Goodbye For Now...and Some Market Parting Shots


There’s something against human nature in saying goodbye. Even the individualistic among us are innately programmed to stay within a group, pack or family unit. We’ve all been in that situation where you are parting ways with someone you know you’ll never see again, but you just can’t bring yourself to say the equivalent of “have a nice life”, instead settling for something along the lines of “see you again soon.”  

So it is with a tinge of sadness that I must say goodbye and end my term at what I’ve come to call Legacy Macro Man. I’ve accepted a new position back in the corporate world that will consume not only my waking hours, but will also lead me into some new markets that I have not dealt with in the past.

Over the past couple of weeks I’ve been thinking broadly about how to analyze, manage and make money in these markets. I realized how much I have learned during my relatively brief spell in the blogosphere. I’ve learned a lot about trading not only from the folks that follow this blog, contribute their comments, and reach out to me directly, but also from the “competition”...the endless array of brilliant people posting their thoughts on social media or their own blogs.  

As a PM, I spent years pouring over my own research, sell side research, research from a small group of independent consultants, and information and ideas from colleagues and personal contacts. It isn’t necessarily that the people posting ideas for free on the internet are better than these people that do it for a living (even though many of them do that as well), but they are most certainly different. And different is the one and only thing that generates alpha. Those contacts and new approaches to trading and investing will stay with me forever.

With that I’ll end the sappy stuff and leave you with a few market observations:

1) Inflation...still not dead! A while back I pontificated on the risk to a quick acceleration of inflation. Bill McBride over at Calculated Risk posts this chart monthly, which incorporates some alternative measures of inflation.  

You can see they are all ticking up...then look at my favorite alt-inflation measure, the NY Fed underlying inflation gauges:


The full data set measure, which takes in a wide variety of non-price data, has moved from 2% to over 3% very quickly, and shown little sign of slowing down this year even though stocks have been (at best) chopping around and credit spreads have been widening.

Lastly, Ben Hunt over at Epsilon Theory had a great post earlier this week highlighting not only the risks from inflation, but the potential that the market will soon realize just how big a threat it because of the reversal of some statistical anomalies in wage growth data.  When you combine that kind of insight with Ben’s penchant for thinking up market metaphors related to his farm animals, you can really see his genius.

Combine those factors with the following: unprecedented fiscal stimulus, a tight labor market, a highly volatile equity market, widening credit spreads, Chinese tariffs, Russian sanctions, a really ugly geopolitical scene specifically in the Middle east, and a presidential administration led by satirical cannon fodder like John Bolton and Larry Kudlow...and tell me again, where is forward rate vol?? Really cheap relative to equity vol. Buy it.
2) The long USD trade. It’s coming back. Trump is the figure that people around the world love to hate but the USD seems to have fallen into that category too. Last year, USD got hammered despite the Fed finally following through on its rate hike projections and a good year for growth...the game changer was the resurgence in growth throughout the rest of the world, specifically in Europe. Many of the indicators I highlighted last year as supporting the resurgence in growth and perpetuating EUR appreciation are showing signs of wear:



Those figures in retail, PMI and the surprise index are hardly illustrating or portending an economic trainwreck but they do show that currency traders might have gotten a little ahead of themselves in pushing EUR above 1.23 earlier this year.

Now, I have a visceral and philosophical opposition to charts that don’t have a proper axis, so with my apologies I’ll post this one to quickly illustrate how the market is long EUR:

Despite EURUSD trading in a very narrow range.

Economic divergence, extreme positioning and little price movement...combined with an abundance of geopolitical risks---buy USD.

And lastly, I can’t sign off without a comment on EM. Trump’s foray into the morass of tariffs, sanctions and the Syrian conflict have triggered some serious divergence in some big EM markets.


EM investors were limit long RUB and Russia rates with the steady increase in oil prices, then with the new sanctions these guys are caught with their hands in the collective cookie jar. The Turkish lira has suffered with a variety of internal stresses, a widening c/a deficit, and risk of spillovers from Syria. And ARS suffered in late ‘17 and early this year after the government and central bank collectively allowed for higher inflation and lower real rates.

Meanwhile, ZAR continues to outperform after Zuma’s departure and some positive signals on the reform front. MXN has outperformed on optimism about a NAFTA agreement sometime in the next month and acquiescence, ambivalence, or ignorance about election risk, depending on who you ask.

But most importantly is the China. CNY continues to appreciate. There is always room for 21st century Kremlinology that attempts to interpret the signals and objectives of the Chinese authorities. Maybe this is an oversimplification, but this is a momentum trade. The government and PBoC have sustained a number of trends in the past ten years, and the current one is to disincentivize additional export capacity to allow for a gradual moderation of credit growth and increase in consumption. Maybe that changes in the near future, but it is tough to argue that isn’t where we are now.

So long as that is the case, and it is overlaid with continued decent global growth and renewed growth in global manufacturing demand and commodity prices, it still paints a positive medium-term picture for EM assets. In light of my view that we could see a short-term bounce in USD, I would look to to overweight the high beta, commodity producing “dogs”--especially in Argentina, which should benefit directly if China implements import tariffs on US soybeans--at the expense of the EMFX outperformers, who in my opinion, really don’t have anywhere to go from these levels.

And with that..farewell!! You won’t have heard the last of me--I will stay in touch with TMM and throw in an occasional anonymous guest piece--most likely on some emerging markets issue I have stuck in my craw. And I will post some brief commentary via Twitter, a medium I’ve come to like quite a bit. Follow me here: @EMinflationista.

Shawn

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Rubberpower
admin
April 12, 2018 at 6:50 PM ×

Really appreciate your contribution to the blog Shawn. Many of us are long time readers but don't actively participate in discussion. Nonetheless, I want you to know that your insights have often been thought-provoking for both research and investment.

Thank you

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Leftback
admin
April 12, 2018 at 8:22 PM ×

Brilliant stuff, thanks for the many insights. All the best in the new gig.

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Leftback
admin
April 12, 2018 at 9:16 PM ×

In the last few minutes of trading, all the banks were sold.

That's usually the big money moving into the close - perhaps a verdict on what to expect tomorrow. JPM, C, and especially WFC were all sold hard into the close. Remember that the trend in the yield curve is no longer the banker's friend, and that mortgage originations, including refis, have crashed.

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IPA
admin
April 12, 2018 at 9:29 PM ×

You will be dearly missed! Good luck in your new endeavor!

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Gus
admin
April 12, 2018 at 9:38 PM ×

Many, many thanks for all the hosting/commentaries/good-nature, Shawn. Best wishes in your new line of work. Much success!

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JohnL
admin
April 13, 2018 at 1:16 AM ×

Thanks for sharing, I've really enjoyed my time spent here reading your work. Good luck with where ever your path leads you.
I prefer "so long" rather than good-bye. I'm sure I'll see you around the tweeter -sphere (is that a thing?).

Cheers!

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Shawn
admin
April 13, 2018 at 2:45 AM ×

Exactly my point! Goodbye is so final. I imagine you would say "so long" when you expect to see someone again, but perhaps not for quite a while. It does seem to fit better.

I do plan to retire to twitter, where I'll post a regular 250 characters and the occasional thread-rant.

Thank you all for your kind comments, as I've said before, it is the feedback and interaction here that made producing this work worthwhile. Thank you for being a part of it!

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Cbus20122
admin
April 13, 2018 at 4:08 AM ×

Thanks for the great posts.

Out of curiosity, does are there any other similar blogs with good discussions or places to discuss macro / markets on? I really enjoy the discussions and insights here, especially from people like LB and IPA.

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sharpe_mind
admin
April 13, 2018 at 8:58 AM ×

Thanks for your many through provoking posts. I rarely have commented, but that doesn’t mean I haven’t been reading and enjoying them. Wish you the very very best in what’s ahead.

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checkmate
admin
April 13, 2018 at 9:24 AM ×

Goodbye, good luck and thank you for your willingness to contribute.

I always visualized the GFC as a line of dominoes each tipping the next in line. We started with the USA and it's underlying gamechanger of derivatives/levearage attached to bricks and mortar. With genius hindsight that all started going wrong with a good 18mths headsup over the rest of the world. Next was the risk transmission vibrating it's way steadily through the credit markets into equity and thereafter trading nation after trading nation got crushed to a greater or lesser degree. So, what does all that matter now? For me it matters because I always thought the recovery would be the reverse with the USA leading the way and those other regions following like good little dominoes. More importantly I always thought the EU would be the last dominoe back on it's feet. Then you're left with the big question if that's the last ripple effect to be squeezed from monetary policy then what comes next when the momentum of that recovery diminishes. Which brings me to the question does EU growth look like it's now tapering away and going soft? If so, then as this becomes more transparent will the inflows into Europe and the Euro reverse? As the last little dominoe in the pack this is what I have been waiting to see as an headsup that global growth projections will soften and frankly a bend in that yield curve would be what I would be looking for to see if the bond market is also forecasting the same thing. I read the recent comments about the usefulness of the yield curve diminishing and how it would be different this time. I respectfully just disagree.

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Nico G
admin
April 13, 2018 at 11:55 AM ×

thanks Shawn and good luck!

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C.Thwaites
admin
April 13, 2018 at 2:47 PM × This comment has been removed by the author.
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C.Thwaites
admin
April 13, 2018 at 2:49 PM ×

Many thanks and good luck. I'm an avid reader but torpid commentator.

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Leftback
admin
April 13, 2018 at 2:56 PM ×

Small cap IWM almost in the red today after the futures were quite exuberant. Spoos also losing their lustre.
A variant on the old Pump and Dump - Lead and Bleed.

JOLTS data out at 10am. Remember good news is bad news, but bad news might also be bad news ... :-)

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IPA
admin
April 13, 2018 at 10:44 PM ×

Add 13K for a total of 147K EUR longs in this week's COT (just out). This boat is gonna sink.

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SRX
admin
April 13, 2018 at 10:55 PM ×

That's a huge shame. You've been one of the best macromen! Good luck Sir.

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Shawn
admin
April 14, 2018 at 12:52 AM ×

Thanks! Although perhaps we should go with the "Macro Dread Pirate Roberts".

(@IPA, just how did traders get *more long* EUR this week???)

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IPA
admin
April 14, 2018 at 4:56 AM ×

@Shawn, CME Futures Euro FX large specs. I should note that I was referring to this week's report vs the actual week itself. As you know, there is a three day lag on COT.

https://www.cftc.gov/dea/futures/deacmesf.htm

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zhen
admin
April 14, 2018 at 7:04 AM ×

Thanks Shawn. As a non-commenter I have been reading TMM posts religiously, I have learned so much here.

All the best!

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Rossmorguy
admin
April 14, 2018 at 3:33 PM ×

Best wishes to you Shawn, you are a smart guy and will no doubt do well at your new gig. I've been a daily reader since maybe 2005 but haven't commented for years.

I did a double take when earlier this year you posted that picture of a townhouse on Summit Avenue, because I almost bought one of those cool places back in 1991, for around $165k. Instead, I moved into a condo at the southeast corner of Dale and Grand for $133K. Sold it for around $320K in 2004. Just a personal anecdote I thought you might get a kick out of. You probably live in one of those mansions down the road!

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Shawn
admin
April 14, 2018 at 9:55 PM ×

Thanks! no not at all, I'm a stereotypical west of the river native--anything east of St. Thomas makes me nervous...that place is actually in Wayzata, although from my experience it is a common design for condos of that vintage so I wouldn't doubt if they are on Summit as well. When I moved here in 1999, Dale and Grand was a trendy place! I imagine it still is, maybe even moreso since Uptown has jumped the shark.

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Mi Pa
admin
April 15, 2018 at 3:15 PM ×

so long Shawn, thank you and good luck.

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Skr
admin
April 18, 2018 at 4:28 PM ×

Shawn, well done and the very best of luck in your new endeavours.

https://youtu.be/NH7I79fLiSw

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Polemic
admin
April 18, 2018 at 8:54 PM ×

I know I've said it to you in DMs but just to air it publicly - you have been brilliant Shawn and you will be missed.
Congrats on the new gig and I look forward to continued twitter contact and whatever you can spare here.

Pol

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