When I posted a retrospective on Goldman Sachs’ 2017 Top Trade ideas, I thought the internet would jump at the chance to whack the squid with a shovel. The MM audience reacted with a collective yawn, as if to say, "hey, take it easy on those guys downtown..." Who knew there was such decorum, humility and understanding out there…
Quick point on rates...most interesting thing I saw in the markets this week was the Citibank US rates team alluding to a big long-end UST flow from domestic pension funds. This ties into the point I made about price action implying a distinct flow in the market due to the divergence of the long end of the treasury curve with global breakevens relative to oil prices. Once again today the long end dip got bought in size--this trend isn't going away soon.
This Japanese flow also would explain the richening of long end swap spreads. Other commentators have credited the move in spreads to Trump’s easing (or expected easing) of Dodd-Frank regulations--the move seems a little too fast in the long end for that explanation--the reality is probably somewhere in between. There continues to be a ton of demand for long end paper, despite great minds from Goldman Sachs to JP Morgan to Gundlach telling us rates are going higher.
All of this ties into today’s post, which I hope turns into a conversation. I have a request of the great Macro Man readers:
Send me your Top Trade Idea for 2018. One actionable trade, and 1-3 sentences on why you like it. Post it in the comments or email it to TeamMacroMan2@gmail.com.
I will aggregate the results and post them with names removed early next week.
For those looking for some inspiration, I submit the following…
In 2017 someone out there coined the term “The Everything Bubble”, which is meant to imply there is a bubble in, well, everything. If you buy into that, maybe you can get a few ideas from this piece, “What Could Pop The Everything Bubble” by Charles Hugh Smith.
And in honor of the Macro Man poetry tradition:
At length corruption, like a general flood,
Did deluge all; and avarice creeping on,
Spread, like a low-born mist, and hid the sun.
Statesmen and patriots plied alike the stocks,
Peeress and butler shared alike the box;
And judges jobbed, and bishops bit the town,
And mighty dukes packed cards for half-a-crown:
Britain was sunk in lucre’s sordid charms.
-Alexander Pope, as quoted in the introduction of the South Sea Bubble Chapter of Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay
And if you were the kid that cheated on your exams, here are the Goldman Sachs Top Trades for 2018, along with my thoughts on each.
Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries.
Shawn’s take: I’m with Goldman on this one--global growth synchronization will finally push inflation higher in enough places to get the attention of those that have power-flattened the curve this year. Term premiums aren’t dead, they’re just sleeping.
Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar.
Shawn’s take: i’m the other way on this one--I think Japan is waking up after a long slumber and will continue to benefit from Asian demand.
Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index.
Shawn’s take: Compra! EM cycles always last longer than you think...we’re only a year into this one, and no signs this will be any different.
Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation.
Shawn’s take: Didn’t I just write about this? It is cheating to have the same idea in 2018 as you did in 2017. You just made a small tweak to make it look different. I’m agnostic on this one--as noted I prefer the TIPS version.
Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the EMBI Global Index against short the US High Yield iBoxx Index.
Shawn’s take: Long EM credit vs. Short US HY credit….I like the theme but I don’t see how you make a bundle of money on this trade. Too clever by half.
Top Trade #6: Own diversified Asian growth, and the hedge interest rate risk via FX relative value (Long INR, IDR, KRW vs. short SGD and JPY).
Shawn’s take: This carries nice, with solid fundamentals throughout and BoK starting a hiking cycle...but a lot baked in here already. Consistent with their global theme, though.
Top Trade #7: Go long the global growth and non-oil commodity beta through long BRL, CLP, PEN vs. short USD.
Shawn’s take: With an election coming in October and reforms still undone, you need to buy into the Brazil local story in 2018 to like BRL. I do...CLP will be more correlated to the global factor if Piñera wins the election, which he probably will--although the stakes are rising after his opponent recently took to quoting Che Guevara. Goldman thinks CLP will be supported by “what opinion polls suggest is likely to be a market-friendly outcome in the upcoming Chilean Election.” Maybe, maybe not...but the business community will lose its mind if Guillier wins. The risk/reward there is simply the wrong way around.
There you have it...There’s probably no way to benchmark this, but what I would like to do this time next year is compare our “Wisdom of Crowds” approach to Goldman’s ideas and see who comes out on top. So here it is...your chance to put it on the line and step into the ring with the mighty Goldman. Goldman is Apollo Creed. Macro Man is Rocky. Nobody believes in us but ourselves.
Correction 12/6/17: This post has been corrected to fix Citibank's attribution of long end UST demand to be from domestic pension funds, rather than Japanese pension funds.
30 comments
Click here for commentsI vaguely recall Goldman usually being 50/50 on their ideas - so 6/10 should give us a win? :)
ReplyShort Tesla. I just don't know when. ;-)
ReplyMaybe I am mistaken, but wasn't the Bloomberg article actually describing a Citi piece that talked about a big Japanese UST selling program? Specifically, that they have been sellers of the 3 - 5y area of the curve, due to a number of factors. A different piece by Konstam was mentioned and it described flows in the long end of the UST curve by domestic pension funds. That is also indirectly corroborated by the stripping volume data.
ReplySo what you have written is a little bit misleading...
a brisk trip to SP 1854
Replyi like em equities but given the weighting of tech, i just wonder how the benchmark index (EEM) will fare if we have a tech sell off/slow down. EM tech multiples have gotten rich.
Replyon latam political risk. I think the market is way too complacent. Carry monkeys. Do I think the left will win even 1 election, probably not, but they will be competitive and I dont think the current risk/reward is there especially if all you are playing for is carry really. Better to wait for a spike to get in
Thanks for sharing the trades and your view shawn
Nicoooo!@@
Reply@Martin, good point, my memory let me down there....I don't have the underlying piece, but looking back at the bloomberg article it says the Japanese are selling the front end, and domestic pension funds are buying the long end. From my perspective the net result is the same--I don't find it particluarly relevant where the flows are coming from-- to me the Japanese flow in the front end is less relevant that the substantial flow/demand for duration in the long end that is disconnected from long bonds elsewhere and the move higher oil prices.
ReplyBack from exile Nick?
Replylet's say I enjoyed watching second baby daughter grow more than the Trumpopium tape
Replywill come back when markets are markets again ;)
My top trade of 2018: buy XOP @ $34.65 (current price) with a target @ $51 and a stop @ $29.40 and trail the stop up $1 for every $3 of gains.
ReplyFundamentals: unloved, under-owned, misunderstood, pegged to WTI at a perceived ceiling of $50 (which looks more like the floor now), grossly undervalued at current underlying commodity price level.
Cuts, cuts, cuts... Biggest beneficiary of upcoming tax cuts for two reasons: direct - 15% haircut off of its current corp tax, indirect - more disposable income in consumers' pockets will translate into longer miles driven and therefore higher demand for gasoline. OPEC output cuts extension is going to drive hungry oil customers around the world towards US producers. Asia is putting huge orders in for US shale and Gulf of Mexico oil.
Trade management... Simple trail of a stop after every $3 of gains from entry on an initial 3/1 reward to risk ratio. I would scale out of position taking profits in thirds or quarters. For those who like to leverage with options I would buy a long-dated call spread on a day like today when they are whacking long (lower) side of the bracket. If you like to buy the underlying, like to hold for longer but want to lock in the profits, instead of selling the underlying you could sell a call once the scaleout price is achieved. Endless possibilities of hedging with options, you could also do a collar to protect (wrap) your underlying once your price objective scaleouts have been met. A hard stop at $29.40 is a must.
Good luck!
Maybe a bit of a stringed bet, but I still like the following:
Reply-Short Gold short USD/JPY spread trade
-long European equties short US equities spread trade
-Long DXY
Using hard Commodities as a hedge when/where needed.
Thanks for pointing out that article Shawn.
ReplyCan't say I have any form in >3-month views. Besides just being long GOOG (own the world's best-and-brightest for a mere 21x '18 earnings), which is more stock pick than macro trade, I'll re-iterate long EURCHF. It's the only macro trade I've stayed long (via options) for over 4 months now, so it's got that going for it. Thesis is "Morning in Europe" and global growth draws out Swiss capital, pension funds start lifting hedges, etc.. Given where SEK is trading now, SEKCHF worth considering as an enhancement (I'm short EURSEK in cash, but it's more a trading position).
Since John McAfee has wagered a lot of "skin" to the trade, I would have to suggest that the top trade for 2018 might be Bitcoin.
ReplyMcAfee tweeted a few days ago: "When I predicted Bitcoin at $500,000 by the end of 2020, it used a model that predicted $5,000 at the end of 2017. BTC has accelerated much faster than my model assumptions. I now predict Bitcoin at $1 million by the end of 2020. I will still eat my dick if wrong." -- John McAfee, a few days ago
That last sentence in his tweet says it all, methinks.
Simple trail of a stop after every $3 of gains from entry on an initial 3/1 reward to risk ratio.
ReplyGoldenslot
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Gclub
It has not gone viral yet Shawn, but the music might inspire a few more ideas:)
ReplyTMM on YouTube...
https://youtu.be/7UhF8SqGZKY
@abee...."carry monkeys"...that hurts, man. :) That is my view in Brazil, I think the center-right will win, but you'll get a better entry point in 1H 2018.
Replyyou may be right that the left won't win an EM election in 2018, but I have yet to hear a persuasive case for how and why establishment candidates will win in Mexico. PRI's solution to AMLO is to run a Yale PhD with no power or influence over the party. How that translates into a candidate that can clean up corruption and relate to regular people, I have no idea.
@skr....yeah, that's pretty awesome. Can we hire an animator to get rocky fighting a squid?
ReplyWell, looks like my hopes for a flip in views around GBP following an deal were WRONG. Still have some time, maybe market changes its mind. Still, trading around Nordic FX this week has more than paid for all the GBP option premium spent ;)
ReplyRemember when people would dream of the riches from selling a toothpick to every Chinese person? Chinese consumers haven't gone away and as China cynicism fades, I wouldn't be surprised if many dream that dream again. This year's move in Chinese consumer stocks are perhaps the beginning of a multi-year move. A thesis I'd like to work up ... once I get through the forty reports on my desktop.
For the time being, I like this scenario for Q1-2 '18.:
Reply1) Lower long end rates and a flatter yield curve.
"The trend is your friend" here. Why fight it? As inflation fears moderate on lower producer prices (see commodities and oil below). Most recent Fed hikes have been followed by a fall in long end rates. Long bonds are already in rally mode, and this is definitely a hated rally at this point with minimal public participation, few vocal proponents and a great many shorts.
2) Lower USDJPY, as terminal rate projections are yet again pushed out into the future on slow wage growth.
Every year the Fed has readjusted its terminal rate projections to the right, "Lower for longer". BoJ is now decelerating QQE, even as JP domestic inflation shows signs of life. The yen also benefits from risk aversion in Asia, and some carry unwind related to reduced Chinese growth and demand.
3) Lower crude oil - by Spring, if not earlier (unless we get an unusually harsh winter).
Supply.... absent a geopolitical shock, global demand and US shale supply conspire to push oil prices back towards $40/bbl.
4) Lower Asian stock indices as China slowdown continues and JPY appreciates.
This is already just beginning but may gather momentum in the New Year.
5) Lower base metal prices and AUD - China credit impulse declining, China growth slowing.
Copper prices are a good indicator that a general fall in commodity prices may lie ahead and perhaps is in motion already.
In summary: another modest but significant disinflationary episode lies ahead, in other words. That probably implies an increase in equity vol, with wider spreads and lower prices for high yield credit and associated small cap equities.
2018 may start out like 2016. Everyone long going into EoY '17 and so there is nobody left to buy equities after the first few days of Q1 fund flows. Similar macro backdrop: China, falling commodities.
@LB, we have a market. As you would expect, I totally disagree with you on oil. I see WTI at $70 before it ever comes back down to $40. I do think though that there may be a tall wall to overcome at $62 and we may see a sideways to slightly down move once it gets there.
ReplyHard to imagine new US oil supply coming close to completely replacing the shortage stemming from OPEC/Russia output cuts extension. Let's also not forget that Libya and Nigeria agreed to quotas.
To your point on possible China slowdown. Their crude oil purchases are currently hitting record numbers and their consumption could be understated.
https://www.bloomberg.com/news/articles/2017-10-23/seen-from-space-china-s-oil-demand-looks-stronger-than-expected
Not that anyone cares, but this is my second favorite trade for 2018. Buy gold right here. Target $1,500
Replyhttps://www.bloomberg.com/gadfly/articles/2017-12-11/gold-s-time-is-nigh
@LB, re point 1...
ReplyI can't possibly imagine why one would find any value in long-dated rates in the US. You would be getting long 30y real rates at arnd 0.35%. This is not a very bigly yuge number, needless to say.
@Martin: Logical indeed, but over-simplistic. I refer the Honorable Gentleman to the history of the Japanese yield curve.... DM bond markets are not going to blow up, not just yet anyway, and in the interim there will be many profitable swing trades in this asset class.
ReplyLook at this way, Ghoulish one, if you are managing quality fixed income funds in Japan or Germany, where are you going to go for yield? Real rates there are clearly negative. You can't buy dodgy corporate or EM govies, so where else are you going to go? OK, so there is already one fairly obvious source of demand. Another source arises from countries like Switzerland, where the FX peg encourage/force the large banks and even the central bank itself to buy assets denominated in other currencies. US-based pension funds are another almost invariant source of demand. In addition, many types of investors and investment funds become fixed income investors when equities turn south, and finally there are the shorts who are forced to cover periodically. That's the marginal demand that fuels the occasional sharp moves lower in rates.
IPA, no doubt you may be right about crude in the short term, but another over-supply episode lies ahead of us. OPEC members say one thing, but often do another - and just keep on pumping.
Thank you for the posts. This article is very useful.
ReplyThank you very much.
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@LB, yes, I am well aware of all the factors that you mention... Question, however, does all this demand that you describe exhibit no sensitivity to the funding rate for the currency in question? If you believe the mkt (which is significantly more conservative than the Fed), by the end of next year the US short rate should be arnd 1.85% (this would put the real short rate at arnd 0). All else being equal, does a 30y nominal rate of 2.25% (arnd 0.35% real) seem like a steal to you?
ReplyAgain, this is what makes a mkt... All I am suggesting is that, absent a very strong Japanification thesis or some sort of a regulatory squeeze, I can't imagine duration representing any value here. In fact, IMHO, duration is the biggest bubble of them all out there.
@Martin: Agree. But duration is a bubble that will perhaps get significantly bigger before it pops?
Reply@LB: Aye aye, far be it from me to suggest that any of these things are obvious slam dunks.
ReplyI said above, "short Tesla, I just don't know when". Well, I've just gone and done it. Up about 20% in the last week or so because of promises at the quarterly results and then that unusual Tweet about taking Tsla private at $420 per share with funding secured.
ReplyEffectively that caps the gains for the stock now with downside to zero.
Oh well, no doubt he'll pull some rabbits out of the hat as desperation rises along an intriguing journey from here.
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