thing than a total CAD weakness thing...does that make sense? I think Canada has some issues to deal with, but I think its more dollar bullish within the pair than anything for me.

Shawn, I like your take. I just wish I knew more about like a timing thing. Meaning I agree it's (ZAR) "been done had it's ass beat" the last two weeks. So looking for the bottom makes sense. However, what is the catalyst for positive developments or news in South Africa. What's the probabilities for continued dollar strengthening and then for South African reform? Even if reform happens...question is when? I've heard of stories bout South Africa and the greater continent's severe food shortage, lack of farming, lack of planning for agriculture etc. That's a risk that could last months, years, or maybe longer.

Sorry just running through everything on my mind before I hang it up tonight guys...mind's all over right now.

P.S. though the Pacific/India/Africa population boom is going to literally test humanities abilities to create capital. Another possible 4 billion people globally in 15 years???? I mean that's dystopic.
US farmers will be the people they look to TRY and feed the world. They're the next 50 years billionaires, IMO.
Johnno, do you know of my guy Mr. H Wilmore? (don't want to bust out his real name here). He writes at oldschoolmacro.com. He hit me up a few weeks ago and agree's completely with me. I'm working on getting rough estimations and commitments (in terms of costs) to actually buy part or all of the production process within Ag/livestock industries. I bring him up because I thought I've seen you talk to him....could be a different person though.

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Skr
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October 28, 2017 at 7:20 AM ×

Leftback, I got ridiculed two years ago when I did research on catalonia. I Still hold the conviction that this is the make or break point of the EU (research was done before Brexit). Imagine if you will, sitting in your armchair smoking your pipe, many years from now replying to your grandkids questions of how the union broke up. I suspect the answer will be along the lines of "they stood by the side lines and watched civil rights and democracy get destroyed, and 10/15 years later many many ordinary folk no longer wanted to be part of such an institution".

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Skr
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October 28, 2017 at 7:25 AM ×

Re:DXY
WTF? How many posts did you spout out "94" was the resistance that would hold. Keep it real man!

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IPA
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October 28, 2017 at 9:02 AM ×

So you had a successful trade, I am happy for you. I am here a bit more often and may have called more than a few myself. You are totally welcome to skip over my posts. Really, no big deal. I admit when I am wrong as well. All in real time, right here. No need to keep a scorecard. I remember you were buying a level on DXY that did not hold by more than a few big handles. It's all good. Peace, man...

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October 28, 2017 at 11:14 AM × This comment has been removed by the author.
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October 28, 2017 at 12:13 PM ×

I think I'm the rook on the blog. This is as good of place as any to ask this. Like, I see dudes swoop in and say some completely random shit...almost like their yelling about past drama on the thread...anyone help me out with that? I've seen some of the competition that can flare up on threads and I get that completely. Shit, I fucking love that about this blog, but my question is sometimes....like (for example) @IPA, did you just get called out for mentioning DXY resistance handles? You trade on your own conviction...then you own it. Now if you were like getting an advising fee, okay I see why ol boy might be a little pissed, but otherwise, I'm a bit perplexed. I have an opinion on a big market move so I'm going to announce it anyways, lol (blogger beware not investment advice) ;).... I'm not trying to be disrespectful at all....actually the opposite. I'm the young guy trying be to b deferential to the long time members...

All that aside, here is my call going forward. If your positioned for short vol/carry trades you might watch out. It's all about liquidity. So if you think liquidity is here forever then your implicitly short vol (IMO) If you are like me and are long dollar, commodities, short the front end of treasury curve, so essentially long VOL then in the next month or so it might be worth setting up h a large and long volatility position.

If anyone is interested I can give you a run down of my reasoning for my conviction in this trade, but it's a long response so I figured I wouldn't take time to write all down.

Just get long the dollar, but the timing is critical. Full disclosure I'm still willing to dabble in the long EM carry strategies, but I'm starting to be more selective because I think dollar liquidity is about to dry up. Alright I'm signing off for the weekend...looking forward to Astros Dodgers game 4-5...

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Skr
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October 28, 2017 at 12:37 PM ×

No worries. I like your thoughts, just found it strange that you didn't mention it that's all.
I'm Happy to admit when I am wrong and take the loss.

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October 28, 2017 at 1:21 PM ×

Right on, well again I meant no disrespect to anyone. Just trying to learn ropes of decorum. Not sure why we didn't bring the dollar up again. I'm going long the dollar big bt for a while also...so with my personal time frame I'm not to concerned with intraday handles (for the most part)

I got worked over bc I was early to trade Natural gas strength last week....sucked so currently Im waiting on it to run...@IPA It's cold in the northern half of the US now....actually crazy cold...thoughts on Nat Gas getting a bid. Also Russia sent a huge brand new LNG refrigerator barge to China...as a gift. My guess is Russia is sending the US a little warning to not try and fuck around in their Nat Gas monopoly...They heard China say that party leaders wanted to look into importing LNG. Might start heating up...

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IPA
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October 28, 2017 at 8:33 PM ×

@Shane, agree, Russia has a lot to lose as the talks about the new pipelines to China have stalled (still have the big one coming though). It also looks like a sizable delegation from our nat gas companies will be joining Trump on the China trip but I don't know if that changes anything in the short term unless major contracts are signed. When XI stopped by in Alaska I am sure it was not only for sightseeing. Something is brewing there but I suspect it was also held up until Trump's visit. Can the big guy close one already? I am being a bit selfish here ;)

We do have a big push into Europe in the works, that's a punch below Russia's belt for sure but it's too nascent to push the market either way in the short term. Mexico is the one to worry about though but probably not until Trump decides to throw NAFTA completely out (some say he simply can't single-handedly). That one will hurt like a bitch and immediately.

All this being said, traders are myopic and it's all about the sustainable cold in US now. They looked at 10-day forecast and pulled the bids. I don't like Dec contact going below $3 and especially staying here for too long. I don't want any memory here at all. Let's get it back above that psychological and technical level and have shorties chase. Easier said than done. It is certainly defying the good news here: supplies are the tightest since 2014, rig count is down four weeks in a row, of course being weighed down by producers talking about uncertain 2018 (probably due to NAFTA) and everyone is now scared of this winter being a possible repeat of last. All conditions are conducive of an upcoming squeeze as soon as the cold weather is here to stay. Gotta be patient, I guess.

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johno
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October 28, 2017 at 11:39 PM ×

My "anxiety bubble" not an original thought, it turns out: http://thereformedbroker.com/2017/10/16/just-own-the-damn-robots/

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October 29, 2017 at 3:24 AM ×

@Shane "I think I'm the rook on the blog"

Your honesty is welcomed. My trading future has veered completely in the last 12 months. My reckoning is that if your coming into the trading sphere at my age, than you really have to admit to yourself that moving into a hedge fund environment is not going to work. After studying this market since the GFC you would have noticed that the sound traders never went all in on the short side at any stage. They took runs up, and took short runs down with the occasional loss. The wall street bloggers , and tip sheets are a great source for outsiders looking for how the street thinks and trades if your coming straight out of uni and looking for a spot on a desk. But if your looking into the future to have something solid to work with in the trading market, and have a life ,you need something you can control and make a living from. You need to separate your self from the wall street crowd altogether even if it means taking the chance of falling flat on your face when not taking the secure salary. I bet to win, not make benchmark hurdles.

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October 29, 2017 at 9:30 AM ×

@Johnno what do you think of Josh's piece? It's good, but I'm not so sure its desperation buying as much as it is zombie buying. Or, who knows maybe it is terror or desperation buying. All I know is when a person does a thing over and over again while expecting different results they are deemed insane. We have been infected with a kind of self deprecating schema. Accepting this premise it's easy to understand why people exhibit herd behavior at the peak of market hysteria. Or why we blindly follow and trust the current gaggle of cult like tech CEO's. Americans went from espousing ideas like "manifest destiny" or "American exceptionalism" to vociferating Marxist ideology and American hierarchical privilege in only 125 years. Something powerful must have happened. The struggle continues...

@ampswasinthehouse

First off, I agree FUCK BENCHMARKS BRO. HFM or PM (IMO) should be judged on return per unit of risk if you have to have a touchstone. I come from a unique background and have been thinking about market structure for years. Sounds like your getting out of markets in an institutional sense anyways? To each is own man, hope you end up doing well. My goal in this business is to grow the world's accumulated capital stock to levels where we can continue to innovate, evolve, and create. Make America great again you say? Well first, we have to make her rich and abundant again.

I have enormous respect for the men who came before me in finance. I just hope, at the end of the day, I remain enthralled with my profession and continue to be fiercely competitive with my colleagues. An old man back home used to say lovingly that I was born full of "piss and vinegar." He said I should take it as a compliment. "Being a fighter is always a good thing." He was old school as hell. Confidence in yourself and a REAL love for global macro (IMO and experience) are key to a manager's success. Don't go crazy trading by yourself homie. and keep hustling.

Hemingway pens a decent stanza in his short story "The Snows of Kilimanjaro" Hemingway was a genius at highlighting the merits of struggle. In particular below he talks about a guy who became so focused on the money that he lost his soul and therefore his ability to make that money in the first place. It helps me with perspective.

"it was not so much that he had lied as that there was no truth to tell. He had had his life and it was over and then he went on living it again, with different people and more money…” Here is the broken man, the man who has fallen from grace, the man who has shorn himself of dignity. He has given up on life and work, and consequently, love. He has tried to start again and “burn the fat off his soul” by retraining to write, like a boxer works fat off his body. But he ceases to aim for truth, and thus his life has become meaningless and enervated."

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Shawn
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October 30, 2017 at 4:47 AM ×

@amps, well said...HF culture is good for a couple of things, and absolutely caustic for a number of others.

@shane, about twenty posts back...Zuma has to go. reversal comes as the probability or reality of that increases--but as I highlight in today's post, if simply "nothing happens"....like anywhere....the carry junkies can't stay away.

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October 30, 2017 at 12:05 PM ×

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